Dr. Steve Meyer - Market Outlook for 2013 and Beyond

From information, knowledge

Paragon Economics, Inc.

Steve R. Meyer, Ph.D.Paragon Economics, Inc.

Minnesota Pork Congress – January 2013

Pork Industry Economic Update

Key drivers of pork producer profits -- 2013 Input prices and production costs =>

- Will it rain? - Where will it rain? - When will it rain? - How much will it rain?- And will it be hot, hot, hot again this

Key drivers of pork producer profits -- 2013 Input prices and production costs How will pork and hog demand hold

up?- U.S. economy and consumer spending- World economy – exports and

exchange rates- Prices of competitor goods – especially

Key drivers of pork producer profits -- 2013 Input prices and production costs How will pork and hog demand hold

up? Just how many hogs will we see and

how big will they be?- December inventories suggest no

reductions- How long will weights stay relatively

low- What will happen with packer margins

and capacity

Late April – concerned about N. Ia-S. Minn . . . . . . But subsoil moisture was short!

Minn improved while rest of U.S. worsened . .. . . 8/21: 77% drought, 44%

severe or worse

Now – most of ECB is in good shape . . .. . . IA and MO are better, west is

still parched

Largest deviation from trend yield since ‘88 . . . What is the new trend? – 157.5

for ‘13

Same for soybeans – down 10.2% vs. trend

Jan WASDE -- +300 mil. bu. for feed/resid . . . . . . Tightest ending stocks

estimate yet2011/12

USDA Jan USDA Dec USDA Jan% Chng vs

'11-12

Acres Planted Mil A 88.2 91.9 96.9 97.2 5.8%Acres Harvested Mil A 81.4 84 87.7 87.4 4.0%Yield Bu/A 152.8 147.2 122.3 123.4 -16.2%Beginning Stocks Mil Bu. 1708 1128 988 989 -12.3%Production Mil Bu. 12447 12360 10725 10780 -12.8%Imports Mil Bu. 28 29 100 100 244.8%Total Supply Mil Bu. 14182 13516 11814 11869 -12.2%Feed & Residual Mil Bu. 4795 4548 4150 4450 -2.2%Ethanol for fuel Mil Bu. 5019 5011 4500 4500 -10.2%Non-Ethanol FSI Mil Bu. 1407 1426 1367 1367 -4.1%Exports Mil Bu. 1834 1543 1150 950 -38.4%Total Usage Mil Bu. 13055 12527 11167 11267 -10.1%Carryover Mil Bu. 1128 989 647 602 -39.1%Stocks/Use 8.6% 7.9% 5.8% 5.3% -32.3%Nat. Wtd. Avg. Farm Price $/Bu. 5.18 6.22 6.80 - 8.00 6.80 - 8.00 19.0%

2012/13

U.S. CORN SUPPLY AND UTILIZATION - JANUARY

2010/11

All usage estimates are much lower vs ‘11. . .

USDA finally agreed with me . . . . . . Animal numbers will not allow

lower F/R

Implications of the animals themselves Beef cow slaughter saves little or NO

grain Dairy cow slaughter DOES save grain

– up to 20-25 lbs. per day per cow All cattle are caught between high

grain and poor pasture/lower hay supply

Sow slaughter saves very little feed for 6 months – and we didn’t reduce sows!

Chicken and turkey can respond FAST and have a big impact on feed – esp SBM

Lowest Dec 1 corn stocks since 2004 . . . . . . And we will use 17% more corn

this year

Hogs are the ONLY species to cut weights!

RFS is 13.2 bil. gal. in ’12, 13.8 bil. in 2013 . . .. . . 13.6 bil. gal. for ‘12-’13 crop yr

= 4.86 bil. bu.

Question: How many RINs are out there?. . . ~2 to 2.5 bil. gallons – will they

be used ?

Ethanol margins: Gross margin < FC . . . . . . Not covering VC – short-term

shutdownEthanol: $2.17/galCorn: $6.50/buNatural Gas: $3.29/mmBtu

Ethanol margins over VC are NEGATIVE . . . . . . Have seen significant cutbacks

since July1/11/12 1/4/13 1/11/13

Prices Corn $/bu 6.29 7.05 7.16Ethanol $/gal 2.13 2.13 2.15DDGS $/ton 188.50 253.25 252.50

Ethanol Value @ 2.8 gal/bu $/bu 5.96 5.96 6.02DDGS Value @ 17.75#/bu. 1.67 2.25 2.24Total Value 7.64 8.21 8.26Gross Margin over corn cost 1.35 1.16 1.10Return over all variable costs 0.31 0.12 0.06Ethanol Value @ 2.8 gal/bu $/bu 5.96 5.96 6.02DDGS Value @ 15.#/bu. 1.41 1.90 1.89

Total Value 7.38 7.86 7.91Gross Margin over corn cost 1.09 0.81 0.75Return over all variable costs 0.05 -0.23 -0.29

ESTIMATED ETHANOL MARGINS

Ethanol responded – down 9.7% in Q3 & Q4. . . 34.2M gal/day will use 4.47 bil.

bu. in ‘13

Corn is still well ahead of oil price . . . . . But it will converge – more

acres, yield?

Cash corn – cheaper but far from cheap . . . . . . But a good ‘13 crop = prices

<$5/bu.

DDGS has finally come back into pig diets

Jan WASDE – higher yield but HIGHER crush . . . . . Steady exports reflects S/A

crop2011/12

USDA Jan USDA Dec USDA Jan% Chng vs

'11-12

Acres Planted Mil A 77.4 75.0 77.2 77.2 2.9%Acres Harvested Mil A 76.6 73.8 75.7 76.1 3.1%Yield Bu/A 43.5 41.9 39.3 39.6 -5.5%Beginning Stocks Mil Bu. 151 215.0 169 169 -21.4%Production Mil Bu. 3329 3094.0 2971 3015 -2.6%Imports Mil Bu. 14 16.0 20 20 25.0%Total Supply Mil Bu. 3495 3325.0 3160 3204 -3.6%Crushings Mil Bu. 1648 1703.0 1570 1605 -5.8%Exports Mil Bu. 1501 1362.0 1345 1345 -1.2%Seed Mil Bu. 87 90.0 89 89 -1.1%Residual Mil Bu. 43 1.0 26 30 2900.0%Total Usage Mil Bu. 3280 3155.0 3031 3070 -2.7%Carryover Mil Bu. 215 169.0 130 135 -20.1%Stocks/Use 6.6% 5.4% 4.3% 4.4% -18%Nat. Wtd. Avg. Farm Price $/Bu. 11.30 12.50 13.55 - 15.55 13.50 - 15.00 14.0%Soybean Oil Price Cents/lb. 53.20 51.90 49.00 - 53.00 49.00 - 53.00 -1.7%Soybean Meal Price $/ton 345.52 393.53 440.00 - 470.00430.00 - 460.00 13.1%

U.S. SOYBEAN SUPPLY & UTILIZATION - JANUARY

2010/112012/13

South American crop still looks good Argentina – some concerns

- Early wetness and now dryer conditions, some are worried about shallow root systems

- USDS lowered yield but the crop is still 54MMT – 35% larger than last year

Brazil – biggest concern is logistics- A record crop – larger than ours – of 82.5

MMT, up 24% from ‘12- Record acres and yields on early harvest

are above average

Where will SBM go? - Depends now on S/A. . . Support at $396 should be no

surprise!

What will it take to recover? Situation 9/29

Jan 12 situation is MUCH better . . .

Lower costs for 2013 but costs have risen. . .. . . By about $3/cwt in past 2

Profit outlook has dimmed . . .. . .futures-implied ’13 profit was -

$2, now -$7

Another view – bad but not as bad as ‘09-’10

Critical Issues Input prices and production costs Demand – domestic and exports

World economic conditions August 2011 . . . . . . Improvement except in U.S.

and EU

November 2012 – EU Recession BUT . . . China, Brazil growth

improvement

The U.S. economy muddles along . . .

. . . Still slowed by uncertainty

Real PDI change: Revised down, April on . . . . . . November was encouraging @

November RPI: Up from Oct, still <100 . . .

RPCE was good in November – for everyone! 4.4% higher beef per

cap consumption, higher prices

6% higher chicken prices!

Pork RPCE driven by 4% increase in per cap cons.

ALL indexes are now positive for 12 mos . . . . . . If it lasts, first time that’s ever

happened

Per cap cons <200# for first time since ‘90

. . . But this is a SUPPLY issue

Prices are increasing as supplies tighten . . .. . New records for beef in Nov,

chicken in Oct

Further proof: Record high expenditures

Broiler flock near smallest since 1996 . . .. . . But was +2% in Dec and is

same as yr ago

The Dec increase was unusual – expansion?

Sets and placements: Very close to ‘11 levels

And were up 1.6% vs. ‘12 in first week of ‘13

And up 1.2% vs. ‘12 during first week of ‘13

Weights were a big driver in spite of feed . . .. . . And were up 2.4% at 4.35 the first wk of ‘13

Broiler cutout begins 2013 strong . . . . . . Will it be as stable as last year?

Chicken summary Companies appear to be moving back

to expansion – profitable! Breeder flock grew in December –

unusual – but is still small relative to history

Egg sets, placements – close to 2011 levels and have started ‘13 higher

Did not expect growth – and it will not be huge if it comes – lower U.S. per cap supply

Record-high prices -- again

54% of pastures are poor/very poor. . . . . . West, Cornbelt, North Plains are

Smallest U.S. beef cow herd since 1946

Smallest U.S. calf crop since 1949 . . . . . . And not the higher rate of

decline!

Tight supplies of cattle outside feedlots . . .. . . Down 1.7%, 2.7% and 3.3%

last 3 years

Nov placements were 5.6% LOWER than ’11 . .. . . After -10, -11 ,-19 and -13%

prior 4 months

Dec 1 COF was down 6% from 2011 . . .. . . There were 700k head fewer on

Beef cow slaughter: -12.4% vs. ’11 . . . . . . And still showed liquidation in

December

No turn-around in sight for availability. . . . . . Per-cap down 2-3% in ‘12 and

3%+ in ‘13

When will Choice cutout finally break $200. .

Beef summary . .. Weights remain high – Zilmax &

Optiflexx? Lower cattle numbers – partially

offset by higher weights – but lower beef supplies

Cow slaughter remains high relative to the herd – pasture conditions – Rain?

Longer term: Tighter and tighter per cap supplies, higher prices – thru 2015?

Will beef cease to be a habit for anyone below the middle class?

Pork exports are still up 5.6% YTD vs. 2011 . . .

. . Oct was down 7.6% from ‘11

China/HK was 59% below yr. ago in Oct but . . . . . +2% YTD; Mexico is +15%,

Canada +17%

Exchange rates

Real is the big mover among competitors

Peso and won have improved but are still weaker than one year ago

Strong renmimbi but rapidly falling yen

USDA: World slaughter +0.09% in 2013. . . NO big reductions – even in the

EU????

Take out China, US and EU 27 . . .

Demand summary Demand indexes are now positive for

‘12 – can they stay that way? Exports are expected to grow;

another record in’13; Exchange rates will be key

Higher beef and chicken (??) prices will be positive for pork demand

My biggest concern: Consumer income and expenditures- 77% of output is still sold here at

Critical Issues Input prices and production costs Demand—domestic and exports Hog Supplies

Dec H&P report – more hogs than expected . .

Category2011 2012

'12 as Pct of

Pre-Report Est's

Actual - Est

Inventories on Dec 1*

All hogs and pigs 66,361 66,348 100.0 99.1 0.9Kept for breeding 5,803 5,817 100.2 99.3 0.9Kept for market 60,558 60,531 100.0 99.1 0.9

Under 50 lbs. 19,524 19,448 99.6 98.4 1.250-119 lbs. 16,643 16,643 100.0 99.0 1.0120-179 lbs. 12,473 12,479 100.0 99.6 0.4180 lbs. and over 11,918 11,961 100.4 100.5 -0.1

Farrowings**Sep-Nov sows farrowed 2,929 2,900 99.0 97.9 1.1

Dec-Feb Intentions 2,864 2,865 100.0 98.4 1.6 Mar-May Intentions 2,982 2,925 98.1 98.8 -0.7Sep-Nov Pig Crop1* 29,365 29,443 100.3 99.0 1.3Sep-Nov Pigs Saved/ litter 10.02 10.15 101.3 100.8 0.5*Thousand head **Thousand litters

USDA QUARTERLY HOGS & PIGS REPORTDecember 28, 2012

Litter size growth back to 1.3% in Q3. . . . . . Trend has slowed a bit but still

strong

‘13 slaughter will be slightly larger than ’12 . .

. . But the pattern will be different

Weights matched 5-yr avg in Q4 . . . . . . still 2+ lbs. lower, likely stay

there thru Q2

YTD pork production was up 1.8% yr/yr . . . . . . And will be higher than ‘12

thru April

Lower cutout value through Thanksgiving . . . . . . Usually the seasonal low – Hold

National Net hogs rallied from Sept swoon . . . . . . We still expect Q4 average of

$78-$82

December slaughter forecasts

Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge

2011 Q1** 27.483 -0.5%

Q2 26.110 0.1%

Q3 27.379 1.6%

Q4* 29.888 0.9%

Year 110.862 0.5%

2012 Q1 28.104 2.3% 28.104 2.3% 28.104 2.3% 28.104 2.3%

Q2 26.659 2.1% 26.659 2.1% 26.659 2.1% 26.659 2.1%

Q3* 27.963 2.1% 27.963 1.2% 27.963 2.1% 27.963 2.1%

Q4** 30.400 1.7% 30.400 1.7% 30.400 1.7% 30.400 1.7%

Year 113.126 2.0% 113.126 2.0% 113.126 2.0% 113.126 2.0%

2013 Q1* 27.762 -1.2% 27.739 -1.3% 27.704 -1.4% 28.292 0.7%

Q2 26.811 0.6% 26.899 0.9% 26.242 -1.6% 26.892 0.9%

Q3** 28.437 1.7% 28.299 1.2% 27.869 -0.3% 28.298 1.2%

Q4 30.349 -0.2% 30.613 0.7% 30.207 -0.6% 29.860 -1.8%

Year 113.359 0.2% 113.549 0.4% 112.022 -1.0% 113.342 0.2%Green figures are actual data from USDA. Blue figures are estimated using USDA data 1/1/13

*Quarter has one LESS slaughter day vs. year ago **Quarter has one MORE slaughter day vs. year ago

December 2012 Hogs & Pigs -- Commercial Slaughter ForecastsMizzou ISU LMIC Paragon

Price forecasts

Mizzou ISU LMIC Paragon CME

Producer-Sold Net Price, All

Methods

Ia-Mn Wtd. Avg. Base Lean Hog

National Wtd Avg. Base Price

National Net Neg'd Price,

Wtd. Avg.

CME Lean Hog Futures

2011 Q1 80.54 78.92 79.74 80.91 81.54**Q2 92.36 89.37 89.53 94.89 93.97**Q3 95.59 92.31 92.25 97.61 97.49**Q4 87.39 85.94 85.17 87.92 88.11**Year 88.97 86.64 86.67 90.33 90.28**

2012 Q1 86.56 84.27 84.11 86.11 86.44**Q2 87.76 83.67 85.31 86.67 86.64**Q3 87.69 85.05 84.74 84.97 86.64**Q4 82.90 82 - 83 80.60 81.61 82.13**Year 86.20 84 - 85 83.69 84.84 85.46**

2013 Q1 82 - 86 85 - 87 83 - 87 84 - 88 85.25Q2 89 - 93 89 - 92 86 - 91 88 - 92 93.07Q3 88 - 92 90 - 93 89 - 94 90 - 94 94.45Q4 80 - 84 84 - 86 81 - 86 83 - 87 84.31Year 85 - 89 87 - 89 85 - 90 87 - 90 89.27

Green figures are actual data from USDA. Blue figures are estimated using USDA data **CME Lean Hog Index 1/16/13

December 2012 Hogs & Pigs - Price Forecasts

The larger Dec sow herd was not a surprise. .. . . Slaughter: Low enough to

suggest growth

Gilt slaughter percent suggest even more. . .. . Lower than 5-yr avg all but 3 wks

since Sept

My model says finances are weak . . . . . . But lenders believe status is

not this bad!

Why are YOU holding on? Futures, esp. summer 2013 have

offered near breakevens for the year -- survive

Financial position is better than my “cash” model suggests – risk management since 2008, lower costs than my model

“This is what I do” – no alternatives? Betting on rain – and the bets are

HUGE- I don’t see how many can survive a dry

‘13- “Massive” liquidation may finally come

to pass

Long-term issues Costs, costs, costs = Prices, prices,

prices- Consumer incomes and spending- How much less meat/poultry/dairy

consumed? Animal welfare – Chronic challenges

- Stalls – not logical, making some headway

- Castration, tail docking, - Ultimately: Indoor production

Risk management skills Policy – farm bill, antibiotics

Questions or Comments?

Dr. Steve Meyer - Market Outlook for 2013 and Beyond

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