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From information, knowledge

Paragon Economics, Inc.

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

World Pork Expo 2012

Grains Situation and Outlook



First major cost paradigm shift since ‘73-’74



Some would blame this on higher oil prices



Before I go on -- an important statement

I am NOT opposed to ethanol



First – an important statement

I am NOT opposed to ethanol

I DO PREFER IT AGED IN OAKEN BARRELS OR PRETTY GLASS BOTTLES!



But we now have a direct link of corn to oil



2007 RFS – A hodge-podge of mandates . . .

. . . Starch-based is the critical one – for now



Ethanol used more corn than F/R in ‘10 & ‘11



Last year’s ethanol output – PROFITS!

Ethanol: $2.33/gal Corn: $5.22/bu Natural Gas: $1.98/mmBtu



Ethanol output has run ahead of the RFS!



Distillers had to export the excess output!

Source: Renewable Fuels Assn.



Main customers: Brazil and Canada

Source: Renewable Fuels Assn.



We expect little change in ethanol usage

Already above RFS

Have completely saturated E10 market

E15 approved BUT NOT ACCEPTED by retailers – year limitations, liabilities

NO INCENTIVE for new plants

KEY ISSUE: Calling corn-based ethanol an “advanced biofuel” and carving out some more mandate– BAD DEAL!!!



Feed demand should increase in 2012-13 . . .

Higher hog numbers

- SLOW growth in sow herd

- 2%-plus productivity gains

More chickens – NOT rapid

- Year-over-year increases beginning in June

- +2-4% from June ‘12 thru 2013

Turkeys – steady to slightly growing

Lower cattle on feed but these have less impact than they once did – DDGS, others

. . . But not by USDA’s 900 mil. bushels!!!



World stocks have tightened steadily



But stocks/use ratios are MUCH tighter!



The big question: How much will China take?



Once a BIG exporter – now an importer . . .

. . . FOREVER (???) and likely a LARGE one!



Historical corn exporters – U.S. smaller . . .

. . . Brazil now a player, China disappeared



Even though China’s output is 60% of U.S.!



Primary cause of current situation . . .

. . . Two straight below-trend U.S. yields



Pushed cash corn to record highs in ‘10



Corn stocks to use ratio near historic lows

- 23 -



Incentive to plant corn – record acres -- ?



Planting was completed in record time



Emergence has been near a record pace



There were concerns about moisture – 4/24



Now better but a bit dry in a lot of places . . .



Corn crop condition is near record high . . .

. . . ‘07 and ‘10 were actually better on 6/3



2012 yield – which trend do you want . . .

Biotech is 163.7, ‘60-’11 is 159.1, 4° poly = 158



May WASDE – First yield estimate was BIG

2010/11

USDA

April USDA May

%Chng vs.

'10-'11

Acres Planted Mil A 88.2 88.2 NA 95.9 8.7%

Acres Harvested Mil A 81.4 81.4 NA 89.1 9.5%

Yield Bu/A 152.8 152.8 NA 166.0 8.6%

Beginning Stocks Mil Bu. 1708 1708 NA 851 -50.2%

Production Mil Bu. 12447 12447 NA 14790 18.8%

Imports Mil Bu. 28 27 NA 15 -44.4%

Total Supply Mil Bu. 14182 14182 NA 15656 10.4%

Feed & Residual Mil Bu. 4793 4550 NA 5450 19.8%

Ethanol for fuel Mil Bu. 5021 5000 NA 5000 0.0%

Non-Ethanol FSI Mil Bu. 1407 1405 NA 1425 1.4%

Exports Mil Bu. 1835 1700 NA 1900 11.8%

Total Usage Mil Bu. 13055 12655 NA 13775 8.9%

Carryover Mil Bu. 1128 851 NA 1881 121.0%

Stocks/Use 8.6% 6.7% NA 13.7% 103.1%

Nat. Wtd. Avg. Farm Price $/Bu. 5.18 5.95 - 6.25 NA 4.20 - 5.00 -24.6%

U.S. CORN SUPPLY AND UTILIZATION - MAY2011/12

Estimate

2012/13



March 1 stocks were tightest since 2007



USDA’s current price forecasts is high . . .

. . . Relative to historical S/U’s of 13-14



Historical prices vs. stocks/use ratios



Yield scenarios – could see LOW prices

USDA, MayBiotech

Yield

'60-'11

Trend Yield'11 Yield

Acres Planted Mil A 95.9 95.9 95.9 95.9

Acres Harvested Mil A 89.1 87.7 87.7 87.7

Yield Bu/A 166.0 163.7 159.1 147.2

0.0

Beginning Stocks Mil Bu. 851 851 851 851

Production Mil Bu. 14790 14364 13961 12917

Imports Mil Bu. 15 15 15 15

Total Supply Mil Bu. 15656 15230 14827 13783

Feed & Residual Mil Bu. 5450 4800 4700 4600

Ethanol for fuel Mil Bu. 5000 5000 5000 5000

Non-Ethanol FSI Mil Bu. 1425 1420 1420 1405

Exports Mil Bu. 1900 2000 2000 1700

Total Usage Mil Bu. 13775 13220 13120 12705

Carryover Mil Bu. 1881 2010 1707 1078

Stocks/Use 13.7% 15.2% 13.0% 8.5%

Nat. Wtd. Avg. Farm Price $/Bu. 4.20 - 5.00 <4.00 4.00-4.25 5.30-5.80

CORN SUPPLY, UTILIZATION & PRICE SCENARIOS

2012-13 Scenarios



World soybean situation MUCH different . . .

. . . Pending, of course, the U.S. crop



Near-record SB stocks, HIGH stocks/use



China is even more important to soy trade!



Higher S/U ratio but HIGHER price = Demand



But beans were underprices vs. corn . . .

. . . We attribute most of the rally to this



Soybean S&U – Lower acres, TIGHT supplies!

2010/11 2011/12

USDA

April

USDA

May

% Chng

vs '11-12

Acres Planted Mil A 77.4 75.0 NA 73.9 -1.5%

Acres Harvested Mil A 76.6 73.6 NA 73.0 -0.8%

Yield Bu/A 43.5 41.5 NA 43.9 5.8%

Beginning Stocks Mil Bu. 151 215 NA 210 -2.3%Production Mil Bu. 3329 3056 NA 3205 4.9%

Imports Mil Bu. 14 15 NA 15 0.0%


Crushings Mil Bu. 1648 1645 NA 1655 0.6%

Exports Mil Bu. 1501 1315 NA 1505 14.4%

Seed Mil Bu. 87 86 NA 89 3.5%

Residual Mil Bu. 43 30 NA 36 20.0%


Carryover Mil Bu. 215 210 NA 145 -31.0%

Stocks/Use 6.6% 6.8% NA 4.4% -35.3%

Nat. Wtd. Avg. Farm Price $/Bu. 11.30 12.35 NA 12.00 - 14.00 -0.8%

Soybean Oil Price Cents/lb. 53.2 53.50 52.50-56.5 0.0%

Soybean Meal Price $/ton 345.52 360.00 335 - 365 -4.2%

U.S. SOYBEAN SUPPLY & UTILIZATION - MAY2012/13



BIG question: Is this actually the demand?



We do not expect meal to get cheap



What country is the #2 wheat producer?



Wheat exports – Driven by RUSSIA!



Wheat is in ample supply worldwide



Near record stocks, comfortable stocks/use



And wheat is NOT keeping up with corn . . .

. . . and is now a feed grain in U.S. – always?



Winter wheat conditions are VERY good

U.S.: 52% good/excellent, 82% fair+ (vs. 34% and 56% last year!)

Hard Red Wheat areas:

- Texas: 26% good/excellent, 58% fair+

- Oklahoma: 72% good/excellent

- Kansas: 40% good/excellent

- Colorado: 39% good/excellent

Soft Wheat areas:

- Illinois: 72% good/excellent

- Missouri 63%, Ohio 51%



Higher output = lower prices = higher usage

USDA April USDA May

%Chng

vs. '10-

'11

Acres Planted Mil A 53.6 54.4 NA 55.9 2.8%

Acres Harvested Mil A 47.6 45.7 NA 49.2 7.7%

Yield Bu/A 46.3 43.7 NA 45.7 4.6%

Beginning Stocks Mil Bu. 976 862 NA 768 -10.9%

Production Mil Bu. 2207 1999 NA 2245 12.3%

Imports Mil Bu. 97 120 NA 120 0.0%


Food Mil Bu. 926 930 NA 945 1.6%

Seed Mil Bu. 71 79 NA 73 -7.6%

Feed/Residual Mil Bu. 132 180 NA 230 27.8%

Domestic Usage Mil Bu. 1128 1189 NA 1248 5.0%

Exports Mil Bu. 1289 1025 NA 1150 12.2%


Carryover Mil Bu. 862 768 NA 735 -4.3%

Stocks/Use 35.7% 34.7% NA 30.7% -11.6%

Nat. Wtd. Avg. Farm Price $/Bu. $5.70 $7.25 NA 5.50 - 6.70 0.7%

2010/11

U.S. WHEAT SUPPLY AND UTILIZATION - MAY

2010/11

Estimate

2011/12



Summary Corn is strictly a weather situation

- Early planting takes away some risk

- Good yield – near $4, perhaps a bit lower

- 2011 yield – near $6

- A real drought -- $8 could still happen

- Counting on big exports to China

Soybeans – fighting for acres and probably losing

- Normal yield will still get us $13 beans

- Meal in the $350-$400 range likely



Summary – continued

Wheat – now a feedgrain much of the time in the U.S.

- Grown everywhere in the world, planted and harvested somewhere about every day

- $5-$6 wheat is profitable in other countries

- Russia is the key – drives exports

- HRW crop has deteriorated some but is still very good – and FAR BETTER than in ‘11

- Even with lower corn, wheat will be competitive in AREAS and at certain TIMES



Key issues for ‘12 have not changed much. . .

Domestic demand – LFTB-BSE, U.S. economy, consumer income levels

Exports – World economy, exchange rates, trade policy, disease status

Feed prices –2012 acreage, moisture situation and yields, SBM costs

Supplies – Inventories, potential profits, productivity, herd health, weights, constraints



LIVESTOCK & MEAT



Broiler production is DOWN 5.2% YTD



Pork production is now UP 2.2% YTD



Beef production is DOWN 2.9% YTD



Turkey production is up 2.3% YTD . . .



Total supply is DOWN 2.3% & exports are up



Freezer stocks: +7.5% & highest since ‘08 . . .

. . .Beef + 17, pork +20, turkey +20, chicken -18



Some demand factors are positive (?) - GDP



Consumer sentiment: Highest since Feb . . .

. . . How will U-rate rise impact it?



Food spending is rising again

Grocery store sales +2.9%, yr/yr in April

Foodservice sales +8.5%, yr/yr in April

April combined: +5.6% yr/yr



RPI is better but fell slightly in April . . .

. . . with Current Situation Index down 1 pt.



Domestic meat demand improved in ’11 . . .

. . . ‘12 thru April is mixed



Real PDI is still stagnant – and . . .

. . . May revisions show that it is WORSE!



Getting some help from gasoline prices . . .

. . . +8.1% yr/yr YTD mid-April, since then 3.8%



Impact of LFTB

LFTB was negative publicity for MEAT, not just ground beef

Took 400-500 million pounds out of lean beef supply

At 3:1 conversion and 75% abandonment, put 900 million pounds of 50s back on the market – now appears permanent

BSE was a non-factor in spite of what some media tried to make it



Not hard to see the impact!



Record-high retail prices – good but have . . .

. . high retail prices strangled movement?



WORLD DEMAND



Dollar Index futures are up 12% since Sept . .



The peso and won have lost value AGAIN . . .

. . . yen and renminbi remain strong



Competitor currencies have weakened . . .

. . . Especially the real – down 34% from July



Pork exports: up 23% in ‘11, RECORD LARGE . . .

. . . Any growth in 2012 will be a victory



Pork exports +17%, led by China/HK at +112%

. . . Canada +28%, Mexico +15%, Japan +3.4%



Beef exports were RECORD LARGE in 2011

U S BEEF AND VEAL EXPORTSCarcass Weight, Annual

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1988 1991 1994 1997 2000 2003 2006 2009 2012

Bil. Pounds



Beef: More markets but slower shipments . .

. . . Total -12% thru March – Korea, Mexico



Broiler exports were RECORD LARGE in ’11 . . .

U S BROILER EXPORTSRTC, Annual

0

1

2

3

4

5

6

7

8

1988 1991 1994 1997 2000 2003 2006 2009 2012

Bil. Pounds

. . . And will remain roughly level thru ‘13



Chicken exports are up 13.5% thru March . . .

. . . Led by China, Mexico, Russia and CIS



Current cost estimates – Mid-$80s for ‘12



Fed cattle costs near $140 by Q3-Q4



CHICKEN



Brdr flock is up 5% from November but . . .

. . . is still 6% smaller than a year ago



AGGRESSIVE broiler cuts since mid-summer. .

DOWN 4.7% YTD 2012

Are -4.0% YTD 2012



AGGRESSIVE broiler cuts since mid-summer. .

DOWN 5.4% YTD 2012

But production is down

only 5.4% YTD



Heavy (8-9 lb.) birds will be more the norm . . .

. . . Efficiencies – but more breast meat



Broiler cutout went above $100 4 wks ago. . .

. . . traction from cutbacks has been slow



Bls/Sknls breasts hit $150 last 5/18 . . .

. . . $160-165 in Aug-Sept, $145-150 in Q4



Wings have been the HUGE surprise . . .

. . . Down to $170 this summer, up to $180 Q4



CATTLE & BEEF



Beef and cattle

Worst of LFTB is behind us – lingering demand impact on 50s

BSE case was a non-event

Higher feedlot inventories will continue to provide LOWER steer-heifer numbers

Though disappointing in March and April, the Choice cutout is back above $195

Lower supplies through 2014 – will still push beef prices up as demand rebounds



Last summer’s drought is STILL the driver

State Beef Cows

(Thousand)

TX 5025

OK 2036

KS 1478

FL 926

CO 727

AL 659

GA 502

MS 495

NM 488

LA 461

NC 351

SC 184

AZ 180

Total 13512

Share 43.8%



May 1 COF was down 1% -- 1st time in 2 yrs. . .

. . . How to reconcile with LOWER slaughter?



Str/Hfr slghtr down yr/yr in 42 of last 46 wks.

. . .and is down 5.0% YTD – HORRIBLE margins



No turn-around in sight for availability. . .

. . . Per-cap down 2-3% in ‘12 and 3%+ in ‘13



Choice cutout was headed for $200-plus . . .

. . . But was “slimed” – again above $195



FC supplies on Jan 1 were down 4% from ‘11



Record-high calf prices have barely blinked



BIG, BIG incentives to grow the cow herd!



Heifers retained were 1.4% lower than in ‘11



Pasture conditions are improving – Exc West



Higher cattle/beef will last through 2014!



HOGS & PORK



March H&P report – close to expectations. . .

Category 2011 2012

12 as Pct

of '11

Pre-

Report

Actual -

Estimate

Inventories on March 11

All hogs and pigs 63684 64872 101.9 101.7 0.2

Kept for breeding 5788 5820 100.6 100.3 0.3

Kept for market 57896 59052 102.0 101.8 0.2

Under 50 lbs. 18863 19332 102.5 101.5 1.0

50-119 lbs. 16060 16456 102.5 101.9 0.6

120-179 lbs. 12361 12569 101.7 101.9 -0.2

180 lbs. and over 10612 10695 100.8 102.1 -1.3

Farrowings2

Dec-Feb sows farrowed 2843 2877 101.2 100.7 0.5

Mar-May Intentions 2917 2890 99.1 100.2 -1.1

Jun-Aug Intentions 2927 2880 98.4 100.3 -1.9

Dec-Feb Pig Crop1 27866 28681 102.9 102.4 0.5

Dec-Feb pigs saved per litter 9.8 9.97 101.7 101.7 0.0

*Thousand head **Thousand litters

USDA Quarterly Hogs and Pigs ReportMarch 30, 2012



Litter size growth 2.0% over past 4 years. . .

. . . How high can litter size go?



YTD slaughter within 0.1% of expected. . .

. . . But look at April-May – summer +2-2.5%



Wts. remain high but will fall seasonally . . .

. . .‘12 increases: weather, margins, matrixes



YTD pork production is +2.2% from 2011

. . . And I expect +2.5 to3.0% rest of ‘12



Cutout value has rebounded . . .

. . Normal rally? Now very small -- $92 in Aug?



Hog prices dipped below $80. . .

. . . But can still get to $90-$94 in August



‘12 profits reached $19/hd in mid-Feb . . .

. . .-$5/hd 2 wks ago, now +$5.70/hd



Price forecasts have been lowered . . .

. . . But have they been lowered enough?

Mizzou ISU LMIC Paragon CME

Producer-Sold

Net Price, All

Methods

Ia-Mn Wtd.

Avg. Base

Lean Hog1

National Wtd

Avg. Base Price

National Net

Neg'd Price,

Wtd. Avg.

CME Lean Hog

Futures

6/4/12

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 89.12 86.64 86.40 86.40 90.28**

2012 Q1 86.56 84.27 84.36 86.11 86.44**

Q2 88-92 89-92 86-95 89-93 85.20

Q3 89-93 89-92 91-96 90-94 89.24

Q4 81-85 80-83 82-88 82-86 81.26

Year 86-89 86-88 87-91 87-90 85.54

2013 Q1 83-87 83-86 84-90 83-87 82.001Prior to Q2-11, ISU forecasts were Ia-Mn Live Price converted using a 75% yield **Average of CME Lean Hog Index

March 2012 Hogs & Pigs - Price Forecasts



Risks to the outlook

Export disruption – not even a major one would have a big impact

More LFTB-type, libelous crap

Poor growing weather and below-trend crop yields

For cattle: Worsening of drought

For hogs: Any problem with a packing plant in Q4 of 2012 or 2013, BH growth > 1% in 2012



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