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Market Analysis: Jan 11, 2008: Walt Hackney and Doug Jackson

posted on January 11, 2008

Forecasts of lower production and ending stocks helped the March wheat contract recover some losses from earlier in the week, while nearby corn prices posted contract highs.

March wheat prices rallied more than 25 cents per bushel on Friday, but for the week, the nearby contract lost about 22 cents. The nearby corn contract moved more than 28 cents higher to close just south of $5.00 and all the deferred corn contracts going out to July of 2009 closed above the $5.00 mark.

Estimates calling for a reduced Brazilian crop helped soybeans follow the coarse grains higher. For the week, January beans gained 37 cents, while soybean meal advanced $9.00 per ton.

In the softs, cotton reversed its recent upward trend as the March contract lost $1.73.

In livestock, February cattle declined $1.73. Nearby feeders dropped 82 cents to close below the $100-mark. And the February lean hog contract lost $2.40 cents.

In other markets of interest, the Euro advanced two basis points against the dollar. Crude oil prices fell more than $5.00 per barrel. COMEX gold advanced $32.00 per ounce. And the Goldman Sachs Commodity Index declined more than 18 points to close at 606.40.

Market Analysis: Jan 11, 2008: Walt Hackney and Doug Jackson Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Doug Jackson. Gentlemen, welcome back, Walter, Doug. Well, Doug, let's talk about today's USDA report, a big surprise on the corn number, want to talk about that. But also a surprise regarding those wheat acres and wheat plantings for the coming year. What is your take on that report as far as the wheat market is concerned?

Jackson: Well, Mark, the acreage was below the trade guesses, the 10th year in a row that the trade has overestimated the January estimate but it's still up a couple of million acres roughly from a year ago. But it surprised the market and we limit up in most of the grains. The wheat still has the best possibility to rebuild stocks slightly next year if we have continued good weather both in the United States and in the world. Wheat is still not the leader here, it's the row crops led by the biofuels demand. Arguably once this rally exhausts itself wherever that is wheat is the first thing to sell. Arguably with good weather in the world next year wheat will be lower by next summer than it is now. But on the other hand we still have an extreme tightness in a lot of the subclasses that we're dealing with. You've still got a real question about how volatile this old crop will be before we make that transition to the new crop and we could see extreme volatility continue as we've seen before. But it's the least bullish of the three grains.

Pearson: Is the wheat more of a short crop, long tail type of phenomenon from the marketing standpoint?

Jackson: Well, I think, you know, we can still see it follow the row crops up here but, you know, this was a surprise. We have a distinct difference in subclasses here, Mark. We had a huge increase in soft red or Chicago style wheat but a shortage or a reduction in acres in hard red winter wheat and that was a real surprise to the market. So, the Chicago style wheat will be a weaker element of the three. But there's still people who think we've got an out of control spring wheat situation both old crop and new crop and it's fighting for acres along with corn and beans.

Pearson: Alright, would you be selling wheat right now, Doug?

Jackson: I don't want to sell anything right now, Mark. But, again, if we sense that we see a substantial change of Washington policy in the CRP, if something happens and the row crops start to lose that momentum then that is the first thing they'll want to sell when the time comes.

Pearson: Alright, let's talk about the corn market, a big surprise from the USDA number. And, Doug, I just went back and I'm pretty sure this is one of the biggest corrections to a final USDA report that we've had at least in modern time. Were you surprised by that corn number?

Jackson: Well, the government dropped the number about 100 million but, of course, the moderate surprise was that feed usage was up 300 million. But remember, Mark, the government had an anomaly in their calculated feed usage in June, July and August and we had to find back that feed usage, we had a record amount of new crop corn harvested before September and that distorted the government's statistics. That doesn't mean we really found extra demand here but it does mean that we have a lower carry out. And, Mark, of course, that is the critical point. It's not that we're running out of corn this year but now we can clearly see that the corn market can not relinquish many acres into soybean production next year. And, Mark, that is really the key point here to this entire grain report. With all these futures limit up on Friday even a casual observer can now see that Washington's biofuels led demand situation is simply out of control. We have a simple shortage of acres as we move forward and the biofuels demand, the mandated levels ratcheting up year after year is simply and clearly going to overwhelm agricultural productivity at this time and at these prices. The bottom line here, Mark, is and the one thing we want to remain focused on throughout all these complicated statistics and changing market conditions and any producer has got to singly focus on this one concept, we need fifteen million more grain acres in the next 24 months than we have today, about 9 million more corn and bean acres this spring, another 6 million the following year. This is a multi-year problem, again, because of the mandated biofuels. You don't sell grain, you don't get bearish, you don't expect this market to lose momentum until you believe we have solved that fifteen million acre problem. How do we do it and when do we do it is now what the market is trying to figure out and right now the market questions whether that's even doable without a change in Washington policy.

Pearson: And without that change in Washington policy, Doug, give us a scenario for corn prices for 2008.

Jackson: Well, there's four ways to solve the problem. We can either use market forces to buy in the acres through natural forces or we can take prices up to an extraordinary level where you ration demand or you can take prices to a level where Washington will reverse direction on these mandated biofuels levels, the ink is just dry on the energy bill, or we can move to a level where finally Washington decision makers realize that we've got to open the conservation reserve program. And we've had three transitional Secretaries of Agriculture coming and going that didn't want to make that decision. We had the head economist retire. Now we have a new head economist in Washington. Whether he will start to see the writing on the wall, realize this arithmetic is out of control and a push then to open the conservation reserve program is the key question for the market to answer now. And, of course, even if the opened it immediately whether we can get a large amount of acres into production this spring is doubtful. Remember, we need fifteen million more acres. Even if they opened low erodability ground in the CRP it might only get ten million. So, even that would not solve the problem long-term but it would be a major speed bump in the short-term. We think prices move up now immediately to the level that will force Washington to re-evaluate that CRP program. Once they open that program even for low erodability acres that would at least create a question mark that could stabilize prices but not until then.

Pearson: You don't want to sell anything, same thing on corn. What about soybeans?

Jackson: Well, I don't want to sell anything, Mark, and practically our strategy is don't sell anything until 2009 or don't sell anything until you believe we've solved that acreage shortage problem and probably that means a change in Washington policy. So, outguessing that is difficult. Barring that if you have to ration demand, Mark, the mind starts to move towards $7 corn, $15 to $20 beans, I mean, you're just grasping in thin air for unprecedented prices that would ration demand over a long period of time, something we've never had to deal with.

Pearson: Alright, Doug, let's talk about the flip side of all of this and that is the person out there feeding livestock, not a good week in the grain sector. You'd expect that certainly in these feeder cattle with the move the corn has made. But Walt Hackney, let's talk about the fed cattle market. What do you see ahead now? We're in the first quarter of 2008. What do we look like numbers wise? What are we going to see happening price wise?

Hackney: Well, dealing with number wise first we have an adequate supply of feed lot cattle on hand as we speak that would satisfy 125,000 head per day slaughter. In that respect that is going to put an excessive amount of beef on the market because unfortunately the cattle feeder is still insistent on making these cattle heavier and heavier and heavier instead of what you would expect with higher price rations of lighter and lighter. We have a very serious issue out here in the feedlots with big cattle. It's going to be really hard to get the inventory back to a current position on weight and grade and finish with the problem we have right now of staying with cattle too long. It's a surprise when you're looking at 85 cent gain cost in the feedlots. You're looking at break evens, Mark, that will lose 100 a head on fat cattle today as the market is under the current price. As far as where do we go we should by all logic start seeing a lighter carcass being produced in the feedlot. We should see a higher demand for choice beef due to the lack of the heavier cattle. And we should see some balance come into the market at that time. Right now we haven't got much of a balance in the thing. We have a market that is probably going to be more dictative of 90 cent cattle than the 95 that all the feedlots were pricing cattle at even this week. A huge disappointment, of course. We have some commercial feedlots in the western areas that are transporting this corn that are predicting that if this trend continues as Doug has alluded it could a dollar a pound gain costs in a lot of these feedlots. That's going to be disastrous to the industry. As a result of that you're going to see, you must see feeder cattle take a significant break. We're not going to provide fewer feeder cattle, we're going to have the same amount of feeder cattle at least this year as we had a year ago. Possibly due to the drought in the southeast, possibly due to the economics of feed costs we'll see fewer cows retained next fall. But this year as we speak we're going to see about the same kind of numbers out there. The corporate feedlots that have a parent company that are also co-owners of a packing company, they probably will be your mass majority cattle feeder versus your corn area farmer, feeders, who probably are going to opt to put their corn into an ethanol program somewhere at these levels versus trying to enhance this $5 a bushel value higher by putting it through cattle.

Pearson: We haven't talked about hay prices which are another factor. Doug is talking about buying acres. We've got record prices on decent hay and dairy quality hay at record prices.

Hackney: You certainly do, you've got 150 a ton going into the southeast on dairy quality hay and some hay higher than that. Some of the western areas where they have drought conditions are paying over 100 a ton for some of this hay that's going in out there and a lot of that is grass alfalfa mix.

Pearson: Alright, Walter, hopefully we've got our feeder cattle slide up there so people can see what's happened with this calf market. And also while I've got you here we haven't talked since that last USDA hogs and pigs report. Walter, you talked about the fact we're overfeeding cattle again, we're starting to back things up a bit on that front and we get this hogs and pigs report that shows a 1% expansion of the sow herd. Explain that to me.

Hackney: I don't believe that report personally so I'm not a good vocal for that one percent increase. What I do believe is the inoculation we are able to use today in this pig crop is saving more available market hogs into the market than we have had for the last several years. I don't believe that we've got extra sows. I do believe we'll have some extraordinary liquidation of sows as these prices of bean meal, of hypro and so forth take place, licing, the whole complex is going to get considerably higher. There is a phenomenon going on as we speak. We've had cash hogs go below 30 cents a pound. We've had 430 head kills as almost a habit lately. We've seen no let up in that volume of available live hog inventory out here for market. That is due, I believe, to part of this medical issue in regard to the inoculations. But interestingly, Mark, with record high feed costs we're seeing record high carcass weights. And so there in itself is a problem. And who is carrying the extra hogs, who's making them heavier? I suspect the whole industry.

Pearson: Walt Hackney, as usual appreciate your insights. Doug Jackson, again, thank you. That will wrap up this edition of Market to Market. Now, if you'd like more information from Walt and Doug on where these markets just may be headed please visit our market plus page, it's at our Web site and you'll also find some streaming video of our program. You can also download audio podcasts of our market analysis and, of course, our market plus segments absolutely free. And be sure to join us again next week when we'll examine an attempt to put the squeeze on food pathogens with high pressure processing. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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