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Market Analysis: Market Analyst Tomm Pfitzenmaier

posted on August 26, 2011


Market Analysis: Market Analyst Tomm Pfitzenmaier

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pearson: Big week. Critical week. Big concern about the corn crop. Numbers coming out Friday afternoon pointing to much lower production of what USDA was predicting August 1 from the pro farmer report. A lot of concern about the ongoing drought in the wheat Wheat Belt, and certainly the situation in Texas and Kansas hasn't improved at all. Disease issues in corn. Let's start with the wheat market first. Strong week this week. A lot of wheat feeding out there. A lot of concern about getting a crop in this fall as dry as it is in key parts of the Wheat Belt.

Pfitzenmaier: Well, they'll be able to get it in. The question is --

Pearson: Will it do anything.

Pfitzenmaier: Yeah, do they want to. It's going to take some rain, I think, before those guys are going to want to pull out there and plant anything. It would be a waste of seed to throw it out there and then just hope, I think. So that is a concern of the market. I think the other concern is that we're going to get wheat prices high enough that -- all we've been hearing about for two months is everybody is going to move away from corn and feed wheat because it's so much cheaper. Well, it's not so much cheaper anymore. So that's a bit of a concern. Wheat has got this problem with it competing against all this wheat coming out of the Black Sea Region. Those exporters have wheat that's substantially under U.S. prices so, you know, even though we've had production problems in wheat, it's -- the going is going to be a little tough because of the competition, now from corn and from the Black Sea on exports.

Pearson: Right and -- let's also talk about the wheat market in terms of making sales. What would you tell a wheat producer right now if they've got old crop sitting there? Hang onto it?

Pfitzenmaier: We're up to some pretty lofty levels. I'm in the camp that does think there's some more upside potential, but you get to these kinds of prices and you have to take a piece of it. I just think it would be foolhardy to not at least make some sales up in here.
Pearson: And you would do it on the board or -- have we still got this huge diversion in the cash market on wheat?

Pfitzenmaier: I guess I'd be inclined to sell the cash wheat. I mean the old story is when is the best time to sell something, and the answer is generally when people want to buy it. That's kind of now.
Pearson: All right. And all varieties, I mean it's across the board.

Pfitzenmaier: Yeah.

Pearson: All right. So make some wheat sales. Let's talk about corn. I want to talk about that pro farmer number that came out Friday afternoon. It's a sampling report. They -- their final number came in a little bit better in some ways, I guess, than what I thought because we've heard that 149 national average yield. They were at 147 almost, 148. Is that it or is this crop in some real trouble?

Pfitzenmaier: Well, it's in some real trouble. I think the trade had been assuming after listening to their state-by-state reports through the week that they were probably going to come out closer to 146. So that 147.8 or whatever number they came up with Friday afternoon may have been a little disappointing to the trade. Part of the big run up here at the end of the week was in anticipation of kind of a low-ball number from them that we didn't quite get. But like you say, there's more talk Goss is -- every time you talk to a farmer and they've gone out in their field to check, they come back disappointed. So, you know, expectations are that the weekly crop condition rating is going to see another slight decline on Monday afternoon when that comes out. So, you know, the supply side of the corn market is pretty positive. The other side is can we sell the corn up at these levels. That's the big question Mark.

Pearson: Life of contract highs now on December corn, are we selling this one, Tomm?

Pfitzenmaier: I think you have -- everybody made -- a lot of people made sales up against that 750 because that's -- you know, the general consensus was that was a big resistance area. I think now that we've broken above that, closed substantially above it on Friday, maybe there's a chance now of running it up toward eight bucks. So I guess I'd maybe, if you're the gambling type and you want to be a little patient, maybe we can see if we can't get another little leg up on, you know, next week. Of course, you know, we're only 30, 35 cents away from eight, so we're not that far away, really.

Pearson: All right. Cash sales, futures, what do you want to do?

Pfitzenmaier: I think you have to make cash sales certainly. A lot of people are uncomfortable with that now because, like I said, they're walking out in the field and they're not sure exactly what their yield is. They've all right sold, you know, a third to a half and maybe even stronger than that in some cases. So a lot of guys I talk to are a little uncomfortable going any more than that on the cash side. So you may want to look at puts or look at maybe some futures sales that have a little more flexibility.

Pearson: Let's talk about the demand side on corn. We've heard all these rumblings out of China for some big potential business coming up there. You start looking at where the ethanol break evens are. A couple of the big poultry operators have said they are cutting back so egg sets are going to be reduced. We've got a lot of cattle on feed early that came out of Texas and Southern Kansas. Where are we going to start rationing?

Pfitzenmaier: Well, number one, China has a history of only -- they don't buy up markets. They buy corrections and usually pretty sharp ones. So unless we have that happen, I don't see china stepping in here to buy any corn. As far as livestock goes, yeah, the poultry producers have been the lead on this in terms of reductions. The cattle -- on the cattle side, we've had a pretty big jump placed on feed simply because of these drought problems in the Southern Plains, which is going to mean some additional usage in the short term, but it also means a lot of livestock are being liquidated. And farther down the road here, the demand from that aspect is going to be reduced. So, you know, the best way to see what happens with demand is to look back and see what happened. It's a little tougher to anticipate, but you're starting to see some cracks here. Exports aren't as good. Again, black sea competition with wheat is going to trump corn for a lot of the people that buy from us. So I think we're up to points where you're going to see demand -- people just change. And that's not even mentioning the ethanol industry, which up to this point is fairly well supported. They're producing a lot of ethanol to try and take advantage of this blenders credit till --

Pearson: It goes away.

Pfitzenmaier: It goes away at the end of the year. By all accounts you get up in this 7.50 to $8 range and their profitability goes away. I'm not saying all the plants are going to shut down or any of that, but I would guess you're going to see some significant reductions on prices from here on higher on corn.

Pearson: And you're seeing the spread on crude oil drop off. That's been a big -

Pfitzenmaier: Ethanol prices have been fairly good. If you look at ethanol futures out through the end of the year good, they're good. But they tail off pretty rapidly after the first of the year. Granted DDG values hang in there with the corn, so that part of it should be okay. But things are going to tighten up for them.

Pearson: No question about it. Let's talk about soybeans, Tomm. There are some similar issues there, concerns about the soybean crop but not near to the extent that there has been about this corn crop. What's your outlook for soybeans and prices and, you know, we're talking about some harvest activity in the Southeast. What do you see?

Pfitzenmaier: Another ten days to two weeks and we're going to see some significant amounts of meat numbers coming out there. I think it's pretty important that we broke up into new-contract highs on Friday, took out that 1411 November high. You know, the beans have been in a trading range basically since January 1 here of 13 to 14 roughly. And breaking out above that is a positive signal technically and probably signals that there's a chance we're going to move beans on up closer to $15. So there is some decent upside potential here. Again, demand is -- well, Chinese and old crop have been gone for months now. Their purchases of new crop have been substantially less than what they were a year ago. So again, high prices have their effect. Now, South America had a great crop, and they're taking a lot of that business when they're out where everybody is assuming they'll come back and start buying U.S. beans again. Crush has been pretty marginal. There's been some pick up in the biodiesel industry, so that's helped support bean oil a little bit. But again, you get in that 14.5 to 15 range, and beans are going to struggle here.

Pearson: I saw a report somewhere, Tomm, when they talked about the fact that as we go into this high corn market into the planting season down in South America, we could see bean acres being lost to corn acres down there.

Pfitzenmaier: Yeah, I think you're going to lose bean acres -- from all accounts you're going to lose bean acres to corn, you're going to lose them to cotton, and you're going to lose them to sugar because they're trying to shore up their ethanol industry down there. We've been exporting ethanol to them, which nobody thought was going to happen. So that's why beans have got a problem. We're probably going to need to plant 94 to 95 million acres of corn next year, which is going to come, a lot of that, from beans. So, yeah, the new crop beans and those 2012 beans should be fairly well supported by the fact that you're going to have trouble getting people to plant them.

Pearson: I have people that I've visited with this last week, and as I get ready to head to the farm progress show, I'm going to hear more about it, where they're thinking, hey, we're at contract highs, should we be selling some 2012? I know you've always been a proponent of being good marketers, but you've got to have your input needs covered first. There's a big concern we scare up a lot of this demand, we see weaker corn prices. Big crop next year.

Pfitzenmaier: Yeah, I understand that argument. But how can you say I want to go out and sell December of 2012 corn at 670 when you're looking at potentially a substantial reduction in carryout into next year? I mean substantial reduction! And you've got the 2011 corn trading up at 720, 730, 760 today. Why would you step in and be aggressively selling 2012 down at 680 when it's that reduced to 2012 and you're looking at tighter carryouts? I mean look what happened last summer on our tight carryouts. We had very good cash corn prices. I don't see any reason in getting the big toot on it. Like you say, we still don't know exactly what our input is going to be. Now, maybe you want to sell 10 or 20 percent because it's a great price and it makes you a ton of money and you're happy with it; who could argue with that. But I wouldn't get too carried away quite yet on that. I think there's going to be better opportunities on that contract into the winter.

Pearson: Let's shift gears. I want to talk about livestock quick and the fed cattle market. There's kind of been some concern about that as this economic recovery has been slowing that maybe the demand wouldn't quite be there. You touched on it earlier. We've moved a lot of calves into feed lots early. That's going to be an impact for us later.

Pfitzenmaier: The cutout has been very good. So that aspect, I think there have been people assuming that we're going to have a fairly good labor day -- you can't help but wonder if Irene is not going to kind of flub that up a little bit. But, you know, we've got October cattle kind of broke under 114. Held there, rallied nicely on Friday. You know, we might have some upside potential back to 118 -- 117, 118. If you got up in there, I guess I'd be selling cattle again. Again farther out in those April contracts where the hole is going to be, if there's going to be one, I guess I wouldn't be getting too excited about selling anything out there.

Pearson: Aren't you happy -- somewhat excited longer term for the cow/calf people? Look at what's happened in Texas with the liquidation down there. A lot of those cows, I suppose they found pastures for them somewhere but, boy, not all of them.

Pfitzenmaier: There's a -- look at what happened with corn making new highs, wheat making new -- all the feeds making new highs and yet the feeder market just hung right in there this week. You talk to the guys that are trying to buy cattle to put on feed, and it's hard to find them at a price that will work. So, yeah, it's a tight supply. No question about it.

Pearson: Cattle has benefited from better exports. The hog business certainly has been a beneficiary of better exports. What's your take on the hog market? Are we going to start to see some expansion at some point?

Pfitzenmaier: Everybody is kind of excited because cold storage, beef and pork, were up a little bit this week. But the exports have been so good that that's just going to get sopped right up and I don't think that's even a consideration. Yeah, that export -- you know, it depends on who you talk to and what camp you're in. I'm personally in the camp that thinks that eventually the dollar is going to have to work lower, not that it's going to fall apart but it's probably going to be under pressure here. And if it is, that's just going to continue to help support exports in the grains as well as -- but especially in the meats. We're moving a lot of product out into Asia, and I don't see that slowing up.

Pearson: Real quick, Tomm, we talked earlier about crude oil prices. Gold has gone crazy. What's your take going forward on those commodities and Bernanke coming out and really not saying anything except what he's already told us, which is he's not going to raise rates till 2013?

Pfitzenmaier: Well, you've got these problems in Europe that aren't going to go away and aren't going to be solved early. You've got the countries over there that are struggling, don't seem to be doing enough to take care of that, all relying on Germany to take care of it. The Germans are sick of it, and they're not going to do it. So the E.U. has got problems. And as long as that's the case, that's going to be a little supportive to the dollar. But the U.S. has got problems too and, I guess, like I said, I think ultimately we're going to work --

Pearson: Tomm Pfitzenmaier, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Tomm on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts, streaming video of our program and links to our Twitter feed and Facebook page-- all FREE -- at the Market to Market Web site.
Pearson: And be sure to join us next week when we'll examine the outlook for agricultural trade. Until then, thanks for watching. I'm Mark Pearson. Have a good week...


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