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Market Plus: Feb 20, 2004

posted on February 20, 2004


Market Plus: Feb 20, 2004

Pearson: Hey, welcome to our Market Plus segment here at our Market to Market Web site. Thanks for joining us and hey, be sure to tell your friends and neighbors they can stop by a visit us here too. Tomm Pfitzenmaier our guest this week. Tomm, we've been talking about these grain markets. And I looked at what happened to beans this week, 63 cent jump on March, bean meal up 23 dollars plus a ton, corn market up a couple of cents but at relatively high levels. We really haven't talked much about it but what is a guy, person who needs to be some feed needs covered, what should you be doing?

Pfitzenmaier: Well, I think this market is getting a little overbought. It's probably about due for a correction and I think that, if we get that correction that is going to be the time for the livestock producers to run in there, get their coverage, at least through August, September, October time period. You know, buy yourself a call, buy the futures and buy a put for protection on the down side, if you're afraid just flat buy the futures. But I think there is probably a pretty good need because you don't want to get this feed, especially if you're going to have a little decline in prices of the critter that you're raising, you don't want to also participate in having feed costs get away from you. So, I guess I'd want to make sure I maintain some coverage, at least six months or whatever that is out a ways here.

Pearson: I also want to go back and revisit something you touched on in the show and I've had people say yeah, you guys need to talk about this, you need to talk about this. The wheat dollar, the days of the wheat dollar may be ending. Now, you were looking pretty much from a technical standpoint during the show.

Pfitzenmaier: But I think there is a general feeling because of the deficits that at some point here you're going to have to start to see interest rates creep up and if you do that, that's, you know, that is going to attract money back to the United States, people are going to buy dollars at the expense of all the other currencies. So, this is a very, very, and maybe it will be negated next week but having a key reversal with a close above the trend line. I mean, every classic turn around signal you could ask for happened in that dollar index today, on Friday when that was the last day we traded, and that is one you really need to watch out for.

Pfitzenmaier: Now, it doesn't change the fact that we have the potential to run out of beans here, but it might make the product just a little less attractive to buy.

Pearson: You bet, okay, quick follow up there. Could that help choke off some of this demand? We start to see the dollar come up, that is incrementally going to effect some of those outlooks for, you know, eleven dollar beans.

Pfitzenmaier: And you combine that with the other thing that we didn't talk about is that freight rates are just through the roof. So, you start to see the dollar creeping up in combination with those freight rates and all of a sudden our product doesn't become quite so attractive. The way it's been in the last six months we continue to creep prices up, with the dollar declining it hasn't made all that much change for the people who are buying our product. Now, maybe in the short run that won't be the effect.

Pfitzenmaier: If people see the dollar turn around and they go holy smokes, this is going to get away from me and it might cause a surge in demand but longer term it's probably going to choke things off.

Pearson: Real quick, we talked about the cattle on feed report, pretty much what we expected. You made a really good point, I think, and for a couple of reasons, you mentioned this on the show too, but between feed costs and these calf prices as strong as they've been, which could weaken with the corn prices going up, but with where this market is and the fear perhaps another event, another BSE event, maybe get some coverage. Talk about your strategy again for dealing with that.

Pfitzenmaier: And the reason I say, I like using either one or two things. Either you sell yourself a futures position and then buy a call, and the reason I say buy a call to cover that is that if the borders get opened up, if Mexico opens up, if they get things worked out with Japan, whatever, we could have a pretty good pop here and you'd be disgusted with yourself if you had futures sold and the thing took off on you. So, go spend a buck or a buck and a half on a call option and you've got it covered on both ways.

Pfitzenmaier: Now, the other side of that, the other strategy is to go in and buy yourself a put, they're kind of expensive, so you go out and sell a call at a substantially higher strike price to pay for that. Now, if the market pops up it's going to, it could go against you buy you've given yourself four or five, six dollars of upside potential to participate in that rally if it comes along. So, I think you want to incorporate some flexibility, what I like to call hope, into that, into whatever strategy you use there and not just flat out sell it and be disgusted if something positive happens and you don't get the chance to participate in it.

Pearson: Alright, some real good thoughts. Thanks so much. Tomm Pfitzenmaier, our guest this week on Market to Market and on our Market Plus segment. Thanks for joining us and for all of us here on Market to Market, have a great week.


Tags: agriculture commodity prices corn markets news