challenges facing the livestock industry

Purdue Center for Commercial Agriculture

Challenges Facing the Livestock Industry

Dr. James Mintert Professor of Agricultural Economics &

Assistant Director of Extension Purdue University

Presentation at

American Farm Bureau’s Annual Meeting Honolulu, Hawaii January 9, 2012


Livestock Industry Challenges 1) Feed costs

2) Recouping higher production costs

3) Economic growth…or lack thereof


Ethanol Dramatically Increased Corn Demand

1.001.17 1.32

1.60

2.12

3.03

3.71

4.59

5.02 5.00

0.0

1.0

2.0

3.0

4.0

5.0

6.0

02 03 04 05 06 07 08 09 10 11

Billion

Bu.

Harvest Year

Corn Used for Ethanol

Source: USDA WASDE Report: 11.09.11


Ethanol Was A Small Part of Corn Demand

11%

62%

0%

10%

20%

30%

40%

50%

60%

70%

02 03 04 05 06 07 08 09 10 11

% o

f Cor

n Pr

oduc

tion

Harvest Year

Corn Used for Ethanol Production & Feed Consumption% of U.S. Corn Production

Ethanol Usage Feed & Residual Usage

Source: USDA, World Agricultural Supply and Demand Estimates & James Mintert, Purdue University


But Ethanol Now Rivals Feed Usage

11%

40%

62%

38%

0%

10%

20%

30%

40%

50%

60%

70%

02 03 04 05 06 07 08 09 10 11

% o

f Cor

n Pr

oduc

tion

Harvest Year

Corn Used for Ethanol Production & Feed Consumption% of U.S. Corn Production

Ethanol Usage Feed & Residual Usage

Source: USDA, World Agricultural Supply and Demand Estimates & James Mintert, Purdue University


Farmers Responded By Increasing Acreage

60

65

70

75

80

85

90

95

100

40 45 50 55 60 65 70 75 80 85 90 95 00 05 10

Million

Acres

Harvest Year

U.S. Corn Planted Acreage


“Old” acreage range

“New” acreage range


And Corn Production Increased Dramatically

4

5

6

7

8

9

10

11

12

13

14

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Billion

Bu.

Harvest Year

Total U.S. Corn Production


5 largest corn crops on record


But We Still Have Tight Feed Grain Stocks

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Billion

Bu.

Harvest Year

U.S. Corn Ending Stocks



Stocks Are Even Tighter Compared To Usage

0%

10%

20%

30%

40%

50%

60%

70%

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

%

of

Usage

Harvest Year

Corn Ending StocksEnding Stocks as % of Total Usage



The Result: Dramatic Corn Price Increase

$1.50

$2.50

$3.50

$4.50

$5.50

$6.50

$7.50

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

$

per

bushel

Harvest Year

U.S. Average Corn Price .

Source: USDAWASDE Report 11.09.11

Historic Corn Price Range

1974-2005 Avg. = $2.35

USDA’S 2011/2012 forecast


$200$225$250$275$300$325$350$375$400$425$450

98 99 00 01 02 03 04 05 06 07 08 09 10 11

$

per

cow

Year

Cow-Calf Feed Costs Per Cow in Kansas

Source: Kansas State Farm Management Association & Kansas State Farm Management Guides, 2011 Forecast

Feed Helped Drive Production Costs Up


$400

$450

$500

$550

$600

$650

$700

$750

$800

98 99 00 01 02 03 04 05 06 07 08 09 10

$

per

cow

Year

Cow-Calf Total Production Costs in Kansas

Source: Kansas State Farm Management Association & K-State Farm Management Guides

Cow-Calf Production Costs Rising Rapidly


$80$90

$100$110$120$130$140$150$160$170$180

98 99 00 01 02 03 04 05 06 07 08 09 10 11

$

per

cwt.

Year

Breakeven Calf PricesRequired to Cover Estimated Total Production Costs in Kansas

Source: Kansas State Farm Management Association & Kansas State Farm Management Guides, 2011 Forecast.

Rising Breakevens Putting Pressure On Cow-Calf Sector Estimated 2011 Breakevens Up 66% Compared to 2006


Rising Corn Prices Pushed Hog Breakevens Higher

45

50

55

60

65

70

75

80

85

90

95

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$

per

cwt.

Year

Monthly Iowa Farrow-to-Finish Breakeven PricesCarcass Weight

Source: Iowa State University

2011 breakevens 60% higher than in 2002


Record Large Meat Consumption in Mid-Decade

195

200

205

210

215

220

225

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Lbs.

per

person

Year

Annual U.S. Red Meat & Poultry ConsumptionPer Capita

Source: USDA


Putting Fewer Pounds on Consumers’ Plates

195

200

205

210

215

220

225

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Lbs.

per

person

Year


Source: USDA, LMIC Forecasts for 2012

Consumers Will Have To Pay Higher Prices for Meat


50

60

70

80

90

100

110

120

130

140

25 30 35 40 45 50 55 60 65 70 75

Million

Head

Year

U.S. Cattle InventoryJanuary 1, 1925-1975

Source: USDA

A Picture of A Healthy Industry


50

60

70

80

90

100

110

120

130

140

75 80 85 90 95 00 05 10

Million

Head

Year

U.S. Cattle InventoryJanuary 1, 1975-2011

Source: USDA

A Shrinking Industry Responding to a Long-Run Lack of Profitability


10094

88 8683

79 7670 69

66 65 6259 58 56 55 53 51 50 52 54 56 55

5963 61

57 58 56 54 53

0

10

20

30

40

50

60

70

80

90

100

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Index

Value

Year

Retail Choice Beef Domestic Demand IndexAnnual, 1980-2010

Source: USDA, Dept. of Commerce & James Mintert, Purdue UniversityPrice Deflated By CPI, 1980 =100 for Choice Beef Demand Index

Index Tracks Demand Changes

But the Demand Index does not address why demand shifts occurred


Beef Demand Project Results The Big Picture

Consumers Value Convenience Beef falling behind More new product development needed

Consumers are receptive to information about health and nutrition Food safety significant to consumers Income is very important demand driver

Source: Mintert, Tonsor & Schroeder, January, 2009


-100

-50

0

50

100

150

200

250

300

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

$'s

Per

Cow

Year

Estimated Kansas Cow-Calf Returns1975-2010

Source: Kansas Farm Management AssociationReturns Above Variable Costs

Rising Costs Helped Push Returns Down Returns Were In The Red From 2007 to 2010


40

50

60

70

80

90

100

01/08 02/26 04/16 06/04 07/23 09/10 10/29 12/17

Thousand

Head

Week Ending

U.S. Beef Cow SlaughterWeekly, Federally Inspected

2010

2011

5 Yr Avg

Source: USDA & James Mintert, Purdue University

As Drought Intensified Cow Slaughter Increased


4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Million

Head

Year

Annual F.I. Cow Slaughter1980-2011


Weak Returns & Drought in Southern Plains Driving Cow Slaughter

Cow slaughter in 2011 was up over 4% compared to 2010


30

31

32

33

34

35

36

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Million

Head

Year

U.S. Beef Cow InventoryJanuary 1, 1995-2011

Source: USDA

Beef Cow Inventory Declining

January 1, 2011 inventory down 1.6% vs. 2010 2012 inventory expected to fall another 1 to 2%


31

32

33

34

35

36

37

38

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Million

Head

Annual U.S. Commercial Cattle Slaughter

Year

Source: USDA, LMIC Forecast for 2012

And Smaller Inventory Pushing Slaughter Down


23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

99 00 01 02 03 04 05 06 07 08 09 10 11 12

Billion

Lbs.

Year

Annual U.S. Beef Production

Source: USDA, 2012 LMIC Forecast

Beef Production Expected to Decline


0.0

0.5

1.0

1.5

2.0

2.5

3.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Billion

Lbs.

Year

Annual U.S. Beef Exports

Source: USDA & LMIC, 2012 Forecast

And Beef Exports Expected To Break Pre-BSE Record


Look at the “Net” Trade Impacts

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

80 82 84 86 88 90 92 94 96 98 00 02 04

Billion

Lbs.

Year

Annual U.S. Net Beef Imports

Source: USDA & LMIC

The Year After BSE Struck the U.S.


The Change Has Been Dramatic

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Billion

Lbs.

Year

Annual U.S. Net Beef Imports

Source: USDA & LMIC, 2012 Forecast


545556575859606162636465666768

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Lbs.

Per

Capita

Year

Annual U.S. Retail Beef ConsumptionPer Capita

S K-State Dept of Ag. Econ.www.agmanager.infoSource: LMIC, 2012 Forecast

Declining Production & Rising Exports Will Push U.S. Retail Supplies Down


Record High Prices Ahead

55

65

75

85

95

105

115

125

135

85 87 89 91 93 95 97 99 01 03 05 07 09 11

$

per

Cwt.

Year .

Kansas Slaughter Steers Annual Average Prices .

Source: USDA-AMS, LMIC Forecast for 2012

2012 Prices Up 47% Compared to 2009


Fed Cattle Prices Will Support Yearling Prices

60

70

80

90

100

110

120

130

140

150

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

$

per

cwt.

Year

Dodge City, KS 700-800 Lb. Steer Prices .

Source: AMS-USDA, Dodge City, KS, LMIC Forecast 2012


And Calf Prices

60

70

80

90

100

110

120

130

140

150

160

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

$

per

cwt.

Year

Dodge City, KS 500-600 Lb. Steer Prices .

Source: AMS-USDA, Dodge City, KS, LMIC Forecast for 2012


North American Pork Industry

70

80

90

100

110

120

130

140

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Million

Head

Year .

U.S. & Canadian Hog Slaughter Annual, 1981-2011

U.S. Commercial Hog Slaughter

Canadian F.I. Hog Slaughter

Source: USDA , Agriculture and Agri-Food Canada & LMIC

30% increase over 20 years


0.00.51.01.52.02.53.03.54.04.55.05.5

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Billion

Lbs.

Year

Annual U.S. Pork Exports

Source: USDA, LMIC Forecasts 2012

Export Growth Was a Big Help

2011 U.S. Exports Up 15% compared to 2010 2011 Exports Up 54% compared to 2007’s


Exports Have Become Important For All Meats But Pork’s Had the Most Success

0%

5%

10%

15%

20%

25%

60 65 70 75 80 85 90 95 00 05 10

%

of

Prod.

Year

U.S. Meat Exports .% of U.S. Production .

Beef Exports

Pork Exports

Poultry Exports

Source: USDA

23% of U.S. pork prod. exported in 2011


While Exports Were Increasing Pork Production Declined

11

13

15

17

19

21

23

25

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Billion

Pounds

Year

U.S. Commercial Pork ProductionAnnual

Source: USDA & LMIC, 2011 & 2012 forecast


Result: Fewer Lbs. of Pork for Consumers

46

47

48

49

50

51

52

53

54

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Lbs

per

capita

Year

Annual U.S. Retail Pork ConsumptionPer Capita

Source: USDA & Livestock Marketing Information CenterForecasts for 2011 & 2012

Per capita supply down 7% since 2009


Smaller Supplies Led to Skyrocketing Retail Prices Starting in mid-2010

280

290

300

310

320

330

340

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Cent's

Per

Pound

Month

U.S. Retail Pork Price2010 2009 5 Yr Avg

Source: USDA

Prices increased 13% from 1st quarter to 4th quarter


Pork Price Rally Continued in 2011

100

125

150

175

200

225

250

275

300

325

350

375

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Cent's

Per

Pound

Year

Monthly Retail Pork Prices

Source: USDA

Record high retail prices Prices in 2011 up 11% compared to 2010


What’s Ahead in 2012?

80

85

90

95

100

105

110

115

120

90 92 94 96 98 00 02 04 06 08 10 12

Million

Head

Year

Annual U.S. Commercial Hog Slaughter

Source: USDA, LMIC forecast for 2012

Hog slaughter in 2012 will increase about 1%


What About the Economy?

-15%

-10%

-5%

0%

5%

10%

15%

20%

30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10

%

Change

prior

year

Year

% Change in U.S. Real Disposable IncomeAnnual, Per Capita, 1930-2011

Source: U.S. Department of Commerce


Unusually Severe Recession Recovery Will Be Slow

-6%

-4%

-2%

0%

2%

4%

6%

8%

60 65 70 75 80 85 90 95 00 05 10

%

Change

prior

year

Year

% Change in U.S. Real Disposable IncomeAnnual, Per Capita, 1960-2011

Source: U.S. Department of Commerce


Savings vs. Expenditures Will Be Important

0

2

4

6

8

10

12

80 85 90 95 00 05 10

%

of

Disposalbe

Inc.

Year

U.S. Savings RateAnnual, 1980-2011

Source: U.S. Department of Commerce, 2011 estimated


All Meats Will Benefit From Smaller Supplies of Competing Meats

195

200

205

210

215

220

225

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Lbs.

per

person

Year


Source: USDA, LMIC Forecast for 2012

Meat consumption in 2012 will be down over 10% compared to 2007


How Much Strength Can We Expect in the Japanese Market?

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Billion

Pounds

Year

Annual U.S. Pork Exports To Japan .


Japan’s share of U.S. pork exports was 29% in 2011


Leading Pork Producers in 2010

1. China 49% 2. EU 22% 3. US 10% 4. Brazil 3% 5. Russia 2% 6. Canada 2% 7. Japan 1%

Share of World Production

Source: USDA-FAS


Leading Pork Importing Nations in 2010

1. Japan 20% 2. Russia 15% 3. Mexico 12% 4. US 7% 5. Hong Kong 7% 6. Canada 4%

Share of World Trade


Consumers’ Rating Pork “Very Safe”, by Country

U.S. 43%

Canada 44%

Mexico 12%

Japan 12% Source: Schroeder, Tonsor, Mintert & Pennings, 2006


% of Consumers That Listed Safety Assurance as a Top 5 Beef Purchase Determinant, by Country?

U.S. 26%

Canada 32%

Mexico 36%

Japan 57% Source: Schroeder, Tonsor, Mintert & Pennings, 2006


How Will Japanese Consumers’ React to Ongoing Food Safety Concerns?

• Japanese consumers

– More concerned about food safety than U.S. or Canadian consumers

– Food safety concerns have sometimes held back demand for food imports in Japan

• Will the reverse be true as result of concerns about radiation contamination in Japanese food supply?


Profitability Returned in ‘10 & ’11 But Feed Costs & Exports Will Be Key in 2012

($5)

$29

($1)($2)($0)

$23

$34

$1

($4)

$30

$18

$2

$10

($9)

($0)

$6 $9

($27)

($17)

$10

$15

($15)

($3)

$28 $31

$21

$2

($24)($26)

$13

$8

($40)

($30)

($20)

($10)

$0

$10

$20

$30

$40

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

$'s/Head

Year

Iowa Farrow-Finish ReturnsAnnual Average

Source: Iowa State University , 2011 through October

Profit margins will be improve moderately in 2012


Thank You [email protected]

challenges facing the livestock industry

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