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Steve R. Meyer, Ph.D. Paragon Economics, Inc.
NPB Pork Management Conference - 2013
Livestock and Meat Outlook
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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 margins
6/20/2013 2
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Backdrop: Massive losses for hogs, cattle
6/20/2013 3
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Cow-calf profits – with 2013 expected good
. . . Assumes “normal” weather, corn, hay
6/20/2013 4
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Output trends all kinked in ‘08-’09 . . .
. . . and flattened in ‘12 – what about ‘13 & ‘14?
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The critical issue for U.S. agriculture is still:
Severe drought area is down to 25%
High Plaines 45%, South 34%, MW 0.0%,
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Scary context: April 2012 -- some problems
. . . But LITTLE HINT of what was to come!
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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 weight
6/20/2013 8
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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
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January 2013 – World economy is better . . .
. . . But EU is still a wreck – and now Japan
6/20/2013 10
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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
6/20/2013 11
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The U.S. economy muddles along . . .
. . . Q1 GDP +2.4% - Still slowed by uncertainty
6/20/2013 12
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Dec Real per capita PDI was false security . . .
. . . Jan was -0.4%, April was only +0.3%
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PC cons did not go below 200# last year . . .
. . . What about ‘13 or ’14?
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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)
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Retail prices are at or near record highs . . .
. . . Would not be if demand was, in fact, lower
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Individual species indexes still mixed . . .
. . . Chicken, beef and pork: Up for past 12 mos.
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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
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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?
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CATTLE AND BEEF
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Some context: August 2011 – severe in SW
State Beef Cows
(Thousand)
TX 5025
OK 2036
KS 1478
FL 926
CO 727
AL 659
GA 502
MS 495
NM 488
LA 461
NC 351
SC 184
AZ 180
Total 13512
Share 43.8%
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Further context: Summer 2012
. . . On 8/21: 77% drought, 44% severe or worse
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‘11 drought drove beef cow slaughter
6/20/2013 25
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‘11 drought also drove HIGHER placements
6/20/2013 26
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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
6/20/2013 29
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Dec 1 Hay Stocks – Pct change, ‘12 vs. ‘11
6/20/2013 30
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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 ‘13
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FC supplies grew by 0.7% vs. Jan ‘12. . .
. . . But are still near record low at 25.56 mil.
JANUARY 1 FEEDER CATTLE SUPPLIESResidual, 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
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May placements expected to be down again
Range of
Estimates
Average of
Estimates
On Feed, June 1 94.3 - 97.6 96.5
Placed in May 84.3 - 99.8 95.9
Marketed 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
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Record-high weights helped prod levels . . .
. . . But we are now back to yr-ago weights
6/20/2013 36
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No turn-around in sight for availability. . .
. . . Per-cap: -3% in ‘13 and -5.5%+ in ’14 @ 52.6
6/20/2013 37
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Just as in ‘12, the sector is poised to grow . . .
. . . But will Mother Nature allow it to do so?
6/20/2013 38
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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?
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CHICKEN
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Poultry: Reductions in ‘07 and ’11 but . . .
. . . Flock has been up 1-2% yr/yr since Jan.
6/20/2013 43
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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
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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
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Weights were a big driver for ‘12 output . . .
. . . A mixed bag so far in ‘13 – but still high
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STRONG chicken prices driven by breasts!
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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
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HOGS AND PORK
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2012 exports were 4% higher than ‘11 record
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Exports have been THE issue in 2013
. . . Down 16% thru April, Feb-Apr down 14.4%
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April exports – Japan down but steady . . .
. . Mexico came back, China on LT trend
6/20/2013 52
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U.S. sow herd is near smallest on record . . .
. . . And yet Q4 production was record large!
6/20/2013 53
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Steady and dramatic productivity growth . . .
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Weights have helped long-term production. .
. . . But feed costs have slowed them!
6/20/2013 55
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Imports from Canada are -9% YTD . . .
. . . Risk issue for ‘14: MCOOL retaliation
6/20/2013 56
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‘12 production costs were record-high . . .
. . .’13 will likely be higher -- new crop help?
6/20/2013 57
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6/20 CME Group futures prices still imply . . .
. . . Large losses for 2013 – but profits in ‘14
6/20/2013 58
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Sow slaughter: Higher due to prices . . .
. . . But lower than “normal” ALL YEAR
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March H&P Report: The herd is GROWING
Category
2012 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 0.8
Kept for breeding 5,820 5,834 100.2 100.3 -0.1
Kept for market 59,117 60,077 101.6 100.8 0.8
Under 50 lbs. 19,235 19,426 101.0 100.9 0.1
50-119 lbs. 16,409 16,650 101.5 100.7 0.8
120-179 lbs. 12,780 13,059 102.2 99.9 2.3
180 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 -0.4
Dec-Feb Pig Crop1 28,550 29,019 101.6 101.2 0.4
Dec-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
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‘13 slaughter will be slightly larger than ’12 . .
. . . But pattern will be different – summer???
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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
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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
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Disappointing Q1 has given way to . .
. . . An exceptional rally – that is likely OVER
6/20/2013 64
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Support from MANY part of the pig! Next?
6/20/2013 65
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Hog rally has gone to my “pre-March” highs. . .
. . . Unlikely to see much more this summer
6/20/2013 66
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Packers have chased hogs since April . . .
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. . . But margins are likely to widen soon
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Price forecasts – April reductions . . .
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 97.15
Q3 86 - 90 83 - 87 82 - 86 88 - 92 96.53
Q4 78 - 82 78 - 82 78 - 83 79 - 83 83.56
Year 83 - 8 81 - 85 81 - 84 84 - 88 90.14
2014 Q1 82 - 86 81 - 85 78 - 84 81 - 85 83.83
Green 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?
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Slaughter trends vs. packing capacity
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But the real capacity trend if FLAT!
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. . . Potential trouble if we return to growth!
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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 now
6/20/2013 71
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Questions or Comments?
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