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Market Plus: Virgil Robinson and Walter Hackney

posted on May 10, 2013


Pearson: This is the Friday, May 10th, 2013 version of the Market Plus segment.  Joining us now are Walt Hackney and Virgil Robinson.  Gentlemen, welcome back.

Hackney: Thank you.

Virgil: Thanks, Mike.

Pearson: We're excited to have you both here.  We've got a lot of great questions being sent in via Twitter and Facebook this week.  Josh and Amanda in Tama, Iowa are asking a corn question that a lot of producers have been asking.  And I was hoping you could give us sort of a general sense of what to expect.  They're asking, how low can corn grow, corn go with a good crop this fall looking at the sort of demand destruction we've seen, the export reductions?  What is the outlook out there if this weather gets back to normal?

Robinson: Hard to quantify a price, Mike, but please understand if we do increase U.S. and global corn coarse grain supplies as was projected today the job of the market will be to discourage production and/or increase consumption.  If you discourage production you do it via price which means you drive the price significantly lower.  Markets have a tendency to accentuate those types of situations, both moving lower and moving higher.  So prepare yourself for what could be something at or around $4 a bushel.

Pearson: Alright, especially if we begin to attract the managed money again or create a compelling story and see some big swings again in the market.

Robinson: Yeah, you know, directional funds really are not terribly interested in the market direction per se, they just want to be a board whether it's up or down.  So as mentioned, futures markets have a tendency to accentuate price moves so prepare yourself accordingly.

Pearson: Certainly.  Now one of the factors, as we talk about the market determining the best, the highest and best use of the grain, as we look at potentially large corn production this year and we look at ethanol plants, which scaled back production last year, so far this year ethanol production has basically been replacing the exports.  How much corn can we anticipate shifting into ethanol production if we get down into that low $4.00 to $5.00 range?

Robinson: Well, you have a blend issue, Mike, you know, mandated use and what capacities will allow are two different subject matters.  So please understand the department and for the purpose of transparency and acknowledgement we'll use their number.  You know, they're talking about an increase year over year of a couple hundred million bushel to approach about 4.8 billion bushel in the '13, '14 crop year.

Pearson: Okay.  Alright.  Now turning over to soybeans, as we look as producers are getting pushed back farther and farther into May with this it seems to be perpetually wet weather here in central Iowa, are we going to see many acres shift to soybeans?

Robinson: I think the prospect of seeing some is yet on the table.  Weather is the X factor here, Mike.  If we happen to catch a two week period of open weather we can plant a lot of corn.  Should that come to fruition I think a lot of ground has been prepared for corn, I think a lot of corn sits in sheds at this point in time.  So I'm not convinced tonight there's a mass exodus from corn planting to soybean planting.  Could there be a million to two million acres?  Yes.  Once we get past about the 20th of May then that problem becomes more acute.

Pearson: Okay.  Alright.  We've got Brad in St. Joseph, Illinois and he's asking, do you think the new crop and old crop, corn and soybean spreads, will increase or decrease?  What is your general thought there?

Robinson: Well, he hasn't defined a time window.

Pearson: No, I'm assuming over the summer into harvest.

Robinson: Um, I would guess the inverses will continue to move higher, Mike, and as we converse tonight the old crop, new crop soybean inverse is as strong as I can remember.  Now that doesn't mean there hasn't been higher but it's as strong as I can remember.  So, again, as long as there's demand for the old crop product, be it from an ethanol facility for corn, be it from a processor for soybeans they're going to have to try and source that product.  I think the product has pretty well moved out of the country elevator systems.  Those people hedged grain and when the basis appreciates they sell the grain.  It's not a flat price scramble for them.  So I think the only sizeable source of old crop corn and/or soybeans is on the farm.  And those producers that still own old crop I think, one, are not in need of cash flow, I think their balance sheets are strong, there's no need to move the grain to acquire cash for any specific reason.  Two, they might be adjusting their acreage this year and as a result of that adjustment may want to retain the old crop as kind of a hedge against fewer acres of what they intend to grow this season.  So there are a lot of reasons why that inverse will remain as strong as it is and perhaps yet grow stronger.  But be advised when it stops and we make the transition into the availability of new, those inverses will give way over the course of time and work towards carry.  It has happened numerous times in my career.

Pearson: And that's what we'll see.

Robinson: So this is a dangerous play, this old crop, new crop play, but at present I still think the odds are in the favor of ownership, at least tonight.

Pearson: Alright.  Thank you, Virgil.  We're just going to talk a little bit to Walter.  We've got a lot of questions regarding cattle.  It's been a hot topic this week.  As you alluded to earlier in the show there's a lot of issues at play in the market.  We've got Ben in Cedar Rapids and Troy in Avoca, they're both asking what to expect.  As we look at those issues you outlined, as we look at the cash price and the cash price and the box beef price and the low number of cattle out there, what is your take on this market in a broad sense.  As a man who has been in this industry a long time, Walt, what are you thinking the cattle market?  What are we going to be seeing?

Hackney: Under normal conditions you would naturally expect to have the Mercantile give you an opportunity to negotiate a positive basis to the Merc and contract the cattle on that kind of a marketing system to a given packer.  The issue as we speak is the Mercantile is not providing a vehicle when it's sitting there $4 to $6 a hundred weight less than the cash value of cattle and the cash value of cattle, Mike, isn't at a break even high enough to support a profit.  So the producer can't go down $4 to $6, negotiate any kind of a sensible basis which might be from par to one or two over the Merc.  That will get him nothing except a little less loss than what it would currently do taken the cash trade.  So the availability of market extension isn't there as we speak.  And I know that's a rough statement for a person sitting out here with a pen full of cattle that are losing a couple hundred bucks a head or somewhere potential might be there if this market continues to collapse like it did from last week to this week.  So we have no qualified answer unless a person has got a very, very knowledgeable broker that can set up an imaginative type of a scenario of marketing using a series of puts and calls to take him through the possibility of the cash market responding a little and leaving him alone then or letting the Merc respond all for some unknown reason and give him an opportunity to get back part of this $4 to $6 disparity between the cash and the Mercantile.  Right now it isn't there unless it's through a very imaginative type of a hedging system through a good, knowledgeable broker.  I want to emphasize that because you go grab someone off the street for a local bucket shop and you could be in a lot of trouble.

Pearson: Going to take some creativity, informed creativity. 

Hackney: Exactly.

Pearson: Alright, now we do have a question from Greg in Omro, Wisconsin.  And it's interesting.  I was hoping we could get your take on this.  He is asking, is the culling of milk cows keeping the cattle price depressed?  It seems every dairy in his area is culling due to lack of feed, now we've got the winter kill of alfalfa up in Minnesota and Wisconsin.  Is that going to have any significant impact on cattle prices?

Hackney: Certainly it will on the economy cut beef and we killed 66,000 cows in a four week period of time through April and projected that we could easily continue that kind of a cow kill, which is very significant.  If that is continued and if the known shortage of dress beef coming out of the feedlots continue, if that imbalance continues to become more and more personified then that economy cut of beef is going to come back at us with this historic high primal value of the cut out that we have, as we speak, this economy cut to the grocer, or if you will, to the retailer, is going to become highly, highly attractive to the shopper.  Even though it's not your prime cut and the like of that it is beef and people are going to opt for what would be more of an economy and if cow beef is in that volume, which I believe it's heading that way, then it could be a real factor.

Pearson: Alright.  So people just looking for something to throw on the grill, looking for beef might be a value option for them there.

Hackney: I think so.

Pearson: Alright.  Before we let you go, Walt, we didn't get a chance to talk about hogs very much on the show.  Could you talk about what we're seeing on the international demand, export demand?  How does that look for the hog market?

Hackney: Well, we had huge anticipation back three months ago that the Asian bins, possibly the China market, which is a real big target on pork exports for us, was going to materialize given the right set of circumstances.  What we failed to identify was the Chinese government was subsidizing their producers in sow numbers on the hog units to produce enough extraordinary pork, extraordinaire pork that they would become more self-supportive and not be so reliant on the extra export or import of our pork.  What happened is we went to cold storage with record tonnage of pork, which is still there.  The export has went to practically nothing going to China and doesn't appear it's going to and China is sitting over there right now with the lowest pork price in history. They've got more volume they know what to do with and they're certainly not looking to import more of our pork.

Pearson: So in order to get rid of that cold storage we need to get folks out there grilling.

Hackney: You're going to have to --

Pearson: We've got to eat it.

Hackney: There's no real solution other than precisely what you say, Mike.  We've got to domestically utilize that overage of pork that we have in storage.

Pearson: Alright, hopefully the weather will warm up a little bit and we can get to that.

Hackney: Exactly.

Pearson: Thank you gentlemen, really appreciate you being here with us today.  Hope you have a great week.  And thanks to all of you for watching us here online.  Continue to do so, continue to please send us your questions via Facebook and Twitter and we'll continue to get experts to answer them for us, for you and us, for everybody.  Thanks for watching.  Hope you have a great week.  Take care.


Tags: agriculture analysis cattle commodity prices corn economy grains hogs markets Mike Pearson news soybeans Virgil Robinson Walter Hackney wheat