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Global Pork Outlook. David Nelson, Rabobank Global Strategist. Key Macro Issues. Section I. Introduction. ... But GDP growth is accelerating demand growth. The connection to wealth creation. - PowerPoint PPT Presentation
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PIC Symposium 2011 | Nashville, TN
Global Pork Outlook
David Nelson, Rabobank Global Strategist
PIC Symposium 2010 | Nashville, TN
Key Macro Issues
Section I
PIC Symposium 2011 | Nashville, TN
The connection to wealth creation...
... But GDP growth is accelerating demand growth
Source: World Bank, IBGE, National Bureau of Statistics China, India Central Statistical Organization
Introduction
Country 2010 GDP growth rate Population
Brazil 7.5% 193,734,000
China 10.3% 1,331,460,000
India 8.2% 1,155,348,000
Indonesia 6.9% 229,965,000
Higher GDP growth Higher protein consumption Higher grain demand
PIC Symposium 2011 | Nashville, TN
While most yield improvements are decelerating
Introduction
Source: USDASource: USDA
Source: USDA Source: USDA
World corn yield % change, 5 yr moving avg World wheat yield % change, 5 yr moving avg
World soybean yield % change, 5 yr moving avg World rice yield % change, 5 yr moving avg
-2%-1%0%1%2%3%4%5%6%7%
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
-2%-1%0%1%2%3%4%5%6%7%
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
-2%-1%0%1%2%3%4%5%6%7%
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0%1%1%2%2%3%3%4%
4%5%
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
PIC Symposium 2011 | Nashville, TN
Meat production growth < demandWorld GDP growth = higher prices
Macro Overview
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2006 2007 2008 2009 2010
Beef Pork Broiler World GDP All Protein
Source: USDA, World Bank
Meat production and GDP, % growth since 2006
PIC Symposium 2011 | Nashville, TN
What is the market telling us?
Brazil will grow more, but...
China will have to pay more.
If corn cost $5.00, then soy cost $12.00.
Price gravitates to marginal cost of production
Introduction
23.5 24.1
7.7 7.4
0
5
10
15
20
25
30
35
2009/2010 2010/2011
Soybean Corn
31.2 31.5
Soybeans = 41.80 BRL/60kgCorn = 8.30 BRL/60kg
October Mato Grosso prices:
Soybeans = 40.09 BRL/60kgCorn = 12.40 BRL/60kg
Source: Conab, Bloomberg
Brazil soybean and corn planted area, million hectares
PIC Symposium 2011 | Nashville, TN
Brazil’s farmers have not benefitted as much from rising soy prices as in the US due to appreciating Real
Prices need to rise to stimulate incremental production
Brazil: higher but not so volatile
Other key issues
-50%
0%
50%
100%
150%
200%1/
7/20
053/
7/20
055/
7/20
057/
7/20
059/
7/20
0511
/7/2
005
1/7/
2006
3/7/
2006
5/7/
2006
7/7/
2006
9/7/
2006
11/7
/200
61/
7/20
073/
7/20
075/
7/20
077/
7/20
079/
7/20
0711
/7/2
007
1/7/
2008
3/7/
2008
5/7/
2008
7/7/
2008
9/7/
2008
11/7
/200
81/
7/20
093/
7/20
095/
7/20
097/
7/20
099/
7/20
0911
/7/2
009
1/7/
2010
3/7/
2010
5/7/
2010
7/7/
2010
9/7/
2010
11/7
/201
01/
7/20
113/
7/20
11
Brazil soybeans in BRL US soybeans in USD
+154%
+41%
Source: Bloomberg
Percent change in Brazil and US soybeans since 2005
PIC Symposium 2011 | Nashville, TN
Russia, Ukraine and Kazakhstan are the primary incremental producers of the world’s grain
Black Sea region rising in importance…
Black Sea Region
0%
10%
20%
30%
40%
50%
60%
94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 (f)
Barley Exports Wheat Exports
Source: USDA
Black Sea share of world exports
PIC Symposium 2011 | Nashville, TN
All grain ex-China fell to 13.6% in 1972/73, and reached 12.8% in 95/96.
Corn ex-China was 9.8% in 72/73, and reached 7.6% in 95/96.
With and Without China
World Grain Stocks-to-Use Ratios
Source: USDA
Source: USDA
All Grains Stocks to Use Ratios
Corn Stocks to Use Ratio
0%
10%
20%
30%
40%
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10World World - China
19.5%
15.0%
0%
10%
20%
30%
40%
50%
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10World World - China
14.7%
9.4%
PIC Symposium 2011 | Nashville, TN
It would take a record yield and nearly a 5 million acre increase in planted area for the corn stocks to use ratio to get back over 10% -- which is not a terribly comfortable level.
Feed costs: No Light at the End of the Tunnel
Source: USDA, Rabobank
U.S. Corn Yield and Area Sensitivity
155 160 165 170
90 0.5% 3.6% 6.7% 9.8%
91 1.6% 4.7% 7.8% 11.0%
92 2.6% 5.8% 9.0% 12.1%
93 3.7% 6.9% 10.1% 13.3%
Area
pla
nted
Yield
PIC Symposium 2010 | Nashville, TN
Key Global Animal Protein Issues
Section II
PIC Symposium 2011 | Nashville, TN
Emergence of the Brazilians has been the big news in recent years
China’s pork companies will move much higher in the next few years
Growth at Cherkizovo from Russia and MHP from Ukraine will move them into the top ranks
Key Global Animal Protein Issues
Source: Rabobank, 2010
Global meat company rankings by volume, 1000 mt
-
2,000
4,000
6,000
8,000
10,000
12,000
Poultry Pork Beef
1,000 tonnes
PIC Symposium 2011 | Nashville, TN
The 14 largest pork packers that represented 20% of the industry in 2009 are being pushed to grow and consolidate by the government to have 50% share by 2013.
Industrialization of China’s pork processing industry
China
Source: MOF, Rabobank
Pork processing in China
42%35%
20%
50%
45%
30%
8%20%
50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2009 2013F
Manual slaughtering Semi-automated slaughtering Automated slaughtering
PIC Symposium 2011 | Nashville, TN
Most markets are fragmented compared to the US
Intra-country consolidation
Key Global Animal Protein Issues
Source: Rabobank
Size of top firm by country (1,000 mt), market share of top three firms
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000 US
Braz
il EU
Aust
ralia
Arge
ntina US EU
Braz
il
Cana
da US
Braz
il EU
Thail
and
Arge
ntina
Beef Pork PoultrySize 68% 35% 8% 47% 39% 57% 20% 30% 62% 47% 38% 19% 32% 35% top 3
PIC Symposium 2011 | Nashville, TN
Japan 13%
Russia 11%
Mexico 8%
United States 8%
EU-27 6%Hong Kong 4%
South Korea
4%Saudi Arabia 4%
China 4%Canada 3%
Vietnam 2%
Venezuela 2%United Arab Emirates 2%
Philippines 2%Iraq 2%
Other 26%
Total meat imports
Key Global Animal Protein Issues
Source: USDA
Percent of world total meat imports for 2010
PIC Symposium 2011 | Nashville, TN
Russia is rapidly becoming self sufficient in chicken... Reducing elasticity of export capability
Russian poultry self sufficiency
Key Global Animal Protein Issues
Source: Rabobank
Russian poultry production and imports, million metric tons
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Production Production + Imports
PIC Symposium 2011 | Nashville, TN
Mato Grosso(Brazil)
Tambov / Lipetsk(Russia)
Grain trapped due to poor infrastructure
Two areas with rapid growth in animal protein production
Key Global Animal Protein Issues
PIC Symposium 2011 | Nashville, TN
Russia’s goal is to be 85% self sufficient by 2015 and 95% self sufficient by 2020
Russian pork: eventual self sufficiency
Key Global Animal Protein Issues
Source: Rabobank
Russian pork production and imports, million metric tons
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Production Production + Imports
PIC Symposium 2011 | Nashville, TN
Government Supports in Developing Countries
Brazil: BNDES
China: Subsidies, Financing
Russia: Import Protection, Financing Subsidies
Be Careful What You Wish For
PIC Symposium 2011 | Nashville, TN
New proposed USDA GIPSA rules – there will be unintended consequences
Key U.S. Meat Industry Issues
Proposed GIPSA rule would make it difficult for packers to pay premiums for quality or other factors without the risk of being sued.
I t would ban livestock contracting >14 days out.
I t would ban buyers from working for >1 packer.
I t would ban packer to packer sales.
PIC Symposium 2011 | Nashville, TN
EU policy measures threatening competitiveness
Key Pork Industry Issues
Source: Rabobank
Pork cost price increases due to policy measures for selected EU countries (in EUR cent per kg cwe)
0
5
10
15
20
25
2007 2013 2007 2013 2007 2013 2007 2013 2007 2013 2007 2013
Environment Production rights Animal Welfare Public health Spatial PlanningNL PLESDKFR DE
PIC Symposium 2011 | Nashville, TN
Questions from around the world
Europe: Sustainability, Farmer profitabilityChina: Biosecurity, Supply chainBrazil: QE2Everyone: EthanolNow 9% of gasoline supplyGasoline up 37% since last fall
U.S./E.U.: BraziliansCurrencyBrazilian/Argentine cattle herdBalance sheet leverageGovernment Meddling? (Vale, Sugar)
PIC Symposium 2011 | Nashville, TN
U.S. Average Gasoline Prices
Source: Bloomberg
U.S. Average Retail Gas Prices, USD/gallon
2.50
2.70
2.90
3.10
3.30
3.50
3.70
3.901/
3/20
101/
17/2
010
1/31
/201
02/
14/2
010
2/28
/201
03/
14/2
010
3/28
/201
04/
11/2
010
4/25
/201
05/
9/20
105/
23/2
010
6/6/
2010
6/20
/201
07/
4/20
107/
18/2
010
8/1/
2010
8/15
/201
08/
29/2
010
9/12
/201
09/
26/2
010
10/1
0/20
1010
/24/
2010
11/7
/201
011
/21/
2010
12/5
/201
012
/19/
2010
1/2/
2011
1/16
/201
11/
30/2
011
2/13
/201
12/
27/2
011
3/13
/201
13/
27/2
011
4/10
/201
1
PIC Symposium 2011 | Nashville, TN
Approximately 1.2mmt swing in 2011 outlook in recent months
Key Pork Industry Issues FMD in Korea has already led to the liquidation of about 35% or 3.5 million hogs. We
expect Korea’s pork imports to rise by 30% this year to 380,000 tons. China is experiencing sow liquidation and we believe has an FMD problem of its own.
China’s sow herd is down 3% compared to year-ago levels by the latest statistics, which we believe could lead to 2011 pork imports of 1.1 – 1.4 MMT, a four-fold increase from 2010.
The fourth consecutive negative profitability in the EU pork industry and the effects of the dioxin contamination in Europe, particularly Germany, is leading to herd liquidation across the continent. We now believe that EU pork production could fall 1 – 1.5% impacting production by around 300,000 tons.
USDA’s forecast for a 1.5% or 150,000 ton increase in U.S. pork production looking optimistic. The U.S. breeding herd was down 1% in December which can be substantially offset by productivity gains but we are not hearing of any expansions and in fact are hearing of financing difficulties.
This all adds up. These factors alone suggest a swing in production expectations of about 1.2 – 1.3MMT compared to expectations last fall. World pork production is about 103MMT, and half of that is in China.
PIC Symposium 2011 | Nashville, TN
USDA 2011 production estimates for the top 3 world pork producers are overstated:
China FMD, most recent sow estimate is -3%
EU dioxin contamination causing liquidation
U.S. breeding herd -1% YOY in December, but hog prices rising faster than feed costs
2011 Outlook
Source: USDA
Key Pork Industry Issues
Pork Production (1000 mt)2010 USDA 2011 (f) % change
China 51,070 51,500 0.8%
EU-27 23,000 22,120 -3.8%
United States 10,187 10,204 0.2%
Brazil 3,195 3,260 2.0%
Russia 1,920 2,310 20.3%
Vietnam 1,870 1,900 1.6%
Canada 1,772 1,720 -2.9%
J apan 1,291 1,290 -0.1%
Philippines 1,255 1,260 0.4%
Mexico 1,165 1,184 1.6%
South Korea 1,110 760 -31.5%
World 101,507 103,392 1.9%
PIC Symposium 2011 | Nashville, TN
The China corn conundrum
China Why is China importing corn for the first time since 1994 if their stock levels are
anywhere near as high as stated?- 60 MM MT, or for an ending stocks-to-use ratio of 37.1%
Same goes for why would they have an internal price of over $8/bushel if stocks are satisfactory?
Why has China limited bidding from industrial users at their Tuesday auctions?
China’s soy imports continue to expand rapidly and faster than anticipated. I f meal use is rising so rapidly, how could it be much different for corn?
China’s soy imports since 1998 imply an incremental corn need of 90mmt compared to only 30mmt as reported
Answer:
China’s corn supplies appear to be desperately low
PIC Symposium 2011 | Nashville, TN
If industrial hog production grows from 55% to 60%, and modified from 11% to 21%, deficit expected to be 23 MM MT by 2015 –Assuming 10 bu. of corn per pig
Industrialization of China’s hog production industry
China
Source: MOA, Rabobank
Herd size of hog farms in China
74%
57%
42% 37%30%
21%
36%
48%51%
55%
5% 7% 10% 12% 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2005 2007 2009 2013F
Backyard farm(1~49 heads/farm)
Commercial farm(50~3000 heads/farm)
Specialized farm(+3000 heads/farm)
PIC Symposium 2011 | Nashville, TN
Even with only 2% pork production growth, China could be importing 25 MM MT of corn per year by 2015 due to industrialization
China’s corn balance sheet
China
Source: MOA, USDA, FAPRI, Rabobank estimates
-70
-60
-50
-40
-30
-20
-10
0
10
20
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Actual Rabobank estimateMT
PIC Symposium 2011 | Nashville, TN
China coal trade
China
Source: Bloomberg
China monthly coal imports and exports, million metric tons
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
2/1/
2005
4/1/
2005
6/1/
2005
8/1/
2005
10/1
/200
512
/1/2
005
2/1/
2006
4/1/
2006
6/1/
2006
8/1/
2006
10/1
/200
612
/1/2
006
2/1/
2007
4/1/
2007
6/1/
2007
8/1/
2007
10/1
/200
712
/1/2
007
2/1/
2008
4/1/
2008
6/1/
2008
8/1/
2008
10/1
/200
812
/1/2
008
2/1/
2009
4/1/
2009
6/1/
2009
8/1/
2009
10/1
/200
912
/1/2
009
2/1/
2010
4/1/
2010
6/1/
2010
8/1/
2010
10/1
/201
012
/1/2
010
China coal imports China coal exports
PIC Symposium 2011 | Nashville, TN
Source: Japanese Ministry of Ag., Forestry and Fisheries, USDA
Japan Japan estimates $198b - $309b in damage vs. $81b for
Katrina
Earthquake, tsunami and nuclear disaster affected Tohoku and Kanto regions – NE Japan.
These two regions account for 44% of hog herd and 27% of broilers.
Assuming only eastern half of regions are affected implies 281,600 mt pork production and 172,800 mt broiler production
US pork exports to Japan = 391,000 mt EU pork exports to Japan = 220,000 mt US broiler exports to Japan = 48,000 mt EU broiler exports to Japan= minimal
Cold storage most likely destroyed
Product is flowing through southern ports
Earthquake
Nuclear reactor and evacuation zone
PIC Symposium 2011 | Nashville, TN
Source: Robert A. Brown/Tyson Foods
Pork Demand
PIC Symposium 2011 | Nashville, TN
Currencies
Source: BloombergSource: Bloomberg
Source: Bloomberg Source: Bloomberg
Brazilian Real/USD Aussie Dollar/USD
Canadian Dollar/USD Euro/USD
1.501.701.902.102.302.50
1/9/
2009
4/9/
2009
7/9/
2009
10/9
/200
9
1/9/
2010
4/9/
2010
7/9/
2010
10/9
/201
0
1/9/
2011
4/9/
2011
0.901.001.101.201.301.401.501.601.70
1/9/
2009
4/9/
2009
7/9/
2009
10/9
/200
9
1/9/
2010
4/9/
2010
7/9/
2010
10/9
/201
0
1/9/
2011
4/9/
2011
0.900.951.001.051.101.151.201.251.301.35
1/9/
2009
4/9/
2009
7/9/
2009
10/9
/200
9
1/9/
2010
4/9/
2010
7/9/
2010
10/9
/201
0
1/9/
2011
4/9/
2011
1.001.101.201.301.401.501.60
1/9/
2009
4/9/
2009
7/9/
2009
10/9
/200
9
1/9/
2010
4/9/
2010
7/9/
2010
10/9
/201
0
1/9/
2011
4/9/
2011
PIC Symposium 2011 | Nashville, TN
The End
PIC Symposium 2011 | Nashville, TN
Meat Consumption
Source: USDA
United States Per Capita Meat Consumption, kilograms
98 96 98 94 95 94 95 94 90 88 85
66 65 67 67 66 65 64 66 64 65 60
90 89 94 95 98 100 101 99 97 93 95
253 250 258 256 260 259 260 259 252 245 240
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Beef Swine Broiler