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Market Analysis: Oct 14, 2005

posted on October 14, 2005

The smaller-than-expected carryout helped offset the bigger production numbers. For the week, nearby wheat futures gained a penny. The December corn contract was unchanged.

Strong exports and South American crop worries combined to give soybean prices a boost. For the week, November beans jumped more than 25 cents. The October meal contract went off the board Friday after gaining $10.00 a ton.

The cotton market enjoyed another good week, with the December futures contract gaining $3.30 for the week.

In livestock, the October live cattle contract was down 98 cents. Nearby feeders lost 65 cents. And the October lean hog contract dropped by $1.18.

In the financials, Comex gold slipped $5.50 an ounce. Nearby crude oil prices climbed 79 cents a barrel. The Euro lost 27 basis points against the dollar. And the CRB Index fell two and a half points to close at 329-even.

Here now to lend us his insight on these and other market trends is one of senior market analysts, Tomm Pfitzenmaier. Welcome back.

Market Analysis: Oct 14, 2005 Pfitzenmaier: Thanks, Mark.

Pearson: Well, it's out in the open now. The USDA's October crop report is a thing of history and for some maybe a surprise with the USDA's expansion. But with all the private forecasts we had, pretty much the crop report came right in line with that. I want to talk first about this wheat market. We've had some very strong markets in Minneapolis and Kansas City. Chicago wheat has kind of been the laggard to the group. What is your take on the wheat market? And what is ahead?

Pfitzenmaier: I would guess that's probably going to continue. I think there is still some more up in the Minneapolis and Kansas City wheat. I think the Chicago wheat is probably going to struggle here. You're getting March wheat up in that $3.60 area or $3.65, right up in there, it pretty quickly runs out of gas and I think that is going to continue. I think there is plenty of wheat in that category around and there is really not a lot of reason to go higher. You've got plenty of corn around so you do have alternatives and I just think that wheat market is going to struggle here. I don't know that it's necessarily going to fall apart but you're kind of in a range where everybody seems to be pretty comfortable and we're probably just going to sit and chop.

Pearson: Alright, are we going to chop some more on this corn market?

Pfitzenmaier: The corn market is going to be pretty dull, I think. We've talked all about it. The basis is terrible, the crop is huge, we've got a whole lot of it to harvest yet and that is going to continue to put pressure on. So, I mean, we're back to the play we've been talking about for quite a while now. You sell the carrying charge out into the July contract in that $2.30 to $2.35 area. You store the corn hoping for some basis improvement. You take the big LDP in that 40- to 50-cent area and that is the marketing plan for the crop, for this '05 crop. There is just not a whole lot else to do. There is probably a little more downside in corn. You know, last year with the similar carryout, we ended up in that $1.91 area and that certainly could happen this year. I think a lot of people feel that the next crop report is going to inch that crop size up a little bit so you might end up with a carryout close to 2.4-billion, which is plenty of corn.

Pearson: That's an awful lot of corn. As a producer, like you say, there's not much else you can do except take advantage of -- and you would take that LDP now.

Pfitzenmaier: Yeah, I mean, yeah. Cash corn price is about as cheap as it's been in a very, very long time. That is pretty much what the LDP is tied to. Going with a loan program and hoping for it to get bigger or whatever, I don't think is going to get you anywhere. So, as far as I'm concerned, take the LDP, wait for that basis improvement or hope there is one into the spring and that's the plan, making sure you sell the carry. Now, we've talked about this before; just because there is a carry there doesn't mean you can just store the crop and hope that price is there next spring. That's not the way it works. You have to sell the carry in order to get the carry.

Pearson: What if you don't have on-farm storage?

Pfitzenmaier: Then you're out of luck.

Pearson: That one just isn't going to work.

Pfitzenmaier: Yeah, I mean, you're going to have to maybe pay commercial storage if you can get somebody to let you put it in their commercial storage because that's about all full and then hope there is enough improvement to offset the storage charges. There are some people bumping up storage charges to make it even more difficult to do that. So, if you dont have on-farm storage, you've got a bit of a problem, which brings up another point; you know, especially in Iowa, the territory I'm most familiar with, a year or so ago we had some 200-bushel yields in the last couple of years and everybody is kind of, well, that's not going to last, I don't see that continuing. Well, I think now this year everybody is finally saying, well, maybe the technology is that 200-bushel corn is what we're going to have. And if that's the case, we don't have enough storage building around; plus ethanol plants, that being a big demand base. They want you to store the corn for them and then feed it into -- so I think there is going to have to be more grain storage built to accommodate the way we farm these days.

Pearson: The state of Illinois had a terrible drought this year and still had some surprising corn yields.

Pfitzenmaier: Right.

Pearson: So, you're right, I think that is going to be something we...

Pfitzenmaier: And some of the big seed companies haven't even introduced their drought-corn technologies yet, so who knows when that comes along what you can raise corn on.

Pearson: Alright, let's head over to soybeans. Now, soybeans, you talk about being plugged full. I'm hearing from producers all through the soybean belt that local elevators are plugged. In fact, a lot of the harvest is not getting wrapped up this weekend around the Midwest because (there's) no place to haul the beans to.

Pfitzenmaier: Yeah, well again, if you don't have on-farm storage for beans, you're in trouble there too. It's a huge problem and there's no way to resolve it except just wait and hope things get better. If you can, sneak your beans in wherever you need to go to get them. The basis, there again, is lousy in a lot of areas; probably will improve into the spring. There is a decent carrying charge there, too, so I mean, there is a good return-to-storing beans also. I guess you're going to have to decide, you know, if it's tight, which one you're going to go with.

Pearson: There is no LDP currently in soybeans for most of the soybean belt.

Pfitzenmaier: In Central Iowa we are 14, 15 cents away from it this morning and we didn't improve things any today.

Pearson: So, with that kind of a scenario in mind, what are you telling producers?

Pfitzenmaier: Well, we did get as high as a nickel LDP this week for one day. If you had to sell the beans you're probably well off to take the nickel. Otherwise you don't do anything because basically that LDP is sitting there as a giant put for you because, you know, with the USDA and this report actually came out with a yield everybody was expecting. The big surprise there was they lowered acreage by 914,000 acres and that is the reason this thing was a big surprise. But they're still using a yield number that is about seven-tenths less than last year's yield and I defy you to find a farmer about anywhere in Iowa that doesn't have a yield substantially better than last year's yield. So, it seems to me there is probably some room to scoot that yield up. If that's the case, you could very easily see carryout over 300 million, which means the upside for beans, you know, we had a 40-cent rally this week, over the last week or so. That is going to be tough to sustain much. I mean, I'm not saying it can't go another 10 or 20 cents, but beyond that it's going to be difficult.

Pearson: ... with that kind of carryout.

Pfitzenmaier: Right.

Pearson: Alright, so take advantage of this market as you can. Now, let's talk about the cotton market and cotton prices, which is another interesting one in the report. What is your take now on cotton?

Pfitzenmaier: Well, the crop size is really quite good. Katrina and Rita didn't really hurt the cotton crop all that much. We did have a pretty good shot to the cotton crop in Pakistan as a result of all the problems over there over the last couple of weeks and that has been one of the things that has bumped the crop up. I think we've also found that demand shaped up to be a lot better than we expected, too. Besides Pakistan, a lot of the other producers of cotton around the world have backed off a little bit, so that's been supportive in spite of the fact that the U.S. crop is pretty good. So, I still maintain that you get cotton up in that 57-, 58- maybe possibly 60-cent area and that's probably going to be about it. I don't see a lot of upside potential from those levels in cotton.

Pearson: Alright, let's shift over to the livestock markets. Fed cattle market, we saw better than 90 cents in the cash market. The board was rolling along pretty good. Friday was kind of a washout for the livestock market.

Pfitzenmaier: Well, the cattle market got a little overdone. The cash market got a little squishy at the end of the week. Some of the product eased up a little bit and all of a sudden you had everybody running through the doors. There is one of the major traders in Chicago had some financial difficulty and there was some speculation that that might have caused some of that sell-off. But I think you're going to, you know, that nearby cattle contract up at 94 runs into really big resistance. That is a tough area to get through. We bounced up against that this week and then sold off. You could sell off another three or four bucks maybe but probably not more than that. You've got a pretty good demand base here and there's still the concern about the economy and heating oil and all that through the winter and I guess that's going to remain to see how demand shapes up through the winter with those factors involved.

Pearson: Okay, what is your hedge strategy for a cattle feeder?

Pfitzenmaier: Well, again, you get those 2 to 3 dollar rallies in cattle with the high breakevens, people have, I think you're crazy not to be locking in because we do have this potential for a demand drop with the economy weakening up and all the sort of scary things that are happening there. And demand has been a big part of this rally. Now, I know there is some optimism because of the potential opening of the Japanese market and that seems like a classic buy the rumor, sell the fact kind of a deal setting up. We've been talking about it for a year. So, I'd guess you'd want to have some protection. Now, the upside potential is enough that you may not want to sell the futures but I certainly would be keeping some kind of a floor underneath me.

Pearson: There's a lot of bred cows out there this year and those folks who are looking to sell calves next year, what are you telling them?

Pfitzenmaier: There has actually been some people hedging some of those feeders out into that August of '06 contract up in that 107, 109 area, figuring that historically that's a pretty darn good price and they're going to lock a piece of it in.

Pearson: Alright, let's talk about the hog market and, you know, we've had a little bit of expansion in this hog market. The hog market has held on pretty good. We went through post-Labor Day period on a constant up...

Pfitzenmaier: Well, you know, last week historically is the high in the cash market and it kind of started acting that way. It got a little toppy, started backing off. I think the futures have probably put their high in for the fall and there is a potential for a big drop there if this Japanese market gets opened up to beef. That is going to be to the detriment of pork and export demand for pork has been one of the big drivers. Now, the other thing that is floating around here is this bird flu thing. You know, anybody, anyplace that shows up, the poultry demand drops and it switches right over to pork. So, that is one that is kind of sitting out there as a potential great demand boost on the pork side. If that doesn't come through to any great extent then I think you're in for a correction, five to six dollar correction, in the hog market here over the next month or so.

Pearson: Let's talk to these livestock producers about feed needs and you mentioned it earlier, we're looking at the lowest cash prices we've seen in decades. Get some of it locked in? Get some of it bought out of the field?

Pfitzenmaier: Like I've been saying, the main advantage there is going to be buying cash. That is where the weakness is, that is where the bargain is. You want to lock as much as you can store. I think you want to get that locked up. If you don't have the capability of doing that, you know, futures tend to bottom out in the November/December time period. I think you can go in and begin to accumulate some long futures positions if you don't have the capability of buying the cash grain.

Pearson: But absolutely right now is a phenomenal opportunity to cover some ...

Pfitzenmaier: These are tremendously cheap corn prices for a livestock producer. It's just, I think a lot of them wish they had more storage to lock it up.

Pearson: Absolutely, some good comments and some great insights as usual. Tomm Pfitzenmaier, I want to thank you so much for being with us. That will wrap up this edition of Market to Market. But be sure to join us again next week when we'll drop into Capitol Hill for the debate on proposed cuts to USDA field offices. That's a hot issue. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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