pic symposium 2011 | nashville, tn global pork outlook david nelson, rabobank global strategist

PIC Symposium 2011 | Nashville, TN

Global Pork Outlook

David Nelson, Rabobank Global Strategist


Key Macro Issues

Section I


The connection to wealth creation...

... But GDP growth is accelerating demand growth

Source: World Bank, IBGE, National Bureau of Statistics China, India Central Statistical Organization

Introduction

Country 2010 GDP growth rate Population

Brazil 7.5% 193,734,000

China 10.3% 1,331,460,000

India 8.2% 1,155,348,000

Indonesia 6.9% 229,965,000

Higher GDP growth Higher protein consumption Higher grain demand


While most yield improvements are decelerating

Introduction

Source: USDASource: USDA

Source: USDA Source: USDA

World corn yield % change, 5 yr moving avg World wheat yield % change, 5 yr moving avg

World soybean yield % change, 5 yr moving avg World rice yield % change, 5 yr moving avg

-2%-1%0%1%2%3%4%5%6%7%

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

-2%-1%0%1%2%3%4%5%6%7%

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010


Meat production growth < demand

World GDP growth = higher prices

Macro Overview

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2006 2007 2008 2009 2010

Beef Pork Broiler World GDP All Protein

Source: USDA, World Bank

Meat production and GDP, % growth since 2006


What is the market telling us?

Brazil will grow more, but...

China will have to pay more.

If corn cost $5.00, then soy cost $12.00.

Price gravitates to marginal cost of production

Introduction

23.5 24.1

7.7 7.4

0

5

10

15

20

25

30

35

2009/2010 2010/2011

Soybean Corn

31.2 31.5

Soybeans = 41.80 BRL/60kgCorn = 8.30 BRL/60kg

October Mato Grosso prices:

Soybeans = 40.09 BRL/60kgCorn = 12.40 BRL/60kg

Source: Conab, Bloomberg

Brazil soybean and corn planted area, million hectares


Brazil’s farmers have not benefitted as much from rising soy prices as in the US due to appreciating Real

Prices need to rise to stimulate incremental production

Brazil: higher but not so volatile

Other key issues

-50%

0%

50%

100%

150%

200%1

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Brazil soybeans in BRL US soybeans in USD

+154%

+41%

Source: Bloomberg

Percent change in Brazil and US soybeans since 2005


Russia, Ukraine and Kazakhstan are the primary incremental producers of the world’s grain

Black Sea region rising in importance…

Black Sea Region

0%

10%

20%

30%

40%

50%

60%

94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 (f)

Barley Exports Wheat Exports

Source: USDA

Black Sea share of world exports


All grain ex-China fell to 13.6% in 1972/73, and reached 12.8% in 95/96.

Corn ex-China was 9.8% in 72/73, and reached 7.6% in 95/96.

With and Without China

World Grain Stocks-to-Use Ratios

Source: USDA

Source: USDA

All Grains Stocks to Use Ratios

Corn Stocks to Use Ratio

0%

10%

20%

30%

40%

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10World World - China

19.5%

15.0%

0%

10%

20%

30%

40%

50%

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

World World - China

14.7%

9.4%


It would take a record yield and nearly a 5 million acre increase in planted area for the corn stocks to use ratio to get back over 10% -- which is not a terribly comfortable level.

Feed costs: No Light at the End of the Tunnel

Source: USDA, Rabobank

U.S. Corn Yield and Area Sensitivity

155 160 165 170

90 0.5% 3.6% 6.7% 9.8%

91 1.6% 4.7% 7.8% 11.0%

92 2.6% 5.8% 9.0% 12.1%

93 3.7% 6.9% 10.1% 13.3%

Are

a p

lan

ted

Yield


Key Global Animal Protein Issues

Section II


Emergence of the Brazilians has been the big news in recent years

China’s pork companies will move much higher in the next few years

Growth at Cherkizovo from Russia and MHP from Ukraine will move them into the top ranks


Source: Rabobank, 2010

Global meat company rankings by volume, 1000 mt

-

2,000

4,000

6,000

8,000

10,000

12,000

Poultry Pork Beef

1,000 tonnes


The 14 largest pork packers that represented 20% of the industry in 2009 are being pushed to grow and consolidate by the government to have 50% share by 2013.

Industrialization of China’s pork processing industry

China

Source: MOF, Rabobank

Pork processing in China

42%35%

20%

50%

45%

30%

8%

20%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2009 2013F

Manual slaughtering Semi-automated slaughtering Automated slaughtering


Most markets are fragmented compared to the US

Intra-country consolidation


Source: Rabobank

Size of top firm by country (1,000 mt), market share of top three firms

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000 U

S

Bra

zil

EU

Aust

ralia

Arg

entina

US

EU

Bra

zil

Canada

US

Bra

zil

EU

Thaila

nd

Arg

entina

Beef Pork Poultry

Size 68% 35% 8% 47% 39% 57% 20% 30% 62% 47% 38% 19% 32% 35% top 3


Japan 13%

Russia 11%

Mexico 8%

United States 8%

EU-27 6%Hong Kong 4%

South Korea

4%Saudi Arabia 4%

China 4%

Canada 3%Vietnam 2%

Venezuela 2%

United Arab Emirates 2%

Philippines 2%

Iraq 2%

Other 26%

Total meat imports


Source: USDA

Percent of world total meat imports for 2010


Russia is rapidly becoming self sufficient in chicken... Reducing elasticity of export capability

Russian poultry self sufficiency


Source: Rabobank

Russian poultry production and imports, million metric tons

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.02000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Production Production + Imports


Mato Grosso(Brazil)

Tambov / Lipetsk(Russia)

Grain trapped due to poor infrastructure

Two areas with rapid growth in animal protein production



Russia’s goal is to be 85% self sufficient by 2015 and 95% self sufficient by 2020

Russian pork: eventual self sufficiency


Source: Rabobank

Russian pork production and imports, million metric tons

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Production Production + Imports


Government Supports in Developing Countries

Brazil: BNDES

China: Subsidies, Financing

Russia: Import Protection, Financing Subsidies

Be Careful What You Wish For


New proposed USDA GIPSA rules – there will be unintended consequences

Key U.S. Meat Industry Issues

Proposed GIPSA rule would make it difficult for packers to pay premiums for quality or other factors without the risk of being sued.

I t would ban livestock contracting >14 days out.

I t would ban buyers from working for >1 packer.

I t would ban packer to packer sales.


EU policy measures threatening competitiveness

Key Pork Industry Issues

Source: Rabobank

Pork cost price increases due to policy measures for selected EU countries (in EUR cent per kg cwe)

0

5

10

15

20

25

2007 2013 2007 2013 2007 2013 2007 2013 2007 2013 2007 2013

Environment Production rights Animal Welfare Public health Spatial Planning

NL PLESDKFR DE


Questions from around the world

Europe: Sustainability, Farmer profitability

China: Biosecurity, Supply chain

Brazil: QE2

Everyone: Ethanol

Now 9% of gasoline supply

Gasoline up 37% since last fall

U.S./E.U.: Brazilians

Currency

Brazilian/Argentine cattle herd

Balance sheet leverage

Government Meddling? (Vale, Sugar)


U.S. Average Gasoline Prices

Source: Bloomberg

U.S. Average Retail Gas Prices, USD/gallon

2.50

2.70

2.90

3.10

3.30

3.50

3.70

3.90

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Approximately 1.2mmt swing in 2011 outlook in recent months


FMD in Korea has already led to the liquidation of about 35% or 3.5 million hogs. We expect Korea’s pork imports to rise by 30% this year to 380,000 tons.

China is experiencing sow liquidation and we believe has an FMD problem of its own. China’s sow herd is down 3% compared to year-ago levels by the latest statistics, which we believe could lead to 2011 pork imports of 1.1 – 1.4 MMT, a four-fold increase from 2010.

The fourth consecutive negative profitability in the EU pork industry and the effects of the dioxin contamination in Europe, particularly Germany, is leading to herd liquidation across the continent. We now believe that EU pork production could fall 1 – 1.5% impacting production by around 300,000 tons.

USDA’s forecast for a 1.5% or 150,000 ton increase in U.S. pork production looking optimistic. The U.S. breeding herd was down 1% in December which can be substantially offset by productivity gains but we are not hearing of any expansions and in fact are hearing of financing difficulties.

This all adds up. These factors alone suggest a swing in production expectations of about 1.2 – 1.3MMT compared to expectations last fall. World pork production is about 103MMT, and half of that is in China.


USDA 2011 production estimates for the top 3 world pork producers are overstated:

China FMD, most recent sow estimate is -3%

EU dioxin contamination causing liquidation

U.S. breeding herd -1% YOY in December, but hog prices rising faster than feed costs

2011 Outlook

Source: USDA


Pork Production (1000 mt)

2010 USDA 2011 (f) % change

China 51,070 51,500 0.8%

EU-27 23,000 22,120 -3.8%

United States 10,187 10,204 0.2%

Brazil 3,195 3,260 2.0%

Russia 1,920 2,310 20.3%

Vietnam 1,870 1,900 1.6%

Canada 1,772 1,720 -2.9%

J apan 1,291 1,290 -0.1%

Philippines 1,255 1,260 0.4%

Mexico 1,165 1,184 1.6%

South Korea 1,110 760 -31.5%

World 101,507 103,392 1.9%


The China corn conundrum

China

Why is China importing corn for the first time since 1994 if their stock levels are anywhere near as high as stated?

- 60 MM MT, or for an ending stocks-to-use ratio of 37.1%

Same goes for why would they have an internal price of over $8/bushel if stocks are satisfactory?

Why has China limited bidding from industrial users at their Tuesday auctions?

China’s soy imports continue to expand rapidly and faster than anticipated. I f meal use is rising so rapidly, how could it be much different for corn?

China’s soy imports since 1998 imply an incremental corn need of 90mmt compared to only 30mmt as reported

Answer:

China’s corn supplies appear to be desperately low


If industrial hog production grows from 55% to 60%, and modified from 11% to 21%, deficit expected to be 23 MM MT by 2015 –Assuming 10 bu. of corn per pig

Industrialization of China’s hog production industry

China

Source: MOA, Rabobank

Herd size of hog farms in China

74%

57%

42%37%

30%

21%

36%

48%51%

55%

5% 7% 10% 12% 15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2005 2007 2009 2013F

Backyard farm(1~49 heads/farm)

Commercial farm(50~3000 heads/farm)

Specialized farm(+3000 heads/farm)


Even with only 2% pork production growth, China could be importing 25 MM MT of corn per year by 2015 due to industrialization

China’s corn balance sheet

China

Source: MOA, USDA, FAPRI, Rabobank estimates

-70

-60

-50

-40

-30

-20

-10

0

10

20

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Actual Rabobank estimate

MT


China coal trade

China

Source: Bloomberg

China monthly coal imports and exports, million metric tons

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

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China coal imports China coal exports


Source: Japanese Ministry of Ag., Forestry and Fisheries, USDA

Japan

Japan estimates $198b - $309b in damage vs. $81b for Katrina

Earthquake, tsunami and nuclear disaster affected Tohoku and Kanto regions – NE Japan.

These two regions account for 44% of hog herd and 27% of broilers.

Assuming only eastern half of regions are affected implies 281,600 mt pork production and 172,800 mt broiler production

US pork exports to Japan = 391,000 mt

EU pork exports to Japan = 220,000 mt

US broiler exports to Japan = 48,000 mt

EU broiler exports to Japan= minimal

Cold storage most likely destroyed

Product is flowing through southern ports

Earthquake

Nuclear reactor and evacuation zone


Source: Robert A. Brown/Tyson Foods

Pork Demand


Currencies

Source: BloombergSource: Bloomberg

Source: Bloomberg Source: Bloomberg

Brazilian Real/USD Aussie Dollar/USD

Canadian Dollar/USD Euro/USD

1.50

1.70

1.90

2.10

2.30

2.50

1/9

/20

09

4/9

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09

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0.901.001.101.201.301.401.501.601.70

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0.900.951.001.051.101.151.201.251.301.35

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The End


Meat Consumption

Source: USDA

United States Per Capita Meat Consumption, kilograms

98 96 98 94 95 94 95 94 90 88 85

66 65 67 67 66 65 64 66 64 65 60

90 8994 95 98 100 101 99

97 9395

253 250 258 256 260 259 260 259 252245 240

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Beef Swine Broiler

pic symposium 2011 | nashville, tn global pork outlook david nelson, rabobank global strategist

Documents

pic symposium

tn grain

tn emergence

key issues

tn key macro issues

area sensitivity slide

tn russias goal

tn brazils farmers