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Paragon Economics, Inc.

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

Iowa Pork Congress – 2012

Meat Sector Outlook

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Key issues for „12 pork producer profits

Exports – Exchange rates, trade policy, disease status

U.S. demand – U.S. economy, prices of competitor goods

Feed prices – S. American crops, moisture situation, 2012 acreage/yields

Hog/pork supplies -- Productivity (farrow-ings, litter size), herd health, weights

Packing capacity re. hog numbers this fall

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CROPS and COSTS

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„12 corn yield 5.8% below 1960-2010 trend . . .

. . . And 8.2% below “biotech” trend

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Result: Continually shrinking corn crop . . .

. . higher stocks, but still 2nd lowest S/U ratio

2009/10

USDA

December

USDA

January

%Chng vs.

'10-'11

Acres Planted Mil A 86.4 88.2 91.9 91.9 4.2%

Acres Harvested Mil A 79.5 81.4 83.9 84 3.2%

Yield Bu/A 164.7 152.8 146.7 147.2 -3.7%

Beginning Stocks Mil Bu. 1673 1708 1128 1128 -34.0%

Production Mil Bu. 13092 12447 12310 12358 -0.7%

Imports Mil Bu. 8 27 15 15 -44.4%

Total Supply Mil Bu. 5961 14182 13453 13501 -4.8%

Feed & Residual Mil Bu. 5125 4793 4600 4600 -4.0%

Ethanol for fuel Mil Bu. 4591 5021 5000 5000 -0.4%

Non-Ethanol FSI Mil Bu. 10183 1395 1405 1405 0.7%

Exports Mil Bu. 1980 1835 1600 1650 -10.1%

Total Usage Mil Bu. 13066 13053 12605 12655 -3.0%

Carryover Mil Bu. 1708 1128 848 846 -25.0%

Stocks/Use 13.1% 8.6% 6.7% 6.7% -22.6%

Nat. Wtd. Avg. Farm Price $/Bu. 3.55 5.18 5.90 - 6.90 5.70 - 6.70 27.6%

U.S. CORN SUPPLY AND UTILIZATION - JANUARY2010/11

Estimate

2011/12

From information, knowledge

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January Grain Stocks reports

Units

USDA,

Dec 1 '10

USDA,

Sept 1, '11 Low High Average

USDA,

Dec1, '11

Wheat Bil. Bu. 1.933 2.150 1.590 1.904 1.695 1.656

Corn Bil. Bu. 10.057 1.128 9.200 9.700 9.391 9.641

Soybeans Bil. Bu. 2.278 0.215 2.227 2.577 2.324 2.366

Analysts' Estimates, Dec. 1, '11

GRAIN STOCKS, DECEMBER 1, 2011January 12, 2012 Grain Stocks Report

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Ethanol now uses more corn than feed/res.

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Corn went to ethanol due to PROFITS!!!!

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World corn stocks: Forecast is 3rd lowest

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Corn at bottom of “range” – lower in Q3 & Q4

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2011 drought grew into the Cornbelt

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Conditions have improved – but . . .

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U.S. soybean crop has held up better

2009/10 2010/11

USDA

December

USDA

January

% Chng vs

'10-11

Acres Planted Mil A 77.5 77.4 75.0 75.0 -3.1%

Acres Harvested Mil A 76.4 76.6 73.7 73.6 -3.9%

Yield Bu/A 44.0 43.5 41.3 41.5 -4.6%

Beginning Stocks Mil Bu. 138 151 215 215 42.4%

Production Mil Bu. 3359 3329 3046 3056 -8.2%

Imports Mil Bu. 15 14 15 15 7.1%

Total Supply Mil Bu. 3512 3495 3275 3286 -6.0%

Crushings Mil Bu. 1752 1648 1625 1615 -2.0%

Exports Mil Bu. 1499 1501 1300 1275 -15.1%

Seed Mil Bu. 90 87 88 88 1.1%

Residual Mil Bu. 20 43 32 32 -25.6%

Total Usage Mil Bu. 3361 3280 3045 3011 -8.2%

Carryover Mil Bu. 151 215 230 275 27.9%

Stocks/Use 4.5% 6.6% 7.6% 9.1% 39.3%

Nat. Wtd. Avg. Farm Price $/Bu. 9.59 11.3010.70 - 12.7010.95 - 12.45 3.5%

Soybean Oil Price Cents/lb. 35.95 53.20 53.00-57.00 50.50-54.50 -1.3%

Soybean Meal Price $/ton 311.27 345.52 355-385 280-310 -15.7%

U.S. SOYBEAN SUPPLY & UTILIZATION - JANUARY2011/12

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World soybean stocks/use is in good shape

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Weekly SBM cash and futures prices

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Still have ample wheat stocks

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And wheat is NOT keeping up with corn . . .

. . . More feeding is likely a long-term trend

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DDGS may be pricing OUT of hog diets . . .

. . . Cattle feed demand, exports

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Hog costs were record high in ‟11 . . .

. . . Have risen from $81.12 for ‟12 since Dec

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MEAT & POULTRY

DEMAND

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QTRLY GROSS DOMESTIC PRODUCT (GDP)Real Dollar (2005) Change from Previous Quarter

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1996 1998 2000 2002 2004 2006 2008 2010

Percent Change

12/29/11Livestock Marketing Information Center

Data Source: Bureau of Economic Analysis, Compiled & Analysis by LMIC

GDP growth: Improving again– but still slow

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Paragon Economics, Inc.

PER CAPITA DISPOSABLE

PERSONAL INCOMEQuarterly

26000

28000

30000

32000

34000

36000

38000

40000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Dollars

CurrentDollar

2005Dollar

Per cap Disposable Income = Mid-2006 . . .

. . . And 4.3% below the peak in 2008

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Consumer sentiment: Highest since June . . .

. . . Improving employment/unemployment

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Domestic meat demand improved in ‟11 . . .

. . For all species, last data point is Dec-Nov

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Yr/yr monthly data – have softened recentlyNovember

monthly index

vs. ‘10:

Pork: -1.7%

Chicken: -8.7%

Beef: +1.3%

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RPI improving – highest since April . . .

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PC consumption fell sharply in 2011 . . .

. . . But demand is strong! How so?

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What will be the impact of record prices?

. . . NOT lower demand but lower Q demanded

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Dollar Index futures have gained ~10%

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Competitors: All have gained since mid „10

. . . Some recent “flight to safety” – Over?

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Customers: Same situation . . .

. . . Impact of peso and won weakening?

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Pork exports will be record large in 2011

. . . Again in 2012???

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Pork exports – EXCELLENT (+23%) thru Nov. . .

. . . China & Korea up >100%, Mexico -0.5%

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Total frozen meat/poultry down 7.6% vs. „11 . .

. . . Led by chicken (-22%); pork +1% yr/yr

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CHICKEN

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Broiler losses – Large and continuing!

. .. 2010 expansion plus higher grain prices

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AGGRESSIVE broiler cuts since mid-summer. .

2011 cuts offset ALL of

2010 increases

DOWN 6% YTD 2012

Placements are now

-4.2% since June 1 and

3.5% since Jan 1

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Reason: Higher weights – are persisting . . .

. . . Continuing breast meat glut, low prices

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Broiler cutout FINALLY broke thru $90 . . .

. . . traction from cutbacks has been slow

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And some improvement in breast meat!

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CATTLE/BEEF

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Paragon Economics, Inc.

C-N-02

07/23/10

Livestock Marketing Information Center

Data Source: USDA/NASS

Lowest U.S. beef cow inventory since 1963

-1.6 Percent

2011 = 30.9 Million Head

+0.7 Percent

2011 = 9.1 Million Head

From information, knowledge

Paragon Economics, Inc.

Beef: Four smallest calf crops since 1950

-0.7 Percent

2010 = 35.7 Million Head

-0.5 Percent

2011 = 35.5 Million Head

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Drought is the driver for beef industry now

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%

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Paragon Economics, Inc.

Beef cow slaughter +11.3% since June 1 . . .

. . . Mainly TX & OK, some growth elsewhere

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Jan 1 COF – about as expected

2011 2012 ActualEsti-

mate*

Differ-

ence

On Feed, January 1 11,514 11,861 103.0 103.3 -0.3

Placed on Feed in December 1,789 1,683 94.1 94.2 -0.1

Fed Cattle Marketed, December 1,830 1,796 98.1 97.0 1.1

USDA Cattle on Feed Report Summary ---January 2012Thous. Hd. 2012 as Pct. of 2011

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Paragon Economics, Inc.

COF was +3% on Jan 1 – 19 months up . . .

. . . But getting closer each month

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Paragon Economics, Inc.

Jan 1 COF – about as expected

2011 2012 ActualEsti-

mate*

Differ-

ence

On Feed, January 1 11,514 11,861 103.0 103.3 -0.3

Placed on Feed in December 1,789 1,683 94.1 94.2 -0.1

Fed Cattle Marketed, December 1,830 1,796 98.1 97.0 1.1

USDA Cattle on Feed Report Summary ---January 2012Thous. Hd. 2012 as Pct. of 2011

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Paragon Economics, Inc.

COF was +3% on Jan 1 – 19 months up . . .

. . . But getting closer each month

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Slaughter lower than ‟10 in 11 of last 14 wks.

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Add in growing exports and . . .

. . . U.S. consumption/availability: -3.8% in „12

U S BEEF CONSUMPTIONPer Capita, Retail Weight, Annual

50

55

60

65

70

75

1987 1990 1993 1996 1999 2002 2005 2008 2011

Pounds

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New record high for Choice cutout @ $196.64

. . . My $200 prediction appears safe???

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HOGS AND PORK

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Paragon Economics, Inc.

Dec H&P Report: Continued slow growth . . .

Category 2010 2011

2011 as

Pct of

Pre-

Report

Actual -

Estimate

Inventories on December 11

All hogs and pigs 64,925 65,931 101.5 101.3 0.2

Kept for breeding 5,778 5,803 100.4 100.8 -0.4

Kept for market 59,147 60,128 101.7 101.3 0.4

Under 50 lbs. 18,864 19,271 102.2 101.8 0.4

50-119 lbs. 16,519 16,895 102.3 101.5 0.8

120-179 lbs. 12,233 12,472 102.0 101.0 1.0

180 lbs. and over 11,531 11,490 99.6 101.2 -1.6

Farrowings2

Sep-Nov sows farrowed 2,874 2,894 100.7 99.9 0.8

Dec-Feb Intentions 2,843 2,865 100.8 100.6 0.2

Mar-May Intentions 2,917 2,890 99.1 100.8 -1.7

Sep-Nov Pig Crop1 28,488 29,014 101.8 101.6 0.2

Sep-Nov pigs saved per litter 9.91 10.02 101.1 101.6 -0.5

*Thousand head **Thousand litters

USDA Quarterly Hogs and Pigs ReportDecember 23, 2011

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

. . . How high can litter size go?

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Doing more and more with same herd!

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Q4 ‟11 was -2 to 3% from ‟10 . . .

. . . With Q2 and Q3 „12 supplies up 1.5 – 2.5%

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Weights remain large and GROWING. . .

. . . Genetics, fixed costs, matrixes

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Cutout value begins „12 near „11 level . . .

. . . Match yr ago: Exports, domestic demand

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Neg‟d Net prices stayed above $80 from Jan!

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Sows very likely to remain at $60-plus in „12

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„12 profits have increased $10/hd since Dec

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Price forecasts

Missouri 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

1/18/12

2010 Q1 68.20 71.99 65.91 69.13 69.38**

Q2 79.54 85.18 77.04 81.89 81.42**

Q3 80.68 82.19 78.21 81.90 81.88**

Q4 69.26 68.97 67.3 67.12 68.23**

Year 74.42 77.08 82.42 75.01 75.23**

2011 Q1 80.63 78.92 78.38 80.91 81.54**

Q2 92.39 89.37 89.49 94.89 93.97**

Q3 95.74 92.31 92.71 97.61 97.49**

Q4 87.68 85.03 85.03 88.74 88.11**

Year 89.12 86.41 86.40 90.54 90.28**

2010 Q1 84 - 88 83 - 88 85 - 89 86.70

Q2 91 - 95 89 - 95 92 - 96 93.63

Q3 91 - 95 91 - 97 92 - 96 94.72

Q4 79 - 83 82 - 89 81 - 85 84.13

Year 86 - 90 86 - 92 87 - 91 89.801Prior to Q2-11, ISU forecasts were Ia-Mn Live Price converted using a 75% yield **Average of CME Lean Hog Index

*Partial USDA data

December 2011 Hogs & Pigs Price Forecasts

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Paragon Economics, Inc.

Monthly price forecasts

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Paragon Economics, Inc.

Pork outlook

2012 supplies will be 1.5 – 2.5% larger with bulk in Q2 and Q3, Q4 steady w/ „11

Weights will remain high

Prices much like „11 – mid „$90s in summer

Questions:

- Will demand hold? – Competitor prices, economy, $US, consumers

- Is there enough finishing space for added pigs?

- Slaughter capacity, fall „12?

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Risks

The U.S. economy

World economy

$US vs. other currencies

2012 corn and soybean crops

Oil prices – corn is hitched to it

RFS waiver/reduction plan

Export disruption

- OIE disease – unlikely but HUGE impact

- Another “swine flu” type scare