Pearson: Welcome to the Market Plus page here at our Market to Market Web site. And, you know, between Walt Hackney going on about Canadian cows we never got to the calf market, Walter. And people expect calf information out of you. A lot of these cow/calf people, they've been making so much money the last three years that, you know, they're getting a little lazy out there. What advice do you have going for them? We had cheap corn; that has helped drive this calf price up. We don't have that many calves, at least according to the USDA; this cow herd still hasn't expanded any. Talk about the calf market the next 90 days, what do you see?
Hackney: Well, Mark, to take a tiny bit of exception, the rancher has made good money the last three years selling his calves. That almost has served to cover his indebtedness he incurred up through that period of time. It has been a good run for the rancher. It might have been too good a run with the cheap corn syndrome for the cattle feeder that is buying those calves. You take $1.30 calf coming out of Montana including freight as six, seven bucks a hundred freight to bring him back here and you feed him that required time to 1300, most of the Corn Belt producers at 1300 won't stop there, this go around with the $1.50 or less corn. They're going to feed that steer to 1400, 1500. Now, there within the problem; we're short on cattle, feeder cattle, yearlings are really hard to find, the market is sky high. Today at an Iowa market as we speak 630 calves were bringing $1.35 in Iowa.
Hackney: A prayer book may not help those buyers cause, those cattle to make money. It's a real risky thing that we're doing to ourselves for one reason: they don't want to sell the corn at $1.50 or less so they're going to put it through cattle that are bought way too doggone high. So, as a result of that we're going to have to live with this thing next year. It will be very interesting, Mark, as we sit here next year, you may be wondering why we've got 75-cent steers instead of 95 where the breakeven is on some of these feeders they're buying.
Pearson: You were talking about a 95-cent breakeven the last time you were on and we're talking similar numbers in terms of calf prices. And calf prices have done nothing but rise since we last talked. So, let's go with the 95-cents and you're bringing them in and you've got the increased energy costs and you've got people charging you surpluses or surcharges to bring product out to the place. So, you've got a lot of things built into this. We can give back a lot of that money we've made in the last three years.
Hackney: We could be returning some of that good fortune back to some of the originators. I think it will deal with energy. I think the people within the energy sector are going to be getting a lot of the dividends off of some of this activity we're doing right now to ourselves.
Pearson: Alright, and of course, keep current is always the best advice; hard to follow when corn is this cheap. But that is the best advice. Walter, is there anything we can do? Can we manage any of this risk out there at this stage of the game?
Hackney: You know, Mark, I would suggest to you that you have analysts at your disposal that are much more adept at risk management with the Mercantile than I am. As a cowboy looking at the Mercantile, again, a 92, 95 dollar breakeven, I find no way. Now, there is ingenuity that can be in place that will allow them to work a series of puts and calls and bring that market back to themselves to some degree. I don't know how to do that but a good broker that you would know and people would ask you and you could recommend they can make this thing work well, I think they claim they are, I don't know how to do it.
Pearson: Okay, well, and you've been at this for a long time Walter so that's a little frightening. Doug Jackson, something that has been frightening us has been the growth in South America soybean production and Argentina and they are the lead dog now. It would seem like the market's push or focus now for soybeans anyway is going to go down to that South American crop. And we keep hearing about -- we talked about it tonight, these guys aren't making any money, they're treating three times for that soy rust, currency issues are out there. Are they going to plant all the beans that our government and their government thinks they're going to plant?
Jackson: Well, we do have a real interesting situation, Mark, in South America. You know, that has been and really does still need to be the Mecca for expansion of soybean production. But now in the last year or two with the unique combination of events, the economics, their competitive economics have deteriorated substantially to where a lot of people there will try to tell you that the price now is below the cost of production, particularly in the far northwestern areas. One of the things that has happened, even though it is regulated to some degree with the government, is higher truck freight. We estimated today that the cost to haul a truckload of beans from the far northwestern Mato Grosso areas to ... that major port has gone up 27 cents a bushel just in the last year.
Jackson: Then, of course, you've had this incredible re-evaluation of their currency; their Brazilian real has just gone sky high versus the dollar. And, of course, they are receiving reals per bag or bushel and so they are receiving a lot less local currency at this appreciated level and I'm not sure that is going to change. Nineteen percent interest rates in Brazil is drawing a lot of currency where people are buying their local currency. Then, of course, the major thing that seems to be a permanent structural feature is this, as you mentioned, spraying for soy rust.
Jackson: A lot of people spray two to five times. It is mandatory almost all over the country. Now, this has jacked up the price of production there maybe 50 cents a bushel. And this is a permanent structural disadvantage now in South America. You put all these things together, the freight, the long distances, hauling 1500-mile haul to the ports, the currency, the rust and all of a sudden South America has lost its competitiveness versus the U.S. on cost of production. So, now here we are, you see, trading at prices that are at best breakeven in those northwestern areas and the market is trying to decide whether we can, in fact, trade down, significantly down from here, which is below the cost of production of the commodity.
Jackson: Now, in the short run, of course, we know we can do that; we've done that in a number of other commodities worldwide over the years. But in the intermediate and long run where we still need to increase acreage six million acres per year in the Western hemisphere, North or South America, you can't sustain that kind of acreage expansion at these prices. And that is the question of what the downside is in the longer run. Their acreage is going to be down unusually a little bit this year after expanding radically in the last few years. Argentina acreage, however, will be up, offsetting the decline in Brazil, so total acreage and total crops can still be at a record level in South America but not expanding like we've had in the past.
Jackson: Land prices coming down there but this means that longer term the floor under bean prices is probably higher than many think. The prices we saw the last few years may be unsustainably low. But how low we can go in the short run is still debatable if the weather is good there, limiting the chances of a third back-to-back drought. They can still have a record crop, up about nine million tons from a year ago. That could keep prices depressed longer than we think but over a multiple crop cycle period, we can't stay at these prices.
Pearson: Alright, Doug Jackson, thank you so much. Walt Hackney, thank you. That will wrap up Market Plus this week. Thank you all for joining us. Be sure to tell your friends and neighbors to join us right here at our Market to Market Web site. For all of us on Market to Market, I'm Mark Pearson. Have a great week.