Pearson: This is the Friday, February 15, 2013 version of the Market Plus segment. Joining us now are Walt Hackney and Virgil Robinson. Welcome back, guys.
Robinson: Hi, Mike.
Hackney: How are you, Mike?
Pearson: Doing well. Walt, we kind of had to cut you off on the show. Let's talk more in depth about where you think live and feeder cattle are headed now that this Barclay's thing is out of the system.
Hackney: You're going to have to separate live cattle from feeders because you've got two totally separate indicators that are governing either of them. On the feed lot side, on finished cattle, fundamentals as far as availability, as far as percent of cattle on feed, as far as placements going in the feedlot and all of it usually would dictate a trend in the future for the cattle market is going to be non-affected if we don't get some substantial improvement in our exports. Our exports are 45% on beef under a year ago. I'm not sure if you're aware of that. And that is approaching a disastrous issue if we didn't have an extreme shortage of fat cattle in the feedlots. Now, it isn't that they're offsetting one another but it is helpful that we're only killing 119,000 cattle yesterday versus maybe our potential should have been somewhere around 125,000 to 127,000. So that is the issue on live cattle. Live cattle are not going to go anywhere in spite of all of the pluses in the fundamentals unless we increase exports.
Pearson: Does the news from Japan, is that going to have any benefit for us soon do you think?
Hackney: Well, that news, your reference, is the 30 month approval versus the 20 and that was decided back here six or eight months ago and we have progressively had that carrot hanging on a stick in front of us ever since and they've done nothing. And I don't know that they will. I don't know when they will. Now, over here on the feeder cattle side, we have a totally separate issue, Mike. We have the lowest national beef cow herd in numbers in 60 years. Now, I would say that is the lowest in history because I don't know that anyone can document where we really were 60 years ago. But they do indicate, records do indicate 60 year low as we speak. That in itself, if all of the feedlot values would do as they should with the lowest inventory of fat cattle coming out of the feedlots, the lowest tonnage of beef coming out of the feedlots because of the price potential of gain costs, the feeders, cattle feeders, are not carrying them quite as long. And so all of that should be a plus for the value of the fat cattle. It isn't, it's a matter of, totally the matter of where is dressed beef going to go and what is going to cause it to go and it has to be exports. Feeder cattle, we've got a huge deficit in feeder cattle resulting from the drought for the last two years, the southwest, the south, the Midwest, the entire area has been adversely affected by that drought. Pastures are of no value right now. Grain costs are exorbitant in the feedlots. Hay is out of sight. And so they're going to hold the cow herd where it is because they can't afford to carry them or increase the size if that answers your question.
Pearson: It does. It does. So we need exports.
Hackney: We've got to have exports.
Pearson: And so in order for that to happen we're probably going to need bigger, better economic news from around the world. I mean, we're going to need consumers out there buying.
Hackney: Our domestic, our consumer, our usage can not support anything near a kill like what we're doing right now which is less than it was a year ago because our exports aren't there. It is reliant on the consumer and they're not going to support a higher cash cattle market as far as dressed beef value go at the retail. They're not going to do it.
Pearson: And we've got a question here from a viewer who is asking, are meat processors making any money?
Pearson: No. And haven't been since this last summer.
Hackney: Long time.
Pearson: And they're just going to keep plugging along hoping we get a turnaround do you think?
Hackney: A good case in point for your viewer, in 1971 Cargill, which is Cargill, was Missouri Beef Packers, became MBP-XL, built their flagship plant in Plainview, Texas and it was an enormous plant. I happened to be there at that time as head cattle buyer. That closed the first part of February indefinitely. 2,000 employees were laid off and shipped elsewhere or else went to different employment. And that will tell you if they'd have been making money that plant would never have closed.
Pearson: Yeah. So it is just not a very sunny picture out there.
Hackney: It truly is not and it all hinges on the value of the dressed product.
Pearson: And who is willing to pay it because American consumers are tapped out.
Hackney: They're tapped out. That's the best way to put it, Mike. That's the best way to put it.
Pearson: All right. Virgil, we do have a question here from one of our viewers, Kevin in Dunlap is asking us as far as cost of production goes, how does South America compare to North America? Is there a big difference there? Do you know?
Robinson: Inputs in both regions have gone up, variable costs have gone up in both. There is a relationship between the value of the Brazilian real and the U.S. dollar and clearly that fluctuates over time but that is a variable that is a major determinant in price between the two regions. To Walt's -- I enjoyed your commentary, Walt, and you know when the payroll tax deduction that we had enjoyed up until this year I think that was a factor for the consumer, his or her discretionary income went down. Gasoline prices have been going straight up. So the competition for that disposable income has intensified and as a result, as you mentioned with retail beef prices in the fourth quarter I believe of 2012 at record high levels it has had an effect on disappearance. I think, Walt now correct me I might be wrong here, but I think there's a cold storage report next Friday, I think, the 22nd, which might give us an indication at least of month over month disappearance as well as disappearances compared to a year ago. And I know in January it was concerning. We built some inventory.
Hackney: Your point, Virgil, on cold storage, due to the ban on our product, meat product by Russia because of the hormone growth additive that they have asked us to discontinue, and we will not do it, because of that, that market is lost to us and because of that we've got still 425,000 to 430,000 head of hogs being slaughtered each day and of that we still are having to rely on domestic usage. They can't do that. And so they're going to cold storage with bellies particularly and the bacon slicing season isn't here yet so we're getting a backlog of bellies in cold storage and we can't export them.
Robinson: Well, you know, Japan as well, a pretty good customer of ours, not only corn but also value added beef and pork and other species, to describe their economy as robust would be certainly misleading. If not recession it's pretty damn close so clearly that is a factor as well as you think about the ability to export higher value products.
Hackney: Excellent point. Good point. Yeah.
Pearson: You guys are making my job really easy here tonight. We do have one final question relating to new crop corn prices. Is there hope for new crop corn prices or did hope leave town? Are we just trading the weather? Is that what it's going to take to get us back to where we were last year?
Robinson: Well, it's certainly a factor. I don't think this is wrong. I think this is accurate. I looked at Iowa State's crop budgets just this week and given central Iowa new crop values there was still a pretty significant, at least as measured by historical values, return in growing both corn and soybeans. So it's kind of relative to what he terms their opportunity or value or however he phrased his question. I mentioned the prospect this season of those who possess on-farm storage. Now I think there is an opportunity if these large inventories come to fruition between now and the fall of 2013 where carrying charges will in fact widen or provide an opportunity for those who understand the mechanics of a storage hedge. Now if that is mystery to our viewers or our listeners please understand that every ag extension site has papers addressing cost of carry or storage hedges. I would suggest our viewers educate themselves and understand that concept. I think it will come into play this season unlike last season.
Pearson: So, advice, if you're looking for something to do before getting out there in the planter, check out the extension websites and read up because this would be a good year to have that information.
Robinson: Storage hedge is a good topic to understand, good subject to understand.
Pearson: Well, thank you both so much for being here. Thank you both for your insights. We really appreciate it. And thank all of you for watching and checking us out here on the web. Please continue to send in your questions and we'll continue to get qualified people to answer them for you. Have a great week.