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Market Analysis: Tomm Pfitzenmaier

posted on January 20, 2012

Market Analysis: 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.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, let's start talking about a couple of things that are certainly floating around out there. A little bit of a rebound in the euro. Are we seeing some hope for some solutions in the EU going forward?

Pfitzenmaier: Well, you know, they beat that thing up the whole last half of last year. I think we've sort of hit a point where we're going to kind of rest here, see if the things they've done so far are going to help any. You can pass all these resolutions and make all these agreements and have new governments and all that, but whether implementation and whether the people are going to accept that implementation is really the question. And so we corrected an oversold situation in the case of the euro. We headed that one back up to around 130. Granted there was some resistance, and I guess we're are going to chop before we start heading back lower as we head into 2012. Now, we have had a lot of bad news out of that. A lot of that has been absorbed by the market, but I still think you're still probably going to see recession in Europe next year, and that's going to continue to keep pressure on the euro and strengthen the dollar.

Pearson: And, of course, a strengthening dollar is a head wind for agricultural, as a rule. What could our export situation be? Obviously South America, the real could strengthen too, couldn't it?

Pfitzenmaier: I don't think that's going to happen, but it could, certainly. We've got some markets that are pretty dependent on that. I don't think cattle would be where they're at, for example, if we didn't have the exports for hogs. Directly it doesn't make that much difference because we don't directly export any corn to Europe, but tangentially it's going to make a difference for us.

Pearson: Well, let's get down to what happened this week, the specifics. And of course, it seemed like this USDA Report from January 12 is still haunting the market some. And the situation in South America is also haunting the market some. So what's your latest on what's happening in South America? What's your thought on that?

Pfitzenmaier: Well, they've gotten some decent rains, particularly in Argentina. I think it's probably stabilized their corn crop. By all accounts, the damage has been done. Most analysts seem to think that their crop is going to be somewhere around, you know, 18- to 21 million metric ton, and that's versus the USDA's last estimate of 26. There's probably some more down to come there. They are getting rains. They're supposed to get rain this weekend and dry out and then rain again next weekend, so there are rains coming. I think that's going to particularly help the bean crop and stabilize the corn crop to.

Pearson: And that's not going to be much of a catalyst for a bull market at this point.

Pfitzenmaier: It's going to be hard to sustain a rally based upon that, unless things turn around when we walk back in Monday morning. Then who knows.

Pearson: Let's talk about --let's move over to wheat and talk about that one first and what you see happening in the wheat market. We've been feeding an awful lot of wheat, Tomm. I know there's a lot of wheat globally and the crop is decent so far.

Pfitzenmaier: See, that's I think the thing that minimizes this Argentine corn problem is because there is a much wheat, there is so much substitution that can be made. Wheat prices are cheap. Acreages -- winter wheat acreages are up, so I think there is going to be plenty of wheat. It's going to be substituted. I think that's going to tend to limit the amount of upside corn has and probably tend to put a nice floor under the wheat market.

Pearson: Kind of bracket us in. What do you see ahead for wheat prices this year?

Pfitzenmaier: I think you can see another 20-30, maybe 40 cents up in wheat. I don't see the anything more than that. If you've got those kind of rallies, I'd certainly be a seller.

Pearson: All right, and that's on this year's crop.

Pfitzenmaier: That's on this year's crop, correct.

Pearson, when you look at the corn market, let's just head right into that. At this stage of the game, there's a lot of bearishness out there. There seems to be a lot of bearish news out there. Informa's numbers were out, 94.8 million acres as of corn. We don't know what the weather is going to do. There is predictions that we could see above trendline yields. What's your take right now? If you're a producer, are you looking at some higher input costs, higher seed costs, higher cash rental rates? What do you do?

Pfitzenmaier: Well, you've got two markets here. You've got this old-crop situation that's relatively tight. 846 million bushels isn't running out of corn, but it's going to make it relatively tight. Farmers are tight holders of that. I think that when you're holding your old crop, it's pretty tough to go out and make a new-crop sale, even though that's probably what needs to be done. If you look back at 2008 when we had the break, everybody looks at it and they go: wow, that 2011 crop is this high; I can't sell 2012 at a discounted rate to that; I don't feel comfortable doing that. Well, that discomfort in 2008 cost people a lot of money. It's discounted for a reason, and that's because, like you mentioned, acreage is going to be up. Yield has the potential to be up. Carryout has the potential to be way up and if that's the case and that happens, we really don't -- we don't need to have corn at six bucks. It's probably going to be closer to $4. So there is some downside risk, and with the expense that people are facing for this 2012 crop, it's beyond me why you wouldn't have 20 percent of your] corn crop locked in at these prices, hoping like crazy that you are long and it goes higher on the rest of your crop.

Pearson: You'd be using a put somehow to --

Pfitzenmaier: If you're completely uncomfortable making a sale, then, yeah, use a put. Use some kind of a put call strategy. Use something that leaves some upside open, but having just 20 percent --I mean there are some of these clients that are offering fairly good basis on new-crop corn, hoping to get some corn locked up going into the fall. So take advantage of some of those sort of situations and lock some of that decent basis in way out there before it starts to erode on you.

Pearson: So you're saying get aggressive on new crop. Decent basis levels right now in some areas. Take advantage of that with moving the old crop.

Pfitzenmaier: Again, when you get close to $6, $6 plus --we had $6 plus ahead of the January report. If we get back up 50 percent of the break that we had would take us -- March corn back up to around get up into those sort of levels and you're going to be six plus cash corn again. I think you've got to start moving some corn.

Pearson: Last year is always the big question. Last year we had big prices in July and August.

Pfitzenmaier: The last two years. That's part of the problem is that everybody says: well, the last two years we've had these big run-ups in the summertime; we're looking at tighter carry outs this year, so I'm not going to sell again this year and maybe they are going to be right. Maybe it is going to get so tight it's --but we have a different situation. We don't have the subsidies in ethanol that we had. We don't have the margins for those ethanol producers to pay up for corn like they have the last couple of summers. So it's a little different situation, and I'm not sure that you're going to see that tightness that jacks that corn price up like it has the last two years.

Pearson: Always the caveat depending on whether.

Pfitzenmaier: Yeah, obviously.

Pearson: Let's move over to soybeans quickly, Tomm. What's your take there on the bean market? There seems to be some export news this week; is that right? Was that China?

Pfitzenmaier: There was export news. There's an expectation that China is going to -- there are rumors around there's as many as 10-12 cargoes of beans, which you'd have to figure is them sort of hedging their bets against further deterioration in the South American bean crop. So they are a major force. Next week is their lunar new year, so there's not going to be anything happening next week. The market is really watching that closely, and it's putting a pretty good buying support at least temporarily under the beans. Now, the weather can turn for the better, they can really still have a great soybean crop in South America. So that's kind of the teeter totter we're on here.

Pearson: With this kind of a teeter counter, do you want to do anything in beans right now?

Pfitzenmaier: Well, I think if you get old crop beans up towards $12, you have to start to make sales. I think if you get new-crop futures up towards $12, 11.80 maybe even, I guess I'd start to make some new-crop sales there too. I mean that's -- we're going to be struggling with acreage there as acreage -- beans are going to be robbed a little bit -- the corn. Some are thinking both are going to be increased. So I think we're going to have plenty of big carryout, and if we have good yields, we're going to have a big bean carryout next year.

Pearson: Let's move onto livestock, which continues to be a bright spot. Even with your scenario, where we do get close to $4 corn, some of these calves out there going to be pretty attractive.

Pfitzenmaier: Yeah, the cattle market is really -- we had a significant day on Friday, where we broke up through -- February actually made new highs and we broke up into some significant areas. We've been talking about it for a year now. The numbers are just tight on cattle. They keep getting tighter. Nobody is pulling any calves back, and we've been exporting beef like crazy. So is that going to --how sustainable is that? I think if we were just left to the domestic beef market, we wouldn't be able to achieve these kind of prices, but the exports have allowed that to happen. We've gotten the domestic prices up to the point --we're right up to that point where every time we've hit it in the past, it's been a problem because retailers can move the beef, and we're going to face that again soon over the next month or two and really see if they can do it, but the packers have bid up -- really bid up for cattle, in spite of the fact that they are in the red this week, more trying to preserve their market share as much as anything. So we'll have to see if that gives or propels us up. You know, the way the charts are setting up, you know, you could see another 5-$6 put on this cattle market here chart wise. So we'll have to see if the fundamentals can support that kind of a chart move.

Pearson: And with the domestic economy improving, we might be able to --

Pfitzenmaier: We might be able to. That's absolutely --it looks like the U.S. economy is going to at least have a GDP growth of 2 percent, maybe even a little better than that. People are tending to be more positive, more upbeat about things, so unemployment is going down. Yeah, you're right, we may be able to sell the beef. Again, I think there's upside potential yet in these cattle markets.

Pearson: Any strategy particularly you want to use on hedging fat cattle at this point?

Pfitzenmaier: Not particularly. I guess if you're really worried and don't believe that and you think something could happen that will blow up the export market or whatever, maybe have some puts underneath. Other than that, I guess I'm not that concerned, particularly in the short run here. You had five dollars on, and I would tune in a change on that, but at these levels, I think you need to watch it to see if there's a little more up.

Pearson: All right, do you want to cover any calf buying needs going forward? I mean this feeder cattle market -- like you say, there's been no retention, so we are looking at a long period of time here with these same numbers.

Pfitzenmaier: Well, they're going to continue to work higher. You know, people are buying the feeder market futures or they're buying fats to cover the feed or they're doing whatever they can to try and hedge themselves for higher replacement costs.

Pearson: and, of course, the hog market, they were soft a little bit on the board this week, but there's some more hogs out there.

Pfitzenmaier: There was but everybody is current. The pork market, again, is going to be a fairly relatively -- relatively cheap price at the retail level, so I think that pork demand is going to be good. Exports are going to be off a little bit, but just barely. So I think that market is going to be fine too. You move cattle up and it's bound to pull pork up with it some too. So again, I think there's probably four or five bucks up in the pork side. I'd certainly be a hedger if that happened there.

Pearson: All right. Tomm, as usual, some great insights. Tomm Pfitzenmaier with us this week. That's going to wrap up this edition of “Market to Market.” Now, if you'd like more information from Tomm on where these volatile markets may be headed, why not visit the market plus page at our website. You can 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" website and, of course, be sure to join us again next week when we'll assess the market impact of President Obama's State of the Union speech. Until then, thanks for watching. I'm Mark Pearson, have a great week.

Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat