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Market Analysis: Apr 21, 2006

posted on April 21, 2006

Grain prices are beginning to follow weather developments as they normally do this time of the year. For the week, nearby wheat futures were down more than 4 cents while the May corn contract moved fractionally higher. Bean prices rose again this week, confounding bearish fundamentals. For the week, May beans gained more than 6 cents per bushel, while the May meal contract advanced by $1.50 per ton. In the fiber market, May cotton gave up more ground this week, with the May contract loosing $1.34. In livestock, the April live cattle contract lost 47 cents. Nearby feeders were down 37 cents. But the May lean hog contract gained $2.12. In the financials, Comex gold gained a whopping $35.70 per ounce. Nearby crude oil prices gained $5.85 and established yet another record high. The Euro lost 278 basis points against the dollar. And the CRB Index gained nearly 12 points to close at 354.75. 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: Apr 21, 2006 Pfitzenmaier: Thanks, Mark.

Pearson: Let's talk a little bit about what's going on right now. Let's talk first about the wheat market where it's always challenging to get that hard red wheat, winter wheat crop up and going. There's always a lot of concern about what the spring wheat crop is going to look like and what conditions they're going to be seeing. So, it's usually a big part of what happens in spring. Well, this year we had some extremely dry weather in the hard red winter wheat belt, a lot of concern about condition, a lot of concern about what we're going to see up north in terms of spring wheat. What is your take on this wheat market? On the show we follow Chicago soft red wheat which seems to be the one that has the least action.

Pfitzenmaier: Yeah, and Kansas City is really the hard red winter wheat which is the one which everybody has kind of been watching over the last few months. It too, you didn't say it in this little report, but it too has broken here. I think there is a general perception that we've had some pretty decent rains in the spring and that winter wheat crop is maybe a little better than it looked when it was dry in the middle of the winter. Demand continues to not be all that great for wheat in spite of all the concerns about lack of it growing around the world. So, wheat has softened here. I think you've got that May wheat contract basis Chicago and a trading range here of $3.70 to $3.40 and we're kind of in the middle of that range. And I think you buy it down at the bottom end, sell it at the top end. And then wait to see if any news comes along to break us out of that. I guess part of the news could be a potential problem in the corn crop could come in here and start to be supportive of the wheat here.

Pearson: That's right. And, of course, we're early in that game here domestically. But let's talk about the corn crop. And we tend to talk about, you know, old crop supplies and we tend to talk about the nearby corn contract. Of course, those are the ones we feature on the show as you're seeing now. But if you go out to 2007, 2008 there are some pretty attractive corn prices out there. Why is that, Tomm?

Pfitzenmaier: Well, I think you alluded to it in one of your earlier reports on ethanol production. The market right now is viewing the grains, corn and beans, as reflections of the energy market. And you look at all the ethanol plants that are expected to come online. There is a lot of production -- we have two years of production to get through before you come into that '07 December corn. With all that stepped up in production, we've got China as a wild card in there, there's just a lot of things that could happen to really shoot that corn contract up. And I understand why it's attractive to people, I understand why people are selling it but I'd be very cautious because there's a lot of land mines between now and December of '07.

Pearson: That's right, that's well put because if you look at the fundamentals from both corn and soybeans right now, we'll stick to corn, you've got a huge carry out this year. You've got good demand, you've got the ethanol demand but you also have a feed byproduct there.

Pfitzenmaier: Right. And, you know me, I tend to be a little on the bearish side. So, for me to say that is probably kind of saying something. But I guess there's enough things that could go wrong, like I said, in that time period that I would be cautious. Now, old crop, you're right, there's a lot of corn around, there has probably been some shifting since that report in acreage back toward corn. I think we're getting the crop planted, I mean, we're a little behind a year ago but I'd guess this weekend and next weekend we're going to catch up and a big chunk of the corn is going to get planted in fairly good conditions here. So, we're going to be over that little area of concern and I would guess when we get it planted you're going to have to take some weather premium out of this market. Having said that, I have to repeat, the traders seem to be viewing corn as an energy. And as long as you've got crude oil making new highs I think they're going to be very, very willing to step in there and buy corn on any breaks for a while here.

Pearson: We've added crude oil prices to our market mix, as you know, and of course record highs this week. And that seems to be the factor that is driving this thing because fundamentals are long -- and you've always been a fundamentalist Tomm, which is another departure for you. We're now becoming part of, in the agricultural sector, in the feed grain sector, we're now becoming part of the energy complex.

Pfitzenmaier: Right, and I think that is a factor that we have to begin to take into consideration when you consider the value of corn. And with all this ethanol coming on board we're not exactly sure of how to evaluate that. I mean, we know how to evaluate it based on feed usage and exports but we don't know with this new energy component in here what exactly is the right price for corn.

Pearson: Alright, soybeans follow under the same category. Soybean market, again, has confounded people from a fundamental standpoint, which is what we generally watch, plenty of soybeans around yet the market has held up here pretty well.

Pfitzenmaier: Saying there's plenty of soybeans around is an understatement. There are huge quantities of soybeans around. We have enough soybean oil around to supply whatever soy diesel plants get built for the next year or two. I mean, there's boo coo product round. But, again, the traders seem in the short one to want to consider bean oil and beans as an energy and I think it's ridiculous. I think beans are overpriced. I think you should be selling the daylights out of them. But there are those traders who want to continue to buy that, at least for the short run. Now, if this energy price rolls over, corrects in a big way similar to what gold and silver did here at the end of the week, that's probably going to be a pretty negative influence and I think there's 50 cents to $1 down in the soybean market at some point.

Pearson: Okay, so you'd at least clean up old crop. Would you sell some new crop?

Pfitzenmaier: I would clean up old crop for sure. I would buy puts on the new crop to get some kind of a floor probably at $5.80 or $6 to establish a floor on new crop beans.

Pearson: Okay, let's talk a little bit about what happened with cotton this week. And there was some pressure there. And, of course, China is such a big factor in this cotton market. If they're in it's up, if they're out it's not.

Pfitzenmaier: China is the cotton market really. You know, we've talked really for a year, year and a half now about a trading range in cotton with $48 to $50 on the down side, $58, you know, maybe creep up to $59 on the top side. Nearby cotton is close to that $50 mark at the end of the week here, maybe there is another dollar or two down, probably not much more than that. You know, we've got planting to go through and see how that crop gets up and going. So, I think you're going to start to see it stabilize fairly well down in here.

Pearson: Alright, let's move over to livestock and I want to spend some time on cattle and hogs. The cattle market since the first of the year has just done nothing but slide down. We've seen a little bit of a bounce up, not a whole lot here in the month of April. Hearing really positive economic news from first quarter of the year obviously tempered by fuel prices. But this cattle trade we did start to build the heard it appears this last year. And, of course, cattle weights are another big factor.

Pfitzenmaier: Well, cattle prices tend to, you know, there's a ten year cattle cycle there and they tend to top in the middle of the decade which we've talked about all winter and that is, we're kind of fitting into that pattern. And then you get the huge amount of poultry available, quite a bit of pork available. I guess I agree that the economy is good but this gasoline price thing really has people spooked and I think that is going to have an effect on overall beef demand. Beef is viewed as a premiere product and I think that is going to be a bit of a problem for beef, it's expensive. I mean, you can buy a ton of chicken for what it costs for a pretty nice sirloin. So, I think that we're going to, you know, they tried to rally the market here Wednesday and Thursday because everybody thought through the week that the cash market was going to come in a little better. Well, late Thursday, early Friday all of a sudden the cash market isn't a little higher, it's actually a little lower and boom, the futures fell right back apart on Friday.

Pearson: What do you do right now if you're a cattle feeder?

Pfitzenmaier: Well, I think you have to use some kind of protection. I don't, you know, on a ten or fifteen dollar break it's pretty hard for me to jump in there and sell the futures market. I think that would probably be not the wisest thing to do. But I think there is enough down side potential that having a put under you, on these kind of markets, certainly isn't a bad idea.

Pearson: Alright, we have a lot of cow/calf producers watching the show. This feeder market also under pressure. What is your take there and what should they be doing?

Pfitzenmaier: Well, feeder prices are, I mean, we're still up there, you know, well over $100 on feeders all the way into the fall and that is when most of those guys want to sell those calves. So, I mean, there is ability here to still lock in a fairly good feeder price. Now, because they're going to have both things working on them. They've got the potentially corn going up and they've got the fat market going down and here you've got that feeder market sitting up there like a big cherry waiting to get plucked off the tree and it looks to me like if you were a producer with that kind of price potential and the negativity that you're looking ahead out into I don't know why you wouldn't be just selling the daylights out of it.

Pearson: Alright, let's talk about the hog market. Futures were up this week. There's plenty, as you mentioned, plenty of poultry which is the background for the whole protein sector. But we did have a little bit of a bounce in the hog market this week. But what is your take going forward on hogs?

Pfitzenmaier: I mean, hog weights are up, we've got a lot of hogs, you've got a cash market that is in that $55 to $60 range and you've got a summer futures market up to $66 in June, $67 on the July and August. Why wouldn't you be selling that? I mean, everybody is saying, well yeah, maybe the cash is going to come up. Well, maybe it's not. You know, there is a bird in the hand here to be plucked off and, again, I don't know why you wouldn't grab that and take advantage of it. I mean, maybe we're going to go back up and test $70, I don't know, but, you know, you can buy $66, $65, $64 puts in the summertime, have yourself a nice floor locked in. If we do have problems you've got yourself a nice floor established. I guess I don't understand why you wouldn't want to take advantage of some of that.

Pearson: Alright, so you're telling producers right now jump on some of these opportunities?

Pfitzenmaier: Well, these are good prices and with the potential for a lot of bad news. Now I know some are worried about the bird flu potential and that is a hazard.

Pearson: Alright, so we'll keep that one in mind. Tomm Pfitzenmaier, as usual some great insights. 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 are headed then be sure to visit the Market Plus page at our Market to Market Website. Of course, be sure to join us again next week when we track planting progress across America. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news