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Market Plus: LIVE from the Fair

posted on August 15, 2014

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Pearson: This is the Friday, August 15, 2014 version of the Market Plus segment. Joining us now is Virgil Robinson, Sue Martin, Elaine Kub and Walt Hackney. Guys, welcome back.

Robinson: Thank you, Mike.

Pearson: We have a number of questions from our audience. And Virgil, like to start with you. As you mentioned, we could be looking at next year's soybean production to be quite substantial if South America takes the price cues and we plant another record crop down there. As we look ahead yield wise, where do we anticipate corn yields to be in this next year from what you've seen today?

Robinson: In this crop season?

Pearson: In 2015-2016.

Robinson: Well, something near linear trend. And, again, there are a lot of calculations you can make, Mike. But it's rare when year over year you increase yields from record to another. There's a tendency over time to kind of revert to the mean. And in this instance the mean would be somewhere in that 166 to 166.5 range. So, if I understood the question correctly. The other thing to keep in mind now is big soybean acreage this year. And from the farmers I have visited with, both on campus and off, most will stay in their rotation. Okay. So, that suggests then that corn acreage, while I don't think it'll be 90 million or higher, I'm guessing it won’t' be far from it.

Pearson: Won't be a big tumble. Now, Sue, that leads right into the actual question from the audience, which is, if we have several years of above average yield or acreage on corn and soybeans, what could the farmer anticipate for an average price? If we look at demand today with this continued big production where could we be at this point next year or the year after?

Martin: Well, I think first off, if you look at the livestock industries, we're thinking already that the pork industry is starting to see expansion. Your poultry is starting to see expansion. And while cattle take time, in time we'll see that industry expand as well not only in the U.S. but probably globally. And you look at the population, it's increasing. You've got China with corn prices that are record high right now. So, you can see why they don't want U.S. prices or U.S. grain coming in. I think there's a little bit more to it than just the mere 162 genetics and the DDGs maybe carry that genetic. I think they're trying to peddle off their huge supplies, their state reserves. And with record high prices they wouldn't be able to do it if they were able to import. So, they're kind of making them a captive audience, they have no choice, they have to buy local. So, that said, I think that the price for corn, the low side you might be, if bearish times were to really hit, maybe $2.90 to $3.08, something like that. To me you look at corn prices we're really in the lower side of it. I think that we're pushing this year's crop pretty high on expectation and yes, we maybe have rotation next year, what have you, but I agree with what Virgil said, it is rare to see two big major crops in price, record prices, I shouldn't say record price, but production each year. So, I think we could see a chance for prices to see a little bit of appreciation. My concern would be this, if we rally for whatever reason into the turn of the year I would make sure I got stuff sold because I think 2015 might not be a pretty year but 2016 could be the flip side coming right back up again.

Pearson: Alright. And now, Sue, you mentioned the issues with China's ban on MIR162 and the DDGs. The question from the audience, Elaine, to you is, with lower corn and soybean prices, as Sue had touched on, do you foresee China or other countries rejecting cargoes because of non-approved GMOs? Do you see that as a potential reason they could keep U.S. crops out of their internal marketplace?

Kub: Yes.

Pearson: Is it going to be a major factor do you figure as we look to these next couple of years?

Kub: I think they have demonstrated that they're willing to do that. And whether or not it's a major factor going forward I think truly depends on global supply and demand. If they needed our grain bad enough I think this problem would go away. But as it is right now where we have sufficient, adequate feed grain supplies throughout the world effectively, then yes, any little thing like this can certainly damage the export possibilities for U.S. grain.

Pearson: Okay. Alright. Something to keep an eye on. Now, Walt, this question is for you. And, of course, we are here at the Iowa State Fair. There has been a trend over the past few years to see cattle feeding moving from Texas, Oklahoma, Kansas, northward as facilities improve and so forth. And the question from the audience is, do you believe the number of cattle in Iowa, cattle fed in Iowa will continue to grow?

Hackney: As long as we can stay under $8 corn. That is what drove us out and now we're coming back and we're going to continue to come back and the growth in the cattle feeding industry here will be very evident within the next year and probably two. A lot of it will depend on expansion. A lot of it will depend on the drought in the southwest. A lot of it, as you're well aware Mike, it can drive those cattlemen out of that area, which it is already doing to a large extent. A lot of the southwest cattlemen are looking back toward the Midwest, the Corn Belt, for a place to harbor even down to cow herds because of the cost of production out there versus back here. It's just cheaper to do it back here.

Pearson: The economics make sense.

Hackney: Yes.

Kub: Something Walt and I were talking about before the show is that given the profitability right now of feeding and processing heifers, there really isn't as much expansion as you might otherwise expect to see. The profitability itself can be a choking of the expansion of the herd. So, I wonder how long or how fast we're going to really see demand coming from the beef sector.

Pearson: Alright. Now, Virgil, we're going to go back to you here. And I guess I'm kind of sticking you with the bear questions here. This one is from the audience and the question is, are we in a long-term grain market downturn like the '80s?

Robinson: Mike, that's a tough question, I work cheaply but that's a two nutty bar question there. Well, I hesitate to compare anything today with the '80s because the variables have changed so significantly. But it's not uncommon and I am not a student of cycles and I think Sue is, she might address this cyclically better than I can. But regarding forecasting for the next few years, I'm going to refer the group to a couple of sites. One is the Missouri Fappery site where the economists down there have made 10-year baseline projections. Now, the reason I highlight them is we, the group I work for, have aligned ourselves pretty closely with them for acreage forecasts, price forecasts and the like. So, I can tell you, and this would be public knowledge, that their price over the next few years, all those prices have a 4 in front of them. Okay. Now, that doesn't mean --

Pearson: On the corn side.

Robinson: That's right.

Pearson: Nobody would be excited about beans with a 4 in front of them.

Robinson: Yeah, Mike, that's not beans, that's corn. Yeah. So, there's a site that might assist you in terms of your longer term strategic planning and business plans. A significantly short crop here or in the southern hemisphere or in the Ukraine, a change in policy here and elsewhere could certainly change the dynamics of the market very abruptly. But to suggest we're in a long-term bear market, I think Sue mentioned that globally the economy continues to kind of limp along and those traditional brick countries I think are doing okay and there are other emerging economies beginning to surface as well. One that I’m particularly interested in and this will be the last project I work on for Pioneer DuPont, one more year, and that is sub-Sahara Africa where the population is forecast to grow well in excess of a billion people within the next 25 years. Now, the key down there will be improving per capita income. If we do that we'll grow our businesses, all of us. So it is dependent on policy, the humanitarian effort and other efforts that are currently underway. I'm very encouraged by that and feel over the course of time that the prospects for row crop agriculture as well as livestock agriculture remains very bright.

Pearson: Alright. And, Sue, let's ask the same question to you. As Virgil mentioned, you do study cycles. And we hear a lot of talk about that when we see corn with a 3 in front that hard times are here. And I know that you disagree with that by and large. Can you share your thoughts a little bit more?

Martin: Well, I think that what we're in is kind of like the '70s in a quirky sort of way. So, I think that we're going in -- and even in the '70s you had one, two years in a row where you would be negative or in a downtrend and then turn around and come back and have some vibrancy. I think that part of also what is feeding into the bearishness in the market, it doesn't matter, I mentioned earlier coffee. The coffee market has some of the most bullish fundamentals under it of any market on our board. And yet, for some reason, it tries to rally and it gets so far and it falls back. I think part of it is the fund investment money that we have in our marketplace today has lessened compared to what it was running. The volatility has sort of started to evaporate out of our markets a little bit, which for us as producers that might be one of the worst things we want to see. We don't want to see markets go dormant or sideways or you won't get prices you need. We need the fund investor money in the marketplace. While yes they're there driving that market down they are also the ones that drive that price absorbantly high like a $91 increase in feeder cattle in the last year and a few months. So, we need that investment money. I think we're going to see I think a 4 in front of corn is very realistic and one thing we have to keep in mind on corn, there is a gap on the charts, even in the July contract it's huge, but for December corn we will see Dec corn go back and trade at $7. It's just when and not five years, ten years, it'll be sooner than you think. I think the marketplace is kind of in a rolling pattern and we'll be back up strong I think in 2016.

Pearson: Okay. Now, Elaine, as we take a look at your direction here's a question from our audience. How do you foresee the early fall soybean basis playing out as we transition from that tight old crop situation to this gigantic new crop soybean situation?

Kub: You're right but the basis numbers will have to go through a radical change between old crop and new crop. You do already see even the old crop bids being based off of the November contract. Merchandisers have certainly learned their lessons over the past couple of summers and are avoiding the August and September contracts entirely, which makes a certain amount of sense given how inverted they are. So, I don't think it will be as wild as you might otherwise expect if you had folks rolling in and out of those contracts. We'll just see it go from 140 cents over the November to 90 under the November in South Dakota as the case may be. It isn't that bad here in the center of the Corn Belt obviously. But I think it will be gradual and certainly, as the audience member is pointing out, show up in basis rather than a futures participation.

Pearson: Okay. Now, Walt, as we take a look in your direction, as we look at this hog market and the effect that that Porcine Epidemic Diarrhea has had, the question from the audience is, if that flares up again this winter and we lose another number of hogs, the question is asking 3-5 million pigs this winter, where can we see price going? As we talk about the consumer demand we haven't seen too much increased demand for pork. Could that change? Could these prices stay up north of $100 or go back north of $100 I should say?

Hackney: That virus may have been overstated. You know, there were analysts that were indicated an 8% death loss, a 10% death loss. There were some extreme estimates out there that physically drove the market psychologically and it really wasn't there. The fact remains we've got hogs in the feeding floor in the Corn Belt and elsewhere with the corporate feeders, we've got hogs that if we're not careful and if we don't pick up the export and if the cheap corn and soybeans continue as it appears it will we're going to put an average of 300 pound market average weight into the market soon. We're under that but by a very small figure as we speak. We're well in excess of 280 pounds as we speak. And the fact remains with the demand as it seems to be around there seems to be a feeling that the market can't stand that extra tonnage. Now, we may kill a kill of somewhere around 1.9 million or something similar on a weekly basis but when you add to that 20 pounds a head extra weight on the market hog we're putting tonnage into this market we can't afford to do. We've got close to an all-time amount of bellies in storage right now that we can't get rid of. We can't eat enough bacon to make it work. The Chinese, they are not interested as we speak because their producers don't want us coming in there with cheap pork and breaking their market. So, we're stuck with this stuff and we're going to continue stuck and we're adding to it on a weekly basis.

Pearson: Alright. Well, thanks so much, Walt. I guess bacon cheeseburgers might get a little cheaper here going forward. Well, I want to thank all of you for coming out tonight and talking to us for Market Plus. Thanks for your years of service on Market to Market.


Pearson: And that's going to wrap up this edition of the Market Plus. Thanks to all of you for sending in your questions via Twitter. Thanks to the studio audience for asking all of your questions. And thanks to you guys for answering them. Have a great week. 

Tags: agriculture analysis commodity prices economy Elaine Kub Fair 2014 Iowa State Fair iptvfair isf14 markets Sue Martin Virgil Robinson Walter Hackney