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Market Plus: Apr 11, 2008: Doug Jackson and Walt Hackney

posted on April 11, 2008


Market Plus: Apr 11, 2008: Doug Jackson and Walt Hackney Pearson: Welcome to our Friday, April 11th, 2008 version of Market Plus, glad you've joined us here at our Web site. And be sure to tell your friends and neighbors to join us. Mark Pearson -- with me this week Doug Jackson and Walt Hackney. We started with Doug on the show so Walt, we're going to start with you on Market Plus. Let's talk about one thing we didn't really get to on the show and that was this feeder cattle market. There are a lot of people and you talk to them all the time, I hear from them who are in the cattle feeding business but maybe not this year. It looks awful easy to haul $6.00 corn to town, Walt.

Hackney: I think maybe not is a little bit of an understatement. It would appear that, and rightly so, that the corn farmer feeder is probably going to opt to cut his cattle feeding operations in half or not go to the feeder cattle at all this year and market the corn into the cash market. That is probably good business on his part. It would be real hard to appreciate $6.00 corn by running it through cattle. As a result of that it would be natural to think that will throw an extraordinary amount of feeder cattle into the open market for someone else that is going to be feeding them. Well, the logical people would be the corporate feedlots. They, in fact, have got to maintain a 65% or better capacity in order to just break even in regard to their operational costs. This go around we have such a reduction in the feeder cattle and we have such a potential reduction in the fall delivery calf crop off of the ranches that actually the commercial feedlot is very anxious to get a hold of feeder cattle, he's propping the market up, he particularly is holding it up on light cattle that will go to grass to supplement his summer needs of yearling cattle coming out in August. And so as a result the fact that the Corn Belt producer is not going to feed as many cattle as had been predicted back maybe a couple of years ago when they said ethanol byproducts were going to increase the cattle feeding in the Corn Belt, it's the opposite. $6.00 corn or something near that is going to prohibit it. So, as a result of that these cattle are in short supply. These cattle due to the drought and so forth of the past year these cattle are not going to be as readily available anyway and so the corporate feedlots are going to maintain a higher level of price on them out of demand.

Pearson: On the show you talked maybe 10% fewer calves this fall.

Hackney: It looks to us like the Virginia country, Tennessee country where the extreme drought was last year could have called back 20%. It looks like as we come around through Texas and the droughty area of New Mexico back up through eastern Colorado and then on into Montana that call rate progressively has gone from the Virginia type calling to about a 10% or 12% cull rate in the herds. Up there in Montana it isn't because of the droughts, it's because of the wintering costs and they were not able to stand that expense of wintering the cows so they called back a large percent of their herd.

Pearson: So, there's a lot of cow-calf people out there very concerned about what's ahead for their business. You think calf prices will be okay?

Hackney: To say okay and to compare them with a year ago, no. You have to remember we were buying FOB Montana good six week calves at $1.16 last year roughly speaking. This year we've got $8 a hundred weight with $4 a gallon diesel fuel, 1000 mile haul on a 50,000 pound load of cattle to get it back to Iowa. That is $8 a hundred. That's one problem. The other problem is are we sure they're all going to be able to come to Iowa? Are we going to lose a buyer base in Iowa due to the price of corn? And so are they going to go around to the more diligent buyers of the commercial feedlots?

00:19:19:23 00:19:48:13 [00:00:28:20] 3332

Pearson: It's going to be an interesting year. We'll see what happens. Thank you very much. Doug Jackson, we talked a lot on the show about some different things. You brought up one thing and I've heard you and I've read some of your stuff where you point out that the USDA estimates particularly for crop size for 2007, which represented a huge shift, I'm not trying to defend the USDA, but that was a huge acreage shift we went through last year, another big one this year that maybe we're not getting the numbers right.

Jackson: 30 years in the business here I think we've seen corn and bean stocks reports this year be more apparently miscalculated than anything I have ever seen specifically in the beans, perhaps the most glaring example where USDA was forced to acknowledge the apparent error in the numbers, they lowered the residual disappearance figure in the April supply-demand report to two and normally it's like 75 million. And, in fact, that may not fully pick up the anomaly that we have in the statistics. The bottom line is that we have found nearly 65 million bushels of beans in each of both of the stocks report since the beginning of the crop year, a cumulative underestimation of the crop by nearly 130 million bushels. We've never seen anything like that. And, of course, with two quarterly reports showing the same trend who is to say that the third quarter report won't continue to show that? So, we do not know how much they underestimated last years bean crop. And so what we'll see, of course, is all this will be revised retroactively in the September stocks report but not until then by law. Now, we've seen many retroactive crop changes but never anything of this magnitude. So, this has really confused the industry and that's what we got the knee jerk $1.50 drop after the stocks report a few weeks ago only to see prices rebound again. But this has distorted the whole perspective on just how many beans we have out there and it still will continue to do that the rest of the year. If we don't see a further increase in the residual find back we could have 110 carry out this year which would be incredibly tight, almost impossibly tight. We don't know whether the carry out is 110 million or 170 million and we'll be guessing that until it's almost too late to matter anyway at the end of the year. One explanation for this dual error floating around in the corn and the beans, we underestimated the beans and overestimated the corn, is that the two million acre switch that we had last year from March to the final report may have been wrong. We may not have had as many corn acres, we may have had more bean acres. And so that could have left us with a situation where the yields ended up being substantially different than we thought last year too but, again, we don't know that. And whether they change those statistics or not is yet to be seen. As far as the corn goes it looks like they overestimated the corn crop maybe by about 150 million. So, with the oddity that we had a record amount of new crop corn harvested last fall before September 1 that created error in the first quarterly stocks report this apparent miscalculation has given us another false second quarterly stocks report and it has confused the issue so much on the feed usage number that the market really has no idea what we've got here and it has masked our ability to see any rationing that might have calmed these markets down. So, we have what appears to be this out of control feed usage that is actually accelerating even with $6.00 corn which, of course, is probably not the case but you can't identify that because the numbers are in error. So, all of this will be sorted out in the September crop report but since the government doesn't have to really change the core number, they can just dump all these mistakes into the residual feed number we may never sort this out. But the bottom line is the residual usage this year may be 6.2 billion and the feed number next year be 5.5 billion. People will think that's feed rationing when in fact it's all of these errors combined. But it tends to confuse the market, Mark, is the point and we'll just have to sort this out in September. But it's really been a factor to deal with here that is adding to the volatility on top of all the other factors we've talked about.

Pearson: More volatility just thanks to some statistics, maybe some modeling mistakes or whatever. Interesting. We'll keep track of both of those. Walter, Doug, thank you so much for being with us on Market Plus and from all of us here on Market to Market, I'm Mark Pearson, have a great week.


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