A Hodgepodge: Ethanol Update, Outlook for Hog Producers ... · All hogs and pigs 96.7 - 98.0 97.3 Kept for breeding 97.0 - 99.6 98.7 Kept for market 96.5 - 97.9 97.2 Market Analysts

From information, knowledge

Paragon Economics, Inc.

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

NPB Swine Educators– September 2010

A Hodgepodge:

Ethanol Update, Outlook for Hog

Producers, GIPSA Rule



210 plants, capacity of 14.18 bil. gal.

Cellulosic: 16.9 mil. gal. – 1% of the total

346 mil. gal. still under construction

Full output would use 5.05 bil. bu. of corn



Ethanol plants are in the black – for now

Nearby corn: $4.83/bu.

Ethanol: $2.15/gal.

Nat. Gas: $4.02/mmBtu



Reason: Big recovery in ethanol price



Why the rally? -- Seasonal? Octane?



RFS is 12 bil. gal. this year, 12.6 in 2011 . . .

. . . Slower growth (600 mil./yr.) thru 2015



Ethanol now uses over 30% of corn supply



Corn above ethanol+DDGS rising SLOWLY



Important policy issues this fall/winter

Renewal of the BTC and Import Tariff

- Both are questionable

- Could lower BTC

- Must keep it close to Tariff or Brazil, et. al. will almost surely challenge in WTO

15% blend allowance

- Or 12%?

- May approve for 2007 and later models – but what about logistics? Liability?



Sept WASDE: Lowest S/U ratio since „96

2008/09

USDA,

Aug

USDA,

Sept

% Chng.

vs '08-'09

USDA

Aug

USDA

Sept

%Chng

vs. Aug

%Chng

vs. '09-'10

Acres Planted Mil A 86.0 86.5 86.5 0.6% 87.9 87.9 0.0% 1.6%

Acres Harvested Mil A 78.6 79.6 79.6 1.3% 81 81 0.0% 1.8%

Yield Bu/A 153.9 164.7 164.7 7.0% 165 162.5 -1.5% -1.3%

Beginning Stocks Mil Bu. 1624 1673 1673 3.0% 1426 1386 -2.8% -17.2%

Production Mil Bu. 12092 13110 13110 8.4% 13365 13160 -1.5% 0.4%

Imports Mil Bu. 14 8 8 -42.9% 10 10 0.0% 25.0%

Total Supply Mil Bu. 13729 14791 14791 7.7% 14802 14556 -1.7% -1.6%

Non-Ethanol FSI Mil Bu. 1316 1365 1365 3.7% 1390 1390 0.0% 1.8%

Ethanol for fuel Mil Bu. 3677 4500 4535 23.3% 4700 4700 0.0% 3.6%

Feed & Residual Mil Bu. 5205 5525 5525 6.1% 5350 5250 -1.9% -5.0%

Exports Mil Bu. 1858 1975 1980 6.6% 2050 2100 2.4% 6.1%

Total Usage Mil Bu. 12056 13365 13405 11.2% 13490 13440 -0.4% 0.3%

Carryover Mil Bu. 1673 1426 1386 -17.2% 1312 1116 -14.9% -19.5%

Stocks/Use 13.9% 10.7% 10.3% -25.5% 9.7% 8.3% -14.6% -19.7%

Nat. Wtd. Avg. Farm Price $/Bu. 4.06 3.50-3.60 3.50-3.60 -11.3% 3.45-4.05 4.00-4.80 17.3% 23.9%

U.S. CORN SUPPLY AND UTILIZATION - SEPTEMBER2009/10 2010/11



Record-large crop and record-high price!



Cash corn is now above the “new” range . . .

. . . And harvest has barely begun!



We have survived the tight stocks . . .

. . SBM futures now in UPPER half of new range



Result: Highest feed index since early „09



Average costs for „11 > $70/cwt carcass



Consider BE costs of new price ranges

“New” range for corn $3.00 to $4.20 and “new” range for SBM is $250 to $350

$3.10 corn and $250 SBM = $61.62/cwt

$3.65 corn and $300 SBM = $67.15/cwt

$4.20 corn and $350 SBM = $72.52/cwt

Since 11/1/2007:

- SBM has been >$300/ton 106 of 148 weeks!

- Corn has been >$3.65/bu. 80 of 148 weeks!

<$3.50 and <$300 look like good buys



PORK AND HOG OUTLOOK



Key Issues for rest of 2010 and 2011:

Feed costs – have reduced profit outlook by over 50% since June

Q4 hog numbers – Have hogs been delayed or are they not out there?

Expansion- Some evidence that we are adding sows

- Higher feed and risk for next summer are holding some people back

Demand- Domestic – soft past 12 mos. but improving

- Exports – July was disappointing



Financial positions are improving . . .

. . . Futures suggest 50% loss recovery by July



Actual slghtr has been -1.9% from June H&P

. . . And -5.4% from ‟09 since June 1

Since 7/17: -336k

head vs. Jun H&P



Weights are NOT GROWING yet implying . . .

. . We are going deep into supply – new corn?



Production declines early in „10 & recent. . .

. . . Yr/yr change is getting MORE negative



Freezer stocks are very tight – esp. pork!



BIG cutout rally – 2 NEW RECORD HIGHS

. . . Will the normal seasonal prevail?



Hog price rally was smaller . . .

. . . But could keep prices above $70 this fall



Exports +18.6% in May, +22% in June . . .

. . . But -7.1% in July, still +5.1%YTD



Japan fell sharply in July from record highs . .

. . .Mexico is still strong, Russia up 4X in May



All demand indexes are lower for 12 mos. . . .

. . . July indexes were better & the trend is up!

July monthly

index vs. ‘09:

Pork – +1.26%

Chick – +3.92%

Beef – +3.67%



Reason: Retail prices are finally rising . . .

. . . At or near record highs and more to come!



Sow slaughter is lower – down 10-20% . . .

. . . But slaughter surged last summer



Slaughter of US sows is now trailing ‟09 . . .

. . . YTD ‟10 = 28.1% vs. 28.9% in „09



YTD gilt slaughter: -0.2% vs. ‟09, -0.3% vs. „08



Futures: Profits of ~$13.49/hd for all of ‟10 . . .

. . . ~ $10.92 for rest of ‟10, but only $8.30 in „11



Slaughter forecasts based on June H&P . . .

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

2009 Year 113.583 -2.7%

2010 Q1 27.631 -3.1% 27.631 -3.1% 27.631 -3.1% 27.631 -3.1%

Q2 26.070 -3.7% 26.070 -3.7% 26.069 -3.7% 26.070 -3.7%

Q3 27.355 -3.5% 27.433 -3.5% 27.681 -2.6% 27.206 -4.1%

Q4 28.675 -3.2% 28.667 -3.2% 28.869 -2.5% 27.995 -2.8%

Year 109.731 -3.4% 109.801 -3.3% 110.251 -3.0% 108.902 -3.4%

2011 Q1 27.800 -2.0% 27.079 -2.0% 27.156 -1.7% 28.273 0.2%

Q2 25.800 -0.2% 26.018 -0.2% 25.878 -0.7% 26.224 1.5%

Green figures are actual data from USDA. Blue figures are estimated using USDA data 8/11/10

June 2010 Commercial Slaughter ForecastsMizzou LMIC MeyerISU

. . . Q3 would be -5%, Q4 would be -2% now



Productivity is driving output



Price forecasts

Missouri ISU LMIC Meyer CME

Producer-Sold

Neg'd Base

Price

Ia-S. Mn. Live

Price1

National Wtd

Avg. Base

Price

National Net

Neg'd Price,

Wtd. Avg.

CME Lean

Hog

Futures

9/23/10

2009 Q1 56.23 56.48 58.11 57.22 $58.14**

Q2 56.83 58.39 59.45 58.19 $59.03**

Q3 51.07 52.60 54.01 52.39 $54.18**

Q4 54.40 55.92 55.57 55.81 $56.60**

Year 54.63 55.84 56.87 55.90 $56.98**

2010 Q1 66.59 70.34 65.91 69.13 69.38**

Q2 78.76* 80.51* 77.04 81.74* 81.42**

Q3 76 - 80 69 - 75 73 - 77 78 - 82 81.88**

Q4 68 - 72 64 - 69 68 - 72 68 - 70 77.13

Year 72 - 74 71 - 74 71 - 73 74 - 76 77.45

2011 Q1 67 - 71 65 - 69 70 - 75 65 - 69 79.25

Q2 76 - 80 77 - 81 75 - 80 74 - 78 83.65

Q3 81.82

Q4 72.10

Year 79.211Converted to carcass using a yield of 75%*Partial USDA data **Average of CME Lean Hog Index

June 2010 Hogs & Pigs Price Forecasts



Sept H&P Report comes out tomorrow

Implies BH=5.8 mil. hd. +12k vs. June

Still means 1.7 mil. FEWER market animals than one year ago

Range Average

Inventories on September 11

All hogs and pigs 96.7 - 98.0 97.3

Kept for breeding 97.0 - 99.6 98.7

Kept for market 96.5 - 97.9 97.2

Market Analysts' Pre-Report Estimates

USDA Hogs & Pigs Report

September 23, 2010

Percent of September 1, 2009



Short-term risks to consider:

Feed costs – Yields? Harvested acres? Exports? What about NEXT SUMMER!

Domestic demand – strengthening but what if we have a double-dip recession?

Quick supply response to profits?

Any of a host of goofy occurrences –remember H1N1?



PROPOSED GIPSA RULE



Addresses 5 requirements of 2008 Farm Bill :

Criteria to be considered in deciding whether an undue or unreasonable preference or advantage has been given.

Conditions constituting reasonable notice of suspension of delivery of birds

Whether a requirement of additional capital investments are a violation of the Act

Whether a reasonable time period has been given to remedy a breach of contract

Arbitration opt-out and “fair” arbitration



1. Undue/Unreasonable Preference

Contract terms/prices based on number, volume, etc. must be offered to all individuals and groups that can meet terms

Premiums for quality, time and prod methods must not be discriminatory against prods or groups

Information regarding procurement methods must be disclosed to all when it is disclosed to one or more



3. Capital investments as unfair practice

Can grower decide against it?

Is it the result o f coercion or threats?

Does packer plan to reduce or stop operations within 12 months?

Are some required while others are not?

Age of recent upgrades or investments

Can investment be expected to be recouped in a reasonable time period?

Is reasonable time give to implement?



Definition of “capital investment”

Investment of $25,000 or more for equip-ment, goods, prof services, labor, interest

Initial or additional

“Additional capital investment” defn.

- The term does NOT include maintenance or repair costs

- Provides no guidance on differentiating maintenance from repair from capital investment



4. Reasonable time to remedy a breach

Packer/contractor must provide:

- Written notice upon initial discovery

- Description and time of the act or omission

- How the breach can be satisfactorily remedied

- Reasonable deadline to remedy

Failure to provide notification within 90 days waives packer’s/contractor’s rights to terminate the contract due to the breach



5. Fair arbitration process, opt-out choice

Clearly disclose

- all costs to be paid by grower/producer

- steps of the process and limitations on rights and remedies

Requires

- impartial neutrals as arbitrators

- Grower/producers be given opportunity to engage in “reasonable discovery process”

- A reasoned, written opinion provided to all

Chance to opt out of binding arbitration



GIPSA went well beyond the Farm Bill

GIPSA has the authority to write rules to necessary to enforce the Act – Are these “necessary”?

Competitive injury – conduct that distorts competition in the market channel or marketplace.

- What is the competitive “norm”?

- Significance of any deviation?

- Gains (such as economies of scale) to offset?



Likelihood of competitive injury

Packer/contractor raising rivals’ costs

Foreclosing competition through

- exclusive dealing

- misusing market power to restrain competi-tion

- Depressing prices paid below market value

- Impairing a producer’s/grower’s ability to:

» Compete with other producers/growers

» Receive the reasonable expected full economic value from a market transaction



Records and justification requirement

Requires written records that provide “justification” for any prices or contract terms that deviate from standard prices or terms

- What is “standard”?

- Apparently ANY deviation

- No time period for records retention

- No idea of what an acceptable “justification” may be



Defines the scope of P&S Act

Applies to all swine prod, poultry growing and livestock prod and marketing contracts

Conduct can violate the P&S Act without a finding of harm or likely harm to competition.

- BIG DEAL!!

- Contradicts 8 Circuit Courts and Congress!

- Legislation by regulation!!



Defines unfair, discriminatory, deceptive

“Unjustified” breach – is there such a thing as a justified breach?

Retaliation for grower’s/producers’ lawful expression, association or actions

Refusing to provide data used to determine payments

Any act or attempt to get a grower to waive rights – jury trial, full damages, et.al.

Undocumented price differences not substantiated by revenue or cost justification



Defines unfair, discriminatory . . . continued

Termination of a production contract for violating a law UNLESS the violation is reported “immediately” to authorities

- Can’t work with them to resolve the problem and then terminate due to the violation

Fraud – duh

Any act that causes competitive injury or the likelihood of it – “any action that distorts competition”



Limitations on livestock buying practices

Prohibits a packer from buying animals from another packer or affiliated company

- State reason is to prevent “signalling”

- Does not define “affiliated companies”

- Producers who are owners of a plant? USPB?

- Packer-sold hogs are reported and published separately, cattle are not – Cattle issue?

- Animals will move through dealers – signals?

Limits dealers who serve as packer buyers to working for only one packer -- culls??



Submission of contracts

Each “unique” marketing contract must be submitted to GIPSA within 10 days

- No definition of unique – ANY term?

- GIPSA may post copies on its website

» Contractors can identify confidential business information

» Says “confidential business info” will be redacted – no guarantee it is same, though

- Must notify GIPSA within 10 days when a “unique” contract is no longer in use

- Significant record-keeping



Other capital investment restrictions

Contracts must be long enough for grower to recoup 80% of capital investment if the investment is required

Can’t require an additional cap investment

- If a grower has given at least 90 days’ notice of intent to sell

- If they have previously approved current equipment and it is still in good working order

Cant reduce animals placed because a grower refuses to make equip changes if current equip is working



Impacts

Homogenization – no premiums other than carcass (???), lower prices

Higher costs and risks of using contracts

- Significant written documentation required

- Opens possibility of challenge after challenge

BIG difficulties for some packers and owners of packing plants

Legislation by regulation – BAD precedent

Uncertainty and liability = costs!



Impacts -- continued

Variations and individual needs will be ignored do to required justifications

- Will limit the gains of good negotiators

- “Treat all the same” regardless of needs

Likely to lead to further vertical integration

- Production contracting too expensive – own your buildings

- Marketing contracting too expensive – own your hog supply

Next action: Ban/limit vertical integration



QUESTIONS & DISCUSSION?

Documents

A Hodgepodge: Ethanol Update, Outlook for Hog Producers ... · All hogs and pigs 96.7 - 98.0 97.3 Kept for breeding 97.0 - 99.6 98.7 Kept for market 96.5 - 97.9 97.2 Market Analysts