Pork and Hog Market Outlook - Vita Plus · •China relaxed chicken import restrictions for Russia in mid-February •U.S. contact: Very high China interest in U.S. beef •EVENTUALLY

3/27/2019

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Kerns and Associates.

Kerns and Associates

2617 Northridge Parkway

Ames, IA 50010

(515) 268-8888

Steve R. Meyer, Ph.D.

Economist

Kerns and Associates

Pork and Hog Market Outlook

Vita-Plus Swine Summit -- 2019


The legal stuff

• This publication is intended for informational purposes only and the opinions set forth herein should not be viewed as an offer or solicitation to buy, sell or otherwise trade futures, options or securities. All opinions and information contained in this document constitute Risk Assessment and Management, Inc.‘s judgment as of the date of this document and are subject to change without notice. Risk Assessment and Management, Inc. and their respective directors and employees may effect or have effected a transaction for their own account in the investments referred to in the material contained herein before or after the material is published to any customer of Risk Assessment and Management, Inc. or may give advice to customers which may differ from or be inconsistent with the information and opinions contained herein. While the information contained herein was obtained from sources believed to be reliable, Risk Assessment and Management, Inc. accepts no liability whatsoever for any loss arising from any inaccuracy herein or from any use of this document or its contents. This document may not be reproduced, distributed or published in electronic, paper or other form for any purpose without the prior written consent of Risk Assessment and Management, Inc. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. For the customers of Risk Assessment and Management, Inc. this report is produced exclusively for our business and expert clients, it is not for general distribution and our services are not available to private clients. Past performance is not indicative of future results.

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Key market factors – February 2019 . . .

• World and U.S. economies

• Meat and pork demand

• Exports and trade

• African Swine Fever – Asia, EU, U.S.???

• Great ‘18 crops = lower costs; Can we get ‘19 crop planted?

• Producer profit outlook was not positive – until last week!

• Packing capacity has pressured packer margins

• Hog numbers have been huge


Equities have had a nice run!!! – S&P 500 up 4X since 2008

. . . And today’s ONLY guarantee: It ain’t going forever!

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Macro conditions remain generally positive, though . . .

• Equity markets are volatile but S&P 500 has regained about 80% of its Q4-2018 decline

• World economic growth is still positive (IMF: +3.7% in 2019) – as are most major countries

• Q4 real GDP growth at 3.1% yr/yr, 2.6% qtr/qtr annualized

• RPDI per capita is growing again – 2.3% yr/yr in 2018

• U rate at 4.0% in January – pushing wages slightly higher

• 2018 inflation = 1.9%, down from 2.1% the past two years• And down from 2.3% through October – ALL DUE TO ENERGY!

• 1.9% says Fed is less likely to raise interest rates, 2.3% says they will be aggressive – 2 more .25% hikes this year


THIS RECOVERY: A GOODIE BUT OLDIE!

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Some concerns – EAS put Jan ‘19 as 1st eligible month

. . .But Feb figure is above critical level – not unprecedented

www.nospinforecast.com


NY Fed follows the 10-year – Fed funds rate spread . . .

. . . And it is flirting with zero – an early recession indicator

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Same spread presented differently . . . Compression and a kink


$US is back into it’s recent trading range . . .. . . Probably not “flight to safety” yet, but stronger

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Major adjustment in crude oil -- slowing economies?


Consumers felt good about things through December . . .

. . . But January’s index was lowest in 26 months

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One reason: A rise in median real household income . . .

. . . But it took 18 YEARS to set a new record in ‘16


Restaurant performance has bounced back . . .

. . . To post 2 years of 100-plus (expansion) readings

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• Trade war(s) will have an impact• China is forecast to grow by 6.3% -- “worst of the last 10 years

and best of the next 10 years”?

• Trade war and ASF could be a very problematic situation

• Inflation driver for the U.S. - we generally import the cheap stuff

• EU is better but BIG issues loom• Italy and Portugal debt problems could make Greece look simple

• Brexit is not resolved – more a British problem but not good for EU

• U.S. federal deficits and debt – Modern Monetary Theory

Some macro problem areas . . .


Per cap meat & poultry availability/disappearance . . .

. . . from 198.9 in ‘14 back to 214.5 in ’17– 220 in 2019? 2020?

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3-species RPCE: Tough second half of 2018 but . . . . . . 3-species demand is still down only 1.6% vs. 2017


Pork demand had a good Nov but fell again in Dec. . .

. . . To finish ‘18 down 2% -- but still higher than any year before 2014

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Dec exports: Higher than Oct & Nov but down 2.3% yr/yr . . .

. . . Finish the year RECORD LARGE and up 4.2% from 2017


Top 10 markets account for 93.7% of 2018 total . . .

Current Last % Chg Yr. Ago % Chg Current Yr. Ago % Chg

1 Mexico 139.5 140.4 -0.7% 174.8 -20.2% 1,767.8 1,808.9 -2.3%

2 Japan 92.8 103.1 -10.0% 99.3 -6.5% 1,211.8 1,229.0 -1.4%

3 South Korea 77.0 75.9 1.6% 58.7 31.3% 726.7 524.9 38.5%

4 Canada 48.0 48.1 -0.2% 46.0 4.4% 529.5 530.4 -0.2%

5 China/Hong Kong 34.3 25.0 37.6% 41.7 -17.6% 396.8 524.8 -24.4%

6 Colombia 32.4 30.4 6.6% 15.7 107.1% 282.6 191.6 47.5%

7 Australia 30.0 23.2 29.5% 24.2 24.2% 231.0 207.2 11.5%

8 Dominican Republic 9.2 10.0 -7.8% 5.8 59.8% 122.9 90.9 35.3%

9 Philippines 5.7 5.7 -1.0% 6.3 -9.7% 96.9 86.1 12.6%

10 Chile 9.6 7.7 23.9% 3.8 152.7% 83.6 73.7 13.3%

Others 47.5 44.0 8.1% 38.3 24.1% 420.5 364.8 15.3%

World Total 526.1 513.5 2.5% 514.3 2.3% 5,870.2 5,632.1 4.2%

Source: USDA Economic Research Service

MONTHLY YEAR TO DATE

MONTHLY PORK EXPORTS, MIL. LBS. CARCASS

YTD

RankMarket

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Korea has been the ONLY performer among top 5. . . Mexico: Volume -7% since April, value -13% YTD


• Chinese tariffs are getting the most press• Primarily important for by-products/variety meats

• May become critically important if pork shortages develop

• Next week’s trip by Lighthizer/Minuchin trip to China is very important

• Watch for an announcement that President Xi is to visit WDC

• USMCA ratification – NOTHING happening in any of the 3 countries• Would end steel/aluminum tariffs on Mexico and pork tariffs on U.S.

• Major impact would be on ham values – Likely add $10/cwt quickly

• CPTPP is now in effect – gives Canada, Mexico and Chile an advantage in Japan, Vietnam, Malaysia and others

• EU FTA with Japan is now in effect – tariff reduction helps EU

Major trade issues remain for U.S. pork sector . . .

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African Swine Fever – A BIG DEAL!

• Chinese eat 88# of pork, 18# of chicken and 10# of beef per year

• Half of the world’s pigs are there

• All of 2017 world pork trade adds up to just 15% of China’s consumption

• VERY dense pig population on MILLIONS of farms – most small, many backyard

• Thousands of small abattoirs that serve the “wet” or “hot” markets

• Garbage feeding is very common – in fact one of the reasons people have pigs


ASF in China’s 433 million pigs (5.9x U.S., 2.9X EU) . . .

. . . China’s production is about 4.5x that of U.S.

Source: USDA-FAS

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• Maybe the most feared disease• Not highly contagious as it does not spread through aerosol

• Categorized as “highly transmissible” – persists in feces, meat and is easily tracked

• High mortality – often 90% plus

• NO VACCINE and none in sight

• Carried by wild boars which are susceptible – problem in EU!

• Warthogs will carry ASF but are not impacted

• NO HUMAN HEALTH RISK – but will that matter to Chinese consumers who were sold melamine (ie. plastic!) as protein?

ASF – a very bad disease!


Officially: 120 cases, ~900k pigs – and the tip of the iceberg!

. . . And has spread to Vietnam – Thailand, Myanmar next

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Jan 2019 China prices: Lowest since 2010 . . .. . . But look at the recent explosion


Large regional discrepancies due to movement bans . . .. . . But note the convergence in recent weeks

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• Jan 2018 Chinese inventory (USDA-FAS)• 44.5 million sows

• 433 million total hogs

• Feb govt. figuresshow BH down 19.1%, all pigs down 16.6% yr/yr• Imply loss of 8.5 million breeding animals

• And 61.25 million market hogs

• China Swine Association: 30% of hogs are already gone• That is 129 million total hogs

• Less 8.5 million sows = 120 million fewer market hogs

• 8.5 million sows that are gone would have producers abour 136 million pigs this year

• Possible? – Absolutely! Probable? – Who knows

Estimated China losses . . .


• January: Farmers were SELLING before their hogs get sick or die • Result: Higher short-term supplies, lower prices

• Appears that supplies are tightening – price spreads tightening, average prices rising

• Loss of breeding animals will make this situation progressively worse!

• We – and others – think the shortages begin this summer: Q3 & Q4

• BUT softening pork demand will offset price impact in short run• Prices of competitor products are already rising

But timing and consumer reactions are paramount!

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Evidence: Prices of substitute proteins have risen sharply


• January: Farmers were SELLING before their hogs get sick or die • Result: Higher short-term supplies, lower prices

• Appears that supplies are tightening – price spreads tightening, average prices rising

• Loss of breeding animals will make this situation progressively worse!

• We – and others – think the shortages begin this summer: Q3 & Q4

• BUT softening pork demand will offset price impact in short run• Prices of competitor products are already rising• Chinese consumers are wary of government/company “reassurances”• China relaxed chicken import restrictions for Russia in mid-February• U.S. contact: Very high China interest in U.S. beef• EVENTUALLY – Chinese consumers will see that no one is dying of

ASF and demand will come back – but how long with that take?

But timing and consumer reactions are paramount!

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• US exports 23% of prod

• Canada exports 70%

• How did PEDv get here?• The strain was from China

• Feed additives is best bet

• ASF has been found in sausages in 4 world airports

• USDA has an extensive plan to handle foreign animal disease – Is it enough?

Possible ASF Scenarios – Best is on the right!


ASF: Pushed LH futures up from Aug lows. . .

. . . Waned since Dec but exploded in recent weeks!

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The world is awash in soybeans: Record stocks and S/U ratio


And so is the U.S. – with near 1 billion bushels in Y/E stocks

0

100

200

300

400

500

600

700

800

900

1000

88899091929394959697989900010203040506070809101112131415161718

US Soybean Carryout (million bushel)Source:

USDA

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If anything, bean prices should be LOWER


News of China purchases is welcome – but the hole is HUGE

. . . And dead pigs don’t eat much soybean meal!

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Soy complex bottom line

• We have WAY too much supply in the world right now and the current supply/demand outlook does not change this situation

• Even with a 5 million acre U.S. decline in 2019, we still have enough supply in North America and the world

• Lack of Chinese exports off PNW allows cheaper beans for western cornbelt

• Basis will keep SBM low


One the world stage – U.S. and China dominate corn output

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Corn: Record yield after record yield

+4.1

80

90

100

110

120

130

140

150

160

170

180

190

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

US Corn Yield (bushel/acre)Source: USDA


Corn may still be underpriced – and USDA’s outlook is low

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Corn thoughts

• Tighter balance sheet than for beans -- little room for deviation

• “We” seem to be more comfortable operating with reduced stocks now compared with historical norms

• Corn needs to buy 3 million acres or so from beans –but it’s not working

• Soybean subsidy from Trump administration

• Banker knocking at the door – favoring soybeans

• Anhydrous ammonia pricing

• Corn futures are likely to rise in battle for acres


Corn & SB futures, ISU parameters: Controlled costs!

. . . Our long-term concern is corn – growing usage, output?

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Steady costs and higher LH Futures . . . . . . Pushed top 20% profit from $8.94 to $26.38 in 3 weeks


There is some financial stress – and it may grow . . .

. . . Best producers are in good shape, others are ?able

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Dec Hogs & Pigs was very close to estimates . .

Inventories on Dec 1

All hogs and pigs 73,145 74,551 101.9 102.7 -0.8

Kept for breeding 6,179 6,326 102.4 102.8 -0.4

Kept for marketing 66,966 68,225 101.9 102.6 -0.7

Under 50 lbs. 21,407 21,599 100.9 102.5 -1.6

50-119 lbs. 18,544 18,932 102.1 102.7 -0.6

120-179 lbs. 13,925 14,412 103.5 102.9 0.6

180 lbs. and over 13,089 13,282 101.5 102.4 -0.9

Farrowings

Sep-Nov sows farrowed 3,103 3,158 101.8 101.7 0.1

Dec-Feb Intentions 3,034 3,110 102.5 101.9 0.6

Mar-May Intentions 3,100 3,147 101.5 101.5 0.0

Sep-Nov Pig Crop 33,328 33,978 102.0 102.4 -0.4

Sep-Nov pigs saved per litter 10.74 10.76 100.2 100.7 -0.5

*Thousand head ** Thousand Litters 1Source: Urner Barry

USDA QUARTERLY HOGS & PIGS REPORT

December 20, 2018

Category 2017 2018

'18 as

pct of

'17

Pre-

Report

Est's1

Actual

minus

Est.


BH was +2.4% yr/yr – but equal to the past 2 quarters

. . . all 3 are the largest since June 1999

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USDA’s 0.2% growth in litter size is unusual . . .

. . . Smallest non-PEDv yr/yr change since J-A ‘03


Record large December market inventory . . .

. . . Continued the post-PEDv trend

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PRRS incidence is down ~40% vs. 2018 – severity is lower too


Another view – Last year was the worst since 2011-12 . . .

. . . this year is the best ever based on percentage

. . . PRRS was the primary reason for September hog shortfall

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PEDv is a non-issue – few outbreaks, much smaller death loss

• PEDv: A warning of what can be imported from China!

• PEDv conclusions:• Came from China• Most likely in feed

ingredients• Spread across the U.S.

through re-use of feed “totes”

• PEDv is MUCH more contagious than ASF but the feed vectors are a worry


Appears that USDA underestimated the Jun-Aug crop . .

. . . Weather disruptions have been large – Huge week 3/8

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Weight rose when hogs were backed up . . . . . . But have dropped sharply – VERY current at present


Pork prod is up 4.1% YTD and we expect +3.7% for 2019 . . .

. . . Main deviation from forecast was weather and catchup!

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Cutout struggled through February – winter, supplies . . .

. . . But have gained over $7/cwt in last 2 weeks


Bellies and hams are the drivers – China, Canada

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Net hog price moved counter-seasonally lower in Feb . . .

. . . Our peaks for summer are in the mid-$70s


Packer margins: Back to an old paradigm!. . . But recent increases provide incentives!

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‘19 slaughter growth is still significant – Kerns: +3.2% . . .

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

2014 106.876 -4.7%

2015 115.425 8.0%

2016 118.240 2.4%

2017 122.547 3.6% 121.847 3.1% 25.584 2.6% 121.415 2.7% 121.317 2.6%

2018* Q1 30.821 2.1% 30.832 2.2% 6.645 2.8% 30.713 1.8% 31.075 3.0%

Q2 30.098 3.2% 30.093 3.2% 6.325 3.1% 29.983 2.8% 29.816 2.2%

Q3 31.106 3.8% 30.820 2.8% 6.315 3.8% 30.801 2.8% 30.402 1.5%

Q4** 33.393 4.3% 33.397 4.3% 7.035 3.4% 33.126 3.5% 33.119 2.5%

Year** 125.418 3.4% 125.142 3.2% 26.320 3.3% 124.623 2.7% 124.412 2.3%

2019* Q1*** 31.951 2.8% 31.535 1.5% 6.755 1.7% 31.918 2.7%

Q2 30.505 2.3% 30.247 1.4% 6.540 3.4% 30.899 3.6%

Q3** 31.548 3.8% 31.178 2.6% 6.720 6.4% 31.496 3.6%

Q4 33.665 1.7% 33.776 1.1% 7.325 4.1% 34.027 2.7%

Year 127.670 2.6% 126.736 1.9% 27.340 3.9% 128.340 3.2%

*Annual total uses actuals to-date plus forecasts for the rest of the year. ** 1 more day in qtr vs. yr. ago1USDA data are carcass weight production *** 1 less day in qtr vs. yr. ago

Blue figures are estimated using USDA data Green figures are revisions since latest Hogs and Pigs report 3/17/2019

Red figures are analysts' last FORECAST for the given quarter (Q1 done in Dec, Q2 done in Mar, etc.)

ISU LMIC Kerns ACTUALUSDA-Pork Prod1

December 2018 Hogs & Pigs -- Commercial Slaughter Forecasts


Big rally leaves futures MUCH ahead of fundamental forecast

ISU LMIC USDA Kerns CME

Ia-Mn

Producer-Sold

Neg'd Base

National Wtd

Avg. Base Price

National Base,

Live equivalent,

51-52% lean

National Net

Price, All

Methods

CME Lean Hog

Futures/Index

2014 102.50 100.31 76.03 102.88 104.99

2015 67.08 69.69 50.23 71.74 70.09

2016 60.42 64.25 46.16 66.52 65.06

2017 65.09 69.43 50.48 71.76 71.74

2018 Q1 64.28 67.82 49.12 69.80 68.98

Q2 60.69 67.82 48.09 70.07 67.78

Q3 54.70 62.92 43.90 65.25 62.64

Q4 53.85 60.82 43.38 62.87 61.73

Year 58.38 64.85 46.12 67.00 65.28

2019 Q1 60 - 64 62 - 64 40 - 42 62 - 65 57.91

Q2 70 - 74 68 - 71 42 - 46 71 - 74 77.74

Q3 71 - 75 63 - 67 44 - 48 67 - 70 87.82

Q4 58 - 62 57 - 62 40 - 43 60 - 64 75.71

Year 65 - 69 63 - 66 41 - 44 66 - 68 74.79Green figures are revisions since the latest USDA Hogs and Pigs report.Blue figures are estimated using USDA data

December 2018 Hogs & Pigs -- Hog Price Forecasts

3/20/2019

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Risks . . .

• Negative

• Export-blocking disease in the U.S. – ASF, CSF, FMD

• No progress on the trade battle with China

• Significant delays for new plant ramp-ups – STF, Prestage

• Labor challenges – Availability? Quality? Cost?

• Lower beef and broiler prices put pressure on pork demand

• Economic slowdown in 2019 and beyond

• Positive

• More pork needed by China – Supply AND Demand??

• Resolution to the trade battle – ratifications of USMCA?


Questions?

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515-720-3332• Risk Assessment and Management

• 2617 Northridge Parkway

• Suite 101

• Ames, Iowa 50010

• 515 268-8888

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Documents

Pork and Hog Market Outlook - Vita Plus · •China relaxed chicken import restrictions for Russia in mid-February •U.S. contact: Very high China interest in U.S. beef •EVENTUALLY