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Market Analysis: Virgil Robinson and Walt Hackney

posted on February 17, 2012

Market Analysis: Virgil Robinson and Walt Hackney

Pearson: Well, here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson. Gentlemen, welcome back.

Hackney: Thank you, Mark.

Robinson: Thank you, Mark.

Pearson: Walt, so many things to talk about. A lot of excitement surrounding Xi's visit, of course, from China here in the Corn Belt. Obviously indications of more demand, Virgil, was music to the ears of traders. We talked a lot about corn and beans because they were here in Iowa. Talk a little bit about this wheat market. Where do you see that part of the grain spectrum headed?

Robinson: Mark, I don't sense any shortage of wheat, and I'll use for reference the recent world supply and demand estimates report. They actually, Mark, increased wheat ending stocks. I remember the number versus a year ago. We increased it by about 12 million metric tons. So it's kind of a benchmark representing supply. That stocks-to-use ratio in excess of 30 percent, and the U.S. at 40. So I don't sense at the moment any critical shortage of wheat. I do believe, however, it has some strength associated with other coarse grain markets too, including corn. 

Pearson: Absolutely. Talk about a little bit about what happened in Eastern Europe.  Very cold temperatures over there and no snow cover. Are you worried about production in that part of the world being reduced?

Robinson: Yeah, I think it probably will be, Mark, but it's very difficult to quantify winter kill until a bit more time passes. Break dormancy and then the other factors that come into play ergonomically there. But even if they were to lose a portion of that crop, Mark, I still think that at least as we visit today that wheat supplies globally are certainly adequate.

Pearson: It certainly seems that way. What about from a sales standpoint, as producer's standpoint? What are you doing for wheat sales at this point, Virgil?

Robinson: Old crop? New crop?

Pearson: Let's start off with old crop?

Robinson: Well, I'm guessing quite a bit of old-crop wheat has been sold, and I think that's true. I do think that's true. If I still had old-crop wheat to sell, Mark, historically, seasonally there is normally a little improvement in price through the month of March, and I'd use that seasonality to finalize or certainly progress forward with old-crop sales and certainly use that same seasonal tendency to price some new or to minimum price some new, Mark, depending on the producer's ability to store at home and handle for any length of time. There are some carries that I think are attractive if the wheat producer does in fact have on-farm storage space, Mark, and an effort there could be made to improve profitability by utilizing that storage, the producer's capital, and then marketing skills.

Pearson: All right. One question that Walter is wondering about is why, and that is the corn market. You heard the Vice President of China talk about a corn deal with Argentina. More corn demand perhaps from the United States from an export standpoint. We've got ethanol demand. We've got strong old-crop prices. Optimistic about what demand could be for the old crop. What's your take in the corn market right now? And again, let's start with old crop.

Robinson:  Mark, again the supply you've just outlined -- the supply scenario you have addressed, year over year corn supplies are down and clearly that's underpinned the value of the market. I did note through the course of this week, that the futures markets, the carrying charges of the nearby contract to those deferreds, specifically May and July, narrowed or diminished again, Mark. So the market is flashing a pretty strong signal right up front that it needs that inventory. Now, interestingly enough, ethanol profitability has been stressed of late, but that's not to say some of the plants didn't do a good job of forward contracting their production, Mark. Maybe use the futures market and hedge some of it. There is still the demand pull there, but I would certainly recognize the strength of the corn market as measured by lack of carry and strong basis, and if I were lugging old-crop corn, I would be inclined to move that, reward the basis, Mark. If you want to be long corn futures, because of weather concerns -- and I heard you visit about that on your show this afternoon radio wise --a futures contract, some type of option strategy springs to my mind.

Pearson: One thing we didn't talk about was feed demand. Walt, you've really pushed up these calves. Based on this kind of a corn price, can we sustain that and what Virgil is talking about? This old crop is going to be tight. We're going to talk about new crop here in a second.

Hackney: I don't know if the calf market is pressured as much by the prospects of higher corn as possibly short yearling and yearlings. Calves are going to be subject to availability of roughage, and the more roughage, the more control you have on your cost of production, of course. with that being said, we cannot expect to see anything but a very bullish calf short yearling and yearling market for this year than what we have now and possibilities of it going considerably higher.

Pearson: Roughage is going to be a key factor to it, and I want to come back to this later, but let's talk new-crop corn for all those cattle feeders out there, Virgil. What are your thoughts on that right now? Should we be locking it in?

Robinson: Can they make a hedge here, a profitable hedge? Certainly if they can, that's an option that they might choose, or some type of option strategy. The last I knew, that wasn't available because of inputs. So having said that, some type of option strategy is probably a better route risk management wise than forward contracting without the prospect of a return. 

Pearson: And riddle me this now. So old crop, you'd be unloading some. Take advantage of a strong basis. Take advantage of the strong market right now. Concern about the weather. There are these two camps out there, as you know, Virgil, on the weather side. There is the - this could be 1988 again in the Corn Belt camp, and then there's the camp that says plant in the dust and the bins will bust. If we get 148-bushel average or Katie Bar the door pricewise, I don't know what it will do for the demand structure, but if we have perfect weather, it could mean 165 annual bushel yield. You're looking at a lot of carryout then, aren't you?

Robinson: Yes, it would be Mark, under those circumstances. You've probably illustrated and done a good job of bringing to the attention to our audience the use of crop insurance. Very appropriate here under the circumstances, I think.

Pearson: Deadlines are looming.

Robinson: And we're in the process of establishing that February price as we visit, Mark, so that will come into play and I think it will attract a lot of attention. It would be difficult to finalize the price of new-crop corn, specifically because --and I've been in areas of late where new-crop corn price is at or very near the cost of production in some areas, Mark. So clearly -- and I think that we've discussed this in years past -- I'm always a little bit reluctant to finalize the price of new crop under these circumstances, so minimum price option strategies and I know there's an expense attached to that are more appealing and more flexible, in my mind.

Pearson: Absolutely. Real quick, soybeans, obviously with the vice president of China's visit here, soybeans are on everyone's mind because they are such huge users. And, of course, there's a lot of cooperation, a lot of smiles across the state of Iowa this week, with his visits and his comments. What's your take going forward on soybeans?

Robinson: Mark, a couple of things. The crop in South America in each of the last two World Report has, in fact, declined, so there remains obviously a concern there. And year-over-year, ending soybeans inventories are projected to decline at about 9 million metric tons, so that's underpinning the price of this particular commodity. I think there's something of an anchorage battle looming, particularly with the recent change in the new-crop soybean, new-crop corn price ratio. So old crop beans, Mark, if I had any -- I don't have any. If I had any, I would be patient if my balance sheet permitted that and sustain that inventory moving forward for at least a while longer. Minimum price comes to mind with respect and/or insurance programs with the new crop.

Pearson: On new crop. All right. Let's shift back over to the cattle market. We talked about this calf market and not a lot of profitability, is what you're saying right now. But your bigger concern is finding the calves. What about this wild fat cattle market? This was a big day on the futures on Friday. What's going on here as you take a look at this thing tonight, Walt?

Hackney: Mark, I've been in this studio for over twenty years. I've been in this market aggressively since 1959. I consider myself fairly well-versed on trends and what to expect, and as we speak, I have no opinion.

Pearson: Okay, that will wrap up this week's show. You have some opinion because I know you're out there doing it right now. What are you telling people on this fat cattle market?

Hackney: I'm telling them to sell cattle. What all of us have got to understand is that $1.29 as we have today in the cash market, those -- some of those cattle lost money. What we fail to understand is that feeder cattle are nearly daily making historic highs in their cash market. And I heard Virgil talking about hedge. I heard Virgil talk about risk management. You better have a plan of some kind of protection. Now, I don't know that a hedge is the proper protection. Yesterday, as we speak, the best money in the country, from West Texas to Illinois was $1.22 big by packers. $1.27 asked by cattle feeders. This morning at the break of the market when it opened, $1.29 was paid. Now, why have we got a $7 disparity from yesterday to this morning and why in that disparity would a packer possibly do that if they were, according to their comments, losing the phenomenal money they claim to have been lost in the beef industry? I honestly don't know. I tell my customers, I tell my people, if you've got the corn under control, if you've got corn that you can market at $8 a bushel or $7 a bushel, food cattle, that's as good as selling it in the elevator, you if insure yourselves that way.

Pearson: Walter, hog market. We've got about a minute left. What's your take there? We've got more hogs. You told us we had that, and the most recent reports have confirmed it. How much are we going to be selling them for?

Hackney: Well, I think that the hog thing has got to be addressed in return of cash flow to the hog producer. Everybody has been waiting impatiently for export to increase. It hasn't necessarily done that. The producer caught on back in the mid summer when the corporate mega producers were building hogs in the feeding floor, weight, weight, weight, anticipating export. That's what they're doing today is building weight with the producers.

Pearson: Absolutely. All right, we'll talk more later. Walt Hackney and Virgil Robinson, thank you so much. That will wrap up this edition of "Market to Market. "If you'd like more information from Walt and Virgil on where these volatile markets just may be headed, visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts, streaming video of our program and links to our Twitter Feed and Facebook page. By the way, it's all free at the “Market to Market” website. And be sure to join us again next week when we'll examine efforts to fight herbicide-resistant weeds. Until then, thanks for watching. I'm Mark Pearson. Have a great week. 

Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat