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Market Analysis: Jan 26, 2007: Tomm Pfitzenmaier

posted on January 26, 2007

The markets remained volatile this week and, with speculators holding record long positions, traders now are waiting for new fundamental information.

For the week, March wheat lost 3-and-a-half cents, while the nearby corn contract lost more than a penny.

Soybean prices were pressured this week as the trade comprehends reports of a large crop in South America. For the week, nearby beans lost more than 7 cents. The March meal contract lost 3.50 per ton.

In the fiber market, March cotton had another losing week, posting a decline of 43 cents.

In livestock, the February live cattle contract was down 83 cents. Nearby feeders gained 53 cents. And the February lean hog contract gained $2.30.

In the financials, Comex gold gained $8.30 per ounce. Nearby crude oil prices moved higher this week, gaining $3.43 per barrel. The Euro lost 61 basis points against the dollar. And the CRB Index gained more than seven points to close at 294.50. Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tom, welcome back.

Market Analysis: Jan 26, 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, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, let's talk first about this wheat market. Again, the market has backed off a little bit this week. Of course, had a couple of volatile weeks prior to this and right now we're hearing about real good wheat plantings. We've had some snow cover in the plains. It's kind of going production wise wheat's way for the time being.

Pfitzenmaier: Well, yeah, you've got kind of a double whammy there. Production is going very well, at least we think it is as near as you can tell. And export demand has been kind of sloppy on wheat. Now, I think the downward potential on wheat is probably not very great because you're going to have some usage switching, some people investigating feeding some wheat for livestock feed. So, I don't know that the downside potential is real great from here. Maybe March wheat down in that $4.50, $4.60 range is probably going to support it. You get up around $5.00 to $5.10 and it's going to run out of steam I guess unless corn really does something unexpected here.

Pearson: In which case give wheat a lift.

Pfitzenmaier: Right.

Pearson: Alright, so sales standpoint, Tomm, do you want to do anything down in this area?

Pfitzenmaier: No, I don't think you do anything down in this area. You know, if you get that 30, 40 cent pop in the market then I think you have to, that should get your attention but I don't think you do anything in here.

Pearson: Let's move over and talk about this corn market which is what everybody's talking about. No matter where you go corn is the driver of this whole thing and you just mentioned it talking about wheat. Obviously we have very strong corn prices. They've backed off a little bit and obviously we don't know what kind of acres we're really going to get but the race is on trying to figure where we are. What do you see ahead now for this corn market as we go forward?

Pfitzenmaier: Well, to back up just a little bit, there was actually only one fundamental in all of these markets and that's ethanol production. It's driving corn, it's driving beans, it's driving livestock, it's driving cotton, everything we talked tonight about is being driven by ethanol demand. So, that is going to continue to grow. Obviously the speech the other night is going to continue to feed fuel to the fire here. So, you're going to have setbacks in corn, very few markets go up without having some. But I don't see that that is a market that you want to stand in front of too heavily quite yet.

Pearson: Alright, so strategize for me. What should a producer do right now? Again, who knows what kind of a spring we're going to have but based on normal weather first of all do you think we'll hit 7 or 10 million acres? Where is your guess on all that?

Pfitzenmaier: I think we're going to hit 10 -- I think we're going to be close to 10 million. I just think you throw this kind of economic incentive to the American farmer and they're going to plant all kinds of corn. They're going to do everything they can to plant corn. I just think you have the potential for huge acreage. If you combine that with decent weather this summer then you're going to put the top in on corn here prior to that March 30th report. And then we're just going to slide from there. That's assuming decent weather and we're going into the summer with pretty good subsoil. If you add acreage to that, you know, I'm not saying that corn can't go higher later but it's going to make it a little tough to rally a whole lot beyond this going through 2007. Now, 2008 is going to introduce a whole other level of acreage demand and that's an issue we can talk about later I guess.

Pearson: From a sales standpoint as a producer what do you tell them?

Pfitzenmaier: I really think there's only one strategy there and, you know, I've kind of harped on options for quite some time but this is like the perfect option strategy time because there is huge upside potential. But there's also a potential for a pretty good break. So, you know, if you can start to buy $3.50 puts, $3.60 puts, $3.70 puts on the December corn contract I think you need to step in there and have, I don't know, 20% to 40% of your crop tied up that way prior to that March 30th report.

Pearson: Okay, so use an option strategy, at least get the floor in, at least take advantage of where this market is right now.

Pfitzenmaier: Yeah, and everybody says, you know, the first thing that happens when you say that is everybody says well those options are expensive. And they are kind of expensive. But you're also locking in a pretty darn high floor compared to anything you've ever sold in the history of the time you've been farming probably and there's some other things you can do to minimize that. You can do bull put strategies. You can sell calls to pay for it. There's things you can do to cheapen it up. But I think you want to leave some upside potential open in this kind of a market and get yourself a floor established.

Pearson: Alright, some really good points on this corn market. And, again, Tomm you mentioned it, obviously the President's State of the Union Address, that's a huge increase just thinking in terms of what is needed. Can we do all this? Can we produce all this corn?

Pfitzenmaier: No. We're going to have to -- something is going to have to give. This cellulosic theory is going to have to come through or something is going to happen because in order to do that we're going to have to have zero exports and get rid of most of the livestock in the United States and that's just not going to happen. So, adjustments are going to have to be made. You know, that's a goal and it's good to have goals and it's a lofty goal but that doesn't necessarily mean it will get hit.

Pearson: Alright, let's talk about the soybean market. Obviously we're stealing the majority of those acres from soybeans.

Pfitzenmaier: Well, yeah, the majority of them are coming there but some of them are going to come from cotton. You know, we grow 19 million acres of hay in this country, a couple million is probably going to come from that. So, there's some other places that are going to give up some acres to go into corn. But yeah, a big chunk of them. That depends on who you listen to -- 5 to 6.5 million acres probably reduction in soybeans. The advantage we have is obviously we're starting off with big stocks. South American crop, you know, is shaping up pretty well. It depends on who you talk to but between Argentina and Brazil we're probably going to have 100 to 104 million metric ton produced. So, it's not quite as critical in soybean production. Having said that I personally would not want to be excited about selling November beans here for quite some time. I think if you get up into the $8, $8.50 area then maybe you look at it. But I wouldn't want to sell November beans here at $7.60.

Pearson: What's going to drive that soybean price?

Pfitzenmaier: Well, again, it's going to be weather and it's going to be acreage and how South America figures up. One of the problems with beans is you've got this drag for meal. We're crushing, going to start crushing beans in order to get the oil and that gives us a lot of meal, that competes with DDG's so beans have got some problems here. I just think there's some upside potential yet and I'm not quite in a hurry to do anything. Now, maybe an option strategy in beans is going to be the way to go there too.

Pearson: Alright, so let's look at this, we start robbing some soybeans acres and you also mentioned the demand for soybean oil. One of your colleagues on the show a couple of weeks ago said we're now burning by the ton a product we used to sell by the pound talking about soybean oil. So, demand certainly could be strong for that part of it and then you have the competition with the DDG's and the soybean meal. There's some adjustments that are going to have to be made in the livestock world big-time.

Pfitzenmaier: Yeah, to digress a little bit to that biodiesel, you know, if you look at any matrix that compares the price of diesel fuel with the price of bean oil and figures out profitability on those they're not working. So, you know, there's not the profit incentive on biodiesel. There's a lot of them in the works and there's a lot of them being planned but the profitability on them which is usually a driving force in any business proposition is not there right as we speak that's for sure. But in terms of livestock, yeah, there's going to be an impact on the livestock no doubt.

Pearson: Talk about the cotton market. You talked about grabbing some acres from cotton.

Pfitzenmaier: Yeah, cotton has got kind of a problem because you're robbing cotton acres, everybody knows you're going to lose cotton acres. The problem is nobody wants to buy our cotton. Chinese cotton demand is down like 80% and they're our majority buyers. So, people are kind of getting excited and running in there buying cotton. You know, there's more to that equation. So, you get up there in that 57, 57.5 area I think cotton is going to struggle. You get down in that 52, 52.5 area then the downside potential becomes pretty limited. So, I think cotton is going to be kind of caught in that trading range.

Pearson: Let's talk about livestock. Fed cattle market, we don't have a large cow herd by any means. We've had a lot of issues with weather in the plains states. What's ahead for fed cattle? Are they going to push this price down?

Pfitzenmaier: That has pretty well supported cattle. The technicals have turned lower on cattle and that hasn't helped and it's a bit of a surprise since we have had all those production problems out west. But, you know, there's some cattle that are getting a little old out there, they're ready to move them out, they need to make room for whatever is coming in behind them and I think that is kind of creating a little pressure there. We had a cattle on feed report out this afternoon showed basically every category was a little bit on the bearish side, not much, but a little bit. So, I think the cattle market is going to struggle here. That's not to say that you can't see April cattle run up into the $95, $96 area. If they do, again, run in and buy yourself some puts or just flat out sell the cattle market. On the feeders that's probably where the big impact from the grain comes. If corn continues to work higher the feeder market is going to struggle here.

Pearson: Alright, of course, as we look at this calf market and, again, a relatively small cow herd, not much in the way of expansion in 2007 it would appear, not much happened in 2006.

Pfitzenmaier: No, I think you're going to be fairly stable there and I'm not wildly bearish on cattle, I just think we've had a little correction here and they're going to struggle to go higher. With hog prices going up like they have been that's going to be some competition for the beef to drag it higher too.

Pearson: Alright, let's talk about hogs and hog prices and what you see ahead for the hog industry.

Pfitzenmaier: Holy smokes that's been a good market. I mean, a lot of people were predicting some breaks into the first part of the year here and it just hasn't happened. We've made new highs this week in hogs, very strong market. But you get a June hog market up in that $75, $76 area and I don't think there's a lot of upside potential there. If you really badly want to buy hogs you go out and buy December hogs at $63, $64 because if we have liquidation of the hog herd that is the area that's going to benefit, not the nearby. The nearby actually may struggle if we begin to see some liquidation which, by the way, we have not seen yet surprisingly. That's one of the things we don't know is that historically when you had a lot of in and outers in the hog business when that got unprofitable they got out and didn't have a lot of fixed costs to worry about to do that. But we've totally changed that dynamic now and we don't know how they're going to react. We don't know how the ethanol plants are going to react if they become unprofitable either. So, there's a lot of unknowns about where exactly we choke off the demand in all three of the demand categories for corn as we move higher here. So, it's going to be very interesting to watch.

Pearson: Alright, we've got about 15 seconds, Tomm. We've talked a lot of livestock feeders this week, very concerned about what these margins are looking like. What about covering feed needs? Do you want to do that on some of these breaks?

Pfitzenmaier: Oh, absolutely. Like I said, there's upside potential and it's upside potential that's pretty great and could fry you. So, yeah, I think you have to look at getting some kind of coverage. Meal broke a little bit this week as you alluded to earlier. Yeah, get some coverage for sure.

Pearson: Tomm Pfitzenmaier, thank you so much. That's going to wrap up this edition of Market to Market. But if you'd like more information from Tomm on just where these markets might be headed visit the Market Plus page at our Market to Market Website. And, of course, you can download audio podcasts of our market analysis and Market Plus segments free at our Website. Now, be sure to join us again next week when we'll examine a Midwest operation that is yielding less pollution and more power by converting waste into watts. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news