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Market Plus: Jun 13, 2008: Tomm Pfitzenmaier

posted on June 13, 2008

Market Plus: Jun 13, 2008: Tomm Pfitzenmaier Pearson: Welcome to the Friday, June 13th, 2008 version of Market Plus. I'm Mark Pearson. Glad you could join us for this week here on our Web site. Tell your friends and neighbors. It's become quite a hot spot because we kind of get some things that we maybe don't have time to get to during the show. So, that's certainly the case today. Tomm Pfitzenmaier with us. I want to talk some hardcore strategies, Tomm. We didn't get to talk about your outlook for hogs and your marketing ideas on hogs which, again, I think maybe we learned a lesson here that we need to get some coverage on our feed costs and keep that going but also we need to start when we get some profitable opportunities down the road we need to take advantage of them.

Pfitzenmaier: There's some good profits, I don't know if there's good profits, but there's profitability in the deferred contracts. I'm particularly concerned about that August timeframe. If you do start getting people spooked out of the hog market and you see liquidation you could see a lot of downward pressure on hog prices through the summer here. The August contract with the basis consideration is probably almost $10 above where the cash is trading today. That to me is a good place to start buying yourself some puts, pay for them with a call, get some kind of a window set up that allows you if you're wrong and the market does drift higher you participate in that but give yourself a nice high floor and I would continue to do that as the opportunities come across on those August, October and December contracts. Maybe out in April you don't need to worry about it so much because if we do have a liquidation that probably is going to take care of itself. But those nearbys there could be some trouble there.

Pearson: Good point and if it does break that way it could get, like you say, soft in a hurry and that's a great concept. I really like that idea for coverage. Real quick -- I want to talk about corn in just a minute -- but for the flip side, for that livestock out there obviously the way this corn market has gone -- I don't know anyone who hasn't under guessed what the prices are going to be -- but if you're looking at $7.00 corn and you're a livestock producer you're thinking, do I want to own this. Should you be thinking I'd rather own it here than at $10?

Pfitzenmaier: Well, I think you have to have that consideration in the back of your mind. Now, I don't know that I would want to own it, I would want to have an option to own it at some price here. I think that's the approach because I suppose if things straighten out here, you have some government intervention, somehow they mess with the ethanol, there's a lot of things that could be done here to kind of cap this off. Then you'd want to have a flexible program that if prices went down you're going to buy the corn cheaper and not lock yourself into a high price. You just want to protect against it going higher against you and you either buy a call which are expensive or buy a bull call spread, you know, buy a $7.00 call and sell a $9.00 or set some upper limit to help finance that and there's a lot of strategies you can do that are going to give you some protection without spending tons of money on it.

Pearson: Let's talk about offense now on the corn side for corn sales that need to be made. And you've mentioned it, everybody on the show, most of our analysts have been saying make some sales, make some sales, make some sales and they look back and you go $4.00, historically that's a great price, $4.50 unbelievable price, $5.00 great price, $6.00 and so forth and now up in the $7.00 range don't you have to make some sales on $7.00 corn, Tomm?

Pfitzenmaier: Number one, I didn't think you should be making sales all the way up. I think you should have been buying puts. And if that's the case you have to continue buying puts. You're right, if $4.00 was a good place to have a put certainly $7.00 would have to be a good place to have a put. So, there's probably limited down side potential so buy yourself a $7.30 put and sell a $5.30 put or some combination because we do have probably limited down side potential so there's no sense buying a put that's going to protect you down to zero because we're not going to go there. So, buy protection for the price parameters that you think you need protection for and I think if you do that, that's a good approach and maybe they're going to end up worthless just like all the ones you've bought but you've help your crop, held your product, you've allowed yourself to participate in the rally and that's certainly not a bad thing. It's a lot better than delivering corn today that you priced at $3.50 bucks.

Pearson: Talk about liquidity out there on the cash markets because I know that's frustrating for some producers. They can't get the crop sold on a cash basis deferred which I think, again, is why your option strategy makes so much sense.

Pfitzenmaier: Yeah, and that's going to be a bigger problem because liquidity, we talk about it off air a little bit, is that there's a lot of talk about these hedge funds and deals they're doing with banks and liquidity and the problems that could generate for agriculture or for the markets in general. But certainly if you're doing hedge to rise and they don't want to do hedge to rise for you any more or forward contracting because the elevator is concerned about its own liquidity or its own availability of capital some of that you're going to have to start doing yourself. And if you're doing it yourself this isn't a bad way to do it because at least you know what your costs are up front and you know what you're sort of locking in here. And maybe we're going to have to do more of that to utilize our bins, utilize our carrying charges out into the next summer and become a little sharper marketers that way.

Pearson: Especially on that cash side.

Pfitzenmaier: Absolutely.

Pearson: Tomm Pfitzenmaier, as usual, some great ideas. We appreciate you being with us on Market Plus and on the show this week. From all of us here on Market to Market we wish everyone the best, particularly those who are struggling with this wet weather. We're sure thinking of you. Be sure to join us again next week for Market to Market and, of course, right back here at Market Plus.

Tags: agriculture commodity prices markets news