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Market Plus: Mar 14, 2008: Virgil Robinson and Erin Golly

posted on March 14, 2008

Market Plus: Mar 14, 2008: Virgil Robinson and Erin Golly Pearson: Welcome to the Friday, March 14th, 2008 version of Market Plus here at our Market to Market Web site. Thank you for being with us and on the show tonight Erin Golly joins us and Virgil Robinson. And we let Virgil talk first because we were talking grains with him and so Erin didn't get to start first so on Market Plus Erin it's ladies first. And you talk about the livestock business, you've got a good background to talk about the livestock business, particularly about what's happening right now in the hog sector. And we've talked to a lot of producers here in the last month, a couple of large producers who have told me they are experiencing massive losses in the hog business. The liquidation that we talked about the first part of January, you're saying it's slow. You don't see this liquidation as being that intense right now.

Golly: No, and because of our business with Lynch Livestock we generally see when we see those sows come to us and we're starting to see that market slow down and I do believe -- I went into it a little bit on Market to Market -- that it's due to intricacy within the pork production any more. 20 years ago if a producer had 200 sows or 200 pigs on the farm he'd just take them into town and be out of the business. Now it's very complicated. We've got contracts with farrowers, with sow facilities, with packing plants and so it's a very intricate process getting out of pork production any more.

Pearson: So, it's not like you're just going to throw all to one end of the building and get out of the hog business. You've got to maybe talk to your lawyer first. So, that's kind of slowing this down. Tell me about price. Kill sows, what are they bringing?

Golly: I don't know what they're bringing today but it wasn't very much a few weeks ago. Five, six cents, it's getting a little bit better since that point and demand has picked up a little bit more and we're starting to get into the spring and summer outlook with brats and sausage as well so that helps pick up with the demand.

Pearson: On the show you talked about Canada, they've got a different set of issues going on up there but there's a liquidation occurring for the most part up there too. Processing issues up there.

Golly: There are and there's talk of a new packing plant up there as well and there's talk of the government giving some producers some extra funds because of back losses that they're going to help fund those pork producers. Whether that's good or bad is yet to be seen but they're getting some support from the government going retroactive and we'll have to wait to see if that goes forward as well.

Pearson: As you know the cyclical nature of that business has always been we've had inners and outers, that's kind of all gone. So, that's not driving the cycle. But one thing that is driving the cycle for all these people is profitability. You're saying even with maybe record deferred futures contract prices -- you mentioned this on the show -- we can still be looking at negative cash flows for a lot of these pork producers.

Golly: That's right. Break evens right now are $80 plus. That's how high the break evens are and a lot of people don't realize that, that aren't in the pork industry. But with break evens that high it's going to be hard to make money for quite some time.

Pearson: But once we do -- we said this on the show too and we don't like to repeat a lot of this on Market Plus, we like to be different -- but I just think it bears repeating my grandfather always said cheap corn will make for cheap cattle and cheap hogs, high priced corn, high priced cattle and high priced hogs. You think we're going to see those high priced hogs fairly soon?

Golly: I do, well, not fairly soon, probably after the beginning of next year when we're going to see some profitability back into the market. I do think once we get into $90 hogs we're probably going to have very high corn prices that might march along right with that. And that's going to take a while for producers to get comfortable after that point.

Pearson: Virgil, your thoughts -- we've been talking with Erin a lot about the livestock sector -- I know you cover that side of the world too. What are your thoughts on this thing going forward longer term? It just looks like you about have to be friendly long-term to the livestock business just as we reduce these numbers.

Robinson: If we see a significant liquidation in animal consuming units, Mark, then that ultimately will be followed, assuming our economy doesn't go through significant convulsions, by a recovery in price. And I suspect that will happen, I don't know how quickly. But I too am seeing some of the same signals that Erin is seeing. I'm not sure the recovery will be quite as quick but nonetheless ultimately there will be a recovery in each of those two commodities. Mark, kind of as a side bar here it was interesting to see the behavior of several markets, financial markets given the Bear Sterns' news here late in the week. Now we have a weekend to digest that not only here in the U.S. our reaction from the federal reserve and other financial institutions but we'll have a global response I'm quite sure. I'm a little concerned about that, Mark, as we think about next week in our marketplace. There could be some repercussions of a significant nature there in terms of liquidation, asset reallocation, things of that nature that could have an effect on commodities futures prices.

Pearson: Perhaps bring some pressure to these volatile corn, wheat and bean markets?

Robinson: Yeah, I agree, Mark. A formation of concern to me -- and there are a couple of them -- one is in soybeans, the behavior the last couple of weeks has been bearish and indicates to me at least technically speaking that market is in position for some additional decline, maybe as much as $1.50 from Friday night's closes. The other market that has been a big, big bull market is soybean oil. And I'm kind of looking at those old crop contracts and recent price behavior, Mark, there's the potential at least in my opinion, given my skill sets of what could be an island top taking shape in soybean oil and that's not a bullish formation, Mark, that's a bearish formation. The other thing that concerns me is you had fairly bullish news as you mentioned on the show tonight early in the week in terms of a draw down in U.S. stocks and the market did virtually nothing. As a matter of fact products closed lower. So, when a bull market doesn't react to bullish news be on guard. There could be a change here of direction in this market.

Pearson: You mentioned the island top, I know you don't track it on the show, but what about energy? What about crude oil? That looks like a similar formation doesn't it?

Robinson: Mark, I don't see the same formation but perhaps we're looking at different charts too. I look predominantly at the monthly continuation chart in crude oil and, again, very difficult for me to suggest I see any kind of a top as nominally we're at all-time highs. If we were to close tonight it would be the strongest close in crude oil futures since the inception of the contract. I'm hard pressed to tell you what is terribly bearish about that.

Pearson: True. Virgil, as usual some great insights, we appreciate it. Erin, excellent, thank you very much. And thank all of you for joining us here at our Market Plus Web site and for all of us here at Market to Market, I'm Mark Pearson. Have a great week and a wonderful St. Patrick's Day.

Tags: agriculture commodity prices markets news