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Market Plus: Sep 22, 2006: Tomm Pfitzenmaier

posted on September 22, 2006

Market Plus: Sep 22, 2006: Tomm Pfitzenmaier Pearson: This is the Friday, September 22nd Market Plus segment for Market to Market and I'm Mark Pearson. Thanks for joining us here at our Website. With me this week Tomm Pfitzenmaier. And Tomm, if there is a question out there and there's so many variables, we've got oil prices coming down, we've got a lot of ethanol plants, 8 billion gallons of production capacity that is either under construction or producing ethanol right now. We're way ahead of what the federal government wanted. That's an awful lot of corn. Producers are sitting there licking their chops saying hey, we're going to be selling some high priced corn next year. I've been talking to these bank groups, they are concerned about whether or not that is going to be there. What is a strategy? What do we do for corn producers? What should -- right now they're in the combines, they're out in the field starting to bring this crop in -- what advice do you have for them? What should they be doing?

Pfitzenmaier: Well, like I said on the show I think you're going to see tightening basis and tightening spreads on the carrying charge. I think you get those spreads locked in and you sit here and you wait for the basis to tighten as the market rallies through the winter which I believe it will. I think there is 40 to 50 cents up. Now, if you're a livestock producer that means you either buy cash, buy the futures, buy whatever you can. If you have to sell grain out of the field you're going to give up some basis but you want to reown that on the futures. There's a couple of ways to do that. You can buy the July futures, you can buy a bull call spread if you're scared to death of the options, you can buy a call option, there are several things you can do. I think you want to ride this up into the mid-winter, early springtime period. As everybody probably knows you generally factor in the worst case scenario for crop production way before we ever plant the crop and I think there's a good chance we'll do that this year. That is the opportunity I think you're going to have to crawl off that cash corn, get that moved and then, if you need to, and then go ahead and start putting on some option strategies to get some good floors established. I'm anticipating having the opportunity to buy $3.10 and $3.20 corn puts to get a really good high, nice floor locked in on this corn here.

Pearson: You've used the strategy where you bought the put and then sold a call to help pay for it. What is that going to look like right now?

Pfitzenmaier: I'm thinking that you're going to get an opportunity to do that, to at least buy the $3.10 put, sell the $3.60 or the $3.80 call to pay for it depending on where you want the ceiling to be, probably going to be able to get that done for, you know, nine to fourteen cents probably.

Pearson: Okay, pretty economical peace of mind.

Pfitzenmaier: Good peace of mind, good upside potential and a really nice high floor too. I think it's a great opportunity for people that's going to be set up and I don't think you want to let it get by you because there's going to be a lot of bullishness running around this winter and you're going to have to be, have to use some discipline to not let yourself get caught up in that when the market does take off because we do have the ability to switch acres, we have a tremendous ability to produce corn, we've had good moisture this fall and there's talk of a La Nina which we have learned means better crops during the La Nina year, not worse crops.

Pearson: Talk about livestock producers covering feed needs. That's got to be the flip side of this thing and there is, again, a lot of nervousness in livestock country about just availability of corn. You mentioned buying up cash, obviously that is one way to do it.

Pfitzenmaier: Yeah, that's the best way to do it. If you can find somebody that, you know, that have over runs that they can't store at home and needs to get it moved try and get a hold of them, whatever you can do to try and get your hands on cash corn. Now, you can theoretically buy it from the elevator but the elevator has a great opportunity cost by selling that carrying charge and they're going to want a lot of money to sacrifice that carrying charge and sell corn to you. So, your best option is probably to find a neighbor that is going to have over runs that you can get some corn bought. But cash is king on that. If you can't do that and they want big, huge premiums to get it then the next best thing is probably to go out and buy the futures.

Pearson: Okay, something else to keep in mind as we go towards, again, a very exciting year as we go into the 2006-2007 crop marketing year.

Pfitzenmaier: Absolutely. There are so many opportunities here, more opportunities than we've had in agriculture in quite a long time and I think if a guy plays his cards right there is not going to be any LDP so you're going to kind of be on your own getting good marketing done and we're heading into a time period here where the good marketers are going to be separated from the bad marketers fairly rapidly.

Pearson: Some good points as usual, good to hear from you, Tomm Pfitzenmaier. Good to have you with us today, Tomm, and of course thank all of you for tuning in. And don't forget about signing up to get a free podcast of our market segments. I think you'll want to get that too and our Market Plus segment. From all of us here on Market to Market, I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices corn markets news