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Market Analysis: May 26, 2006

posted on May 26, 2006

Wheat harvest is underway in the southern plains and reports from dry areas include some surprisingly good yields. For the week, nearby wheat futures moved fractionally lower, while the July corn contract gained more than a penny. Private estimates calling for reduced soybean plantings failed to move the market higher. For the week, July soybeans lost more than 4 cents per bushel, while the July meal contract declined by .10 per ton. In the fiber market, nearby cotton prices continued their decline with the December contract losing $3.17. In livestock, the June live cattle contract gained $2.18. Nearby feeders were up $2.53. And the June lean hog contract lost $1.38. In the financials, Comex gold lost $6.50 per ounce. Nearby crude oil prices were up $2.84 per barrel. The Euro lost 63 basis points against the dollar. And the CRB Index was unchanged from last week closing at 349-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: May 26, 2006 Pfitzenmaier: Thanks, Mark.

Pearson: Let's talk about the wheat harvest. As we mentioned the harvest is underway down in the far southern plains. They are seeing some better yields, some surprising yields on wheat. I'm sure not a dramatic impact on the markets this week but this wheat market has had quite a rally.

Pfitzenmaier: Well, we actually had a reversal in wheat today or this week. We went up and made new highs. Closed quite a ways off of those highs, and this -- the wheat market has a feel of the market that's kind of starting to run out of steam. Like you say, some of the yields are coming in a little better than we expected. Harvest is starting to pick up and progress which generally speaking puts a little pressure on anyway. And if yields come in a little better than they were thinking they might, that $4.20 to $4.30 area that we ran into here may -- well, plus, in addition to that, those kind of prices are going to tend to choke off demand a little bit, which has been a continuing problem for wheat over the last two or three years. So, I think you would have to honor those reversals and maybe look at making some sales up in -- at what I think are some pretty lofty levels for wheat.

Pearson: Alright. And, of course, we talk about the Chicago rate of wheat is what we show on the show. The Kansas City market has been really exciting and so has the spring market up in Minneapolis.

Pfitzenmaier: Yeah, those are the markets where the real action has been and it has kind of drug Chicago along with it. But, you know, they're all in the same general category and they're going to tend to move together.

Pearson: Like you say, these are decent prices, you'd make sales?

Pfitzenmaier: Right.

Pearson: Alright, let's talk about the corn market. We're getting a lot of conflicts about, you know, what is going to be planted, what the real planting number is going to be and so forth, we just heard the reports from Informa. It looks like we could have switched some of those bean acres back to corn. It's going to be interesting to see what happens this year. We're so early in the growing season. We have corn emergence in big parts of the Midwest. And all the reports we're hearing so far are good. What are you telling producers these days about making sales?

Pfitzenmaier: Well, you can tell them all day long what you think they should do but making a sale in this kind of a market is a very difficult thing when you see gold and silver and energy prices rocketing. You look in the paper every day and all you hear about is ethanol production and you look over at the energy markets rallying up and you think corn is an energy, why should I be getting to excited about selling corn up at these levels. And they certainly are right. Now, like you reported with the world stocks down as sharply as they are if anything goes wrong this summer there's going to be a real explosion in corn prices on the up side. And any time you have that situation you want to develop a strategy where you can at least leave that top end open somehow. Now, there's a couple ways to do that. You can just flat out buy a put. You can go out and either do a forward contract or a hedge to arrive contract and then go back in and buy a call which essentially creates a synthetic put for you. But I think you have to come up with some sort of a strategy that locks in a floor for you, because like you said, these are good prices historically but they are, it is also a market that has a lot of upside potential. So, I think you have to kind of wrap those two together somehow to develop a marketing plan that builds hope into it but yet gives you some security on the down side.

Pearson: And an option strategy economically is about as efficient a way to do it as you can?

Pfitzenmaier: That's about the only way to do it that I know. You know, the other situation you've got setting up here is you've got a lot of old crop corn coming along. And if we go another month or two down the road and we continue to have pretty decent, have a pretty decent crop developing on maybe slightly bigger acreage we're vulnerable to some pretty good break, particularly in the cash market. And you started to see that, that basis is starting to slip a little bit and people are calling saying, you know, what is going on with the basis. Well, what's going on with the basis is you still have that 2.2 billion bushel of carry out we've got to deal with in the short-run.

Pearson: That's right. And, of course, those sales like you say, a softening basis -- that's a big factor right now. And, of course, we could if we do have a decent crop and we do carry that old crop we could be in worse shape than we were in last year.

Pfitzenmaier: Well, there is that potential. I mean, I think that last report came out and gave us very friendly numbers in terms of acreage, in terms of harvested as a percentage of planted acres, in terms of ethanol production, on exports, just about every category was about as good as you're going to get. So, barring some huge, major weather problem we're going to struggle. And the crop is off to a good start. And when you're off to a crop planted this early with this kind of moisture and this kind of good emergence it is pretty hard to have a below average yield.

Pearson: That's true. Alright, let's talk about soybeans. Again, a little bit different scenario there. Maybe fewer acres of soybeans. Not much of an impact in the market this week but there are so many other things going on. What is Brazil going to do? What is that Brazil harvest actually going to be and some of those questions that need to be answered and obviously, we have a new crop emerging in the United States.

Pfitzenmaier: And crush wasn't very good this week, exports were a little on the soft side. So, I mean, all that you would, if somebody told you all that you'd think beans would have been down quite a bit with the carry out we've got and they're not, they hung in there very well and it looks to me like maybe there's another ten or fifteen cents on the upside here. We're going to be watching very closely Tuesday to see how that planting progress number comes out. Normally out Monday, going to be delayed a little, a day here. So, we'll watch and see if we progress very well on planting that could be another little stab in the heart of the bean market here.

Pearson: Alright, what is your bean strategy?

Pfitzenmaier: I guess I think the upside on beans is probably a lot more limited so I guess I'd feel a little more comfortable selling the futures there or forward contracting or hedge to arrive or whatever works best in your program. But you get in that $6.15 to $6.40 area I think that is the window for selling new crop beans and I certainly would be a seller there. Now, if you're afraid of it blowing out through the top side I guess you could buy yourself a cheap call to cover that. But I guess I wouldn't be too inclined to do that.

Pearson: Talked to a lot of producers with old crop beans still.

Pfitzenmaier: Yeah, and those are going to -- with a 650 million bushel carry out at some point that is going to be a big problem for the cash market and you're going to see the basis on beans get pretty sloppy. Now, August is, you know, the key time for soybean production so we're probably going to wait a month or two before that has much impact on the cash market.

Pearson: Let's talk real quick about cotton, another big down swing today. And I guess, you know, we always come back when we're talking about cotton to China and if they're in the market we're good, if they're out of the market the cotton market suffers.

Pfitzenmaier: And the crop has developed fairly well. You're always a little worried about dryness early and we're in pretty good shape moisture wise in the cotton areas. The dollar has been pretty beneficial, or harmful, excuse me, to sales of cotton. So, you know, but we talk all winter long that cotton is going to be in a trading range from $50 on the down side to $58 or so on the top side. We tested that top side a few months ago and now we're testing the bottom side. I think you'll see fairly good support here on cotton in this, you know, high, very high 40's to 50 dollar area.

Pearson: Alright, let's talk about livestock. It's Memorial Day weekend, it's the big start of the grilling season. Pretty decent beef movement out there at the wholesale level. Have we got some hope now in this fed cattle market?

Pfitzenmaier: I think there's limited hope. We've had a pretty good bounce off the lows. I think you can see June cattle work their way up into that 80.25 to 82.25. I'd say that's the window you want to keep a close eye on. It's probably going to take us a few days to work our way up into that window and then I think you have to, once again, become a seller. You're going to start to see the numbers pick up as we get into mid to late June. Weights are up. You have a tendency to be building numbers, the cattle on feed report sort of confirmed that where you saw those, the big problem is going to show up in October because you've got those lighter weight cattle where the real increases came. I think we're probably going to be okay through the summer but the fall is really an area of concern, I believe.

Pearson: Alright, let's strategize for the fall because that is the big question for cattlemen. Cow/calf guy, he's watching this feeder market and that's been interesting to see. What do you see for fed cattle come this fall?

Pfitzenmaier: Again, I think you can see those deferred markets rally a dollar or two and then I think you can just step in and sell them. I'd be probably a seller of futures on that kind of a rally.

Pearson: Alright, let's talk about hogs. Again, we've had this avian flu thing, we were hopefully starting to work through some of that, see some of that poultry start to finally disappear at extremely cheap levels. Pork market has held right in there hasn't it?

Pfitzenmaier: Well, it has. I have a fear the way we broke down this week we may be going back to check out the lows. That cheap poultry statistic that you just sited I think is a big problem on the pork because they really but heads. The beef is viewed as kind of a special meat, a little more premium product and doesn't really compete like pork and poultry do. And when pork gets measured up to poultry you kind of suffer there. So, I think you're going to see a little heavier weights. Again, come mid June you're going to start to see more hog numbers pick up. So, you've got the potential for a little strength over the next two, maybe three weeks then I think you're going to start to see pressure on that hog market again.

Pearson: Alright, what is your strategy out there for a pork producer at this stage of the game?

Pfitzenmaier: I guess basically the same as it is in the hogs. I think you have to continue to use those August through December contracts and use them as selling opportunities. I don't know that I'd get too frisky beyond that but I think for that third and fourth quarter you have to be fairly aggressive at getting some marketing done and just, you know, that October contract looks cheap, it always does every year because you've got that inverted basis situation there. But I think you kind of have to suck it up and sell them when you get, you know, up not too much higher than where we're at.

Pearson: The number of producers who were actually impacted by the pork futures and cash prices are really getting smaller and smaller every year. And when you look at that, when you look at the changes that have occurred from the corporate production standpoint we've kind of altered this whole pork -- you talk about those fall markets -- a lot of that has changed.

Pfitzenmaier: Yeah, it has changed a lot but that basis situation I was talking about off the October contract hasn't changed. You've got a positive basis every year, it's happened for year in and year out and it continues despite all these structural changes that have taken place in the pork industry. You still have that invertus basis in that September time period and it really floods people up because a lot of times you'll look at $56 October hogs and say wow, I don't want to sell them that cheap. Well, the reality is that is probably projecting $59 to $60 hogs because of that special basis situation.

Pearson: So, we have October pork month. Tomm, thank you so much. Appreciate it, Tomm Pfitzenmaier. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm on just where these markets are headed visit the Market Plus page at our Market to Market Website. And, of course, be sure to join us again next week when we'll take you inside America's only nationally recognized avian flu testing facility. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat