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Market Plus: Jun 01, 2007: Walt Hackney and Doug Jackson

posted on June 1, 2007


Market Plus: Jun 01, 2007: Walt Hackney and Doug Jackson Pearson: This is the Friday, June 1st, 2007 version of Market Plus. We're so glad you've joined us here at our Market to Market Website. Be sure to tell your friends and neighbors, they can join us here too. There's always room for one more. With us this week two of our longest serving market analysts, Doug Jackson and Walt Hackney. And we started with Doug on the show so on Market Plus we're going to start with Walt. And Walt, on the show we talked about this calf market. These calves are on the ground, there's no doubt about it, pretty decent crop out there from all the anecdotal information that I've heard. I asked you about pricing and you said, yeah, there might be a few contracts that are going on but not a whole lot yet.

Hackney: Well, historically, Mark, it's early in regard to contracting. You are so correct about a lot of good calves are in fact on the ground. We've had maybe a record calving percentage of live calves this year. We could probably be up close to 98%, 99% of calves on the ground right now. Another factor that is really causing some head scratching, we're having the wettest, best spring grass year in the ranch country that we've had for five years. The drought as we knew it over the last four years kept our weights down in October by 25, 50 points. Now, it looks like we're going to gain that weight back. Now, there is a possibility in July that we could pick up 104, 105 degree temps and we could, in fact, get high winds and, in fact, in ranch country that lush grass will burn out and we'll lose our gains. But right now the ranchers are very, very optimistic about their weaning weights going into this next fall. The cattle feeder on the same token isn't alarmed at having to buy a heavier calf interestingly because of the cost of operation it's going to take to grow that calf on up to 1300 pounds or 1400. They don't mind the fact that they're going to be buying extra weight because in some cases, Mark, when you get to a finish ration you're going to be costing yourself 80 to 85 cents a pound at this corn price that we're potentially at least looking at going into the fall. So, there is no real hesitancy on either side, we're just trying to wait now for the market in corn to adjust itself to some stability to where then we can make some numbers work on the calf price.

Pearson: Alright, I want to move on but Walter, again, we've heard about those good conditions out West. Is this going to be enough to spur some heifer hold back or could we see some expansion finally in this cow herd do you think on the strength of the rain we've had so far in 2007?

Hackney: It may because the wintering cost, there is going to be ample supplies of hay which hasn't been there in the past three or four years. This year they're going to be able to winter some cattle that they hadn't in the past that forced them to sell heifers. This year we may see some extra heifer retention.

Pearson: Okay, alright, Walter as usual appreciate the insight. Let's talk with Doug Jackson. Doug, we've been hearing a lot about ethanol, haven't heard as much about soy biodiesel lately but soybean oil prices have been extremely strong. What's been going on and what's happening in that part of the biorenewable world?

Jackson: That's right, Mark, of course, the general backdrop to the entire grain rally is that we see proposal after proposal out of Washington that I think almost border on ridiculous. We have proposals to increase ethanol by seven times from the current level, we have proposals to increase biodiesel, we even have people talking about increasing the mandated levels on ethanol and mandating a certain amount of biodiesel use and this is just simply incredible and I think somewhat out of line with the general underlying fundamentals. As you said, the vegetable oil markets have been the leading aspect of this soybean rally. We've seen palm oil and soybean oil trade at nine year highs. We've seen the discount of palm oil in the world to bean oil narrow to nothing now so the two oils are traveling in tandem. We've seen rape oil, of course, explode in price and, Mark, this is happening in just the very initial stages of expanding biodiesel production in the world. This is basically a trend that we believe is certainly unsustainable. Mark, we believe that just based on the likely capacity of biodiesel production that will be constructed by 2008 if we simply utilize 25% of that investor constructed capacity it would wipe out the entire U.S. ending stocks of soybean oil. In other words, Mark, it's going to have to continue to be -- the market already realizes this -- the job of the biodiesel industry, the job of the bean oil market, the job of the vegetable oil market worldwide to make sure that biodiesel profitability is never anything but just marginal. In fact, we really must choke off biodiesel production worldwide or it's going to wipe out, of course, one of the most inelastic demand commodities that we have which is a key staple around the world of vegetable oil. People are confusing the economics of biodiesel with ethanol. Everybody considers them to all be biofuels but the arithmetic of supply-demand and profitability are dramatically different. Ethanol has a dollar a bushel profitability today where while even just today biodiesel production is only marginally profitable. If you can't move your product to an export point to export to Europe, in fact, it looks like a net loser. Again, Mark, we've said it before but we'll say it again. What you're doing is biodiesel is attempting to take a commodity that we've historically measured in pounds and now you want to burn it in tons. It's simply nothing that can be utilized in those quantities and what you see is we already see near rationing prices in India, the Indian government considering buying oil on the open market to donate to their poor. You don't really understand the broad geopolitical consequences of raising a staple like vegetable oil and this is something that is going to continue to squeeze biodiesel margins perpetually.

Pearson: Alright, well, well said, Doug, it's going to be an interesting one to watch, there's a lot of political support for biodiesel. As you mentioned with the corn expansion of profitability that's where the dollars are going to go and the expansion in soybeans and soybean production just can't do it, is that what you're thinking?

Jackson: We've got to have 10 million more acres of soybeans and corn in the western hemisphere every year. Where are you going to get that without sky high prices? And that's, of course, diametrically imposed to increase the conservation reserve acreage.

Pearson: Doug Jackson, Walt Hackney thank you so much for this special version of our Market Plus segment. We're so glad you've joined us. Thank all of you for tuning in here at our Market to Market Website. Tune in here each week for our market analysis portion and, of course, our Market Plus segment. For all of us here on Market to Market, I'm Mark Pearson. Have a great week.


Tags: agriculture commodity prices markets news