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Market Analysis: Sep 22, 2006: Tomm Pfitzenmaier

posted on September 22, 2006


Estimates this week of a smaller-than-expected wheat harvest in the southern hemisphere pushed prices higher in the pits. For the week, nearby wheat futures gained more than 26 cents, while the December corn contract gained 13 cents. Threats of an early frost failed to stimulate soybean prices. For the week, nearby soybeans moved fractionally higher, but the October meal contract was up $3.80 per ton. In the fiber market, the December cotton contract trended lower, giving up more than $3.00. In livestock, the October live cattle contract was down 2 cents. Nearby feeders lost a-buck-and-a-half. And the August lean hog contract declined 3.35 cents. In the financials, Comex gold gained $12.50 per ounce. Nearby crude oil prices declined nearly $3.00. The Euro lost 183 basis points against the dollar. And the CRB Index declined 3 points to close at 304 even. 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: Sep 22, 2006: Tomm Pfitzenmaier Pearson: Well, 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: Now, let's talk a little bit about that -- less wheat in South America, tight wheat stocks around the world.

Pfitzenmaier: Yeah, they are and that gave us a nice little boost up, a nice little rally in the December wheat contract. The problem is we've got kind of sluggish demand in the U.S. for wheat and I think unless you can get that going wheat is going to have a tough time. Now, maybe, you know, we closed around $4.20 on Friday, I'd guess you could maybe bump wheat up around $4.30, maybe a little more than that and then I think you're going to start to struggle again here.

Pearson: At $4.30 would you start making sales?

Pfitzenmaier: Then I would start to make some sales. I guess it is possible eventually through the winter wheat might be pulled up a little bit if corn takes off but left to its own we're probably priced about right, right now on wheat.

Pearson: Alright, let's talk about corn. The corn market has been one that has held a lot of people's interests certainly because of the biofuels demand that is going up there for '07 and '08. We haven't talked as much maybe as we should about 2006 which the harvest is upon us, it's rolling in many parts of the Corn Belt and we've seen really a pretty decent market so far, Tomm.

Pfitzenmaier: We've got a little harvest delay and that -- there have been several things really. We've seen a little bit of harvest delay. You've seen, amazingly, you see basis firming because the farmer doesn't want to sell anything, the elevators don't want to sell anything, there is a huge carrying charge in the market. That is pulling the basis up. You're starting to see the spreads narrow so there is less incentive to carry that corn out into May or June or July. We probably took six or seven cents out of that carry from December to July trying to entice people to sell and free up corn nearby. You've also had pretty good export demand. I think all this signals that maybe end users are interested in buying our corn. Now, we're going to have some sloppy times here because you tend to not bottom corn out until October. Maybe we have bottomed, absolute bottoms been put in here but I would guess you get the combines rolling and you could sag back some. But it's a market that kind of wants to go. You had huge fund buying in on the market on Thursday so I think there is a lot of that sort of revved up ready to go if the signals look right. And in all of this tightening of the basis and tightening of the spreads are big indicators that maybe we've got some excitement ahead of us in corn, in the corn market.

Pearson: As we look ahead, Tomm, and as we go through this harvest season a lot of producers and, of course, we're already hearing some pretty decent yields out there in many parts of the Corn Belt and obviously the September 12th report, USDA, is looking for a pretty healthy corn crop and yet falling out these funds have been coming. What is driving some of this? Is this still just euphoria for biofuels in the face of lower oil prices?

Pfitzenmaier: Well, I think we're rapidly approaching the point where we're not going to be talking about supply any more. The corn market, maybe the yield is going to be a little better, maybe a little worse, who knows in October. But I think the market is going to pretty much ignore that and start switching to demand. And if you start talking to demand you don't have to talk very long before all of a sudden it gets pretty exciting, the potential demand both from ethanol and from exports being bumped up because end users over there are a little afraid of implications of the high usage of corn in the United States. Japan has already said that -- or China -- that they're not going to be exporting any corn in all likelihood. So, I mean, there is a lot of tightening going on here. You've got the potential for some real fireworks next summer if we stub our toe at all. We need to plant probably at least 5 million acres more next year. There was a report out this week that there's, by one of the major firms, that they were calling for a 3.8 million acre increase. That is not enough. I think you have to be close to 5 with trend line or better yields in order to keep our carry out steady.

Pearson: Alright, and it seems like farmers are already at work in finding a place to put this 2006 crop. What strategy -- I've talked to a couple of bank organizations, state bank organizations the last couple of weeks and they all want to know for their customers what can we do, how can we capitalize on this?

Pfitzenmaier: Well, absolutely I think you've got to find a place to put it away. Cash is king. You need to get your hands on cash corn, that is where the real excitement is going to be. If you're a livestock producer you need to get your hands on cash corn. If you're a corn producer you need to hold onto your cash corn and hold it as long as you can -- with those carrying charges we ended up at the July-Dec. spread or Dec.-July spread, excuse me, at around 27 cents. Well 26 used to be considered historically wide. I mean, there is very good incentive to hold that corn into next summer not to mention the fact that there is probably pretty darn good upside potential in corn too and most of that excitement or a lot of it will come on the cash side. So, I think the strategy is to maybe park the combine outside this winter and fill the machine shed up with corn but find a home for the corn. Wait for that basis to tighten up, wait for the spreads to narrow up and then you go ahead and market the corn.

Pearson: Alright, let's talk about soybeans. Obviously there is some demand out there for soybeans. We're also looking at a substantially bigger crop I think that what we anticipated a month ago on soybeans. What should producers be doing on that standpoint in terms of making sales?

Pfitzenmaier: Well, if you buy the research that has told us for several years that August weather makes soybean yields we had darn near perfect weather in August so I would guess we're going to have good soybean yields, probably better than what the USDA even said in September adding to the carry out and, you know, we're at 530 million now, probably is going to be up over 600 million. In that case I don't think there is a lot of upside potential. You know, beans couldn't even get sucked along with the rally that corn had this week, ended up closing just sort of basically unchanged. So, I think if you've got beans to sell I think you need to sell them. I think there's not going to be a whole lot of reason to store them for a while here. Now, maybe South America is going to have problems. Maybe the concern about shifting acres out of beans into corn is eventually going to pull them up but I think that is a little ways down the road. In the near term we're going to sag in beans I believe.

Pearson: Real quick on cotton futures, a lot of pressure this week. But, of course, again, you're coming back to China as being the big demand, in fact, good crops here in the U.S.

Pfitzenmaier: Yeah, we've got a good crop here. You know, we're down at that $50 level which -- we're not quite there but we're approaching that -- and that is going to be the area that you're going to look at for support. We're below the support prices so there is no incentive for producers to sell any cotton down in here. You know, like you said, if China comes in and does a lot of buying there is maybe five bucks up in cotton. If they don't then we're going to sit down here and bounce along at $49 to $50.

Pearson: Alright, let's talk livestock. I've been talking to a lot of cow/calf producers who, you know, who are maybe also feed cattle. It's pretty hard to argue to keep those calves. They're getting $1.50 a pound for over 500 pounds. This calf market has remained strong, softened up a little bit towards the end of this week. What is your thinking first of all in fed cattle what do you see going forward?

Pfitzenmaier: Well, in fed cattle we had a cattle on feed report out this afternoon, showed bigger numbers on feed than even the trade guess was, higher placements of those lighter cattle which we've been getting off the off dry pastures again this month. Marketings were okay, we'll probably support the October contract but I'd guess you're going to see some pressure on the deferreds when we open the market on Monday. We have anticipated bearishness in this report so some of that has been factored in. I'd guess you get another dollar or two down in cattle and they're probably going to find some pretty decent support. We've had a good break off the high on the fat side. On the feeder side that is basically an inverse relationship to corn. If you see corn start to take off this winter, which I believe it will as much as 40 to 50 cents higher on the December of '07 corn, you're going to see feeder market break. I mean, these are ten dollar plus beans kind of markets here on the feeder market and there's a lot of vulnerability on the down side in that market.

Pearson: Absolutely, we've got a feeder slide here we want to put up here while you were talking about them. This feeder market has been good for a long time. Again, we're hearing maybe this cow herd expansion may not be occurring as that drop continues out in the far West.

Pfitzenmaier: Yeah, well, I mean, that is the main reason that market has been supported and it's also been supported by cheap corn. If cheap corn goes away that part or that component of that equation is going to change things.

Pearson: Alright, let's move over to the hog market which, of course, again, it's been a good summer for hogs. We've seen some huge numbers here in the first part of September, Tomm. Is this a precursor, is that what we're going to see this fall?

Pfitzenmaier: Well, we're heading into the time when we're going to see the biggest numbers probably but when you're slaughtering 411,000 to 415,000 head every day the stated capacity of the United States to process hogs is around 420,000 a day so, you know, we're banging up against those limits. And weights are starting to creep up a little bit, the market is just having trouble swallowing that much pork and moving it through the system. I think you're going to struggle here maybe another four or five dollars lower in this hog market because we're just slaughtering too many hogs and we can't get them all used up. You've seen over a nine dollar break in the cut out over the last few days and I just think hogs are going to struggle here for a while.

Pearson: Alright, Tomm Pfitzenmaier, that's all the time we have. Thank you so much for your insights. That will wrap up this edition of Market to Market. But if you'd like more information from Mr. Pfitzenmaier on where these markets may be headed visit the Market Plus page at our Market to Market Website. And, of course, remember you can download audio podcasts of our market analysis and our Market Plus segments free of charge at our Website. So, be sure to join us again next week when we'll examine differing perspectives on U.S. farm policy. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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