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Market Plus: Nov 20, 2009: Walt Hackney and Virgil Robinson

posted on November 20, 2009


Market Plus: Nov 20, 2009: Walt Hackney and Virgil Robinson Pearson: This is the Friday, November 20, 2009 version of Market Plus. We're glad you've joined us here at our Internet site. I'm Mark Pearson. With us this week Walt Hackney and Virgil Robinson who joined us on the show and obviously the extra discussion here at Market Plus. First of all, I want to thank you both for being here, appreciate your candid comments. Walt, let's get started with something we didn't talk much about on the show because of our usual time limitations. We didn't talk much about this calf market. You talked about fat cattle but you didn't talk about this feeder market. What is your take on what's going to happen for 2010? What do you see in these calves that are being sold right now and on the calf market? Obviously we had a strengthening corn market and that's never good for calf prices.

Hackney: The calf market is a source of amazement to cattle -- order buying industries like I would present were amazed that the optimism is in, purchasing that feeder cattle per say. With all that there is obviously a huge amount of optimism by the buying public that our cow herd is long enough, the supply of kids has lessened enough that we're going to see a certain amount of April, May, June shortage of finished cattle going into 2010. We thought the same thing last year. We had calves last year at $1.15 a hundred weight weighing five and a half to six, this year they are $1.05 to $1.10 weighing five and a half to six with the same optimism in owning the calves. I honestly can not put a figure to the feasibility at this price level. The rancher is very pleased with the price that he has received but he would like to have more. But he is willing to sell at this $1.05, $1.08. As we speak this week in the Midwest five and a half to six hundred pound calf would bring $1.08 to $1.12. A 425 pound calf would bring $1.25. I don't know what the extension of him is, I don't know where the break even has to be in order for him to be a viable, hedgeable commodity going into say next June. I can't make them work. But then again it is an old adage in the feeder cattle industry rarely do you ever buy a feeder that is hedgeable the day you own him, very seldom does that occur. So, it could be this hope buying is there. That may be what we're looking at. It might be the fact that there is a lot of optimism out there about this late winter, early spring fat cattle market being too tonnage. It may be that tonnage is going to control. Tonnage controlled our fat cattle market in August and September, we had 1600 pound cattle going to the packing plants. It killed us. Our beef tonnage is considerably lower than it was a year ago. We're eight pounds a head under a year ago. We're eight pounds a head under a week ago out of the feed lots as we speak. Now, that may show up as a positive for some extra futuring and so forth to take care of the holiday period in beef and so forth. That may come back to be an asset to the cattle industry. If we don't book that then we're going to struggle at 83 and 84 cent fat cattle like we did this week.

Pearson: That's true. We've been in that zone for too long. Virgil Robinson, let's talk the flip side and that is the grain market. You mentioned on the show several things. One thing I want to come back to is you talked about if you're comfortable doing it and $4 or better corn and $10 soybeans are profitable as you point out, the studies are indicating that's certainly the case at a 50 bushel average, maybe you look at selling some 2010 corn and soybeans. There's a big crop at least trying to get started down in South America. That is going to impact us at some point.

Robinson: That's a good point. Again, the projection is for a crop out of the southern hemisphere the largest soybean crop ever grown. Now, it's not in the bin and there are normal issues through a crop cycle in every hemisphere. So, there is talk now that Argentina is dry in select areas and their production they fell below USDA forecasts as we visit. But, again, what metric is it that trips the producer's trigger? Is it per acre? If that's the case, Mark, there are opportunities as we visit tonight. Again, I dropped the Iowa State numbers and might as well give them all, they are corn on corn, cost of production with a yield of 165 bushel was $4.04. So, when you look at the 2010 futures contract at or near $4.50 and assume a basis of 25 under there is a return as we visit tonight. Mark, I happen to be of the opinion that that 2010 futures contract will trade beyond $4.50. I think it's going to take a swing up towards the $4.75 area. So, if I were selectively trying to time my short hedge or my forward cash contract at least as we visit tonight that would be my target to begin, $4.75 in the futures. Corn following soy with 180 bushel yield the break even cost calculated by Mike Duffy up at Iowa State, $3.45. Well, futures, new crop futures are $4.45. Assume a basis of 40 cents and you're talking about a pretty handsome return per acre given those circumstances. Is that enough to compel the producer, he or she to make a sale? I can't answer that question but if that metric is the one that drives your decision process you are there.

Pearson: Again, we can't speak for everybody's operation but if you look at those averages it does kind of give you at least some resources to make decisions. I have talked to a lot of dairymen who said they wished they had locked in some class 3 milk prices over $20 and, again, depending on what happens to demand issues. You mentioned ethanol demand around $80 and you're fairly bullish on a long return. We could see more ethanol demand stick with this thing, we could see more of those plants that have been dark maybe fire up and who knows what will happen with the EPA and E-15. So, there are some other issues that could drive some additional demand.

Robinson: Oh absolutely, I think the variables are unlimited. Again, that all should factor into your risk management philosophy.

Pearson: You've always had that minimum price strategy which I think has always served you pretty well. Maybe a couple of exceptions but your strategy with this minimum pricing seems like it is tailor made for what is happening right now.

Robinson: Option premiums are not inexpensive, they are hefty given the current volatility and current price level. But there are methods and there are alternative ways of using options, a vertical put spread where you buy an at the money put and sell one that is out of the money. It cheapens the expense of that protection, it gives you a pretty good price floor moving forward. There are things that could be done in that direction as well.

Hackney: When you say a basis are you saying the cost of the premium?

Robinson: By basis I meant the local cash basis.

Pearson: We're going to have to leave it there but that's a good question. We'll follow up with that at another time. Virgil, thank you so much. Walt, thank you. Virgil Robinson and Walt Hackney with us this week on the show and here on Market Plus. For all of us here on Market to Market, I'm Mark Pearson. Have a great holiday week.


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