NPB Pork Management Conference - 2013

From information, knowledgeParagon Economics,

Inc.

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

NPB Pork Management Conference - 2013

Livestock and Meat Outlook

From information, knowledge

Paragon Economics, Inc.

Key issues 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 margins6/20/2013 2



Backdrop: Massive losses for hogs, cattle

6/20/2013 3



Cow-calf profits – with 2013 expected good. . . Assumes “normal” weather,

corn, hay

6/20/2013 4



Output trends all kinked in ‘08-’09 . . . . . . and flattened in ‘12 – what about ‘13 & ‘14?

6/20/2013 5



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

Severe drought area is down to 25% High Plaines 45%, South 34%, MW

0.0%, 6/20/2013 6



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

come!

6/20/2013 7



Grain, feed, cost assumptions “Normal” weather from here on out Corn yields in the mid- to upper-140

range SB yields in the mid-40s Current futures are fairly priced for

corn, a bit high for SBM – weather premium in SB

F-F hog costs near $80/cwt carcass Fed cattle BE’s >$130 thru year end,

$120s in 2014 as feeders increase Chicken BE’s near $90 RTC weight6/20/2013 8



The macro-economy – key issues Short term

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

- Wealth effect has been positive – at least until this week

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

Long term- Deficit & spending – must be reigned in- How will economy react when the Fed

actually slows on Quant Easing?6/20/2013 9



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

now Japan

6/20/2013 10



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 policy6/20/2013 11



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

uncertainty

6/20/2013 12



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

+0.3%

6/20/2013 13



PC cons did not go below 200# last year . . . . . . What about ‘13 or ’14?

6/20/2013 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)6/20/2013 15



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

fact, lower

6/20/2013 16



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

past 12 mos.

6/20/2013 17



RPCE figures show monthly changes

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

in 2013

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Exports have been a BIG challenge in ‘13 . . .. . . Pork is -14.5%, beef is -3%,

chicken up

6/20/2013 20



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?6/20/2013 21



CATTLE AND BEEF

6/20/2013 22



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%

6/20/2013 23



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

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‘11 drought drove beef cow slaughter

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‘11 drought also drove HIGHER placements

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

condition report

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Ranges/pastures have improved sharply . . . . . . Still at the same level as last

year

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Regional -- Only the west is bad

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

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

January 1 U.S. beef cow herd

since ’46

. . . Smallest calf crop since

1949 is forecast for

‘136/20/2013 31



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

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

and April

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

closer in fall

6/20/2013 34



May placements expected to be down again

Range of Estimates

Average of Estimates

On Feed, June 1 94.3 - 97.6 96.5Placed in May 84.3 - 99.8 95.9Marketed in May 97.0 - 101.1 97.9

Pre-Report Estimates -- USDA Cattle On FeedSaturday, June 22, 2013

(Percent of year ago)

Source: Dow Jones

6/20/2013 35



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

weights

6/20/2013 36



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

in ’14 @ 52.6

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

do so?

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Choice cutout FINALLY broke $200 . . . . . . Still there but falling from $210

peak

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Driven by middle meats as end meats lag

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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?

6/20/2013 41



CHICKEN

6/20/2013 42



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

since Jan.

6/20/2013 43



Sets have grown, yr/yr but placements . . .

Sets were virtually even with ‘11 levels

the entire second half of 2012 – now +1%

. . . Are even with last year – so far

Chick placements YTD are unchanged

from 2012

6/20/2013 44



Slaughter is up slightly but prod is up 2+%

Broiler production is now +2.2% YTD vs. 2012 – and more to

come!

Broiler slaughter is up 0.9%YTD vs. 2012 – and more to come!

6/20/2013 45



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

still high

6/20/2013 46



STRONG chicken prices driven by breasts!

6/20/2013 47



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

6/20/2013 48



HOGS AND PORK

6/20/2013 49



2012 exports were 4% higher than ‘11 record

6/20/2013 50



Exports have been THE issue in 2013 . . . Down 16% thru April, Feb-Apr

down 14.4%

6/20/2013 51



April exports – Japan down but steady . . . . . Mexico came back, China on LT

trend

6/20/2013 52



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

record large!

6/20/2013 53



Steady and dramatic productivity growth . . .

6/20/2013 54



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

them!

6/20/2013 55



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

retaliation

6/20/2013 56



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

crop help?

6/20/2013 57



6/20 CME Group futures prices still imply . . . . . . Large losses for 2013 – but

profits in ‘14

6/20/2013 58



Sow slaughter: Higher due to prices . . . . . . But lower than “normal” ALL

YEAR

6/20/2013 59



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

6/20/2013 60



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

summer???

6/20/2013 61



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

6/20/2013 62



What will be the impact of PEDv? As of 6/10: 218 positive samples 199 premises, up 44 from 6/3 – 47

sow farms, 130 growing pigs sites, 20 unknown

Positive in 19 states 102 in Iowa, 19 in Minnesota and 38

in Oklahoma – up 20 from 6/3 Earliest confirmed case is still mid-

April Number of animals impacted is

unknown Death losses, 7-10 days of slow/no

growth

6/20/2013 63



Disappointing Q1 has given way to . . . . . An exceptional rally – that is

likely OVER

6/20/2013 64



Support from MANY part of the pig! Next?

6/20/2013 65



Hog rally has gone to my “pre-March” highs. . . . . . Unlikely to see much more this

summer

6/20/2013 66



Packers have chased hogs since April . . .

6/20/2013 67

. . . But margins are likely to widen soon



Price forecasts – April reductions . . .

Mizzou ISU LMIC Paragon CMEProducer-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 97.15Q3 86 - 90 83 - 87 82 - 86 88 - 92 96.53Q4 78 - 82 78 - 82 78 - 83 79 - 83 83.56Year 83 - 8 81 - 85 81 - 84 84 - 88 90.14

2014 Q1 82 - 86 81 - 85 78 - 84 81 - 85 83.83Green figures are actual data from USDA. Blue figures are estimated using USDA data **CME Lean Hog Index 6/21/13

March 2013 Hogs & Pigs -- Price Forecasts

. . . Now look too big -- book Q3 and Q4?

6/20/2013 68



Slaughter trends vs. packing capacity

6/20/2013 69



But the real capacity trend if FLAT!

6/20/2013 70

. . . Potential trouble if we return to growth!



Summary Beef industry is still being impacted

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

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

Pork industry: 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 now6/20/2013 71



Questions or Comments?

6/20/2013 72

Documents

NPB Pork Management Conference - 2013