Pearson: This is the Friday, July 1, 2011 version of Market Plus. Thanks for joining us here at our Market to Market Web site. With us this week two of our great analysts, Walter Hackney on livestock on Elaine Kub on the grains. We talked grains first so, Walter, let's talk cattle market first now. I was kidding, kind of, but I was out talking to a bunch of your buddies in Denver and they were saying kind of what you have been telling us here for a while and that is this second quarter looks pretty good. One thing you didn't talk about was you were saying you expected a better economic expansion last time you were on which we've kind of seen some improvement on that front this week. But in terms of supply you think it's going to be tight.
Hackney: I believe it will be -- the replacement supply I believe is going to be tight in cattle. We had an extraordinary death loss in the calf crop in the northwest and in the western states due to winter, storm after storm killing calves. We had poor performance in the cow's milking during that rough winter and as a result we've got a few calves a little lighter this year. So, we've got fewer calves at lighter market weights. That is going to move that finish weight forward or extend it on those cattle when they get back here on putting them in the feedlots. I think the thing that has surprised me to some degree, three weeks ago about half of my Midwest or Midland cattle feeding clans, about half of them indicated to me they were either going to cut their winter feeding in half and market the corn at that optimistic $7.00, $7.50 a bushel or they weren't going to feed any cattle this winter and market all their corn into that mystic figure. I don't know if it was the market change, I don't know if it was just a general feeling that the economy has supported the fat cattle industry for the last year in great shape, wonderful profits and I think they may have had some encouragement from their lenders that maybe they needed to keep their oar in the water buying feeder cattle, at least partial.
Hackney: We saw a feeder market as of maybe a week ago on Montana contract cash for October/November delivery, we saw a feeder market that was hanging around $125 to $135 depending on the live weight of the calves. Yesterday, Mark, that calf in an auction in Montana were bringing $142 to $152. Now, a prayer book wouldn't let them cattle work and those guys that are buying them have got to have a mystic opportunity in risk management someway to protect their cash flow. And hopefully they do. I hope they do. One other point on that, Mark, I do believe that we're dangerously close to seeing a swing in production between the mega corporate feedlots and the individual independent cattle feeder similar to what we saw and you and I talked about it in the latter 90s in the hog industry. We're seeing a similar thing happening. The major buyer this week on those high priced calves has been corporate buyers going to the mega feedlots. Now, there are some of the Corn Belt buyers starting to step in. I've got more orders this week to buy western calves than I've had since January 1st and they really are wanting to own some good calves. But it's the farmer feeder who is buying that added value age and source verified calf that is picking up additional 50, 55, 60 bucks ahead premium and not the guy that is buying that just average, middle of the road commodity steer.
Pearson: You said $142, is that going to look cheap in three months on those feeders?
Hackney: I don't think so. I have to say -- we've always tried to be candid here -- I don't think so. I think that if you've got calves bought at $120 or $125 and you bought calves yesterday at $140, $142 and throw them together and you've got $130, $135 average now you've got some opportunity. But to walk out naked and buy at $140 today with nothing behind them to average I think is a risky business.
Pearson: Interesting. Walter, I've asked you this every year for the last five years. Are we going to see, with these kinds of prices in markets and some profitability back in the business, are we going to see some cow calf expansion? We've got huge replacements in the drought parts of Texas and Kansas, the entire southwest. Will we ever see some expansion of this cow herd?
Hackney: Well, you just nailed it. If the southwest starts picking up late summer rains, has an opportunity for good winter pasture, subsequently next spring good pasture with good moisture those Texas ranchers are going to make our market on cows and pairs and bred cows because the exodus of those herds down there have been ... some of them have liquidated 100% of their cow herds. Now, they're going to buy back but the opportunity will be dependent on feedstuff and if they got prospects for grass they're going to step in and they're going to be the one to drive this cow market.
Pearson: Good point. Always good points. Thank you Walter. Elaine, this USDA report came out and they immediately announced there's going to be a revision. It was also the two minute premature reporting there. What's going on with the USDA?
Kub: I don't know, I would have loved to have been a fly on the wall as they were, first of all, making ...
Pearson: They were still trading in France when that report came out, that's why people were upset about it.
Kub: Livestock was trading. First of all, I would love to have been in the room while they were making the assumptions to arrive at these numbers. If you don't have a full set of data from the Dakotas and Minnesota why do you assume that they planted more when obviously all these -- I've obviously driven through there and there's a lot of preventive plant acres and there's a lot of acres, fields that did get planted but there's just all those potholes that are really, really full and you're losing incremental acres in every field across the northern Corn Belt I think. And to say nothing of the flooding, to say nothing of all of these things -- so there's a lot of questionable assumptions that were made to come up with these numbers and so I do think that they will be adjusted down. The stats Canada number is also probably going to be adjusted down 2 million acres so let's say you take 2 million acres off of Canada which is probably spring wheat and you take 6 million out of North Dakota and not all of that is going to be spring wheat or corn or soybeans, there's going to be canola and everything else taken out of there too but that's still a pretty big chunk of acres, you take I don't know how many millions of acres off for the Missouri River flooding, the Mississippi River flooding might have been included in some of those numbers, you don't have acres out of the southern drought but you've got yield loss in the southern drought, you've got yield loss in Ohio and everywhere else that has had this stunted slow spring. So, there are a lot of things that by the time we come around to September, by the time we really get a sense of what this crop is going to look like there's a lot of adjustments that can be made on both the acres and the yield.
Pearson: And you remain long-term bullish both corn, beans and wheat?
Kub: Spring wheat, yes.
Pearson: Spring wheat, all right. Elaine Kub, thank you. Walter, thank you. That's going to wrap up our Market Plus edition here on Market to Market. Thanks for joining us. Again, everybody have a great Independence Day weekend.