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Market Plus: Dec 19, 2003

posted on December 19, 2003

Market Plus: Dec 19, 2003

Mark: And welcome to the Market Plus segment here at our Market to Market Web page, I'm Mark Pearson, so glad you could join us. Always exciting when we have Walt Hackney and Doug Jackson with us on the show and to help us out on our Market Plus page. Walter, we talked about this feeder cattle market. You seem to be pretty friendly. This is a pretty small cow herd out here.

Walt: We've got a cow herd that's as small as it was in 1982, Mark. We've had a phenomenal amount of good young cows up to six years old with pairs last year of spring of 2003. Those men have not been able to do much replacing. They haven't retained the heifers because of the drought country where the big ranchers are. Those people have had barely enough hay to carry their existing cows through the winter. So, that crop of heifers are going to go into the market as fat cattle this next spring coming out of the feed lots. As we get into next year, unless Mother Nature does some phenomenal moisture tricks in the ranch country, we're not going to see too much replacement at that time. I think we're two years away from any significant herd rebuilding period. It's going to be the same scenario on yearling cattle that we had this last spring and summer. There is no reason to believe that the drought is over in the western areas. Montana, Wyoming, western slope Colorado, eastern slope Colorado, those areas, Mark, are phenomenally dry. A lot of those ranchers have eaten the grass, literally, into the ground just to sustain the cow to keep from using up their hay for the winter. So, I find no reason not to be bullish on this thing. Will it be $1.10 or $1.20 as we saw in light calves last fall? I don't know that for sure and no one else does. But I do know that we've got as aggressive a condition out there for higher prices as I've seen for probably five years.

Mark: Some good news out there, a little early Christmas present there for these cattlemen.

Walt: It really is.

Mark: Thank you Walter. Let's move over, let's talk about soybeans. Doug Jackson: We've never had a situation like that. You called it complex on the show tonight. That it is. Can Brazil deliver?

Doug: Well, that's right. We're still trying to balance all those record tightness in the United States against record supplies in South America. This, Mark, the fear here for those that are afraid of lower prices is that in almost every other prior short crop year, '83, '88, '93, '95, all the famous nine, ten dollar bean years, in every case the market understands the situation very early. You know you have a drought, you factor it in, you run it up, the funds get long, the specs get long, you blow it off, you make your highs early. Over the years those highs have been successively lower as South America has become a bigger and bigger factor. But once the market figures it out it discounts it and then it's over. And very seldom do you ever come back and make significantly newer highs later in the year. So, the question is whether indeed we'll look back on this year, six months to a year from now, and come to understand the tremendous price muting impact of the huge crop in South America. That is, we run out of beans in the United States, we have a major drought and ultimately we look back and say well, the highest we could ever go, even under those circumstances, was eight dollars because eight dollar beans in South America is a fabulous windfall for those people. That could be an important, significant long-term lesson that this market learns through this crop cycle. But for the moment, of course, we still have the task that appears anyway, that we have to cut demand nine million tons, Mark, the rest of the year versus last year's pace keeping in mind that last year we cut usage about two million tons. And we have an unprecedented job reducing demand from first half to last half this year, something that we've never done. And whether or not we can do that with this price level, with this market structure, with the crop coming out of South America, is far from clear. And we could get down the road here a few months and realize we're just running out of beans in the United States and explode higher late on a demand led rally like we did in corn in 1996.

Mark: Interesting. So, again, you're saying hold the physical inventory.

Doug: Even though we understand it we're holding US beans into a record South American crop that could be over 100 million tons. We still think this thing is so delicate that I'm going to dare South America to be able to ship that extra quantity and any kind of a problem logistically, weather wise, GMO wise, politically, you can see prices shoot up sharply in the US and I think that's worth taking a chance on particularly with the July near $7.50 right now.

Mark: Very good. Doug Jackson, thanks so much. Walt Hackney, thank you. That's Market Plus for this week. Thanks for joining us. Be sure and tell your friends to join us at the Market to Market Web site and the Market Plus segment. Thanks much.


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