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Market Plus: Jan 12, 2007: Walt Hackney and Doug Jackson

posted on January 12, 2007

Market Plus: Jan 12, 2007: Walt Hackney and Doug Jackson

Pearson: This is the Friday, January 12, Market Plus segment here on "Market To Market's" web site. We're so glad you joined us. I'm Mark Pearson. This week a special program; the longest market segment we've ever been able to do. I want to thank our guests Walt Hackney and Doug Jackson for covering the material so well. Now, there's still some more things to talk about. I want to get to Doug and talk about corn prices again and corn demand coming up here in just a moment and the impact on the ethanol industry. But I want to finish up with Walt Hackney, because the one question we wanted to get to and we weren't able to get to in the show because of the time was this weather market. We had the worst blizzard in history happen across the plains states, Walt, and that had a big impact on livestock surviving and also in terms of snowpack. It was a horrific period of time for plains cattlemen.

Hackney: Horrific is an understatement when you go from Amarillo to Fort Morgan, Colorado, across to Western Nebraska, east -- and western Kansas. Thousands up on top of thousands of cattle are laying out in those wheat fields dead. Thousands of cattle have been smothered within the feedlot because they drifted up into the fence line with the blizzard and smothered. We don't know that count as we speak. What we do know is in some cases, a rancher in Colorado lost 3,000 head of cattle. He can't find them. He figures there under about 20 foot of snow somewhere out there. A cattle producer in garden city, Kansas, with 3,000 light calves on wheat -- irrigated wheat pasture, he's lost 25 percent of those cattle. The death loss is enough to ruin those of that industry involved of affected, but it doesn't even touch the chronic cattle coming out of this issue with the bad lungs, the poor performance position. In the feedlots, Mark, we've lost from 50 to 75 pounds easy in the feedlots in finished cattle weight. Now, we talked in your "market to market" segment about 75-, 80-cent feed costs. How do you equate losing 75 pounds of weight and trying to get it back before you market the cattle? You're looking at well in excess of a dollar a pound. We've lost a portion of our spring feeder cattle availability in this thing. I'm not going into those communities and buying chronic cattle to ship to my clients. Neither would you expect to receive them, mark, as a cattleman. So the entire industry in the west is immediately directly affected in the most severe way in loss of weight, loss of livestock, loss of dollars, loss of cash flow. Here in the Midwest, the packer has not picked up on that and tried to reward this area for ample production good cattle that have not unduly suffered in the weather. We're not getting rewarded for the cattle: $88 today in the corn belt; $1.40, $1.41 dressed on these cattle; maybe $1.44 on a grid. That don't make it work in the whole equation because these cattle now proportionately should be bringing 92 or 3.

Pearson: What are we going to do, Walt? I was thinking here when we were talking about those losses, you know, a year ago at this time you were talking we might see a 1-, maybe a 3-percent expansion of the cow herd. Didn't happen. Drought continued in the west. You talked the following season maybe 1 percent. What do you think is ahead for 2007?

Hackney: I said all through the latter summer and early fall 1 percent probably instead of the 2 or something we talked earlier last spring. I don't see any now. You can't grow a heifer calf in Montana on $130-a-ton hay. It won't work and they're not going to make it work. A few of them are weaning them. A few of them are trying to bring them down as bred heifers. Well, that market come from 13-, 1350 a head down to 900 in the last two months. Well, is that a good, equitable figure to be paying for a 1,200-pound, 1,100-pound bred heifer? $900 probably would be an equitable figure, but think of the thousands of those that are bought, as we speak, that cost $12- and $1,300. So the industry is nervous about that, and they're R.O.I. on those cattle that cost that kind of money to rebuild the herd. The R.O.I. is probably shot down about right now, and this deal today with the corn might have been the straw that broke the back.

Pearson: All right. A critical day in all the grain production world -- or on the flip side in the livestock production world. Walter, some good comments. Appreciate the insights, as usual. Doug Jackson, I can't really talk about anything except corn. Everywhere I go, that's all people want to talk about. Obviously the report today really threw a hammer into the livestock world, and I think it also has caused some fear on behalf of some farmers as to what might be ahead from a production standpoint.

Jackson: Well, Mark, you know, we still – the key question we talked about earlier, of course, is people have got the market and individuals have got to make a decision on how many more corn acres do they think are going to be planted. If you believe that we do have 10 million more corn acres, then the situation can be balanced as we go forward. A lot of people, Washington politicians and many others, will make the argument that we haven't suspended the law of gravity, nor have we suspended the law of economics. And the market will respond to these kinds of economic incentives. You have a lot of fertilizer and seed corn dealers that think that, yes, in fact there is 10 million more corn acres to be planted out there. Whether we get that logistically handled within, say, the spring is another question. But if private analyst' estimates that will be coming out monthly now monthly now before the march 31 acreage reports start to reveal even more than the 7- to 8-million-acre increase that's been projected already, the market can start to pause and consider whether we've done enough to stimulate the acreage switch that we need. But as we talked about earlier – as Walt mentioned earlier, the distinct difference between this situation and '96 is that in 1995-'96 we only had to go to $5 corn for a brief period of time and then we all knew that you'd open up the set-aside then, add more acres, and we'd rebuild inventories for the next decade. This is not a short-term problem. This is a problem then of perpetuity. It just gets worse and worse and worse as demand for ethanol corn goes up a billion bushels per year. So, see, if you ever fall behind the curve with production, then you'd have to take prices to a level that basically kills the ethanol business. And then once you're there, you need to stay the price and keep your foot on the neck of the problem at that level really into perpetuity. So this is really an unprecedented situation in agriculture. We said earlier that the combination of these renewable fuels forces is something we've never seen before, and the market is just continuing to realize that as we ratchet higher.

Pearson: All right. Your discussion -- and we don't have much time, but your discussion was related to the perfect crop; in other words, we get the crop planted on time. March 31 is our first key date, but really our first key date is the middle of April when we start planting this corn crop. And if it's raining and the El Nino is gone, then what's our scenario for corn and soybeans? What will be the impact on bean prices?

Jackson: If you have any – if you ever imagine anything other than nearly perfect conditions, then, of course, the balance table collapses into price rationing. And the gap, really, between let's say $4 corn and $5 corn could be very, very small. You either think you've got enough crop now, or you're into a rationing mode. So you could move a dollar a bushel higher in a heartbeat if you ever had any kind of a weather problem, anything – hot, dry, cold, wet – you know, then the thing, of course, could be explosive. And of course any type of a legitimate weather threat, of course, then we talk prices that are even beyond the $5 highs of '96 and the scenario that that would be untenable. Remember, now, of course, Washington has, of course, the ability to waive ethanol mandates in a disaster scenario, so you always have the possibility, of course, that they could change the rules and, I guess, not force people to use ethanol which, of course, then would drop that demand very rapidly. So we can play that game but right now, of course, the direction and the momentum in Washington is to double and triple ethanol production, not curtail it in any way.

Pearson: Okay, well, it remains to be seen what happens. This marketing year is going to be a wild one. A brave and exciting and new chapter in the history of American agriculture getting these crops sold, whether they're on the hoof or by the bushel. Doug, Walt, thank you so much. That will wrap up this edition of our market plus segment. Thank you for being with us. From all of us here at "Market To Market," have a great week.

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