Dr. Steve Meyer - Grains and Livestock Economic Outlook

From information, knowledge

Paragon Economics, Inc.

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

World Pork Expo 2013

Grains and Livestock Economic Outlook



Key issue for 2013-2014 profitability . . . Input prices and production costs Demand

- Domestic economic conditions- World economy, competition and

demand- Exports and a resolution to challenges- Competitor protein supplies – and

prices Output levels for 2013 – and ‘14 Prices and margins



Key drivers of meat and poultry in 2013: Input prices and production costs

- Will it rain? -- YES, at least for now!- Where will it rain? – Most places in

need! - When will it rain? – Early but what

about July and August?- How much will it rain? – PLENTY for

now?- And finally: Will it be hot as Hades – AT

THE ABSOLUTELY WORST TIME -- again this year? -- Remains to be seen



The critical issue for U.S. agriculture is still:

Severe drought area is down to 25% High Plains 55%, South 37%, MW

0.5%,



Some context: August 2011 – severe in SW

State Beef Cows(Thousand)

TX 5025OK 2036KS 1478FL 926CO 727AL 659GA 502MS 495NM 488LA 461NC 351SC 184AZ 180Total 13512Share 43.8%



Further context: Summer 2012. . . On 8/21: 77% drought, 44%

severe or worse

Bethany Swine Health Services Feb 2013



Scary context: April 2012 -- some problems. . . But LITTLE HINT of what was to

come!



Output trends all kinked in ‘08-’09 . . . . . . and flattened in ‘12 – what

about ‘13 & ‘14?



Bottom Line: Massive losses for hogs, cattle



Though better than last year in the east . . .

EXTREMELY important for beef supplies – through 2015!!!

Problems for HRW wheat

May 29, 2012

. . . Conditions are MUCH worse in the west



Critical issues for grains Delayed plantings

- How many unplanted corn acres? - How many to soybeans?- Yield impact?- Definitely brings an early frost into play

Key information:- June 12 WASDE – will USDA change

yields?- Grain Stocks and Acreage reports on

June 28



World situation -- Corn

Nearly 80% of projected gain in world stocks is U.S.– Will that happen?

Most of world stocks are in China – accuracy? Meaning?



World situation -- Soybeans

Record-high projected stocks and 5th highest S/U ratio ever – DEMAND DRIVEN!

Does not “solve” U.S. short-term problem



World situation -- Wheat

Stocks are forecast to rebound slightly – recent U.S. frost damage fully included?

S/U ratio better than ‘03-’07 but ~5% lower than the 1980-99 average



South America Brazil

- Now a major source of corn – but limited corn exports until 2nd harvest

- Ample beans – and getting them to ports finally – will fill supply gap as U.S. stocks are depleted

Argentina- Long-time corn competitor but

government is limiting exports- Grain as an inflation hedge?



Corn demand – ethanol output is growing . . .. . . But from VERY low ‘12-’13 levels



And for good reason – Lost their shirts!. . . $7 corn is no fun for them

either!



Ethanol margins are good again . . .

5/30/12 5/24/13 5/31/13Prices Corn $/bu 5.99 7.07 7.15

Ethanol $/gal 2.10 2.57 2.62DDGS $/ton 217.25 220.50 221.13

Ethanol Value @ 2.8 gal/bu $/bu 5.88 7.20 7.34DDGS Value @ 17.75#/bu. 1.93 1.96 1.96Total Value 7.81 9.15 9.30Gross Margin over corn cost 1.82 2.08 2.15Return over all variable costs 0.78 1.04 1.11Ethanol Value @ 2.8 gal/bu $/bu 5.88 7.20 7.34DDGS Value @ 15.#/bu. 1.63 1.65 1.66

Total Value 7.51 8.85 8.99Gross Margin over corn cost 1.52 1.78 1.84Return over all variable costs 0.48 0.74 0.80

ESTIMATED ETHANOL MARGINS

. . . Should lead to higher corn usage



2007 RFS – A hodge-podge of mandates . . .. . . Starch-based is still the critical

one



Ethanol output has run ahead of the RFS!



But there is a BIG problem looming . . . . . Mathematical REALITY and the BLEND WALL



Result: Small increase in ethanol usage RFS is higher than can be blended --

Have completely saturated E10 market

E85 has not caught on – will it ever? E15 is ALLOWED but not yet

accepted and is, in fact, being challenged in court

Profitable but “blend wall” means there is no incentive for new plants

KEY ISSUE: Calling corn-based ethanol an “advanced biofuel”



Feed demand should increase in 2012-13 . . .

Higher hog numbers - SLOW growth in sow herd- Slower productivity gains

More chickens – and maybe MANY moore- Breeder flock is +2% so far in 2013- Prices have strengthened – ready to

grow! Turkeys – soft demand, lower numbers Lower cattle on feed but these have

less impact than they once did – DDGS, others

. . . But by USDA’s 735 mil. bushels!!!



2012 drought: Significant yield shortfalls. . .

”

Bethany Swine Health Services Feb 2013

• ‘12 corn yield: Largest de-viation vs. trend since ’88

• Never had three in a row below the trend line – ’13?

• SB yield: Only 10% below trend – August rains!

• ‘13 South American crop has helped satisfy world demand – Logistics?



Biofuels & drought: Same but different????

2007-08 represented a PERMANENT (?) shift in costs – led to adjustments

2012 is a one-year (???) short crop situation – same as ‘95-’96 and the goal is to survive for a year!



March 1 stocks were tightest since 2004. . . ’03 crop was 10.1 bil. bu., ‘12

crop was 10.8



Planting: Complete opposite of ‘12 . . .

. . . Latest planted crop EVER



Corn emergence – EVEN SLOWER vs. history



Corn crop condition is okay . . .. . . But look at last year – result???



2013 yield – which trend do you want ? . . . . . . USDA’s 158 is very close to the

’60 trend



Yield, yes – but what about acres?

Planted deviation - no strong relationship

Harvested – some positive relationship but much variation

BIG QUESTION: Is this ‘93 again???



May WASDE – Lowered yield from Feb . . .

2012/13 USDA

MayUSDA

April USDA

May% Chng vs

'11-12

Acres Planted Mil A 91.9 97.2 NA 97.3 0.1%Acres Harvested Mil A 84.0 87.4 NA 89.5 2.4%Yield Bu/A 147.2 123.4 NA 158.0 28.0%Beginning Stocks Mil Bu. 1128 989 NA 759 -23.3%Production Mil Bu. 12360 10780 NA 14140 31.2%Imports Mil Bu. 29 125 NA 25 -80.0%Total Supply Mil Bu. 13516 11894 NA 14924 25.5%Feed & Residual Mil Bu. 4545 4400 NA 5325 21.0%Ethanol for fuel Mil Bu. 5011 4600 NA 4850 5.4%Non-Ethanol FSI Mil Bu. 1428 1385 NA 1445 4.3%Exports Mil Bu. 1543 750 NA 1300 73.3%Total Usage Mil Bu. 12527 11135 NA 12920 16.0%Carryover Mil Bu. 989 759 NA 2004 164.0%Stocks/Use 7.9% 6.8% NA 15.5% 127.6%Nat. Wtd. Avg. Farm Price $/Bu. 6.22 6.70 - 7.10 NA 4.30 - 5.10 -31.9%

U.S. CORN SUPPLY AND UTILIZATION -- MAY

2011/122013/14

. . . Questions now: Acres? Harvest? Yield?



USDA’s current price forecasts is high . . . . . . Relative to historical S/U’s of

15+



Historical prices vs. stocks/use ratios



Soybean planting – same story as corn



As with planting – so with emergence



Trend yield is 44.4 – ’08 was -2.5 vs. trend



Soybean S&U – Lower acres, TIGHT supplies!

USDA April USDA May% Chng vs

'11-12

Acres Planted Mil A 75.0 77.2 NA 77.1 -0.1%Acres Harvested Mil A 73.8 76.1 NA 76.2 0.1%Yield Bu/A 41.9 39.6 NA 44.5 12.4%Beginning Stocks Mil Bu. 215 169.0 NA 125 -26.0%Production Mil Bu. 3094 3015.0 NA 3390 12.4%Imports Mil Bu. 16 20.0 NA 15 -25.0%Total Supply Mil Bu. 3325 3204.0 NA 3530 10.2%Crushings Mil Bu. 1703 1635.0 NA 1695 3.7%Exports Mil Bu. 1362 1350.0 NA 1450 7.4%Seed Mil Bu. 90 90.0 NA 87 -3.3%Residual Mil Bu. 1 5.0 NA 33 560.0%Total Usage Mil Bu. 3155 3080.0 NA 3264 6.0%Carryover Mil Bu. 169 125.0 NA 265 112.0%Stocks/Use 5.4% 4.1% NA 8.1% 100%Nat. Wtd. Avg. Farm Price $/Bu. 12.50 14.30 NA 9.50 - 11.50 -26.6%Soybean Oil Price Cents/lb. 51.90 49.00 NA 47.00 - 51.00 0.0%Soybean Meal Price $/ton 393.53 425.00 NA 280.00 - 320.00 -29.4%

U.S. SOYBEAN SUPPLY & UTILIZATION - MAY

2011/12 2012/132013/14



May price frcst is HIGH vs. S/U ratio . . .



We do not expect meal to get cheap



Futures prices are ridiculously constant!



Summary Corn is AGAIN a weather situation

- Late planting creates acreage, yield and frost risk

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

- 2011 yield – upper $5s- $7-plus is possible but not likely

Soybeans – World supplies are helping- Normal yield will still get us $10-$11

beans- Meal in the $280-320 range is likely



Hog cost implications . . .. . . 2013 average will be about

$94



LIVESTOCK & MEAT



The macro-economy – key issues Short term

- Housing market is improving – low interest rates, job growth

- Wealth effect is positive – equity markets

- U-rate is falling but will likely stay above 7%

Long term- Deficit & spending – must be reigned in- Fed is still “easing” – but so is everyone

else in the world – what happens when it stops?



January 2013 – World economy is better . . . . . . But EU is still a wreck – and

now Japan



Exchange rates

Real moved big in ‘11-’12, stable recently

Peso has improved but is still weaker than in ’11, ditto for the won

Rapidly falling yen – due to gov’t policy



The U.S. economy muddles along . . . . . . Q1 GDP +2.4% - Still slowed by

uncertainty



Dec Real per capita PDI was false security . . .. . . Jan was -0.4%, April was only

+0.3%



PC cons did not go below 200# last year . . .

. . . What about ‘13 or ’14?



Demand Primer Demand is – The quantities of a

product that consumers are willing and able to buy at alternative prices.- A set of price-quantity pairs- Downward sloping in P-Q space- Consumer is the primary demand – all

others are derived based on transformation costs

Factors: Tastes/preferences, prices of substitutes (+) and complements (-), consumer incomes (ie. budget constraint)



Retail prices are at or near record highs . . .. . . Would not be if demand was, in

fact, lower



Individual species indexes still mixed . . . . . . Chicken, beef and pork: Up for

past 12 mos.



RPCE figures show monthly changes



Further proof: Record high ’12 expenditures. . . And another record expected

in 2013



The problem is exports – April pork down 16% . . . Beef down 0.2%, chicken up

only 1.3%



2012 exports were 4% higher than ‘11 record



Russia & China Why is it happening? Not really about ractopamine China: Low hog prices, protection Russia:

- Push-back on human rights language- Protecting its domestic industry – self-

sufficiency goals, vested interests in govt.

- “Normal” fun and games with Russkies Exports to Russia accounted for 1.2%

of ’12 pork production, China accounted for 3.4% -- 10-15% price impact?



Demand summary Demand indexes are slightly higher

than in ‘12 so far – with chicken leading

Still concerned about consumer incomes in ‘13 – wages, taxes?

New pork export records are in BIG doubt - Russia and China – over 20% of volume- Weaker yen will hurt Japanese buying

power- MCOOL retaliation – may not hit until

‘14 Higher beef and chicken (??) prices

will be positive for pork demand



CATTLE AND BEEF



Very high portion of pastures were poor . . . . . . In October ‘12 - last crop

condition report



U.S range/pasture conditions are bad . . . . . . With 32% of beef cows still in

P/VP states



Dec 1 Hay Stocks – Pct change, ‘12 vs. ‘11



‘11 drought drove beef cow slaughter



‘11 drought also drove HIGHER placements



Beef: Long-term trends PLUS droughts . . . . . . Smallest

January 1 U.S. beef cow herd

since ’46

. . . Smallest calf crop since

1949 is forecast for

‘13



FC supplies grew by 0.7% vs. Jan ‘12. . .. . . But are still near record low at

25.56 mil.JANUARY 1 FEEDER CATTLE SUPPLIES

Residual, Outside Feedlots, U.S.

25

27

29

31

33

35

37

39

41

43

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Mil. Head



Placements had been lower yr/yr 8 of 9 mos.. . . Until +6% & +15% in March

and April



May 1 COF is still 3.4% below last year . . . . . . Lower near-term supplies,

closer in fall



Record-high weights helped prod levels . . . . . . But we are now back to yr-ago

weights



No turn-around in sight for availability. . . . . . Per-cap: -3% in ‘13 and -5.5%+

in ’14 @ 52.6



Just as in ‘12, the sector is poised to grow . . . . . . But will Mother Nature allow it to

do so?



Choice cutout FINALLY broke $200 . . . . . . And likely will stay there through

July.



Beef summary . .. Cattle are still big but will run close to

‘12 Lower cattle numbers thru Q3 and

thus lower beef supplies Producers are keeping heifers but

have some already moved to lots? Grass!!!!

Longer term: Tighter per cap supplies thru 2014 (‘15?) and higher prices

Will beef cease to be a habit for anyone below the middle class?



CHICKEN



Poultry: Reductions in ‘07 and ’11 but . . . . . . Flock has been up 1-2% yr/yr

since Jan.



Sets, placements & production are growing . .

Sets were virtually even with ‘11 levels

the entire second half of 2012 – now +1.3%

Broiler production is now +2.9% YTD vs. 2012 – and more to

come!

. . . And will grow MORE if feed costs fall



Weights were a big driver for ‘12 output . . .. . . A mixed bag so far in ‘13 – but

still high



STRONG chicken prices driven by breasts!



HOGS AND PORK



U.S. sow herd is near smallest on record . . . . . . And yet Q4 production was

record large!



Steady and dramatic productivity growth . . .



Weights have helped long-term production. . . . . But feed costs have slowed

them!



Imports from Canada are -9% YTD . . . . . . Risk issue for ‘14: MCOOL

retaliation



‘12 production costs were record-high . . . . . .’13 will likely be higher -- new

crop help?



6/2 CME Group futures prices still imply . . . . . . Large losses for 2013 – but

profits in ‘14



Sow slaughter had been near year-ago . . . . . . March & April were driven by

sow prices



March H&P Report: The herd is GROWING

Category2012 2013

'13 as Pct of

'12

Pre-Report Est's

Actual - Est

Inventories on Dec 1*

All hogs and pigs 64,937 65,911 101.5 100.7 0.8Kept for breeding 5,820 5,834 100.2 100.3 -0.1Kept for market 59,117 60,077 101.6 100.8 0.8

Under 50 lbs. 19,235 19,426 101.0 100.9 0.150-119 lbs. 16,409 16,650 101.5 100.7 0.8120-179 lbs. 12,780 13,059 102.2 99.9 2.3180 lbs. and over 10,693 10,942 102.3 101.6 0.7

Farrowings**Dec-Feb sows farrowed 2,864 2,879 100.5 100.1 0.4

Mar-May Intentions 2,982 2,955 99.1 98.7 0.4 June-Aug Intentions 2,890 2,905 100.5 100.9 -0.4Dec-Feb Pig Crop1 28,550 29,019 101.6 101.2 0.4Dec-Feb pigs saved per litter 9.97 10.08 101.1 101.1 0.0*Thousand head **Thousand litters

USDA QUARTERLY HOGS & PIGS REPORTMarch 28, 2013



‘13 slaughter will be slightly larger than ’12 . . . . . But pattern will be different –

summer???



March H&P Report slaughter forecasts

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

2012 Q1 28.104 2.3%

Q2 26.659 2.1%

Q3* 27.963 2.1%

Q4** 30.426 1.8%

Year 113.152 2.1%

2013 Q1* 27.930 -0.6% 27.930 -0.6% 27.930 -0.6% 27.930 -0.6%

Q2 26.811 0.6% 26.960 1.1% 26.242 -1.6% 26.892 0.9%

Q3** 28.437 1.7% 28.419 1.6% 27.869 -0.3% 28.393 1.5%

Q4 30.349 -0.3% 30.609 0.6% 30.207 -0.7% 29.880 -1.8%

Year 113.527 0.3% 113.918 0.7% 112.248 -0.8% 113.095 -0.1%Green figures are actual data from USDA. Blue figures are estimated using USDA data 4/1/13

*Quarter has one LESS slaughter day vs. year ago **Quarter has one MORE slaughter day vs. year ago

March 2013 Hogs & Pigs -- Commercial Slaughter ForecastsMizzou ISU LMIC Paragon



Disappointing Q1 has given way to . . . . . A better-than-normal seasonal

rally



Cutout has finally taken hog prices higher . . . . . . Mid-$90s is likely to be the top –

exports?



Price forecasts – Lower but low enough?

Mizzou ISU LMIC Paragon CME

Producer-Sold Net Price, All

Methods

Ia-Mn Wtd. Avg. Base Lean Hog

National Wtd Avg. Base Price

National Net Neg'd Price,

Wtd. Avg.

CME Lean Hog Futures

2012 Q1 86.56 84.27 84.11 86.11 86.44**Q2 87.76 83.67 85.31 86.67 86.64**Q3 87.69 85.05 84.74 84.97 86.64**Q4 82.90 79.59 80.60 81.61 82.13**Year 86.20 83.15 83.69 84.84 85.46**

2013 Q1 83.54 80.83 81.14 82.72 83.34**Q2 87 - 91 84 - 88 83 - 86 87 - 91 89.95Q3 86 - 90 83 - 87 82 - 86 88 - 92 91.99Q4 78 - 82 78 - 82 78 - 83 79 - 83 82.25Year 83 - 8 81 - 85 81 - 84 84 - 88 86.88

2014 Q1 82 - 86 81 - 85 78 - 84 81 - 85 83.80Green figures are actual data from USDA. Blue figures are estimated using USDA data **CME Lean Hog Index 6/2/13

March 2013 Hogs & Pigs -- Price Forecasts



MPR for pork and the new cutouts. . . Plant was +$3.95, Omaha was

+$3.35



Summary Beef industry is still being impacted

by ‘11 drought – and output will be effected through 2014 and into 2015

Chicken slowed in ‘11 but has begun to grow again – and could grow QUICKLY

Pork industry has taken a huge equity hit but has “maintained” pending good ‘13 crops and a return to “normal” costs

Cornbelt rains have been good – need some warm, dry days now



Questions or Comments?

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Dr. Steve Meyer - Grains and Livestock Economic Outlook