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Market Analysis: Jan 20, 2006

posted on January 20, 2006

The livestock markets were virtually unaffected by Japan's decision, and actually posted modest gains on Friday. More on that in a moment. The grain markets, on the other hand did not have a good week. For the week, nearby wheat futures lost more than 8 cents, while the March corn contract also declined 8 cents. Soybeans, which have been trying to find the bottom of the recent sell-off, came up short again this week. For the week, the March contract fell more than 8 cents, while the nearby meal contract declined $2.30 per ton. Cotton prices, meanwhile, continued their sustained rally. For the week, the March futures contract gained 20 cents. In livestock, the February cattle contract was up 20 cents. Nearby feeders gained 27 cents and the February lean hog contract advanced 25 cents. In the financials, Comex gold advanced 2.60 per ounce. Nearby crude oil prices rose 4.43 cents per barrel. The Euro gained just 1 basis point against the dollar. And the CRB Index advanced 4 points to close at 341.50 Here now to lend us their insight on these and other market trends is one of our regular market analysts, Tomm Pfitzenmaier. Welcome back.
Market Analysis: Jan 20, 2006 Pearson: Here now to lend us his insight on these and other market trends one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back

Pfitzenmaier: Thanks, Mark.

Pearson: Well, let's talk about where we are -- a couple of weeks ago I was down in Amarillo, Texas and I got a good look at what is happening down there in the plains. And I'll tell you what, this winter wheat crop has been under some stress. Up until this week we've seen the market kind of reacting to that. What is your take on wheat prices? Was it just a little overdone?

Pfitzenmaier: Yeah, I think it was a little overdone. I mean, overall I think the winter wheat acreage was up, I've talked to other people that say it looks, you know, it's suffered and it has had problems but probably is going to be alright. The demand for wheat isn't all that great, exports were disappointing again on Friday morning. So, maybe wheat has got a five to eight cent rally left here in it, maybe it's got another twenty cents down in it. I think we're in a trading range of $3.00 to $3.10 on the bottom and $3.35, $3.36 on the top side. I don't see a lot happening to break us out of that range. You know, I've read before that a lot of people consider winter wheat like a weed and it's hard to kill off a weed. And we always have these concerns through the winter and then when spring comes around it tends to work out alright. So, I guess I wouldn't get too wound up on the up side on the wheat market here.

Pearson: Alright, if you're a producer out there what would you recommend at this stage of the game?

Pfitzenmaier: Well, that's what I say, five to eight cent rallies I think need to be sold. You also have the problem with the competitive corn competing pretty well with the wheat and that is going to keep wheat in check also. Worldwide wheat supplies are fairly ample and exports are probably overstated and going into decline also. So, wheat has got some problems here and probably has limited upside potential.

Pearson: Alright, you mentioned corn. Let's talk about the corn market and what's been happening as far as corn is concerned. We're hearing about increased livestock numbers and we're talking about hogs that are being fed to heavier carcass weights and so forth. So, it looks like from the feed demand standpoint things look pretty well. USDA obviously said, you know, we've got plenty of carry out going forward. And I want to talk about some of these deferred contracts out there. Talk a little bit about what your thought is in the corn market and what would you recommend to a producer?

Pfitzenmaier: As far as the deferred contract

Pearson: Which you've talked about over the years, you know, getting sold at $2.50 or better has always worked

Pfitzenmaier: The new crop contract it looks to me like if you can go out and buy yourself a $2.50 corn put, spend 20 to 22, 23 cents maybe for it, get yourself a two and a half dollar floor locked in, if we go ahead and produce another good crop and break this market back in that $1.90 to $2.00 area you've got a potential forty, fifty cent gain on that option. Now, a lot of people don't want to spend 20 to 22 cents, they think that's too much money to spend, you know, it's a big expense to off that $2.50. You can go out and sell yourself $2.80, $2.90 calls to pay for it, collect 20 to 22 cents. You've got basically your floor locked or a range locked in with a bottom of $2.50 and a top of $2.80, ride that down, pick up your fifty, sixty cents, you have a big crop again, have a 25 to 30 cent carry, collect a 40 cent LDP and all of a sudden you've locked yourself in close to $3.00 cash corn. So, I mean, there are opportunities here if you can sell these rallies and take advantage of them to have yourself a pretty good year if you have yield to go with it

Pearson: Alright, and typically we do. I mean, we went through the drought here of 2005 of late and we still wound up with some crop. Talk about selling that call because we talk about selling calls and buying puts and expense of that. How complicated is it?

Pfitzenmaier: I don't know if it is particularly complicated but it is, you do have margin risk if the market goes against you above $2.80. Now, I generally like to sell at $2.80 and at $2.90 so you can, you have to do that to collect the full 22 cents. I would not risk more than a nickel on one of those because you're going to be a little overloaded if the market starts to go up. You are limited if you sell $2.80's, for example, you are limited on the upside to $2.80. I mean, if you've sold a $2.80 call anything, if the market goes above $2.80 you aren't going to be able to take advantage of that rally. So, there are risks to that and those risks kick in when you start to get above $2.80. But, you know, there is defensive mechanisms you can take and say, you know, I'm only going to risk a nickel or six cents or something on that and if it goes that much against me I'm going to get out of the way of it. But anything you do is going to have some risk associated with it

Pearson: But that strategy has worked pretty well

Pfitzenmaier: It's worked very well the last two or three years. If we don't have a crop next summer, if we actually have a drought that ruins a crop then that strategy is going to get into trouble and you need to be a little careful. I think one of the big concerns, well there's two, one is what is going to happen with acreage because of fuel and fertilizer is going to be switching to beans, number one. Number two, there is the dry weather and the drought and the drowned index and the concerns about La Nina and some of the prognosticators have doubled their -- Ellen Taylor, the climatologist that a lot of people watch from Iowa State University has doubled his estimate of drought possibilities. So, you know, the Illinois crop was made basically last summer on sub soil and sub soil is pretty lacking in most of the Corn Belt. Now, if we get good rains in the spring that can get recharged and that can eliminate that. But it's a hazard that is sitting out there and I think has kept that December corn fairly well propped up. Historically you would expect December corn to be this time of the year with these kind of carry outs to be down in that $2.30, $2.25 range and we're still hanging around $2.40 to $2.45

Pearson: And if you go out to '07 around $2.60. Would you go that far

Pfitzenmaier: A lot of people are, I would not. I think there is enough area of concern, not area of concern but this growing ethanol industry is going to continue to boost demand. Cheap corn tends to boost demand, both the livestock and export wise. So, I guess that '07 crop is $2.60, maybe got to $2.62. I guess for going out that far I'd want to get more than that. You got up in that $2.75 to $2.80 range then I think you'd have to look at that pretty hard.

Pearson: Alright, let's talk about soybeans. And same question there Tomm, you look at that deferred contract, and I mean deferred, I mean, you go out to November '07 you're talking $6.35, $6.40 on soybeans. The word that we're getting out of South America is the crop looks pretty good, plenty of beans down there. You just mentioned it, the potential of switching from high energy corn to less input costs, soybeans, could be a factor this spring.

Pfitzenmaier: There is a ton of factors against beans. That 550 million carry out which could very easily grow up to even more than that the way demand has continued, export demand has continued to lag. Like you said, acreage shifting, South American crop last year was about 97 million metric ton. They're already figuring 102, to 103, it may even creep up to as high as 107. So, I mean, we are building big bean crops, that last report showed a huge increase in world stock, world carry out. I understand what you're saying and the $6.60 area for an '07 bean is a fairly good price but with the volatility of the bean market I guess I would be inclined to be a little cautious on that if it was me.

Pearson: Alright, what about '06 November

Pfitzenmaier: I think that contract you get up in that $6.15 to $6.40 area, anywhere up in there and I think you have to look pretty hard at starting to lock in beans. Now, if you're uncomfortable with that go buy yourself a $5.80 put or a $6.00 put, something like that and get yourself a nice little...

Pearson: Which is going to cost you about what?

Pfitzenmaier: Around 30 cents I'd guess for the $5.80. You know, if you want to finance it go out and sell the $7.80 call or something to pay for it. But that I'm fairly comfortable because I think in the short run we do have big carry outs, we do have the South American crop to feed off of for this summer. Soybeans tend to be a little more drought tolerant than corn does historically. So, I think you can feel fairly comfortable on those, going out to the '07 I'm not so comfortable with it.

Pearson: Let's talk cotton market. As you look ahead for cotton, we've had this nice rally here, a lot of this is China?

Pfitzenmaier: Almost all of it is China. China's demand has been up, you know, in '05 versus '04 like 35-40%, December we had huge increases. That is starting to tail off. We've got the Chinese New Year coming up. It runs from the 29th of January to the 3rd of February or something like that. That is going to start to tail off demand a little bit. So, this has all been predicated on that demand, if that starts to back off which it has started to do I think you're going to start to run out of steam. The cotton market is probably going to do real well in that 52 to maybe 58 cent range. I think in order to stimulate the demand that we have that happened when we were in that 48 to 52 range, you start getting up to these higher levels and you start to price yourself out again and so I think, we closed at 56 plus this week, so there is maybe a little more up but probably not a lot.

Pearson: Okay, maybe take advantage of that one.

Pfitzenmaier: Yeah.

Pearson: Alright, let's talk about livestock, fed cattle market. This whole situation with Japan and of course, things can get blown out of perspective pretty quickly when you have a situation like we had. We had some product that went to Japan. It was outside the bounds of our agreement with them and all shipments coming in were stopped. It looks like it may just be a short-term phenomenon, no one knows for sure. What is a cattleman to do, Tomm?

Pfitzenmaier: Well, you know, the press made it sound like we halted all exports and we sort of did but it was more like we put them on hold. That was a mis-marking of some beef that went out of the United States. I think that is a problem that can get straightened out here and obviously the market shook it off on Friday and didn't pay a lot of attention in terms of price movement. So, I think that is going to get worked out. It seems to me I guess it comes back to, again, the Japanese I think want a product that has been tested and the United States doesn't seem to be inclined to want to do any testing. So, that is a problem that I think we're going to continually deal with until we bite the bullet and decide we're going to start testing. As far as what do cattlemen do? They're at the whim of this here, you have cattle up at 93 to 95 dollars, fabulous price for cattle, you can lock in cattle all the way out through December at almost 90 dollars. I don't understand if you've got cattle on feed why you wouldn't be doing that. That is a price that is way above where we were a year versus the previous year. I just think those are numbers you've got to take a piece of. And maybe you don't 100% hedge but you've certainly got to take some of that when it's offered to you.

Pearson: Alright, and as we're going forward now the calf crop and getting in prices, feeder markets backed off a little bit but we were at some phenomenal levels too.

Pfitzenmaier: Yeah, we had a cattle on feed report out Friday afternoon. Placements were a little less than what they thought so that is probably going to be supportive to those back months. The marketings were a little disappointing, may pressure the nearbys so we're going to react to that early part of next week. But yeah, otherwise I mean there aren't a lot of cattle around, probably numbers are going to be falling off in the next 30 to 60 days. That was a supportive factor, that February maybe on into the April contract too. So, this market has been very resilient, every time you think it's about ready to fall apart it comes back, domestic demand has been very good. We seem to have disconnected from the poultry and the pork market and demand for beef just continues to rock along here and you have to be impressed by that.

Pearson: Alright, you mentioned pork. Retail pork has cheapened up some. The hog market has come down some. We had a run on some pretty heavy hogs a week or two ago which not uncommon after Christmas, New Year's, kind of ... you can see what happened on the board is a substantial sell off. Have we bottomed out here for the time being?

Pfitzenmaier: I guess I'm not sure that we have. I think there may be a little more down, maybe even as much as three or four dollars down. You still have the futures pretty well at a premium to that cash index and I think some of that needs to be taken out of the market here. So, there is probably three or four dollars left down on the pork. On the April contract you start getting up in that 66.40 to 67 area up where that big gap is and I think you have to be a seller of April hogs when you get up into that range.

Pearson: Alright, real quick Tomm, we mentioned energy prices at the start of the show. Crude has jumped up a lot, you've got all these indexed funds coming into Chicago. There's a lot of bullish sentiment as far as commodities period. Real quick, energy prices, what is your take and what is the impact going to be for us?

Pfitzenmaier: Well, the impact is going to be like we talked earlier maybe some switching in acreage. But I think that is something that farmers need to look pretty seriously at and maybe even start booking fuel out all the way through 2006.

Pearson: Excellent, Tomm Pfitzenmaier, thank you so much. That will wrap up this edition of Market to Market. Now, be sure to join us again next week when we'll examine how one small town is fighting the methamphetamine epidemic in rural America. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices livestock markets news