Market Plus - Tomm Pfitzenmaier

Dec 9, 2016  | 15 min  | Ep4216 | Podcast


Pearson: This is the Friday, December 9, 2016 version of the Market Plus segment. Joining us now is Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mike.

Pearson: We've got a lot of great questions here from our folks on Facebook and on Twitter. And I want to come back to a question we asked you on the show is from James in Kremlin, Oklahoma. He's got a second question. He's asking, what is the upside, let's say we plant, let's call it 3 million more acres of beans, La Nina sticks around, causes us to have a dry spring in the Midwest, would that dryness offset the acreage increase?

Pfitzenmaier: In the short run it probably won't. If that in fact happens you're probably going to get a run, maybe run new crop beans back up to $11, maybe even a little stronger than that because think about it, how freaked out we got about La Nina last year and there never was any, it was like a figment of everybody's imagination. So if we actually have a dry period I think they'll react to it a little bit. To some extent that may also be tempered a bit by what happens in South America. If Argentina also had a problem here and their crop isn't quite what we thought it was going to be that's just going to sort of magnify the concern up here this summer. So if they have a huge crop and we plant a big acreage that's going to certainly dampen that.

Pearson: Okay. Now last year at the tail end of the South American growing season they had all of those harvest troubles, constant rains and deterioration of crops and the loss of so many corn acres. But it seems like when we get dryness in the Midwest of course that news is in Chicago that day. When it's coming out of South America there's such a delayed reaction to that. Just big picture stuff, is technology going to allow us to get that information faster do you think as we go to the future?

Pfitzenmaier: I don't think there's any question about it. I get a more detailed South American weather map every morning that I do a U.S. -- there's a lot of information available and I know the guys in Chicago are watching that as closely as I am. So yeah, I think that information gap has pretty much gone away.

Pearson: We don't have to wait for Conab's reports necessarily anymore.

Pfitzenmaier: Correct, it's a confirmation and it's something to watch and their soils are different so you have to be a little careful about the conclusions that you reach based on what their moisture is. But they also tend to get more of the moisture than they need on average. So if their rainfall is diminished just a little bit it actually in some cases kind of brings them down to normal. So you've got to be a little careful about that too.

Pearson: Okay. Well, we've got a second question here from Michael in Story City. Michael has got a long question. He's asking, what is your take on the upcoming January reports? Given the perceived supply of corn, what are the chances of corn seeing $4.50 or higher July '17 futures? Let's tackle the first part. Are you expecting any surprises on the January report? Bean yields coming up again?

Pfitzenmaier: There's a historical tendency once they're increased on November for them to be bumped up a little bit in January so I guess I wouldn't be surprised to see that. But I don't really anticipate changes that amount to much. I guess I was a little surprised in Friday's report that they didn't bump exports and ethanol usage a little bit so that could be coming. But when you've got a 2.4 billion bushel carryout I don't see any reason in the world why you'd have $4.50 corn. Why would anybody pay that much? You've got the farmer willing to store it, they're willing to sit on it, just let it sit out there and let the farmer carry all that for you.

Pearson: Even if this La Nina expands I know that's predominantly Argentina, Southern Brazil. Would that give us any reason to get fired up about the corn market?

Pfitzenmaier: I'm sure they're going to talk about -- the thing actually what people are talking about that I talk to are more concerned about this dry weather in the southeastern United States and the history of droughts moving from the southeast up into the central U.S. Now, probably not going to affect Iowa or anybody west of the Mississippi but it certainly could come up and cause some troubles in Ohio, Indiana, maybe southern Illinois. So that's really what I hear talked about more than anything.

Pearson: So he's asking on a scale of 1 to 10 with 10 being very probably $4.50 futures 1 being improbable you're around a 1?

Pfitzenmaier: 2 maybe.

Pearson: Maybe a 2. Okay. Our next question, Matthew in Windsor, Illinois on Twitter @chief321 has two questions for you. One of Trump's nomination picks is Pruitt from Oklahoma to head the EPA and he hasn't historically been overly outspoken in support of ethanol. Matthew's questions are, do you have any worry as him as an EPA head as it pertains to biofuels?

Pfitzenmaier: Yeah, there's a couple -- number one, he's not real keen on RIN's so I think those are in danger. As far as ethanol production, I think ethanol is standing on its own. Export demand I think it probably going to pick up and I think ethanol is going to be, I'm not sure he can do much to touch it. Maybe he can mess with the mandates but we're already using more than the mandates, so what. I think it's the RIN's and I think it's the potential, he could do some stuff that I think could hurt the biodiesel side of it, that's where the trouble is and that's where I think there's a risk on the bean oil side. Bean oil has certainly been elevated by this problem with the Malaysian palm oil market but it has been also supported somewhat by the EPA's attitude about biodiesel and diesel fuel. That could be a problem from him. Everything I've read says that's one area to be cautious. But I'm not all that concerned about ethanol.

Pearson: Okay. If the RIN's go away how would that change the industry? Those are the renewable identification numbers that are created whenever ethanol is brewed, right?

Pfitzenmaier: Again, I don't know that it will have any effect on it. It's just, it's a game that people play in the oil industry --

Pearson: Shuffling their RIN's around to meet their targets.

Pfitzenmaier: Yeah.

Pearson: Alright, interesting. Matthew's second question is talking about something you mentioned on the program, the spread or the ratio between new crop beans and new crop corn is higher than it has been historically. Matthew is asking, is the 2.65 to 1 bean to corn ratio going to narrow?

Pfitzenmaier: Well, I would guess it will narrow if people go out and plant a bunch of beans. If you plant 3 to 5 more million acres of beans that's going to tend to be supportive of corn prices and negative to beans. So I would guess it would pull it back into that 2.4. That's what I was alluding to on the show when I said if you're going to go out and plant beans, and as he said the incentive is there to do so with new crop beans up at $10.40 or $10.50, wherever they get to, but in order to take advantage of that you’ve got to make the sale, you can't just plant the beans and hope.

Pearson: Because if everybody is looking at these numbers and everybody plants beans that number is going to change. How aggressive would you be, for those that have revenue insurance, would you be selling up here at these prices, call it $10.40, call it $10.50, $10.30, would you be selling 50% of your guaranteed bushels?

Pfitzenmaier: I thi8nk you can do that,  yeah, because you're up at levels where if you kind of work the basis a little bit you're going to be getting pretty close to $10 cash beans in a lot of areas. And if you have any kind of yield you can kind of make that work. So I think you'd have to look really hard at that. I know guys that are going a lot stronger than 50% and I'm always a little uncomfortable with that, but the numbers kind of make sense.

Pearson: If you go north of 50% of guaranteed bushels would you do any kind of a call to reown it or would you wait and see what happens a little bit?

Pfitzenmaier: I guess if you're making a sale and you can't stand it then I guess going on -- spending some money on a call probably isn't too bad an idea.

Pearson: Okay. Only use it as a tool to make the sale if you need to.

Pfitzenmaier: If you can't sleep and night and you can't stand it and you're afraid you're going to miss the move back to $17 or whatever, yeah then spend a little money on a call and feel better.

Pearson: One of the things that I hear a lot in the countryside and I know you hear a lot is this push to bean acres is going to be driven by profitability looking at the numbers, but also as bankers look at spreadsheets, look at balance sheets and say hey, it's a little riskier out here, we don't want you spending all that money. You talk to a lot of folks. Is that a valid reason you think to see some --

Pfitzenmaier: That's the one I hear all the time is well, these guys won't have enough money to plant corn but they're going to plant beans. And I was like, how does that conversation go when you go into the banker and go, Mr. Banker, I don't have enough money for planting corn but I'd like some money for planting beans. I'm just afraid the Mr. Banker is going to go, nah, maybe we just won't give you any money for anything and give it to Fred down the road. That argument sort of bothers me I guess because I'm not sure those meetings with the banker actually go like that.

Pearson: Right. The banker is going to be just as willing to find somebody else who --

Pfitzenmaier: And if people are in a rotation how do you do that anyway? You're not going to plant beans on beans. So you only have a certain amount of flexibility in that anyway.

Pearson: Although I was talking to an agronomist, this was last year in southern Minnesota, he had a number of clients growing beans on beans and they were pretty excited and pretty pleased with it. So I don't know, talk to an agronomist, don't take my advice for it viewers. I am not an agronomist. I can barely keep plants in my house alive. Another question for you here, Rodney in Edgar, Wisconsin wants to know, what is setting up to drive the cattle market in 2017?

Pfitzenmaier: Well, I don't think there's -- the basics, the numbers. How are these numbers going to shape up? We've had fairly low placements but that's going to change in the next cattle on feed report I think and you're going to start to see placements really pick up. You had all these calves that were doing, like we talked out in wheat ground and out in pastures held up, we had an awesome fall so there was no reason to bring those calves in, let them sit out there, put on weight, so they're going to come in with some pretty nice weight on them. So I think you're going to start to see those numbers pick up through the winter. If we have a quasi-mild, maybe not mild but sort of average winter, the cattle should do okay. And then you have to look at demand. I mentioned it on the show and I guess it's worth repeating is this strength in the dollar is a giant headwind for all of us involved in agriculture and there's particularly true with beef exports. So that's something that I think you need to watch really closely. And then you've got this differential between high beef prices and pork and poultry that's quite a bit cheaper. So all that is going to be a problem for the cattle market. And we're up at the top end of the trading range that maybe you should be taking a look at some of that.

Pearson: How far out in the future would you be willing to pull the trigger on some sales?

Pfitzenmaier: We've mostly been going through April, although I have had a few guys that go out to August. That August is pretty heavily discounted and that's a little hard for me to get excited about.

Pearson: Right around $100 isn't it?

Pfitzenmaier: Yeah. But April cattle are getting up to levels, $112, somewhere up in there, I think it's worth taking a look at because most of the people I talk to can make some money if they're selling those cattle at that level.

Pearson: It's interesting on the cattle market, I read a report by Urner Barry that of the 41 weeks in the year, however long ago that was, lean ground beef had sold cheaper than boneless, skinless chicken breast, 37 of those 41. So they're finding a market for that low end, it's the high end cuts of beef that we're having trouble competing with poultry and pork.

Pfitzenmaier: Grind up those dairy cows and you get some pretty cheap hamburger.

Pearson: I've sold a couple of cows that, they made delicious burger, but yeah there weren't a lot of T-bones, not a lot of high quality ribeye. We've got a question here for you to help us understand the futures markets in general, Tomm Pfitzenmaier. Our ask the analyst question today is, what are the pluses and minuses, the drawbacks or opportunities, of selling in December as we approach the end of the year? Anything extra to think about this time of year when you're making sales?

Pfitzenmaier: In terms of futures sales? I don't really -- I think all the issues revolving around year-end are pretty much cash oriented whether you want to take the income, not take the income. It used to be structured tax wise that there's some advantages to some things you could do in the futures but that has all gone away. So I really, unless you're using it as part of some sort of a tax strategy on the cash side to reown or whatever then maybe, but other than that no.

Pearson: And you don't see any big movements by the hedges as we approach end of the year because their fiscal years are probably already over?

Pfitzenmaier: There's always rebalancing and so you have to try and figure out, okay what has made a good move and what hasn't and sometimes you'll see -- but everything has kind of been moving up. Maybe you'll see a little selling of beans and buying of corn because beans have gone up a little more than corn has but I don't, again, I don't see rebalancing being a big deal this year.

Pearson: Not a factor to keep people up at night.

Pfitzenmaier: Correct.

Pearson: Okay, well Tomm Pfitzenmaier, thanks so much for joining us.

Pfitzenmaier: Okay, thanks, Mike.

Pearson: Be sure to check out this week's M-to-M podcast as Peter Tubbs tells us about why young veterinarians are working in remote, underserved regions of the country. And join us again next week for our feature story to see how it all plays out. So until then, thanks for watching. I'm Mike Pearson. Have a great week. 

Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa PBS or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa PBS which is solely responsible for its content.

Grinnell Mutual Insurance