Pearson: This is the Friday, January 11, 2013 version of the Market Plus segment. Joining us now is Don Roose. Don, welcome back.
Roose: Thank you, Mike.
Pearson: We had you on the show and you were talking about hog prices and you mentioned that on the chart we're approaching a ledge and hogs could fall off. I was hoping you could explain that a little bit more. How far is that drop off the ledge if that's the direction the hog market goes?
Roose: Well, and you have to be kind of cautious because it could also hold right in here. But I think a lot of it does depend on the grain market and I think when you look at the hogs and pigs report it certainly told you that we didn't have a lot of liquidation. But if you look at the $96 has been holding on the June and July hogs in the summer months but they could easily drop down into the $90 area. The USDA has hogs at only $94 as the high for the year so you know that is not that far off of what they believe either. But when you look into the October hogs the same thing, we're sitting in the mid 84 range and if we drop off of this big, broad support zone -- and by the way that's what we actually did in the grain market here over the course of the last couple of months -- but when you drop off of that, that could push you back down in that 75, 70 cent range even into October and December hogs.
Pearson: So we could be looking at a 10 to 15 cent decline in prices here if we end up dropping off that ledge.
Roose: We could. We could come under some pressure. And, of course, some of that will coincide with if we get a big crop because new crop corn, soybean meal is going to be substantially lower. We've already dialed some of that into the market in those back months. But the futures market in the grain is telling you the same thing.
Pearson: All right. Well, now we do have a lot of questions here from our social media people, the viewers who tweet us and Facebook us different social media questions. Kev in Dunlap, Iowa is asking, what effect will the Mississippi River barge traffic have on grain prices?
Roose: Well, I think when you look at the grain what has happened, it has had some effect already because you have to, you can't barge it down as efficiently so you have to rail it down. So what it really does is it costs more so it makes you less competitive. Of course, in this last year our export pace has been so dismal on corn it has been less of a factor. So that is one plus, we didn't have as much grain being shipped out as we normally do.
Pearson: Now, that drop in prices, is that mainly going to be reflected in basis that farmers are getting at their local place they're selling the grain?
Roose: Well, it is some basis but I tell you what we have right now is a basis on corn is just red hot, it's on fire and part of that is because our export pace is so anemic and our real usage is in the domestic market, the ethanol market, the feed market and the food market. So it's just a year where exports aren't as important as they were on corn.
Pearson: All right. Jerod in Seldom Rust, Oklahoma, this is bringing us back to livestock. He says, will consumers continue to pay more for beef or will it become a luxury item food some can not afford?
Roose: Well, that's what you have to be afraid of is that it does turn into a luxury item and I think there has even been some restaurants that are offering portion meals and weight meals on beef so that's a fear. When you look into the 80s each person was consuming about 68 pounds of beef and now they're consuming more like 55 pounds of beef so we're not going the right way on the demand but we have more numbers. So that is a risk to high price is that you lose some of your customers.
Pearson: Now, are we going to pick up any of that demand on the export side? Or are these high prices going to eliminate exports as an option for us if they keep up?
Roose: Well, exports on cattle are different than hogs. We export about nine percent of our cattle and it's pretty stagnant. So I don't think the export pace is going to change a lot. It's an item that is going to have to really find support from the domestic. And we just have had not much success pushing beef over $200 on the box beef and that is what makes you cautious when you're talking these hugs wild numbers on cattle. I think high numbers are more $137 to $140.
Pearson: Because we've got that ceiling on there as what the consumers are willing to pay.
Roose: The consumer just won't pay. Now maybe he will change but I don't think the economy is that strong either. So I think you have to be concerned about the demand.
Pearson: So that's something to keep an eye on. Brad in St. Joseph, Illinois is asking, what corn/soybean price ratio would likely get the proper balance of corn and soybean acres in the next few months? As we look into planting season what are you hearing from producers out there as for their planting intentions.
Roose: Well, there's no doubt that the producer, the profitability is in planting corn, Mike, and it has been always. But to get back into a balance, the old balance has always been corn 2.4 times the value of corn for new crop so you take December corn $5.77 times 2.4 and I think that would buy the acres back. Well, we're not at that level right now. So right now corn acres are favored over soybeans and unless something changes it probably stays that way.
Pearson: And what would change? We're looking at price? Or weather wise what is going to drive a big change in acres to be planted?
Roose: Well, I mean certainly the one thing that would change it is if we got into a wet period, which right now we say that doesn't look likely but if we went into a wet pattern, you weren't able to plant corn, you'd plant soybeans. The other would be if the old crop corn with this tight stocks really does drag up new crop even higher than we think and so you bought -- that could be something that would continue to keep the ratio out of balance. But it's going to be something different than what we see right now.
Pearson: Okay. Now, something you mentioned on the show as what we're potentially going to see record amounts of corn acreage and if we see that possible at trendline yield that kind of I think plays into Phil from Ontario's question. He says, he is asked this all the time. Is corn going back to $4? What do you see being the scenario with decent weather and roughly a trendline yield?
Roose: Well, if you take something just off of trendline, 160, 161 bushel yield and you take even 97.5, 98 million acres with up demand the way it should bounce back you're left with about a 2.2, 2.3 billion carry out. I don't want to scare anybody but in the olden days that was sub $3 corn. I want to remind people that December 13 corn is sitting up here, you know, $5.75, something in that area. But we started this whole rally, you go back and look at the charts on December 13 corn it was about $4.20, $4.25.
Pearson: So it's a possibility.
Roose: It's a very much possibility because it's even on the charts.
Pearson: All right. So just keep an eye on the weather and what comes out as we see what acres are being planted.
Roose: See what it looks like in 2010 before we had three losses in a row on crops, corn actually moving under sub $3.
Pearson: All right. Well, Don, I want to thank you for coming on today. Now, before we let you go, as we look into this next week is there any particular trade that you've got in mind? What would be your trade of the week if you could make one this next week?
Roose: Well, if I had to make a trade of the week it would probably continue to be the same direction. I would still be a buyer of the old crop corn and a seller of new crop corn, take some of the sting out of the market also but I think there you're trading too that the fundamentals are moving in the right direction for you.
Pearson: All right. Well, thank you so much, Don, really appreciate having you on the show with us and doing the Market Plus segment and working to answer these questions. And thank you for submitting your questions via Twitter and Facebook and please keep it up and we'll continue to get to them as best we can. Hope you have a great week. Thanks for watching.