ppic/rac – september 2010

From information, knowledge

Paragon Economics, Inc.

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

PPIC/RAC – September 2010

Ethanol Update, Pork Industry Economic Outlook, GIPSA Rule



ETHANOL IS STILL A BIG DEAL FOR LIVESTOCK AND POULTRY

PRODUCERS!

AND FINALLY – MEAT AND POULTRY CONSUMERS!



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

2008/09USDA,

AugUSDA, 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 $3.10 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! <$3.65 and <$300 look like good

buys



Competing Meats -- Briefly Beef production is falling

- Smallest calf crop since 1950- Smallest beef cow herd since 1962- Weights will not likely increase given $5

corn- I expect record-high (‘03??) cutout

values in 2011 Chicken output is growing again

- SBM is providing a relative advantage- Composite is still near record-high ~

$85- Breasts $180, Leg qtrs >$40, Wings

>$120



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 – Sept H&P report

says there are few hogs “backed up” Expansion

- Some evidence that we added sows but the BH was lower in Sept than in June

- Limiting factor: Risk – feed and rules 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



September Hogs and Pigs Report

Category 2009 20102010 as Pct

of 2009Pre-Report Estimates

Actual - Estimate

Inventories on September 11

All hogs and pigs 66,716 64,991 97.4 97.3 0.1Kept for breeding 5,875 5,770 98.2 98.9 -0.7Kept for market 60,842 59,221 97.3 97.2 0.1

Under 50 lbs. 19,758 19,538 98.9 98.7 0.250-119 lbs. 17,148 16,810 98.0 97.3 0.7120-179 lbs. 12,684 12,254 96.6 96.7 -0.1180 lbs. and over 11,253 10,620 94.4 95.6 -1.2

Farrowings2

Jun-Aug sows farrowed 2,959 2,905 98.2 97.5 0.7 Sep-Nov Intentions 2,915 2,881 98.8 99.2 -0.4 Dec-Feb Intentions 2,872 2,886 100.5 99.9 0.6June-Aug Pig Crop1 28,718 28,507 99.3 98.8 0.5June-Aug pigs saved per litter 9.70 9.81 101.1 101.5 -0.41Thousand head 2Thousand litters

USDA Quarterly Hogs and Pigs Report

September 23, 2010



Supplies slowly getting back to yr/yr levels



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 = 28.8% vs. 29.6% in

‘09



YTD gilt slaughter: -0.2% vs. ’09, -0.3% vs. ‘08



Futures: Profits of ~$12.03/hd for all of ’10 . . . . . . ~ $7.08 for rest of ’10, but only

$4.15 in ‘11



Slaughter forecasts based on Sept H&P . . .. . . Growing supplies through 2011

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

2009 Year 113.583 -2.7% 113.583 -2.7% 113.583 -2.7% 113.583 -2.7%

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

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

Q3 26.966 -5.1% 26.966 -5.1% 26.966 -5.1% 26.966 -5.1%

Q4 28.700 -3.1% 28.875 -2.5% 28.156 -2.4%

Year 109.372 -3.7% 110.251 -3.0% 109.185 -3.9%

2011 Q1 27.750 0.4% 27.304 -1.2% 28.044 1.5%

Q2 26.000 -0.3% 26.165 0.4% 26.055 -0.1%

Q3 27.400 1.6% 27.214 0.9% 27.129 0.6%

Q4 29.000 1.1% 29.076 0.7% 28.719 2.0%

Year 110.150 0.7% 109.759 -0.4% 109.947 0.7%

Green figures are actual data from USDA. Blue figures are estimated using USDA data 9/27/10

September 2010 Commercial Slaughter ForecastsMizzou ISU LMIC Meyer



Price forecasts

Missouri ISU LMIC Meyer CME

Producer-Sold Net Price, All

Methods

Ia-S. Mn. Live

Price1

National Wtd Avg. Base

Price

National Net Neg'd Price,

Wtd. Avg.CME Lean

Hog Futures9/24/10

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 68.32 70.34 65.91 69.13 69.38**Q2 79.42 82.76 76.81 81.74 81.42**Q3 80.65 82.47 78.04 81.82 81.88**Q4 74 - 78 74 - 76 70 - 73 72 - 75 77.74Year 75 - 77 77 - 78 72 - 74 76 - 77 77.61

2011 Q1 76 - 80 75 - 78 70 - 75 71 - 75 79.48Q2 81 - 85 83 - 86 75 - 80 78 - 82 84.11Q3 76 - 80 80 - 82 74 - 79 76 - 80 81.55Q4 67 - 71 69 - 74 67 - 70 72.43Year 75 - 78 72 - 77 73 - 77 79.39

1Converted to carcass using a 75% yield *Partial USDA data **Average of CME Lean Hog Index

September 2010 Hogs & Pigs Price Forecasts



Short-term risks to consider: Feed costs – Yields? Harvested acres?

Exports? What about NEXT SPRING AND SUMMER?

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

Appears that BH is not growing but how large will productivity growth be?

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- Stated reason is to prevent “signalling”- Does not define “affiliated companies”- Producers who are owners of a plant?

Triumph? US Premium Beef?- 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 due 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



What is the impact at retail? Higher costs at farm level will have

to be covered - Eventually – lower supplies than would

otherwise have occurred – higher prices - Which species will it favor?

Ditto for packers – risk=costs Potentially less variety --Less

differentia-tion due to fears of legal action



And now the target shifts to RETAILERS Competition “workshops” are

separate from GIPSA rule (sort of) December 8 session in DC is on Price

Spreads or Marketing Margins – difference between retail and farm price

Labor unions and some activist groups are trying to “unite” the livestock/poultry sectors to rise up against the REAL culprits – Retailers!



QUESTIONS & DISCUSSION?

ppic/rac – september 2010

Documents

knowledgeparagon economics

mmbtufrom information

hog outlookfrom information

gipsa rulefrom information

nearby corn

cash corn

corn supply

ethanol price