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Market Plus: Jan 26, 2007: Tomm Pfitzenmaier

posted on January 26, 2007

Market Plus: Jan 26, 2007: Tomm Pfitzenmaier Pearson: This is the Friday, January 26th, 2007 version of our Market to Market Market Plus segment. With us this week is Tomm Pfitzenmaier. Talked about option strategies for producers out there because we often find ourselves at these soaring markets and these higher markets and year in and year out we're selling to the bottom third, Tomm, and we don't want to miss the boat this time. I thought your strategy of going out, spending some money in some options, you know, I paid for insurance on the house at the farm this year and it was expensive but had it burned down I would have gotten a check. And I think that's the approach producers are going to take this year and I think you're absolutely right. So, look at an option strategy. Let's talk about something else. Let's talk about the real world out there in terms of cash values and what's happening with basis and some of these issues, Tomm. What are you seeing out there right now? We've got ethanol plants chewing through an awful lot of corn, pulling a lot of corn from traditional channels into the ethanol world. What is happening out there? We saw soybean meal drop dramatically on the board this week. Is that all tied together?

Pfitzenmaier: Well, I think you have to talk about basis and the impact this ethanol industry is going to have on basis. And that relates to another issue and that is on farm storage. If you can do your marketing yourself, in other words, do your own hedging instead of going to a hedge to arrive contract, use options rather than letting somebody else establish it for you because that ties up your grain and there are going to be super, super, super opportunities here if you can stay flexible and shop around because these ethanol plants have hot bids all the time. And if you get yourself locked in to some particular plant or elevator you've given up all opportunity to take advantage of those hot bids. I think you're going to see basis levels in Central Iowa that are comparable to what we used to see over at the river and maybe even stronger than that simply because you've got such a huge concentration there. In terms of marketing those ethanol plants, I mean, they're not operating in a vacuum, they see what's going on, they've been aggressive trying to get their coverage established. Once they get that coverage established out into the September, October time period because they're looking at higher acreage too they're going to hedge a little bit and take the change that there might be a good crop. So, as soon as they get everything covered on there they're going to go out of the market, they're going to disappear on you and then you're going to be stuck with whatever you're stuck with here. So, I think you have to continue to feed the market. These prices are too good to be just whistling past here and not doing anything. Opportunities are being presented. Again, hot bids all over the place for those who have the flexibility to deliver.

Pearson: It almost reminds me of formula pricing on cattle right now. If you lock yourself into something to a plant you may regret it down the road. From a cash standpoint you could be talking 20, 30 cents in some of these hot bids.

Pfitzenmaier: Right, absolutely. I mean, there's going to be great opportunities and it's not going to do anything but improve as the competition between all these plants starts to grow, you're going to be in the driver's seat and by committing to one person you're taking yourself right out of that driver's seat.

Pearson: But what you're really doing is you're talking about getting control of a product which means more on farm storage which we saw. We saw a lot of on farm storage going up this year.

Pfitzenmaier: There's going to be a tremendous return to on farm storage. And for people who don't have it you need to get to your lender or whoever you have to get to and talk to them about putting a plan together for on farm storage because there is all kinds of benefits to it. Now, if you're just going to use it to sit on grain and not make marketing decisions then don't do it. But if you want to become a merchandiser then read up and study on how to be a good merchandiser and build yourself a bin and it'll pay you big dividends.

Pearson: At the tail end of the show I asked you about covering feed needs, you said obviously any breaks, but that again comes back to this cash market availability too.

Pfitzenmaier: Yeah, getting your hands on the corn is not that easy. If you're just worried about price protection then buy yourself a call or buy the futures or that will at least protect against price moves. But it doesn't get the corn in your bin, you're absolutely correct.

Pearson: Anyway, it's going to be an interesting year. It's going to be volatile and we're really not going to know much until we start putting the crop in the ground.

Pfitzenmaier: Right, we have to get a handle on acreage and that's going to dictate how everything else reacts from there, there's no question about it.

Pearson: Tomm, let's say we hit 11 million acres switched over to corn which we've heard people talk about that. Are we going to see this market break?

Pfitzenmaier: Yeah, you'll be back sub $3 corn again. I don't think there's any doubt about that. Whether it's $2.50 or $2.75 or where we go but if you have a good crop on top of that kind of acreage then you're going to break the market back. We don't need to have corn at $4 under those circumstances.

Pearson: There you go, another reason to get something done. Hopefully we've given you some ideas. Tomm Pfitzenmaier, as usual some great strategies, appreciate you being with us. And for all of us here at Market to Market, thanks for watching, we'll see you again next week as we continue to track these volatile markets for you. Thanks for joining us. For all of us on Market to Market, I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices markets news