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

posted on January 11, 2008

Market Plus: Jan 11, 2008: Walt Hackney and Doug Jackson Pearson: This is the Friday, January 11th, 2008 version of market plus. We're so glad you've joined us here at our Market to Market Web site. A lot of big news in agriculture this week. Stunning news in terms of what the USDA reported. We're going to talk with Doug Jackson about what this could potentially mean and maybe some key things that you should be watching to remain profitable. Before we go there we want to talk a little bit about what's going on with this calf market. Walter, I've seen cow prices drop off dramatically here in the last ten days, two weeks. Calf market obviously moving in a teeter totter with what's happening with this corn market lately. What do you see ahead for the cattlemen?

Hackney: I think the cattlemen, as we would call the cow man in the western areas, for instance, I think that he is going to have to figure on entering a new era of production. I think he is going to be primarily forced to go into some form of a retained ownership program because the Corn Belt cattle feeder is not going to be in position to put $7 or $8 a hundred weight freight on these cattle coming out of the western states here and then feed them on $5.06 or even possibly higher corn prices. He isn't going to be able to do it. The economics will dictate that you don't need to put 240 days into a 550 pound Montana calf to enhance the value of your corn. The ethanol industry is doing that for you. And a lot of your Corn Belt cattle feeders the demand for the calf to use for that additive of supplement isn't going to be there. You're going to have the Montana producer, the Wyoming, the Colorado producers being more and more aware of a Midwest or a near Midwest growing program and a partnership or a retained program on their calves, probably a packer will be his partner.

Pearson: Okay, so retained ownership may be the key to profitability to the cow-calf guy through '08 and '09 anyway?

Hackney: Well, that certainly is the way we're looking at it. Unfortunately, it's not good for business like we conduct as broker or as order buyer in that kind of a cattle company. But the fact remains the hard rule is you go where the money is and the money for the cow-calf operation with the good genetics is probably going to seek out a corporate buyer who probably will be a packer and will probably get into then that enhanced value through a grid program.

Pearson: Okay, and again, it comes back to genetics and profitability and that's how you're going to get your payback because it's not going to come from the market with these feed prices where they are which takes us over to Doug Jackson. Doug, '08 we seem to be okay, '08-'09. You're thinking going forward we've got a big problem with acreages, there isn't enough acreage. And there are a lot of people standing on the sidelines going, you've got 33, 34 million acres in the conservation reserve program and they're saying the key word there is reserve. We need to pull them out of reserve. How are we going to gauge this thing? What impact could another ten, twelve million acres have on price for both corn, soybeans and wheat?

Jackson: Well, that's right, Mark. We have a manmade problem here that is going to probably require a manmade solution. Washington has believed that we can use a market based price solution but I think as Washington continues to pursue the fairy tale of fuel independence with this biofuels policy that it's simply -- I think people are starting to realize it's just going to overwhelm productivity capabilities here in the next couple of years. We know that Washington, USDA has said that they would look at data checks, we had certainly a big data check on Friday about reviewing their policy to not open the conservation reserve program and really I think a lot of people are now starting to focus on the idea that that is the pressure. The short run is to move to a level that would prompt Washington to recognize all these problems and start to reverse policy, the first being changing the conservation reserve program. As you've said there's 34, 35 million acres in that program. We have some precedence in the past where they opened the program with low erodability index acres, something about an eight index would be about ten million acres. There's about ten million acres in that program, Mark, that were cropped before it went into the program. About ten million of it was grass before it went into the program. And submitting that ten to twenty million acre universe to be eventually cropped and then fifteen million acres probably never to come into production. If you open that immediately how many acres could possibly come into production by spring? Very few. It would be difficult to manipulate that acreage. But for '09, of course, maybe a significant amount could come into play. But by then we need nearly 15 million more acres anyway to make this supply-demand arithmetic work. And that is assuming perfect weather. So, even opening the conservation program would not solve the problem in the intermediate run but it would be a change of policy in Washington that would show a new psychological approach that might start to temper price action as we figure out what they do and how they do it. But outguessing the timing on something like that is impossible and up until now, of course, that has been the antithesis of Senator Harkin and other people's projections of expanding the conservation reserve program. Senator Thurm from the Dakotas, again, indicating that he wanted to increase payments for conservation acreage to keep it from coming into the marketplace. Those kind of policies, I think, will soon be seen as short-sided, something we don't have the luxury for. And the environmentalists and the greens are going to have to decide which side of the biofuels issue are they on? Do you want to try to hold onto that acreage for all the environmental benefits? Or do you want to put that into production to produce compatible biofuels? You can't have it both ways. You can't have your cake and eat it too and the market realizes that now even though Washington doesn't.

Pearson: What about international expansion? You've been on the show talking about expansion in South America. Could we pull enough acres in from down there?

Jackson: Mark, ultimately, of course, that is the pressure valve. You've got to take prices of soybeans to a level where you'll get double digit percentage expansion in Brazil year after year after year. The western hemisphere needs seven million tons of additional beans, six million more acres every single year. And obviously that's difficult if you're trying to produce corn for ethanol too. That is ultimately the pressure valve. How high do you have to go to get the world to produce more? South America, Brazil particularly on the oil seeds, Eastern Europe on the wheat, those are the pressure valves but it takes time and high prices to do that to overcome the infrastructure problems, that's exactly right. Where is that? Maybe it's these kind of prices long-term, Mark, it may even be lower than these prices very long-term but you've got to stimulate it in the short-term and the market is desperate to try to move the prices that will do that now. And that's really hard to define now until we watch for a change in Washington policy.

Pearson: It's going to be an interesting year. Walter, thank you. Doug, thank you so much. That will wrap up market plus. Thank you for joining us. Be sure to join us here next week and tell your friends or neighbors to join us here too. And until next week, I'm Mark Pearson. From all of us on Market to Market have a great week.

Tags: agriculture commodity prices markets news