Dr. Steve Meyer - Meat/Poultry Economic Update & Outlook

From information, knowledge

Paragon Economics, Inc.

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

Missouri Pork Producers – Feb 2014

Meat/Poultry Economic Update &

Outlook



October‟s government shutdown – Impact?

No disruptions of animal or product flows –Inspectors were deemed “essential”

No apparent “gouging” but a few price shenanigans

- Most markets remained stable

- Packers did not pressure prices – MUCH

- Margins were tight by the end – lower prices

Big backlog of data – as much detail as we will see is now available

6/20/2013 2



Demonstrated the importance of USDA data

Many relied on Urner Barry‟s Yellow Sheet

- Poultry and eggs have always used YS prices

- Good coverage for beef and pork as well

CattleFax probably signed up a lot of new members – fed cattle markets were okay

Hogs and Feeder Cattle were the voids

- NPPC‟s effort for voluntary hog price reporting by packers

» Good but too late

» Antitrust challenges

6/20/2013 3



Now what?

Another shutdown avoided – for now

CME Group has to have a better plan

- Dodged a potential bullet with Oct LH close

- Feeder cattle is cash settled, too - - MUCH trickier due to dispersion of data

- Need “auditable” data if from a private source

Buyers & sellers should be investigating alternatives just in case

NPPC hog system is functional – what legal criteria must be met?

6/20/2013 4



Smithfield and Tyson announcements

Smithfield announced that it is “asking” its contract growers to adopt group sow housing by 2022

- “You don‟t have to but contract extensions are less likely” = “change or else”

- “Sliding scale” incentives to adopt faster

- NOT A SURPRISE

» Company-owned farms began switching in ‟07

» 54% now in group systems

» Productivity has been maintained

6/20/2013 5



Tyson announcement is MUCH bigger deal

Because it‟s TYSON

- #2 packer (77k/day), #12 producer (52k sows)

- Successor to IBP which never backed down from a fight over priniciple

- Historically a staunch defender of producers

Sow housing PLUS key items required for contract growers, “recommended” for all

- Stop using blunt force euthanization

- Pain mitigation for castration, tail docking

- Video monitoring in all barns

6/20/2013 6



Key Factors for 2014

Costs

6/20/2013 7



„14 production costs – down ~$15/cwt carc.

6/20/2013 8

. . . ~$30/hd. better profits w/o price change!



USDA Jan WASDE – LOWER corn yield, crop . . .

. . . Record crop, higher F/R, steady ethanol

USDA

January

USDA

February

% Chng

vs '12-13

Acres Planted Mil A 91.9 97.2 95.4 95.4 -1.9%

Acres Harvested Mil A 84.0 87.4 87.7 87.7 0.3%

Yield Bu/A 147.2 123.4 158.8 158.8 28.7%

Beginning Stocks Mil Bu. 1128 989 821 821 -17.0%

Production Mil Bu. 12360 10780 13925 13925 29.2%

Imports Mil Bu. 29 162 35 35 -78.4%

Total Supply Mil Bu. 13517 11932 14781 14781 23.9%

Feed & Residual Mil Bu. 4557 4335 5300 5300 22.3%

Ethanol for fuel Mil Bu. 5000 4648 5000 5000 7.6%

Non-Ethanol FSI Mil Bu. 1428 1396 1400 1400 0.3%

Exports Mil Bu. 1543 731 1450 1600 118.9%

Total Usage Mil Bu. 12528 11111 13150 13300 19.7%

Carryover Mil Bu. 989 821 1631 1481 80.4%

Stocks/Use Pct. 7.9% 7.4% 12.4% 11.1% 50.7%

Nat. Wtd. Avg. Farm Price $/Bu. 6.22 6.89 4.10 - 4.70 4.20 - 4.80 -36.1%

Source: USDA World Supply and Demand Estimates

U.S. CORN SUPPLY AND UTILIZATION -- FEBRUARY

Units 2011/12 2012/13

2013/14



Better yields and record highs in the east

6/20/2013 10



Big increases for all corn uses – exc ethanol

6/20/2013 11

. . . Feed ingredient supply back near pre‟08



RFS is clearly not realistic due to gas usage

. . . 13 bil. gal. of corn ethanol

X



Note the prod & cons trend change in „04 . . .

6/20/2013 13

. . . But not much change in stocks level



World stocks are higher but S/U still tight . . .

6/20/2013 14

. . . Due to persistently larger usage levels!



U.S. biofuels policy fueled growth . . .

6/20/2013 15

. . . and new, ongoing corn competition



Have we seen the bottom for corn?

. . . Likely, especially with Feb WASDE changes



Corn is cheap versus about everything!



World soybean situation is quite different . . .

World output +6.2% in „13-‟14

Consumption +4.4%

Ending stocks +20%, S/U tied for 3rd high

. . . Record high output, consumption, stocks



But SB prices are still near $13 . . .

. . . Primarily due to China‟s appetite & means



Jan WASDE: Larger SB yield, crop . . .

. . . Steady – and TIGHT – stocks, higher meal

USDA

January

USDA

February

% Chng

vs '12-13

Acres Planted Mil A 75.0 77.2 76.5 76.5 -0.9%

Acres Harvested Mil A 73.8 76.2 75.9 75.9 -0.4%

Yield Bu/A 41.9 39.8 43.3 43.3 8.8%

Beginning Stocks Mil Bu. 215 169.0 141 141 -16.6%

Production Mil Bu. 3094 3034.0 3289 3289 8.4%

Imports Mil Bu. 16 36.0 25 30 -16.7%

Total Supply Mil Bu. 3325 3239.0 3454 3459 6.8%

Crushings Mil Bu. 1703 1689.0 1700 1700 0.7%

Exports Mil Bu. 1365 1320.0 1495 1510 14.4%

Seed Mil Bu. 90 89.0 87 87 -2.2%

Residual Mil Bu. -2 1.0 22 12 1100.0%

Total Usage Mil Bu. 3155 3099.0 3304 3309 6.8%

Carryover Mil Bu. 169 141.0 150 150 6.4%

Stocks/Use Pct. 5.4% 4.5% 4.5% 4.5% 0%

Nat. Wtd. Avg. Farm Price $/Bu. 12.50 14.40 11.75 - 13.25 11.95 - 13.45 -15.3%

Soybean Oil Price Cents/lb. 51.90 47.13 35.50 - 39.50 34.50 - 37.50 -23.6%

Soybean Meal Price $/ton 393.53 468.11 375 - 415 425 - 465 -4.9%

Source: USDA World Supply and Demand Estimates

U.S. SOYBEAN SUPPLY & UTILIZATION - FEBRUARY

Units 2011/12 2012/13

2013/14



And MEAL has carried the value!

Mar SBM Futures

Mar SB Oil Futures



Are “high” costs behind us?

Depends on your definition of “high”

“Normal” 2014 crops will give us corn at $3.50 and beans at $9.00 – maybe less for both

Reason: Yields (and acres) have finally caught up with ethanol usage

$90-plus hog costs will be rare – only when we have a severe drought

Key issue: Veg oil prices

6/20/2013 22




Costs

Demand

6/20/2013 23



The macro-economy – Improving

Good things:

- GDP growth, improving housing market, low interest rates, job growth (+175k Sept, +200k Oct, +203k Nov but only +74k in Dec)

- Wealth effect has been positive – Record equity values prior to recent “correction”

Question marks:

- U fell to 6.7% in Dec – due to -347k “seekers”

- U-6 is 13.1% -- improving but still high

- Personal disposable income – better, but ????

6/20/2013 24



2013 RPDI growth averaged 0.1%/month . . .

. . . And December was abysmal at -3.4%, yr/yr

6/20/2013 25



Per cap consumption is flat thru „14 . . .

6/20/2013 26

. . . Chicken, pork will grow, beef will decline



Retail prices are at or near record highs . . .

. . . Would not be if demand was, in fact, soft

6/20/2013 27



Meat/Poultry demand has been good in‟13

6/20/2013 28



Beef, chicken & pork are up, turkey lower

6/20/2013 29



Pork exports: BIG 2013 issue & remain soft . .

. . . USDA (and I) expect some growth in „14 (?)

6/20/2013 30



Decexports – +33.3% for Mexico, +17% Others

YTD: Canada -1.6%, Mexico +9%, Others +12%

6/20/2013 31




Costs

Demand

Competitors

6/20/2013 32



Chicken is now in a full growth mode

Industry started positioning for growth last winter – delayed by backfilling Mexico AI losses

6/20/2013 33



Breeder flock grew modestly thru July . . .

6/20/2013 34

. . . Up 4.6% to 4.8%, yr/yr, Aug-Nov; +3.3% Dec



Chicken is now in a full growth mode

Industry started positioning for growth last winter – delayed by backfilling Mexico AI losses

Profitable at present and going forward –but can‟t stand prosperity

Egg sets have been +2-3%, placements up only fractionally vs. ‟13 since Jan1

I expect 3-5% more broiler supply in 2014

Chicken will be very competitively priced

6/20/2013 35



Beef – Now in full expansion mode, too

Range/pasture conditions are good enough to support cow herd expansion

6/20/2013 36



Replacement cow prices are record high . . .

6/20/2013 37

. . . and even higher???



Cow-calf operations should get best of it!

6/20/2013 38



Feedlot breakevens are still VERY high . . .

6/20/2013 39

. . . Due to record-high calf, feeder prices





Heifer retention is tightening an already-tight feeder and fed cattle supply

6/20/2013 40



Jan Cattle report: Slow expansion . . .

6/20/2013 41

2013 2014Pct of Yr

AgoAverage Range

All Cattle & Calves 89,300 87,730 98.2 98.6 98.0 - 99.1

Cows & Heifers That Have Calved 38,515 38,251 99.3 98.9 98.7 - 99.3

Beef Cows 29,297 29,042 99.1 98.5 98.3 - 99.1

Dairy Cows 9,218 9,209 99.9 99.9 99.8 - 100.0

Heifers 500 Pounds & Over 19,134 18,751 98.0 99.0 97.9 - 99.6

Beef Cow Replacements 5,381 5,471 101.7 103.1 102.4 - 103.5

Dairy Cow Replacements 4,551 4,539 99.7 100.3 98.9 - 101.1

Other Heifers 9,203 8,741 95.0 95.9 93.2 - 97.1

Steers 500 Pounds & Over 15,813 15,415 97.5 98.4 97.3 - 99.6

Bulls 500 Pounds & Over 2,056 2,035 99.0 99.0 98.4 - 99.7

Heifers, Steers & Bulls Under 500 Pounds 13,782 13,278 96.3 97.9 97.0 - 99.1

January 1 Cattle On Feed, All Feedlots 13,364 12,695 95.0 95.0

Rev 2012 2013

Calf Crop 34,279 33,930 99.0 97.9 97.7 - 98.1

Source: USDA National Agricultural Statistics Service, Urner Barry

Pre-Report Estimates*

JANUARY 1, 2014 -- U S CATTLE INVENTORY






Per capita beef availability in 2014 will be down 3-5% -- RECORD HIGH prices again

6/20/2013 42



RECORD-HIGH cutout values – in JANUARY!

Weekly averages hit $238 and $236 the week of January 24

Value is being carried by END meats

Tighter supplies are still to come!

6/20/2013 43






Per capita beef availability in 2014 will be down 3-5% -- RECORD HIGH prices again

LONG reaction period – I don‟t expect more beef, yr/yr, until 2016

AN OPPORTUNITY FOR PORK & CHICKEN!

6/20/2013 44




Costs

Demand

Competitors

Hog Numbers

6/20/2013 45



Imports from Canada are -11% for 2013 . . .

. . . FP -11.7%, MH -14%, S&B -1.1%

6/20/2013 46



Sow slaughter was -6.5% yr/yr Q3 & Q4 . . .

6/20/2013 47

. . . And was down 2.9% for the year



And gilt slaughter has been below average

6/20/2013 48



Dec Hogs and Pigs – BH was a surprise . . .

6/20/2013 49

. . . Other numbers were not – picked up PEDv?

Inventories on December 1

All hogs and pigs 66,374 65,940 99.3 99.9 -0.6

Kept for breeding 5,819 5,757 98.9 101.0 -2.1

Kept for marketing 60,555 60,183 99.4 99.8 -0.4

Under 50 lbs. 19,299 19,049 98.7 99.7 -1.0

50-119 lbs. 16,752 16,669 99.5 99.7 -0.2

120-179 lbs. 12,634 12,626 99.9 99.9 0.0

180 lbs. and over 11,871 11,838 99.7 100.1 -0.4

Farrowings

Sep-Nov sows farrowed 2,888 2,882 99.8 100.4 -0.6

Dec-Feb Intentions 2,788 2,825 101.3 100.9 0.4

Mar-May Intentions 2,816 2,855 101.4 101.2 0.2

Sep-Nov Pig Crop 29,319 29,298 99.9 101.2 -1.3

Sep-Nov pigs saved per litter 10.15 10.16 100.1 100.8 -0.7

*Thousand head ** Thousand Litters Source: WSJ (formerly DowJones)

2012 2013

'13 as

Pct of

'12

Pre-

Report

Est's

Actual -

Est

December 27, 2013

USDA QUARTERLY HOGS & PIGS REPORT

Category



Sep-Nov litter size does show PEDv signs. . .

6/20/2013 50

. . . Closest to year-ago level since Q3 2003!



What about PEDv? -- 1/26 was a new record . .

6/20/2013 51

. . . Big jump in IL, IN went from 9 to 25 in 1 wk.!



PEDv – Must remember timing

First case was April 15 – in spite of conspiracy/neglect/incompetency theories

Sow/boar and suckling pig cases began to grow sharply in June – DECEMBER slghtr

Rules of thumb: 2.3, 2.5, 2.7 pigs/sow

Anecdotal figure at present ~ 1.7M sows and growing

1.9M x 2.5 = 4.75M pigs lost in 8 months

7.1M in 12 months = ~6% of „14 pig crop

6/20/2013 52



Is Oklahoma a harbinger for other states?

6/20/2013 53



Immediate impact: RECORD HIGH pig prices

6/20/2013 54



Sept H&P: Growth in Q4, sizable growth in „14

6/20/2013 55

. . . But from 9/1: -4.4% vs. „12, -3.0% vs. pred?



Hogs & Pigs indicates tight supplies Q1-Q2

6/20/2013 56

. . . Higher numbers in Q3-Q4 – farrowings?



Making up for some losses with weights . . .

6/20/2013 57

+2.7% since shutdown, nearly +3% in „14 . . .



Cutout has improved but hogs are lagging . . .

Expect MUCH higher prices in March-April

Summer highs at $105-$110

6/20/2013 58

. . . “Near last year” may become a refrain



„14 forecast profits are now best since „87. . .

. . . For those who have avoided PEDv -- All?

6/20/2013 59



Slaughter forecasts per Dec Hogs & Pigs

6/20/2013 60

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

2013 Q1 27.874 -0.8%

Q2 26.778 0.4%

Q3 27.668 -1.1%

Q4 29.730 0.8%

Year 112.050 -1.0%

2014 Q1 27.580 -1.1% 27.428 -1.6% 27.829 -0.2% 27.800 -0.3%

Q2 26.479 -1.1% 26.494 -1.1% 26.579 -0.7% 26.355 -1.6%

Q3 27.685 0.1% 27.923 0.9% 27.990 1.2% 27.088 -2.1%

Q4 30.027 1.0% 30.476 2.5% 30.496 2.6% 29.320 -1.4%

Year 111.744 -0.3% 112.321 0.2% 112.894 0.8% 110.563 -1.3%

Green figures are actual data from USDA. . Blue figures are estimated using USDA data 1/13/14

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



Price forecasts per Dec Hogs & Pigs

6/20/2013 61

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

2013 Q1 83.53 80.83 81.08 82.73 83.34**

Q2 91.80 88.06 89.32 90.83 90.66**

Q3 97.90 94.34 95.25 98.00 98.98**

Q4 84.99 82.57 82.98 85.26 83.93**

Year 89.56 86.45 87.16 89.21 89.23**

2014 Q1 84 - 88 85 - 90 85 - 87 83 - 86 86.28

Q2 94 - 98 95 - 100 91 - 95 95 - 99 100.88

Q3 92 - 96 91 - 96 92 - 97 96 - 100 104.10

Q4 77 - 81 80 - 85 81 - 87 82 - 86 85.86

Year 86 - 90 88 - 93 87 - 92 89 - 93 94.28

Green figures are actual data from USDA. Blue figures are estimated using USDA data **CME Lean Hog Index 2/10/14

December 2013 Hogs & Pigs -- Price Forecasts




Costs

Demand

Competitors

Hog Numbers

Strategic Issue for Pork -- Capacity

6/20/2013 62



I‟m still concerned about packing capacity

6/20/2013 63

. . . 2014 is okay – 2015 and beyond????



Closing thoughts . . .

Lower feed costs will drive expansion, especially for pork and chicken

Demand is good, macro conditions are improving – positive prefs for meat?

Beef supplies will be tight thru 2015 – high prices and opportunities for competitors

Chicken will be MUCH more competitive

Hog supplies will be lower due to PEDv ---profitable but less price advantage

6/20/2013 64



Questions or Comments?

6/20/2013 65

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Dr. Steve Meyer - Meat/Poultry Economic Update & Outlook