Market Analysis:Tomm Pfitzenmaier

Market Analysis: Tomm Pfitzenmaier

Jul 12, 2019  | Ep4447 | Podcast


Traders appeared to shake off the USDA report as weather concerns linger in the market. For the week, September wheat gained 8 cents while the nearby corn contract bumped 16 cents higher. The government lowered yield projections for the new crop helping offset less buying by the Chinese. The August soybean contract jumped higher by 37 cents. August meal improved $9 per ton. December cotton plummeted $4.14 per hundredweight. Over in the dairy parlor, August Class III milk futures declined 36 cents. Livestock was in the green again. August cattle put on $1.48, August feeders expanded $2.77, and the August lean hog contract rose $3.60. In the currency markets, the U.S. Dollar index shed 44 ticks. August crude oil increased $2.72 per barrel. COMEX Gold added $16.30. And the Goldman Sachs Commodity Index gained nearly 13 points to finish at 435.75 even. 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, I want to start off here, we've seen some discrepancies in this week's WASDE report. In your opinion, was it a bearish report or a bullish report?

Pfitzenmaier: That might be an understatement. It's a mess really. Basically all they did was took the June acreage estimate, plugged them in to the supply/demand tables and that's what they gave us. And on corn particularly that 91 and a fraction million acres, planted acres, I don't think anybody believed that. And I'm assuming there was a certain percentage of people that didn't understand the methodology there, saw the big number, sold it in initially after the report came out, then everybody that kind of did know that it was a bogus number came in and bought it hard and we ended up rallying pretty nicely with follow through then again on Friday. So I think that, the fact that we rallied as much as we did I think is a pretty good example of why nobody really believed the numbers.

Howell: Yes, nobody it seems that way as well. When you look at the wheat exports we saw that they were raised for the '19-'20 marketing year citing cuts in Russia and other parts of the country. Do you think we'll really be able to follow through and have increased wheat exports?

Pfitzenmaier: Well, those, the crop problems in all those countries is really what gave us the boost. The fact remains that U.S. wheat is still priced well above world prices. So we had initial reaction to that, pretty nice reaction to it in the wheat market, and then we kind of stalled out on Friday and I would guess we're going to stall out and wait to see how all of their weather shapes up and whether in fact world prices start to catch up to the U.S. or whether the U.S. has to pull back a little bit and get back down more in line with the rest of the world for prices. So I guess at this point I wouldn't expect a huge amount of follow through quite yet, although that potential sits out there like it does with all the other grain markets.

Howell: Is that why we've also seen a pretty strong spread here trending higher in the spreads for the Kansas market?

Pfitzenmaier: Yeah, I think that plays into it. That's part of it too. And there is some weather uncertainty so that is supportive of the wheat market and I think until that sort of gets figured out that is also going to be a supportive factor for all the wheat contracts.

Howell: Comfortable at these levels?

Pfitzenmaier: I think so, yeah.

Howell: Okay. What about the corn markets, Tomm? As you mentioned there they reacted favorably, which I think shocked some people in this week's report. Do we stay here? Do we head a little higher? What can we expect?

Pfitzenmaier: Yes. I don't know what to expect because we have no idea really what the acreage is. They're going to do this resurvey of 14 states and that number isn't going to come out until August. Yield we have no idea. 40% of the corn was planted after June 1st so there's got to be some yield implications to that. They did already lower the yield 10 bushel per acre approximately so to some extent that has been taken into account but we don't know if that's enough yet. We're looking at a couple of weeks here of maybe hot and dry weather, which the first two to three days that's probably good for the crop, after that it could be a problem. So there's just so much unknown on the supply side. If you take the bullish scenario where acreage is a lot lower, yield drops, then we're well underpriced probably on December corn. If on the other hand it's kind of there was some loss but not too bad and we have a decent fall and an okay summer maybe $4.50 to $4.75 is good enough for December corn. The tricky part about corn in my mind is that assume we get down to a 1.1 to 1.2 billion bushel carryout, the USDA was at 2 billion, so we lose 800 to 900 million bushel of corn, that's a big drop but it's also not running out. And South America is going to have corn that competes with us right into the fall probably because the Brazilian crop is about being harvested so they're going to compete with us. And then you get into what are they going to produce next winter. And then add to that the way the price differentials are we could see huge corn acreage in the U.S. next summer. So do we just need to get by enough to get back to when we've got huge supplies again or how is that all going to wash out here? So there's a lot of moving parts and it's really hard to know, there's great potential, but then maybe we just go sideways. So I guess as a producer the obvious question is what the heck do I do? Well, my philosophy has always been when there's great upside potential, which there is here, but we've got decent prices and you want protection, that is the perfect situation for buying puts because it kind of gives you a floor if it does fall apart but lets you participate on the upside. So I guess that's the way I'd be playing it. Having said that, we're getting up to fairly good prices and I think you'd want to at least take a little piece of that. You've got really good basis in a lot of areas and corn, some corn is going to have to move by the time harvest comes, so you're going to want to kind of maybe keep feeding lower corn into the market to take advantage of that good basis.

Howell: Since you're talking about basis, Tomm, you're setting us up for the perfect question here we've got from our Canadian friend, Phil in Dresden, Ontario. He said, how will cash corn basis respond in the U.S. Eastern Corn Belt and Ontario for both old crop and new crop leading up to the August 12th USDA report? And what cash corn scenarios might play out after that report?

Pfitzenmaier: I guess I'm not sure after because we don't know exactly what the USDA, but leading up to that, the Eastern Corn Belt, when I was referring to strong basis that's kind of what I was talking about. Those are the areas that really had crop problems, that Indiana, Ohio, up into his area, they really had a lot of crop problems and as a result we're seeing super strong basis in that area. So again, I know people are reluctant to make sales at least until they know somewhat what their crop is going to be and we aren't going to know that or at least see how it pollinates for the next 30 days. And then after that I think you have to take advantage of that basis and just keep feeding some into it like I said. After the report who knows. I doubt that they're going to come up with big numbers sitting around anywhere in Indiana and Ohio so I would expect that basis to stay strong right into harvest particularly for those areas.

Howell: Well, you never know what USDA is going to do. They shock us sometimes.

Pfitzenmaier: Obviously, yeah.

Howell: I don't think it was any shock that we dropped a bushel on yield in soybeans. Does that change the story at all? I know it creates of course a smaller stockpile we've got to sit on. But does it make the story a little healthier for the soybean market/

Pfitzenmaier: Yeah, I think so and I'm not convinced, there was a ton of beans planted after June 1st, like the vast majority of them, so there's bound to be yield implications to that even if we do have a decent fall. We did have a nice change in the acreage number on soybeans so that just sort of adds to it. I don't know, I don't think it's too hard to come up with a scenario where that billion plus carryout shrinks down to 500 and some. So to me that's supportive. Again, that's not running out of beans. South America is probably going to produce a lot of them. But it certainly could push November beans up into that $9.40 to possibly $10 on an overreaction. So there's upside potential here in both corn and beans.

Howell: And how much are we looking at for a yield drop to get up into that $9.50 to $10 range for soybeans new crop?

Pfitzenmaier: Well, like you said, we already dropped a bushel. I think a couple more would probably be enough to push that up at least temporarily up into those levels.

Howell: What do we have to get up to or what do we need to drop yield wise or is it more of a trade situation to see $10.50 to $11 soybeans?

Pfitzenmaier: I don't think that will happen. I don't think the losses were great enough to get us much above $10.

Howell: All right. Well, Tomm, let's start talking about the livestock markets. They have had some positive weeks in the live cattle and feeder cattle markets. Have we been putting in a bottom for those two?

Pfitzenmaier: Yeah, well I don't know about feeders. If corn keeps working hard feeders are going to struggle and we saw that on Friday when corn was up nicely the feeder market dropped. So all things being equal I think that's probably true in feeders but if corn keeps going up they're going to struggle. On the fat side we've had a nice rally up, October got up in that close to $110 area. They're wildly overbought and probably due for a correction. If they pulled back in that $108 area I'd want to be buyer of cattle again. The cash market is well above where particularly the August contract is trading and I think that's going to tend to be supportive. We're into a period where demand isn't quite as good as it had been so we may struggle because of that. But I think you're going to see October cattle in that $108 to $112 range for probably most of the next couple of months.

Howell: And the USDA also released some information saying that '19 and '20 were expected to reduce our beef production by about 505 million pounds. Is the market factoring that in yet? Or is that something wait and see game?

Pfitzenmaier: I think that's a wait and see. Like you said, it's another one of those USDA numbers that I’m not sure anybody is totally factoring in right now.

Howell: Okay. Feeder cattle markets you said just reacting to corn markets? Is that really all we can talk about there?

Pfitzenmaier: Yeah, I mean, if the fat market starts to work up that is certainly going to be supportive of the feeders. Beef guys tend to be optimists anyway so I would guess on any breaks they're going to be supported fairly well.

Howell: Okay. Tomm, let's round out our discussion with the hog markets. We've seen pretty steady exports to China, now we're starting to see China's hog prices in flux because of probably African swine fever no doubt. Does that leave us any opportunity here to pick up export pace? And at what point or really how many exports do we need to send to China before it starts to light a fire underneath the hog markets?

Pfitzenmaier: There's two factors in hogs. One is if China doesn't buy significant quantities we're producing way too many hogs and that's why we dropped $40 in hogs is they haven't bought enough, we're producing a lot of hogs, if they don't buy and hogs are probably a little overpriced even at these levels. Second factor is China. How much are they going to buy? How much more are they going to buy? Like you said, they have been, although it hasn't been shipped out at the pace that I think the trade would have liked. But that's an upward factor, if they come in and buy significant quantities then there's great upside in the hog market. So take your pick. Again, maybe that's a situation where you buy puts whether you need a floor in case they don't buy, but you want to participate in the rally if they do. So that is kind of the way we'd play the hog market. There's great potential both directions I think depending on what happens there.

Howell: Do you see China ever stockpiling something like pork as they do with other commodities?

Pfitzenmaier: That's a little harder to do. I guess I'd be surprised if they did that. I'm not sure they have the facilities to do that to any great extent. So I guess I wouldn't see that. I think that's going to get bought and used pretty quickly.

Howell: Okay, Tomm, thank you so much for breaking down the commodity markets for us.

Pfitzenmaier: Thanks, Delaney.

Howell: 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 The corn is finally growing and we have pictures to prove it on our Instagram account. Give Iowa PBSMarket a follow for other behind-the-scenes images. Join us again next week when we’ll explore how one seafood company is using strong community ties to thrive. So until then, thanks for watching. I’m Delaney Howell. Have a great week!



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