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Market Analysis: May 27, 2005

posted on May 27, 2005


Weather concerns in April caused speculative buying in the grain pits to dry up. Now the funds are back big-time. For the week, nearby wheat futures jumped 22 cents. The July corn contract advanced by eight cents.

Fund buying also drove prices in the soybean pits, with the July contract moving to new highs. For the week, July beans gained nearly 36 cents. The nearby meal contract jumped $12.40 per ton.

Cotton traded in a narrow range this week, with prices rising 38 cents on the nearby contract.

The livestock markets went flat this week. The June cattle contract was down 55 cents. Nearby feeders lost a dime. And the June lean hog contract was off by just two cents.

In the financials, Comex gold gained $2.10 an ounce. The Euro climbed just seven basis points against the dollar. And the CRB Index advanced six-and-a-half points to close at 300.75.

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

Market Analysis: May 27, 2005 Pfitzenmaier: Thanks, Mark.

Pearson: Well, let's talk about volatility again in the soybean market. I guess there has been a theme lately to what you've been saying, it's been to expect a volatile growing season.

Pfitzenmaier: I think this is just a little taste of what we've got coming this summer. I mean, we really haven't had weather so far that is all that terrible. So, I think this is a pretty good precursor to the type of summer we're going to see when you get into those hot, dry periods of July and August.

Pearson: Tomm, as we look at these soybean prices for new crop we seem to be reaching almost, we seem to be really fairly flat. The old crop values were up pretty good. It seems like there are still a lot of farmers holding old crop soybeans out there.

Pfitzenmaier: Yeah, there is and we had a pretty good round of farmer selling in that February/March run up that we had and I think that satisfied a lot of financial needs and I think from what I hear talking to people around the country is that they're prepared to hold those beans because they think there is going to be either number one, a lot of people feel the acreage is going to be a little lower on beans and maybe the switching was more than the USDA picked up on their initial reports. Number two is that there is a possibility of some weather conditions that could give us a bounce because the market will be a little more nervous because of that lower acreage. And then the big one is that everybody has kind of bought into this fear of rust scare and if that doesn't happen and it's dry then we're going to have an aphid problem. So, I think they are prepared to hold those old crop beans fairly well into the summer here.

Pearson: This is going to be the first year that we've had the threat of the Asian Soybean Rust. And there is just a factor of uncertainty out there. I've talked to a lot of farmers, you've talked to a lot of producers out there who say we feel pretty comfortable. If we think we're going to see it we can control it.

Pfitzenmaier: Yeah, and I saw a study put out by Iowa State University here in the last week or so saying that, you know, the worst case scenario so to speak of that is kind of beyond us the fact that not much of it is showing up beyond Southern Georgia and Florida. You know, every week we go by here then our crop gets that much more mature and the chances of damage continue to decline here. So, you know, we're on a good track from that perspective. And we do have the potential of everybody sitting with all these chemicals sitting out in their shed they're probably going to get used one way or another and there is some ____ and mold and some other things that can be, some control done on them by using those chemicals. So, we might overall have a better soybean yield because of that.

Pearson: True and we've heard the experts say that too that if we do have to spray for rust we might wind up with better yields after all.

Pfitzenmaier: Right.

Pearson: So, as we look ahead, we look at new crop in November do you want to be doing anything at this point, any kind of insurance?

Pfitzenmaier: I guess I'm fairly comfortable with the fact that we're probably going to make a run at seven bucks on these November beans and until we get to that level I guess I'm not that excited about doing anything. And then you'd have to be a little cautious when you get up against there too, you know, this $6.40 puts I think if you can get them down around 25 cents, they closed at 33, 34 this week so get another dime off of them and I think that is a good place to look because you start with the $6.40 put, you pay a quarter for it, you're still above six bucks as your floor and having a $6.00, $6.15 floor isn't a bad place to start I don't think.

Pearson: That's a good point. Let's talk about what is happening in the corn market which has been, it's had a lot less sex appeal from a volatility standpoint because of the size of our carryover. But, of course, we've seen an awful nice rally in May corn rally which really would be your classic rally, everybody is in the field theoretically.

Pfitzenmaier: Well, you tend to top, if you look at a long-term seasonal chart for corn you tend to top out here in this end of May through the 15th of June time period and then it's kind of pretty much a slow decline, a little bounce there and the 4th of July and then it's a pretty steady decline into harvest historically on an average year. So, yeah, this is a solid rally that I think you need to take advantage of. You're getting that $2.40 to $2.50 range, buy yourself either the $2.40 put for under 20 cents, a $2.50 in the 21 to 23 cent range and you've got a nice floor. With a two and a half billion bushel carry out an increase in acreage which may even be a little higher than the USDA said on its last report and there is a potential for pretty huge crop out there. We've got good subsoil moisture. The thing everybody can -- it surprises me -- everybody continuously forgets is that unbelievable ability that our hybrids are out to make crop under all kinds of variety of conditions.

Pfitzenmaier: So, there is still a potential for a huge crop out there and if that is the case $2.40 or $2.50 either one are going to look like an awful good floor.

Pearson: So, it wouldnt hurt you at least to start there, at least get something on the board there.

Pfitzenmaier: Absolutely, 10 to 25% maybe just to kind of get a start on it if you're totally uncomfortable selling something. And maybe you just go out and make some cash sales too and get hedge to rides or whatever to get that started too.

Pearson: Alright, but get the thinking cap on because we're probably going to see that soybeans and corn are probably going to have some divergence here in terms of direction.

Pfitzenmaier: That would be my anticipation, yeah. And like you said, you know, we've had a 20 to 25 cent rally here in corn which is a pretty good early summer rally.

Pearson: Absolutely, as we look ahead for the wheat market, the reports were extremely positive in terms of condition for the U.S. wheat crop. Again, some concerns about, you know, that crop is not made until it is in the bin.

Pfitzenmaier: Well, and you're getting some early harvest reports that says the harvest, you know, yields are coming in pretty good too. So, you know, the wheat has had a really nice pop up here from just about $3.00 to $3.40. I think $3.40 is going to be very difficult to get through. We can't really discount the fact that the funds have a lot of money, a lot of money to throw at this market and they can kind of over-exaggerate some of those moves. So, you know, if that gets going maybe we've got a little more. But I think the fundamentals in wheat probably don't support much above $3.40.

Pearson: You think about wheat and the fact that we have fewer acres, less production in the U.S. this year would be a big factor but on the worldwide scene, on the macroeconomic front wheat is everywhere.

Pfitzenmaier: Yeah, you're upside of a good crop and supposedly they've got some isolated problems here and there around the world but overall things look pretty good.

Pearson: Alright, let's talk about this cotton market. Not a big move this week but cotton has had a nice rally. We're back into the zone where you said if we get back up over I think fifty-six, fifty seven makes some sales.

Pfitzenmaier: Yeah, I'd say maybe even earlier than that, maybe $55, $55 to $57 I think you're going to have a very difficult time going above that in the wheat market. China kind of disappeared there for a couple of weeks but they were back in again strong this week as the primary buyer and will probably continue to be and that is going to shore that market up and probably give us a fairly good floor and the $50 level. But like I said, rally above $55 to $57 is going to be tough to come by.

Pearson: Cotton has been fairly resilient in the face of so much talk about, you know, reducing textile imports into the U.S. from China and so forth which has been a big buyer hasn't it?

Pfitzenmaier: Yeah, they are the buyer, I mean, that is the big kahuna in that market. that is why you see that sag when they disappeared there for a week or two, cotton kind of headed south and as soon as they come in buying boom we firm it right back up again.

Pearson: Alright, so around $55 start making some decisions. Tomm, let's talk about livestock and fed cattle market and again, a little bit of a softening on the board this week. A little bit of softening in that Midwest and that Oklahoma, Texas, Kansas market this week. We were at some pretty lofty levels though.

Pfitzenmaier: Well, we were at pretty lofty levels. That cattle on feed report came out and showed that over 800 pounders up 43% so that expansion is beginning and that top is probably in the cattle market. As you start to see weights coming up a little bit numbers are going to start to creep up a little bit. I think the consumer doesn't quite have the money to spend on meat like they did. I think the gas, energy costs have cut into that demand just a little bit. So, I guess you get rallies on basis of June contract back up in that $86, $87 area you have to become a seller there or a buyer of puts, whatever you're most comfortable with.

Pearson: Tomm, we've got a situation in Canada, the situation in Japan that still has been floating out there. How much of a factor do you see those two things if we get -- if they both happen at the same time opening Canada and opening Japan will there be much impact?

Pfitzenmaier: I think that is going to be an off set. I guess the thing I would say when I talked about declining demand is the caveat on that would be is if Japan gets opened up which a lot of people think is going, that gate is going to gradually get opened up by fall and that is going to tend to be a supportive demand figure there. But the Canadian thing is a bit of a wild card still I think.

Pearson: As we look down the road in the beef market, like I said, we had those two factors going on. We've had incredibly strong cow prices, feeder cattle prices you pointed out exceptionally strong. And we all want the good times to last forever but when are we going to start to expand this herd? When are we going to start to see this cattle market long-term start to shift?

Pfitzenmaier: Well, I think we are. I think that started probably all the way last fall in a very small way. I think, you know, this feeder demand is fairly high and that makes it difficult for a guy who has got a heifer they want to hold back, you know, that is a pretty valuable heifer they're holding back to breed. And so that is going to slow it up a little bit but I think part of the reason you're seeing these prices higher is some of those heifers are being kept off the market and that has helped to keep that feeder market higher. Having said that I think that about $120 high that we put in in the feeder market is probably going to hold, $110, $111 that we were at this week is probably going to be the recovery bouncing and I think you can see that market sag back into the $100 to $105 range.

Pearson: As we look out and we look at weather conditions around the country out in the West we still see some dry pasture areas, still some concern there. So, these cow prices which we've been getting reports, $1500-$1600 on fed cows that is pretty hard to make work isn't it?

Pfitzenmaier: Yeah, it is. I don't know how they do make it work but apparently they're going to give it a heck of a go anyway and try it, that is the part of the resiliency of the cattlemen that they're not afraid to give it a try. p>Pearson: Absolutely not, never afraid to be in the arena. Let's talk about the hog market which has seemed, it's been spooked just a little bit here this spring. You talk about this I think when you were on in January you were talking about what was ahead for the hog market and you said we'd see some expansion. It looks like that's starting to happen there too.

Pfitzenmaier: Yeah, numbers are creeping up, weights are creeping up so that gives you more tonnage even though you dont have any change in the sow herd size. Demand, there again, is creating -- look at bellies have dropped thirty bucks I guess in the last two or three months here. So, the whole complex is starting to run into a little bit of a demand problem, the competitive meats are cheaper and numbers are going up so that is not a good combination for the pork industry. I think you get the June/July contract back up in that $74, $75 range it probably needs to be sold. I think it's turned from a by the brakes market to a sell the rallies kind of a market and that is not to say that there won't be rallies and some probably pretty decent ones. But those are going to be designed to sell.

Pfitzenmaier: You get a lot of questions, people asking what to do out in those deferred months where you've got December hogs, you know, down in the low -- mid 50's, excuse me, I guess I'm not real excited about hedging that. I would want to see more rally in that market. I think that is fairly well discounted already. But that is still thinking in those summer months and front months there are still some opportunities going to be created here.

Pearson: Alright, but you would look at getting some locks in the $74, $75 area?

Pfitzenmaier: Yeah, absolutely.

Pearson: Alright, let's talk about the flip side of the livestock business. That is the feed side. Talk about this volatile soybean market and volatile corn market so far to kick off the spring. Livestock producer would you be locking in some product?

Pfitzenmaier: I wouldn't -- well I'll start with corn. I guess I think that the crop looks pretty good, the acreage is going to be high, carry out is big. I think you can stay hand to mouth on corn. I don't think the corn markets are going to get away from you and I don't see any big reason to now. If you don't believe anything I say there and you think I'm totally wrong then go out and some of these $2.80, $2.70 calls are six, seven cents, you know, it gives you some protection against a big blow off on the top and you're not spending that money. So, you know, if you're concerned about dry weather that is your opportunity.

Pfitzenmaier: On meal, if the bean market goes wild this summer meal is going to go higher.

Pearson: Alright, some good points as usual. Tomm Pfitzenmaier, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm on where these markets are headed then be sure to check out the streaming audio at the Market Plus page on our Market to Market Web site. And be sure to join us again next week when we'll examine the role the funds play in driving market prices. Until then, thanks for watching, I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices markets news