Market Analysis: Tomm Pfitzenmaier

Market Analysis: Tomm Pfitzenmaier

Dec 9, 2016  | Ep4216 | Podcast

Podcast

Despite profit taking, good weather and a bearish stocks report the commodity markets finished mostly higher by the final session. For the week, March wheat rose 12 cents and the nearby corn contract moved 12 and quarter cents higher. A 25 cent gain in the soy complex was undone by South American weather and the WASDE report revealing higher global stocks. However, the January soybean contract managed to finish a dime higher for the week. January meal stayed with the trend adding $6.30 per ton. In the softs, March cotton lost 24 cents per hundredweight. Over in the dairy parlor, January Class III milk futures fell 23 cents. The Livestock sector gained back some of last week’s losses as the February cattle contract added $1.66. January feeders put on $1.35. And the February lean hog contract increased 14 percent over last week putting on $7.53. In the currency markets, the U.S. Dollar index increased 77 basis points. Crude oil fell back after last week’s 12 percent gain losing 18 cents per barrel. Gold fell for the 6th week losing $15.90 per ounce. And the Goldman Sachs Commodity Index gained nearly 2 points to finish the week at 388.35.

Pearson: Here now to lend us his insight on these and other trends is one of regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.   

Pfitzenmaier: Thanks, Mike.

Pearson: We're excited to have you here. Before we get started, you can listen to our market discussion anytime by downloading our Market Analysis podcast on our Web site, that's at iptv.org/mtom.

Pearson: Let's take a look at this wheat market. Finally a move to the upside, 12 cents on the week. Is it this cold snap coming in that's really driving this market?

Pfitzenmaier: I think so. And exports weren't all that bad thi8s week. I think the wheat market is probably trying to establish a base here, probably going to be a choppy sort of affair, but I think over time we're going to start to see wheat start to kind of work up a little bit. I think we ended up March wheat around $4.08, $4.10, somewhere in that range. I think it's got a shot at moving up in that $4.30, $4.35 range maybe even. So I wouldn't let myself be too bearish wheat at these levels. I think there's some potential there.

Pearson: Do you think a lot of these winter wheat acres are going to be grazed off rather than harvested for grain? Or if we push into that $4.30, $4.40 does that pencil out enough for most guys to run the combines?

Pfitzenmaier: Yeah, I don't think there's any question that there's been some calves left out there to graze that grain. Now with the weather turning here that's probably going to come to a screeching halt here. And I'm not super familiar with the economics of production of wheat but I would guess you get up into those higher levels and there will be people starting to think about it again. There's been some talk about some of the wheat acres going to beans, part of a contributor to this being supposed bean increase we're going to have next year.

Pearson: And let's talk about that bean acreage increase from a different point of view, from the point of view of corn. We could see some wheat acres go to beans, we could see some cotton acres go to beans, but the bulk of that 4 or 5 million acre increase is probably going to come out of this corn market, would you say?

Pfitzenmaier: That's what they say.

Pearson: Okay, but where do you stand on that, Tomm Pfitzenmaier?

Pfitzenmaier: I hear that after harvest every year, beans are a little higher than corn and everybody is all excited, I'm going to plant beans because I'm so broke I don't have any money to plant corn and beans are going to be great. And I don't think there's any question that we had great bean yields last year. But I also don't think there's any question that most people aren't going to plug those kind of yields into their budgets for next year. So I'm sure there's going to be some switching but I don't know, people like to grow corn, corn yields have been pretty darn good too and I understand that the new crop bean price relative to new crop corn, that ratio favors beans, but it only favors it if you sell them. If you're just sitting there, well I'm going to plant beans and hope, that is not going to work out so good for you because you've got to remember, we have almost a 500 million carryout of beans, South America, except for a little pocket in Argentina, looks quite good and their production is up 24%, 26%, something like that. It's a big jump. And then they're talking about a big jump in acreage here too. So if you're going to plant beans and it's profitable and it looks great you better get some of them sold.

Pearson: Get some of the -- well as long as we're talking beans, we do have a question from one of our Twitter followers, excuse me, a Facebook follower. And we encourage all of you to send in your questions via Facebook and Twitter. You can find us @MarkettoMarket on both those sites. This question comes from James in Kremlin, Oklahoma. He's asking, with this potential big increase in planted bean acres next year what is the downside price risk? Let's say weather turns around in South America, Brazil does do their 102, 103 million metric tons, we plant four or five million more bean acres on top of an already large carryout, what is our downside risk in this market?

Pfitzenmaier: And I understand that China has been a big buyer of beans but they're not going to be buying that many beans. We got new crop beans as high as $10.40, $10.43 I think just in the last few days. I think you could see easily an 8 in front of that, possibly a 7. They're talking for the carryout getting as high as 700, 800 million under the right circumstances here. And I'm not saying it's going to happen but I'm just saying there's huge downside and huge risk. If you're one of these guys that wants to go out and plant beans, great, but you better get them covered somehow.

Pearson: Did the market react to Governor Branstad's appointment to Chinese Ambassador on the soybean side? He's got such a report with the Chinese leaders, did that inspire some confidence?

Pfitzenmaier: It did in me and I kept kind of watching for the market but I never got a sense during the week that the market was responding to that. I thought it was a positive because we've had all this hand wringing over fighting with the Chinese and afraid it's going to hurt our ag exports and all that, so I really kind of thought maybe there would be a stronger reaction to it. I think it's a good thing and I think he's going to be a good buffer between the two governments.

Pearson: Let's circle back to the corn market. We had another bump this week, 12 cents to the upside. If I've got old crop corn in the bin am I aggressively selling up here at $3.60 or do I hold on and let this thing keep running?

Pfitzenmaier: I don't know if you're aggressive but you probably start and they just start feeding some in here. The problem with the corn market is there's tons of it around and they're going to use that basis just like an end gate and a wagon. I know, nobody uses wagons with end gates anymore.

Pearson: Some of us do. Some of us old school guys do.

Pfitzenmaier: Those people can understand. But every time you get up here they're going to close that down a little bit, widen the basis out and when it goes down they're going to open up the end gate and try and draw more corn in. So I have a sense that a lot of farmers are holding out for a minimum of around $3.30 on the cash market, sort of Central Iowa type markets, and I think they'd really be aggressive sellers if they get up to $3.50. So I think that's part of the reason we're sort of locked in this trading range is that you get March corn up in that $3.60, $3.65 range that translates to sort of the lower range of those sales and end users understand that too so their interest tends to fall off when you get up to those levels and then it all gets sort of rekindled down at that $3.40, $3.35 range.

Pearson: So we're just going to have to grind through.

Pfitzenmaier: We're stuck, yeah.

Pearson: Looking at the new crop, with a transfer of acres into beans, is there opportunity here to see this new crop corn, Dec '17 pop a little bit?

Pfitzenmaier: That got to like $3.88 on Friday. I can't get -- with that potential sitting here, and I understand the carryout is big, but the ethanol demands have been quite good and could get better. Exports have been pretty darn good and we're in the sort of driver's seat, at least probably through March, for corn exports. So yeah, I guess if you got up in that $4.05, $4.10 range I would certainly start making new crop sales figuring that there's a chance under the right circumstances, a weather issue or whatever, that you could maybe even go to $4.50 but I'd sure start at those lower levels.

Pearson: Get north of $4 and pull the trigger.

Pfitzenmaier: Some kind of scale up program from there, yeah.

Pearson: Let's talk this livestock market. Live cattle up $1.66. We ran higher, $20 higher, we stepped back, now are we looking to make another leg higher or are we just on a step back before we head back to the basement?

Pfitzenmaier: Well that's a question I was looking at my charts before I came over to do the show and that cattle market is in a nice little up trending channel here, we went down Friday, sort of checked out that support level on that upward trending line. If that holds then I think we're probably okay. If we start breaking through that then I think we've got problems. The problem is we still have a fair amount of beef around, most of the buying has been done for the holidays so that part is going to kind of go away. But having said that, you're heading into a period where sometimes weather can give you some pretty nice pops in cattle yet too. So I'm trying to be cautiously optimistic but there's a lot of numbers, despite the rally in pork there's still a fair amount of that. I'm a little concerned about this rally in the dollar and the effect that's going to have. You can talk about we're mad at China or whatever but if the dollar keeps going higher that's a huge headwind for all of us trying to export agricultural commodities.

Pearson: Especially on the premium products like the meats.

Pfitzenmaier: Correct.

Pearson: Feeder cattle just following live cattle higher here as long as corn stays in the range?

Pfitzenmaier: Yeah, I think so. There's guys wanting to walk some corn off the farm by buying cattle. Historically that doesn't usually work all that great but I can see why they want to give it a shot. And we've had a nice rally in the cattle market that has maybe given them an opportunity to lock that in. So yeah, I think the demand probably for feeders is going to stay strong simply because of that.

Pearson: Okay. Now you alluded to it, we were talking about the live cattle markets, lean hogs, Tomm Pfitzenmaier, $7 plus to the upside this past week. What happened?

Pfitzenmaier: Yeah, totally caught everybody off guard. We've got lighter numbers. Weights have come down a little bit. We had a pretty darn good export number. We've got excellent packer demand for these hogs. You've had a big jump up. Now, the USDA's prediction for hog prices is really quite a bit lower than where we're at today. So it seems to me if you get these June hogs up in that $76 to $77 plus area you need to be looking at making some sales if you've got market risk on any of the hogs you're producing.

Pearson: Looking at, I know this was a concern earlier in the year, slaughter capacity, hanging space for these animals. Last week if I remember correctly we had the largest hog slaughter in history and this week we put another $7 on the market. Does that tell you that maybe we don't need to be as concerned about capacity?

Pfitzenmaier: Well, probably. It doesn't really matter because we've got a lot of capacity coming at us next fall and so that's going to change the dynamics of all of that too. And that's going to be really interesting to see how much those plants are willing to compete with one another and possibly pay up for hog prices. So that's something coming on next fall that I think is going to be pretty interesting.

Pearson: But you made the point earlier, it's those summer months where we're not going to have that capacity online. And what was your target, $77?

Pfitzenmaier: $77 on the June and July hogs. I think anything north of that you've got to look at it pretty hard.

Pearson: Alright. One of the stories that has been ongoing here, well particularly since the election, has been the drop in gold prices. We've got the Federal Reserve board meeting this next week. Do you think they're going to raise interest rates?

Pfitzenmaier: Absolutely.

Pearson: So is gold going to continue to slide?

Pfitzenmaier: Absolutely. Why would you buy -- what would be the reason to own gold right now? I can think of none. And interest rates are going to work up, probably going to have another rate next summer I would guess. So you've got -- that's going to impact land values too. You've got rising interest rates, lower income, that's going to be a headwind for land values too I think.

Pearson: Well, Tomm Pfitzenmaier, thanks so much for taking the time to join us this week.

Pfitzenmaier: Thanks, Mike.

Pearson: That wraps up the broadcast portion of Market to Market. But Tomm and I will keep the market conversation going including answering more of your questions during Market Plus available on our website. While you’re there 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 then 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.

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