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Market Plus: Jan 28, 2011: Tomm Pfitzenmaier, Market Analyst

posted on January 28, 2011


Market Plus: Jan 28, 2011: Tomm Pfitzenmaier, Market Analyst Pearson: This is the Friday, January 28, 2011 version of Market Plus. Thanks for joining us here at our Market to Market Website. Mark Pearson and with me this week one of our long time Market Analysts, Tomm Pfitzenmaier, and he's never seen what we've been going through no has anyone else in these markets. And Tomm here is the thing in 2008 we had some HUGE prices, I had people talking about how they were dancing the street with the big corn price, big bean price, at the end of the day a lot of people didn't get it. They hung on. They were waiting for twenty dollar beans. They were waiting for ten dollar corn and it didn't happen. And they wound up disappointing selling much later for much lower prices. There has got to be some ways we can strategize to put some money out, buy a little insurance on some of these prices?

Pfitzenmaier: Absolutely - you got to build into this strategy. You got to build what I call building hope into it where you can say this is a good price, I'd love to have this as a floor price, but if it goes up I'm going to participate and I'm not getting left out and that's the perfect opportunity for using options. Now the first thing every body says is well, I can't buy put options because they're too expensive. Which is true. When you're going out and buying November bean options and buying December corn puts they're expensive because you're buying a ton of time and this is a volatile time with a lot of option premium in. So you've got to find ways to off-set that by going out and selling nineteen dollar bean calls or selling ten dollar corn calls or collecting some premium on the other and set that high enough so that if we go to nineteen dollar beans it won't be the end of the world for you but you'll have that good thirteen dollar floor underneath you. Same thing on corn you're happy with the five seventy four. If corn happens to go to eight or nine dollars well worse things could happen to you but build strategies and try and find ways to sell option premium to off-set to get those costs down to a decent level to give yourself a good floor and still build hope to participate in higher movements.

Pearson: That's the big beef. I heard this week several times these option premiums are so high.

Pfitzenmaier: You've got to be creative and you've got to pay attention. A lot of people - I just want to put that on and forget about it. You can't. We're in volatile times. We're in exciting markets. You can't just do something and go to sleep. You've got to watch it, monitor it, set up parameters, pay attention to what the heck is going on.

Pearson: People have used options in livestock, in my mind, to lesser extent than what they've used them in the grain market. And yet we talk about volatility, my gosh, look at this fed cattle market, look at this calf market, look at what hogs did this week.

Pfitzenmaier: The only exception I would take with you on that Mark is historically the people I work with have done better in the livestock options than they have in grains for one simple reason. Is that they know what the end point is. They know that in April these cattle have got to be gone and so they can sit. Well as in corn it is kind of well we can store, we can roll it, we can - it's kind of a loose end deal. So, that's an advantage. It helps give people discipline for livestock that the grain producers haven't tended to have.

Pearson: But option premiums are big premiums, are big costs there too. On the livestock side too now.

Pfitzenmaier: But again you can lock in hundred and nine/hundred and ten dollar puts. You can buy on fat cattle and sell a hundred and twenty/ a hundred and twenty-two dollar calls and so you say ok, I'd be really happy to get one ten has my floor but holy smokes if it goes up to a hundred and twenty-two that would be - Yeah, I'll make that work. If you've got the product it builds flexibility in, it gives you the ability to sleep, it makes your banker happy, it fulfills a lot of different - as opposed to just hoping and wishing and thinking that maybe you'll hit the high.

Pearson: All right. There is land prices off the chart. I talked to Mike Boehlje this week and, the economist of Purdue University, heard him talk and he made the comment that there are so few sales out there and so forth, these markets are so volatile, and they're so strong that things are a little out of whack. But I'm looking at people now who are looking at seven/eight/nine thousand dollar an acre land. These people are averaging up from other ground that they got but the feeling out there on the country side and again, we're not approaching what we had in 1980, all these bankers are all telling me boy balance sheets are strong, cash flows are good, big equity in all these operations, but as you go forward unless you are somehow tuned into taking advantage of these markets for a longer period of time you could be in trouble down the road. I mean we can over produce this thing, can't we Tomm? I mean get in front of this demand curve?

Pfitzenmaier: Well, you're talking about land? In terms of land most of the people that are buying it have the money to pay for it. Like you've said they've made a lot of money. If you had good yield two hundred bushel corn and you're cashing it in at six bucks, that's a twelve hundred dollar gross, and you're farming any kind of acres, you've got a lot of cash to spend. And I contend that most of these are going to farmers and if you're a farmer, you're going to keep dancing with the gal that you brought to the dance, and that's farm ground. You're not going to buy Disney stock or something. You're going to keep buying farm ground and if you can do it without a lot of debt, why wouldn't you keep doing it? I talked to some guys that said well, I was at a farm sale the other day and it was just two guys bidding against each other that drove it up. And I said every sale I've ever gone to is just two guys. That's what it boils down to. Ultimately everybody else is a spectator. So, I don't see - if we maintain these kinds of commodity prices I don't see how land can pull back much. Now if the commodity markets fall apart, they pull the plug somehow on ethanol, there's some change in government policy that we don't expect, then yeah, then land is in trouble. But without that it's going to be strong and cash - are going to get stronger.

Pearson: A good buddy of mine is a little farmer from Southern Iowa, very successful, his name is Moe Sinclair, he said Mark when do you buy the farm? I said well, I don't know Moe. He said when it's for sale. There you go! Tomm thank you so much, great insights, appreciate it. Tomm Pfitzenmaier joining us this week on Market to Market and of course here on Market Plus. From all of us at Market to Market have a great week.


Tags: agriculture commodity prices markets news