WEBINAR Q2 BIG PICTURE OUTLOOK - J.S. Ferraro Picture Webinars/Q2 2020... · Global News, CTV, National Post, Globe & Mail, National Hog Farmer and Grocery Business. Kevin speaks

Q2 BIG PICTURE

OUTLOOKNAVIGATING MEAT PROTEIN MARKETS

AMIDST A GLOBAL PANDEMIC

HOSTED BY: J.S. Ferraro

DATE: April 15, 2020

Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.

WEBINAR

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An integrated sustainable food brand committed to creating the

best-tasting fresh proteinexperience.

Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.

Providing market intelligence, risk

management and meat

distribution & logistics solutions

for the meat and livestock industry.

ABOUT JSF

CO-HOST | DR. ROB MURPHY

DR. ROB MURPHY, BS, MS, PhD Agri EconomicsExecutive Vice President, Research and Analysis

J.S. Ferraro

www.jsferraro.com

An agricultural economist and business leader with over 27 years in the industry, Dr. Rob Murphy has

a wealth of experience in the North American meat and livestock industries studying, analyzing and

predicting market movements. His expertise spans commodity analysis, econometric modelling,

forecasting, futures markets, hedging, and risk management.

Rob holds a Ph.D. in Agricultural and Applied Economics from Virginia Tech and has developed his

market expertise over the past three decades by serving as an economist with the Chicago Mercantile

Exchange, Sparks Companies and Informa Economics.

At Informa, Rob held two senior leadership roles (Senior VP of Livestock, Meat, Dairy and Poultry

group and Vice President) over 13 years. He focused on the development of risk management

programs and directed the division’s work in commodity analysis in the protein sector. He has spoken

internationally on many topics, including agri supply chain-development and international protein

demand.

Currently, Rob is the Executive Vice President, Research and Analysis at J.S. Ferraro & Co. leading

the team in commodity analysis, financial modelling, and the development of trading and risk

management strategies.

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http://www.jsferraro.com/

mailto:[email protected]?subject=Q1%202020%20Webinar%20Question


https://www.linkedin.com/in/robmurphycommoditymarkets

CO-HOST | KEVIN GRIER

KEVIN GRIERMarket Analyst

Kevin Grier Market Analysis & Consulting

www.kevingrier.com

Kevin Grier is a noted Canadian Agriculture & Food Market Analyst providing economic and market

outlook for livestock, meat and grocery industries over the last 20+ years. His critical market insight

and analysis helps his clients - from government and producer groups to small to large businesses -

drive profitable bottom line decisions.

Kevin is a regular contributor and respected expert across media platforms throughout North America -

Global News, CTV, National Post, Globe & Mail, National Hog Farmer and Grocery Business. Kevin

speaks with clarity on a range of topics including market analysis, economic impacts, consumer trends

and commodity analysis. He provides regular commentaries on the market and is a national and

international keynote speaker known for his approachable yet pragmatic style.

His breadth of knowledge was developed over 18 years at the George Morris Centre, a leader in

economic research in the agriculture and food industry. Prior to that Kevin was a manager with the

Ontario Farm Products Marketing Commission, the supervisory body of the provincially regulated

marketing boards. Currently, Kevin is managing director of Kevin Grier Market Analysis and

Consulting, a company specializing in livestock, meat, poultry and grocery industry market insight and

analysis working across a breadth of organizations internationally.


http://www.kevingrier.com/

https://www.kevingrier.com/

mailto:[email protected]?subject=Q1%202020%20Webinar%20Question

http://www.kevingrier.com/

https://ca.linkedin.com/in/kevingrier

1. MARKET OUTLOOK | CATTLE & BEEF

• US Markets - Supply, Demand & Pricing

• Canadian Market Insights

• Speaker Panel Discussion

2. MARKET OUTLOOK | HOGS & PORK

• US Market – Supply, Demand & Pricing

• Canadian Market Insights

• Speaker Panel Discussion

3. LIVE Q&A

DISCUSSION OUTLINE


• MARKETS OVERVIEW

• SUPPLY, DEMAND & PRICING

Q2 BIG PICTURE MARKET OUTLOOK

CATTLE & BEEF | US


Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.7 |

• Social distancing has become the new normal, restricting travel and economic interaction.

• Food supply chain appears safe, but there has been a huge shift away from foodservice and

toward retail sales as restaurants close or move to take-out only.

• All sports have been put on pause along with other large gatherings such as concerts, religious

services, schools and conferences.

• The global economy is now in recession. US unemployment has skyrocketed to unprecedented

levels, economic activity has slowed to a crawl.

• We must recognize the potential for packing plant closures. Workers may refuse to enter plants if

they fear the risk of contracting the virus is high.

GENERAL OBSERVATIONS: COVID-19 PANDEMIC

• The live cattle futures market

has become increasingly

pessimistic as the Covid

pandemic progressed

• Some of it has to do with

fears that plant closures will

back cattle up and force cash

prices lower.

• While those concerns are

valid, packers have worked

hard to avoid plant closures

and are slowing chain speeds

in order to space workers and

limit the potential for

spreading the disease.

JUNE 2020 LIVE CATTLE FUTURES


• Once stay-at-home orders

began to be issued,

consumers rushed to grocery

stores and cleaned out the

meat case

• Retailers rushed to replenish,

causing the Choice cutout to

spike close to $50 in two

weeks

• Cutouts are now retracing as

the retail pipeline is full once

again

• Middle meats have struggled

while end meats and grinds

have been stronger than

normal

CHOICE CUTOUT


• The sharp rise in the cutouts

sent packer margins to all

time record levels, even

exceeding those of the plant

fire back in August

• That incentivized packers to

increase fed kills to meet the

sudden demand surge

• Now packer margins are

retreating, but are expected

to remain well above normal

in the coming weeks

• Slowing chain speeds and

the reduced slaughter that

they create will support

larger-than-normal packer

margins.

PACKER MARGIN


• Fed cattle slaughter during

Q1 has been larger than

expected and well above last

year’s level

• The mild winter had cattle

finishing 30-60 days ahead of

schedule, supporting big kills

• Slowing chain speeds and

some plant closures should

push Apr slaughter 7-8%

below last year’s level

• This will provide some

support for the cutouts if it

continues, but threatens live

cattle prices

+1.3%

+4.4%

+9.1%

-7.6%

-4.1%

-4.0%

WEEKLY AVERAGE STEER & HEIFER SLAUGHTER


• Carcass weights remain very

heavy for this time of year.

• The blended (steer+heifer)

carcass weight was 23

pounds over last year

• This is concerning for cattle

feeders because it limits their

leverage in negotiations with

the packer

• Slowing chain speeds will

exacerbate this problem

• The de-trended and de-

seasonalized carcass

weights are near their highest

level in almost 5 years

BLENDED S&H CARCASS WT.


• The uncertainty surrounding Covid-19 and sharp drop in cattle

futures has caused cattle feeders to sharply reduce placements

in March

• JSF projects placements down 12% in March, but other

estimates call for as much as a 20% decline

• The sharp drop in placements should leave feedyard inventories

down about 4% as of April 1.

• Feedyard inventories could slip to around 5% under last year in

summer, but much will depend on the slaughter pace between

now and then.

History Forecast History

Forecast


FEEDYARD PLACEMENTS & INVENTORY

• Current breakevens on fed cattle

slaughtered today are around $123/hd, far

above the $105/cwt that cattle sold for last

week.

• Our margin model suggests cattle feeders

are losing about $200/head on cattle being

marketed in April

• Breakevens will stay high until at least

Memorial Day and after that they begin to

decline, reaching $106 by the end of July

• Breakevens will decline this summer due to

the lower prices producers had to pay for

feeder cattle this spring

AVERAGE CATTLER FEEDING BREAKEVEN


• A huge increase in beef

production during Q1, could

give way to a 10% YOY decline

in beef production in Q2

• Q3 beef production now

expected to be about 1.0%

below last year.

• Buyers should be prepared for

a big drop in beef production

during Q4, down 3.5% or more

• Slowing feedyard placements in

Q2 will drive the reduced

production in Q4

+7.9%

-10.0%

-1.1%

TOTAL BEEF PRODUCTION BY QUARTER, 2018-20


• Movement in the weekly

demand curve show the surge in

demand in the second half of

March

• Demand is moving lower now

that grocery stores have been

replenished

• Demand is still above the level

that we saw in February and

early March

• Normally, we would expect

strong seasonal demand

increases in April, but the Covid

pandemic has destroyed that

Supply Curve

Demand Curve

WEEKLY BOXED BEEF DEMAND


• Beef exports were strong in February, up 21% YOY

• March exports should be down from Feb levels and April and

May could be even worse

• JSF’s projection for 2020 beef exports is up 4%

• The risk is that slow global growth will push exports below last

year


BEEF EXPORTS

• JSF sees the Choice cutout moving

lower for the next 3-4 weeks, then

stabilizing around the $215 mark.

• Kill slowdowns due to labor issues

driven by Covid-19 could cause the

cutout to exceed our expectations this

summer, depending on how serious the

disruptions become.

• Light placements this spring set the

stage for supply tightness this fall,

elevating the cutout. Current projections

have the Choice cutout averaging about

$220 in Sep-Nov

• Pricing will be highly dependent upon

the depth and length of the recession.

CHOICE CUTOUT


• All of the live cattle contracts currently

trading look seriously under-priced

compared to the JSF fundamental forecast

• Much of this under-pricing is likely due to

uncertainty about the length of time that

consumers will be asked to stay at home

due to Covid-19

• Uncertainty about the length and depth of

the recession is also contributing to the

weakness in deferred futures

• Buyers should be prepared for near-term

price increases if more plants are forced to

close or slowdown dramatically.

• The low level of futures makes this an

excellent time to book fixed-price product

for fall delivery.

JSF LIVE CATTLE FUTURES


• INSIGHTS


CATTLE & BEEF | CAD


FOODSERVICE SALES BREAKDOWN

Special8%

Drinking4%

Full Serve44%

Limited Serve44%

Foodservice Sales Breakdown 2015-19 Average


FOODSERVICE MONTHLY AVERAGE SALES 2015-2019


FOODSERVICE SALES Q2-Q4 2019-2020


FOODSERVICE AND RETAIL

• 60% at home

• $1 away $1 home

• Rabobank 10% away leads to 3% home

Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.| Photo by Andrew Seaman on Unsplash24 |

CANADIAN SUPERMARKET SALES Q2-Q4 2019-2020


CDN QUARTERLY CATTLE SLAUGHTER 2018-2020

• Q1 +2%

• Q2 +5%


CANADIAN BEEF CUTOUT MONTHLY 2020, 2019 AND 2014-2018 AVG


WEEKLY BEEF WHOLESALE PRICE DIFFERENTIAL VS 2017-2019 AVERAGE


RETAIL BEEF MARGINS VS 2017-19 AVERAGE WEEKLY FEB-APRIL


BEEF SUMMARY POINTS

• Availability?

• Costing is uncompetitive

• Margins are not competitive

• Merchandising option?



PANEL DISCUSSION



AUDIENCE QUESTIONS – FOODSERVICE TO RETAIL

What is the long term impact of COVID-19 on meat demand

and restaurant business?

We know the obvious that demand has shifted to retail from

food service but what is your sense of the overall

demand/growth for beef, pork and chicken in this new

environment?

“


AUDIENCE QUESTIONS - CBOT

Wondering if it would help if there was a contract for the cutout

traded on the CME. With the large disconnect between the live

cattle contract and the cash price, in both the U.S and Canada,

it doesn’t really seem like it is a relevant risk management tool

anymore. It seems like the feeder cattle contract and live cattle

contract correlate (some what), so would a cutout contract do

the same?

“

• MARKETS OVERVIEW

• SUPPLY, DEMAND & PRICING


HOGS & PORK | US


• Lean hog futures have moved rapidly

lower in recent weeks

• The futures rallied briefly in mid-March

while consumers were rushing to

grocery stores and stockpiling meat

• The June contract has had an

amazing spread, posting a $95 high

last spring during the “ASF” rally and is

currently trading below $50

• We view this sell-off as overdone, but

much will depend on how fast

foodservice can come back online.

JUNE 2020 LEAN HOG FUTURES


• Note the sharp rally in the cutout that

occurred in mid-to-late March as

grocery stores scrambled to refill

their meat cases

• Since then however, it has been

straight down as demand has fallen

considerably

• A lot of this decline has been driven

by the processing items, bellies and

hams, which have a heavy

foodservice presence

• JSF thinks we are now near a

bottom for the cutout and it should

begin to work higher into the spring

PORK CUTOUT


• USDA reported the US breeding herd up only 0.4% as of March 1

• That is the smallest breeding herd increase in four years.

• A smaller breeding herd will give way to smaller pig crops going

forward.

• The Dec/Feb pig crop however, was reported up 4.7%, which

implies ample supplies this summer when those hogs come to

slaughter

• Productivity was phenomenal once again, with pigs saved per litter

rising by 2.8%

• Low futures prices, if they persist, will encourage producers to

scale back production later this year


BREEDING HERD / PIG CROP

• One of the ways producers are already scaling back

production capacity is by retaining fewer gilts to add to the

breeding herd in Q1

• The number of gilts held as breeding replacements

declined 9.2% YOY in Q1

• Another method producers are using to scale back is by

increasing the number of sows they send to slaughter.

• Sow slaughter in the Dec/Feb quarter is projected to be

up 6.5%

+6.5%

-9.2%


GILTS ADDED / SOW SLAUGHTER

• One concerning development is

that in recent quarters slaughter

has far exceeded USDA’s pig

crop estimates

• This has forced USDA to go back

and revise prior pig crops sharply

upward

• As of the first week of March,

JSF estimates the industry killed

300,000 head more than what

the Sep/Nov pig crop indicated

• However, smaller kills in the

ensuing weeks holds the

potential to significantly reduce

the Q2 over-kill

HOG SLAUGHTER OVER/UNDER

• Pork exports remain a bright spot. February exports clocked in at

+45% YOY, with much of that increase due to China

• Weekly data on exports suggest that exports remained strong in

March, even as Covid raged

• JSF now sees total pork exports up 19% in 2020

+39.4%

+7.9%+18.3%

+13.7%


EXPORTS

• Pork demand surged higher in mid-

March as grocery stores sought to

restock following a flood of panic

buying by consumers

• Since then however, demand has

plummeted, and we are now seeing

demand lower than it was back in

February

• This differs from beef, which has

not seen demand fall below

February levels

• JSF thinks the worst is behind us

for pork demand and it should

slowly recover in the weeks aheadDemand Curve

Supply Curve

WEEKLY PORK DEMAND


• Pork bellies are a big part of the

demand and pricing problem

• It is not easy to shift bacon from

packaging designed for foodservice

into retail packaging, thus retail has

not taken up the slack caused by

foodservice shutdowns

• The belly primal last week

averaged $34.54—the lowest level

in our dataset going back to 2007

• As time passes, bacon slicers will

better shift from foodservice to retail

packaging and that should help lift

the belly primal out of its dismal

state

BELLY PRIMAL


• Forecasting pork prices in this

environment is extremely difficult

• Supply is uncertain because

packers are having to slow down

chain speeds to help with labor

constraints

• Demand is really uncertain because

we don’t know when consumers will

be allowed out of their homes again

• JSF is looking for some recovery in

the cutout as we head into summer,

but the tops in the cutout are likely

to be well below what we’ve

experienced in past summers

PORK CUTOUT


• Most of the lean hog futures contracts

currently trading look way under-priced

relative to the JSF fundamental forecast.

• June 2020 is the most under-priced,

probably because traders are building in a

high probability of additional plant

disruptions

• One thing is certain, the “ASF bullish

story” that dominated hog futures for the

past year has now faded and the “Covid

bear story” has taken over.

• If more plant disruptions occur, we are

likely to see a growing disconnect

between the price of pork and the price of

hogs, which the futures are based upon.

JSF LEAN HOG FUTURES MIS-PRICING


• INSIGHTS


HOGS & PORK | CAD


CDN QUARTERLY HOG SLAUGHTER 2018-2020

• Q1 +5%

• Q2 +5%

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Q1 '18 Q2 Q3 Q4 Q1 '19 Q2 Q3 Q4 Q1 '20 Q2

Mill

ion

He

ad


CANADIAN PORK CUTOUT 2020, 2019 AND 2014-2018 AVERAGE

130

150

170

190

210

230

250

J F M A M J J A S O N D

c$/C

KG

2014-2018 Average 2019 2020


WEEKLY CANADIAN PORK WHOLESALE PRICE DIFFERENTIAL VS 2017-2019 AVG

-50%-45%-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

Feb 8 Feb 15 Feb 22 Feb 29 Mar 7 Mar 14 Mar 21 Mar 28 Apr 4 Apr 11

Pri

ce D

iffe

ren

tial

Pork-Beef Pork-Chicken


RETAIL FRESH PORK MARGINS VS 2017-2019 AVERAGE FEB-APRIL

0%

2%

4%

6%

8%

10%

12%

14%

Feb 8 Feb 15 Feb 22 Feb 29 Mar 7 Mar 14 Mar 21 Mar 28 Apr 4 Apr 11


PORK SUMMARY POINTS

• Availability?

• More competitive than beef

• Merchandising option for spring



PANEL DISCUSSION



AUDIENCE QUESTION – PORK & PROFITS

What level of pork exports would we need to stay

profitable throughout 2020? “


AUDIENCE QUESTION – PLANT PRODUCTIVITY

How confident are we re: packing capacity in the

coming weeks?

With the processing plants productivity decrease,

how would the sector react, how would our livestock

be processed?

“


AUDIENCE QUESTION - ASF

How does ASF factor in to all of this as China

recovers from Covid19 vs. the slowing global growth

picture due to virus spread?“


Q & A SESSION


?

?

?

You can email our panelists directly

at:

• [email protected]

• [email protected]

Please complete our brief survey

to help us continue to shape great

discussions.

ADDITIONAL QUESTIONS: SESSION SLIDES:

SURVEY:

Session recording and deck

will be emailed to registered

participants 24-48hrs after the

session.

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CONNECT:


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CANADA

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WEBINAR Q2 BIG PICTURE OUTLOOK - J.S. Ferraro Picture Webinars/Q2 2020... · Global News, CTV, National Post, Globe & Mail, National Hog Farmer and Grocery Business. Kevin speaks