Market Analysis: Tomm Pfitzemaier

Market Analysis: Tomm Pfitzemaier

Dec 28, 2018  | Ep4419 | Podcast

Podcast

Technical signals mostly moved the trade as stalled government shutdown slowed news on export sales. For the week, March wheat fell 3 cents and the nearby corn contract also dropped 3 cents. A lack of demand and mixed South American weather reports muted moves in the soy complex as the March soybean contract moved lower by 2 cents. The March meal contract gained $2.90 per ton. March cotton trended lower again this week by 99 cents per hundredweight. Over in the dairy parlor, January Class III milk futures improved 14 cents. The livestock market was mixed. February cattle added $1.48. January feeders gained $1.73. And the February lean hog contract fell 48 cents. In the currency markets, the U.S. Dollar index lost 49 ticks. February crude oil shed 26 cents per barrel. COMEX Gold added $24.90 per ounce. And the Goldman Sachs Commodity Index declined nearly 5 points to finish at 375.60. Joining us now to offer insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Delaney.

Howell: Tomm, we've got a lot to talk about. I want to focus on some bigger picture things here. We're at the end of the calendar year, trade has been pretty low, volume has been low. Let's start out here, walk us through what is going on with the government shutdown and how that is impacting the commodity markets.

Pfitzenmaier: Well, generally speaking a lack of knowledge is not good. The markets operate best when everybody has full knowledge. And I think probably the commercials probably have a little better handle on what's going on than anybody else does so maybe it's a bit of an advantage for them. I guess I think it's going to tend to be not so friendly to most markets. When you don't know exactly what's going on you tend to push prices down a little bit.

Howell: And when you say not knowing what's going on, we're not having weekly export sales, WASDE, is that a concern for the January 11th report?

Pfitzenmaier: I think it is. A lot of people are talking about whether if something doesn't get resolved or doesn't get resolved next week then I would expect that report is going to be in peril, which that's important, but it also includes the final production number, which is what the final yield was in corn is kind of a number people have really been talking a lot about the last month or so. So yeah, it's going to be a problem if it's not released. I mean, eventually the information is going to come out I suppose, but it's not going to come out on the 11th possibly.

Howell: Right. So how would that work then? If the information doesn't come out on the 11th is it just rumors of what the trade is expecting?

Pfitzenmaier: I think it will go on just like it's been going on where privates come out with their ideas and the market reacts and there are those that believe that's good, it would be better off to not have the government putting out numbers. But they tend to be fairly accurate when all is said and done so I think it's important to know really where we're at, to have those numbers.

Howell: And if we don't get those numbers come out, you said specifically the corn market is one that could be impacted by that. Was the corn market anticipating some bullish news on this January 11th report?

Pfitzenmaier: Yeah, I think a lot of the people that are friendly to the corn market believe yield is overstated by half to two bushel per acre, which drags that carryout down into levels that are just a little bit tighter. Now, there's probably a chance we're going to offset that because ethanol usage hasn't been what we were expecting, export sales haven't been meeting the needed category every week, so there's some adjustments that could offset that. But overall I think the perception is that it's going to be supportive.

Howell: I want to go back to the ethanol thing. We've got a good question here I think that sets the stage for just the grain markets in general. We've got Tim in Crookston, Minnesota. He said, New Year projection, Tomm. What crop has the most upside from here? Corn, soybeans or wheat?

Pfitzenmaier: I think wheat probably does. Wheat has got problems around the world that I think are going to tend to be supportive. Probably second would be corn. The corn market has got potential things sitting out there. If there's a problem with South America, if China does come in and buy corn, if the yield is lower then corn maybe has some bounce in it. But I'd guess overall wheat. South America has had problems, Australia has had problems, there's a lot of spots around the world that have kind of had wheat troubles.

Howell: What about when you factor in what's going on in Russia right now with wheat? The Russian Federal Statistics Service just estimated 72.1 million acres for their 2018 wheat harvest. That's a lot higher than a lot of other estimating services were guessing. How does that impact our world outlook?

Pfitzenmaier: The whole Black Sea region, the Ukraine crop in wheat was quite a bit better than we expected too. So that is why I'm a little cautious about getting too carried away with wheat because always somebody around the world every month is harvesting wheat some place and there's quite a bit of it around. So when I say I think it's got more potential, maybe 30 to 40 cents, versus corn has maybe got 15 to 20, so the margin of better than is not all that great in my mind.

Howell: So they're looking for another maybe 30 to 40 cents in the wheat markets?

Pfitzenmaier: Correct, yeah. March wheat up around $4.40, I mean $5.40 to $5.50 certainly is a possibility but that would be the upper limits I would think.

Howell: Okay. You mentioned earlier ethanol and I want to make sure we talk about that because going into the New Year here, you even mentioned it in your newsletter this week, we're seeing ethanol producers and ethanol processors being in negative margins, they're pulling back on production, they are maybe shutting down plants in some instances. When we look at the 2019 picture, what does that reduction in ethanol do for the corn situation?

Pfitzenmaier: Well, that's what I was saying earlier, to some extent if there is a drop in yield it's going to offset, if there's not a drop in yield then it's going to contribute to stocks being bigger than we thought they were going to be. It certainly isn't a great thing for farmer producers that have grown accustomed to selling ethanol plants because one of the ways they can adjust that is that they're going to have to lower their basis and not pay farmers so much for corn to try and get their margins back. So we've really developed a big dependency on that ethanol industry and if it starts to back off on us a little bit it's going to be kind of a problem at the farm gate.

Howell: Have we seen basis start to decline yet from that ethanol reduction?

Pfitzenmaier: No because up to this point it has been offset by lack of farmer selling, the farmer has been in such a tight hold or they've kind of had to bid up to get the corn to process. I don't know if that's going to change after the first of the year because at some point corn is going to have to move.

Howell: Absolutely. So did we set ourselves up this week for testing our November lows?

Pfitzenmaier: Probably. We broke down through some pretty important support points. I guess I think that March contract could move back down into that $3.73, $3.67 area, somewhere down in there. I guess I'd lose my enthusiasm for being bearish corn and probably be accumulating long positions at that point.

Howell: Okay, the other big news we had this week, just actually on Friday, was this announcement that China purchased U.S. rice. That doesn't really fit into our mold of typical patterns here but let's unpack that a little bit. Tomm, why would China buy rice from the U.S.?

Pfitzenmaier: Apparently they have less rice than we thought they did, that's the only thing I can figure out. I don't know, politics gets in the middle of this to some extent too. So I don't know whether they did that to satisfy some requirement or some agreement that was made between the U.S. and China and trade negotiators. I don't know.

Howell: The question that came to my mind too is why not buy, if it's a political move or some sort of olive branch, why not buy soybeans? Why are we buying rice?

Pfitzenmaier: Yeah, good question. And maybe we're the only ones that have it. I'm not big on the rice market but I'm not sure you can go to Brazil or Argentina and buy much rice. So if you need that and we've got it maybe we're sort of in the driver's seat on that because in two or three weeks they're going to be able to buy new crop beans out of Brazil.

Howell: So speaking of Brazil, what are you hearing, Tomm? Are we still ahead of pace in Brazil and Argentina for their harvest?

Pfitzenmaier: Well, yeah, because particularly in Brazil their crop got planted pretty early so as a result some of that is going to be harvested early. All reports I've had that by mid-January they're going to be starting to harvest new crop beans. One of the things that has popped up and we saw a nice little rally on Friday on beans because there is some wet conditions in Argentina and that had the market a little nervous. Now we really had light volume and not many people participating so it didn't take a whole lot of effort to get a 15 cent rally in beans and that may very well soften back up next week when people start coming back to trade. But there is some sensitivity to South American weather for sure.

Howell: Absolutely. And the other big question I think on a lot of producers' brains, it has been for a while now, is acreage. Tomm, we've got to talk about acreage estimates for 2019. It seems silly, but would we see any acres convert to rice maybe in the South areas?

Pfitzenmaier: Maybe, I don't know. To be honest with you I have no idea on the dynamics of rice profitability and even cotton prices have been depressed as you indicated earlier and that certainly would be down in that area where they'd grow rice too. So I don't know. The acreage thing is going to be interesting. A couple of times ago when I was on this show I was concerned that you were going to see big acreage shifting from beans to corn. I guess I've moderated that a little bit simply because the more you talk to people the more you find that production costs on corn are going to be up pretty substantially next spring, which makes it a little tougher to make that transition. If you take new crop corn versus new crop bean prices that spread isn't that far off historical relationships. The one area that would tend to make you think so is up in the North Dakota, South Dakota area where they grow 12% to 14% of our beans. They've gotten to be significant bean growers and they have really taken a hit because of this lack of soybean demand out of China because a lot of their beans went up into the Pacific Northwest and there's nothing moving up that way. And so their basis is really bad. So if you take a cash beans versus cash corn price it really favors corn in some of those areas. So I don't think there's any doubt there's going to be switching. I originally thought 5 million, maybe more like 3 now.

Howell: Okay. Tomm, let's talk about the meat markets. We mentioned earlier in the program we've seen blizzard conditions all across the U.S. How is that impacting the live cattle market at this point?

Pfitzenmaier: It has impacted it a lot. It has been, the cattle market has been overbought for a couple of weeks now really and it continues to march higher strictly because of weather. And this is the time of year when you've got to be really cautious selling cattle because almost invariably in this late December through end of February period you can have these storms that give you these kind of pops. Now, generally speaking they're not sustainable, they tend to have a nice jump up and then tend to fall apart and as overbought as we are in the cattle I suspect that's what is going to happen. Everybody was expecting the cash market to be a little firmer than it was this week so there might be some disappointment next week if there isn't any follow through on that. I guess if the weather moderates at all I'd probably use whatever rally we got at the end of the week or maybe into Monday to make some sales. December contract on cattle goes off the board on Monday. There's a lot of open positions in there and with the rally we've had versus the cash market I wouldn't be surprised to see some deliveries on the December contract and that could sort of throw a little cold water on that market too.

Howell: What about when we look at feeders? We've closed above the 9 day moving average. Does that signal that the short-term trend remains positive?

Pfitzenmaier: Yeah, I think so. Well, you've had a drop in corn prices, which is always a positive. Wheat prices have pulled back really this last week some. The fat prices, we broke up into new high ground on the February and I think on the April contract, so that always is encouraging for the feeder market. So all the stars have aligned a little bit to some extent for feeders. Now, I wouldn't get too carried away with that and at some point breaking out into new highs is very rarely a bad thing so you don't want to get in a big hurry. But I'd start watching that. If it starts getting a little toppy and overbought you might want to step in on making sales there.

Howell: Absolutely. Tomm, five seconds. Are the hog markets continuing to head lower or are they going to hold here?

Pfitzenmaier: I think they're going to hold here. We've got good Chinese demand, markets oversold, I guess I'm looking for a little pop in the hog market.

Howell: A little pop in the hog market. We're going to save hogs and oil and cotton for Market Plus. Tomm Pfitzenmaier, thank you so much. That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we'll answer more of your questions. You can find it on our website at MarketToMarket.org. If you make a resolution to write more in 2019, send us your thoughts via email to markettomarket@iptv.org. Join us again next week when we'll look back at the big stories of 2018 impacting rural America. So until then, thanks for watching. I'm Delaney Howell. Have a great week.

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