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Market Analysis: May 18, 2007: Tomm Pfitzenmaier

posted on May 18, 2007

Bearish export sales reports this week coupled with private estimates calling for increased wheat acreage dampened prices.

For the week, July wheat lost nearly 22 cents, while the nearby corn contract gained two and-a-half cents.

The real action this week was in the soybean pits where virtually all of the deferred contracts moved well above $8.00. The nearby soybean contract gained more than 30 cents, while the July meal contract was up more than $10.00.

In the fiber market, the December cotton contract broke into positive territory for the first time in weeks, posting a gain of $1.45.

In livestock, the June live cattle contract was down 75 cents. Nearby feeders were off 58 cents. And the June lean hog contract posted a gain of 43 cents.

In the financials, Comex gold lost $10.30 per ounce. Nearby crude oil prices were up $2.63 per barrel. The Euro gained 26 basis points against the dollar. And the CRB Index gained four points to close at 312.50.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Market Analysis: May 18, 2007: Tomm Pfitzenmaier Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Tomm Pfitzenmaier. Tomm, good to have you back.

Pfitzenmaier: Thanks, Mark.

Pearson: Alright, so more wheat acres put some pressure on prices. There was some pressure on wheat anyway, wasn't there, with ideas of a better crop?

Pfitzenmaier: Yeah, well, we had several things happen. One is Australia had kind of what you call a drought breaking rain down there, that didn't help any. I think the wheat crop, you know, a month ago we thought this cold weather had really done a lot of damage to the wheat crop and it turns out it didn't do quite so much. Egypt was supposed to tender for some wheat this week and they ended up going home without buying any. So, all that kind of came together plus the market was starting to weaken up a little technically and so that was all they needed for a catalyst to kind of break wheat back. There is potentially another 30, 35 cents down in the wheat market from here. And, you know, traditionally you do break wheat from now into harvest so there's kind of a seasonal tendency for that anyway.

Pearson: Alright, so this stage of the game hopefully people made some wheat sales. We had some good opportunities to do so.

Pfitzenmaier: Yeah, that's right. There was good prices. I assume everybody at least got something sold there. I don't know that you want to get too excited about selling this break. I think, you know, there could be plenty of rallies available as you get into, you know, if problems develop with the corn crop that could drag wheat along or if demand does start to show up maybe not everybody's going to go home without buying anything. So, yeah, I wouldn't get too down in the dumps on wheat right here.

Pearson: Let's talk about the corn market which, again, people have been watching a slow start to getting the crop planted, we're a little bit behind the five year average. Now it looks like we've caught up. There's been some decent weather across the Corn Belt. Odds are Monday when the numbers are reported we'll probably be pretty darn close to complete and a pretty good jump on soybean prices. So, what now in this corn market? What are we watching for next? Obviously dry weather.

Pfitzenmaier: Yeah, that's it, I mean, I'm assuming that Monday the crop is going to be fairly well planted. You know, the emergence numbers last week were actually ahead of normal. So, ultimately the corn got planted, there's pretty decent moisture everywhere, we're watching the eastern Corn Belt is a little dry and that, you know, a lot of times there is some research that shows that that's where droughts tend to come from so everybody is watching that pretty closely. So, yeah, I'm assuming we're going to sit here for two or three weeks, bounce around, not do much and then wait and see how weather develops. You know, we got a lot of corn planted in a really, really short period of time which is going to bunch up that corn at pollination time so if you'd happen to hit some really hot weather at that particular week in July it's going to be kind of important and people are going to be watching that pretty closely. But between now and then not much. A private forecaster came out with an acreage estimate this week that was virtually right on with the March 30th USDA number so I think everybody is kind of assuming that. The acreage is probably about right.

Pearson: Alright, again, at this stage of the game cash market seems to have responded fairly well so would you want to make some cash sales at this point if you need cash?

Pfitzenmaier: Well, on old crop, yeah, I think old crop cash sales probably need to be made. A lot of times there is an opportunity here when everybody is out, you know, spring and planting and working in the field and not paying much attention to their marketing. Sometimes that creates some opportunity and I think that's the case this week, that's why you saw the July contract gain almost every day this week against the deferred December contract because they're pumping some premium back in there trying to draw some corn out. So, that has created an opportunity to take advantage of. In terms of December corn, new crop corn I think you can buy puts. Beyond that I don't want to do a whole lot. You certainly don't want to forward contract any cash corn I don't believe because you don't want to get yourself locked in. I think you want to leave that basis because all kinds of marketing opportunities are going to be created that you're going to give up on if you make cash sales. There is upside potential so that's why I'm a little uneasy about making future sales. The price is good so that's where I think you have to start looking at buying puts, $3.50, $3.60 puts here, start getting some kind of a floor locked in and leave your upside open.

Pearson: Alright, good strategy. Let's talk about soybeans, again, big move this week. Soybeans, deferred contracts as we noted also above $8. What's happening with soybeans?

Pfitzenmaier: Well, you know, there's a lot of uneasiness about that 320 million bushel carryout that they came out with in that projected supply-demand report a week or so ago. That kind of was the catalyst for it. There was a little unease about acreage although that private forecaster that came out with acreage estimates this week bumped soybean acreage 1 million, 1.2 million because of wheat switching and cotton acres switching. So, that eased it, when that came out you also saw beans kind of, the rally kind of slow up a little bit. There's been some uncertainty about the beans getting planted. I think that's going to get taken care of in that report Monday. The bean market has also been led by bean oil which is, as your report just a second ago showed, has been crude oil is up 2.5 dollars this week and that's pulled bean oil right along with it. So, there's been some positives, technically the market has moved a bunch of the averages and technical stuff people watch have all moved higher and that brings a lot of fund buying, you've seen a lot of speculative fund buying, not so much in the corn but in the beans they've really been in there buying them and particularly in bean oil. So, you know, all that stuff could very easily sort of go away over the next couple of weeks so, you know, you've got November beans up around $8.25, anywhere between there and $8.40 I think you should start locking in something. You can buy a $7.80 put for around 30 cents so that locks in, gives you a floor of $7.50. I don't think that's a bad way to go on beans. It's hard for me to get excited at all about old crop beans, I think they should be just sold right along here, people have kind of lucked out on this rally I think to get a chance to make sales.

Pearson: Absolutely, it's been a strong -- you mentioned bean oil and soybean oil and its impact on the crude oil prices and that relationship there. It's turning into a pretty expensive commodity right now this bean oil.

Pfitzenmaier: Yeah, it is and it's, you know, it's on the verge of running itself out of the market if it's not a little careful here. But there's a lot of optimism about the biodiesel industry and the future that has, a little bit here in the United States but worldwide it's just really exploded. So, I think we're catching a little of the optimism that is worldwide, a lot of that is canola and other things, sunflower seeds and other things than bean oil. But the whole vegetable oil market is very strong worldwide and we're benefiting from that.

Pearson: Let's talk about the cotton market, a big up week this week. Is this just a big correction? This thing has been such a decline.

Pfitzenmaier: Well, partially it is. You know, we're sitting around here, we're hoping the Chinese will come in and buy, they've been a little reluctant to be too aggressive doing that. There's some concerns about dry weather in the eastern part of the Cotton Belt, wet weather in the western part of the Cotton Belt so all that has come together with a market that was, like you said, oversold. I think you get December cotton up in that 57.75 to 57.76 area and it's probably going to run out of steam again, that's up about 2 dollars from where we closed on Friday.

Pearson: Alright, let's talk livestock here, fed cattle market, you look at the board and you look at this chart you kind of see what's happened as far as the futures are concerned and that's been some real pressure on fed cattle prices the last few weeks, a little bit of a rally so a little bit of pressure this week. And the cash market remains fairly strong.

Pfitzenmaier: Yeah, I think ultimately the cash market is going to pull the futures back up. You know, we closed around 92.75 or so on Friday afternoon and I'd guess we could pull back maybe to 92, maybe a little under 92 but we had a cattle on feed report out on Friday afternoon that they were looking for, everybody is scared to death about the placement number, it was virtually dead on estimates. The marketing number was actually better so I would guess that's going to be a little supportive to June cattle on Monday morning. I guess I'm having a tough time being bearish cattle. I think the numbers are going to be tough coming along here, I know there's a lot of uncertainty about gas prices, the competition of gas for the consumer's dollar versus beef and that's legitimate. But we also have very good exports on beef and I think that's going to continue to shore up the beef market. Everybody's working, everybody's got a job, yeah, gas it a little high but they also like to eat well and beef is a good way, a perceived way for people to eat well. So, I guess I'm not that negative on the beef market right in here.

Pearson: Okay, speaking of which, the calf market, again, showed some real resiliency, there's a lot of concern about just where this calf market may be headed. Boy it's hung in there pretty stout the last three months.

Pfitzenmaier: Grass is good, you have seen a pretty sharp break in the cash price of corn which is, you know, almost an inverse relationship there between feeder cattle prices and the corn market. So, that's been supportive, the beef market has bounced around a little bit but still, I mean, we're bouncing up in the mid-90's so that's pretty good price. I think all that put together is going to continue to keep the feeder market well supported in here.

Pearson: And finally let's talk about what's been going on in the hog market, we've seen a lot of featuring of pork, decent exports for pork. As you pointed out in that last hogs and pigs report virtually no expansion for all practical purposes.

Pfitzenmaier: Again, I hate to be Mr. optimism here because it kind of runs against my grain but the hog market also looks to be, you know, the producers are current, weights are at a good level, export demand is good. Now maybe that's a market where people are a little more economically watching it closer so maybe it's going to compete with chicken harder and domestically that may be one of the markets that suffers a little bit because of the higher gas prices. But overall I think you have to be pretty optimistic on the hog market. I think you can see June hogs and July hogs work their way up towards $78 and re-test that resistance up in that level. It's going to take something positive to break it up above that but I think we're going to be well supported here through the summer.

Pearson: Alright, Tomm Pfitzenmaier, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm on where these markets just may be headed visit the Market Plus page, it's at our Market to Market Website. And, of course, you can download audio podcasts of our market analysis and our Market Plus segments free at our Website. And, of course, be sure to join us again next week when we'll examine a Midwest effort to grow pharmaceutical crops underground. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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