webinar q1 big picture outlook - j.s. ferraro picture webinars/q1 2020... · 2020 is almost sure to...

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Q1 BIG PICTURE OUTLOOKEVALUATING GLOBAL PROTEIN MARKETS 16 MONTHS INTO THE ASF CRISIS

HOSTED BY: J.S. Ferraro

DATE: January 22, 2020

Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.

WEBINAR

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An integrated sustainable food brand committed to creating the

best-tasting fresh proteinexperience.

Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.

Providing market intelligence, risk management and customized supply chain solutions for the

meat and livestock industry.

ABOUT JSF

CO-HOST | DR. ROB MURPHY

DR. ROB MURPHY, BS, MS, PhD Agri EconomicsExecutive Vice President, Research and AnalysisJ.S. Ferrarowww.jsferraro.com

An agricultural economist and business leader with over 27 years in the industry, Dr. Rob Murphy has a wealth of experience in the North American meat and livestock industries studying, analyzing and predicting market movements. His expertise spans commodity analysis, econometric modelling, forecasting, futures markets, hedging, and risk management.

Rob holds a Ph.D. in Agricultural and Applied Economics from Virginia Tech and has developed his market expertise over the past three decades by serving as an economist with the Chicago Mercantile Exchange, Sparks Companies and Informa Economics.

At Informa, Rob held two senior leadership roles (Senior VP of Livestock, Meat, Dairy and Poultry group and Vice President) over 13 years. He focused on the development of risk management programs and directed the division’s work in commodity analysis in the protein sector. He has spoken internationally on many topics, including agri supply chain-development and international protein demand.

Currently, Rob is the Executive Vice President, Research and Analysis at J.S. Ferraro & Co. leading the team in commodity analysis, financial modelling, and the development of trading and risk management strategies.

3 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.

http://www.jsferraro.com/

mailto:[email protected]?subject=Q1%202020%20Webinar%20Question




https://www.linkedin.com/in/robmurphycommoditymarkets

https://www.linkedin.com/in/robmurphycommoditymarkets

CO-HOST | KEVIN GRIER

KEVIN GRIERMarket AnalystKevin Grier Market Analysis & Consultingwww.kevingrier.com

Kevin Grier is a noted Canadian Agriculture & Food Market Analyst providing economic and market outlook for livestock, meat and grocery industries over the last 20+ years. His critical market insight and analysis helps his clients - from government and producer groups to small to large businesses -drive profitable bottom line decisions.

Kevin is a regular contributor and respected expert across media platforms throughout North America -Global News, CTV, National Post, Globe & Mail, National Hog Farmer and Grocery Business. Kevin speaks with clarity on a range of topics including market analysis, economic impacts, consumer trends and commodity analysis. He provides regular commentaries on the market and is a national and international keynote speaker known for his approachable yet pragmatic style.

His breadth of knowledge was developed over 18 years at the George Morris Centre, a leader in economic research in the agriculture and food industry. Prior to that Kevin was a manager with the Ontario Farm Products Marketing Commission, the supervisory body of the provincially regulated marketing boards. Currently, Kevin is managing director of Kevin Grier Market Analysis and Consulting, a company specializing in livestock, meat, poultry and grocery industry market insight and analysis working across a breadth of organizations internationally.


http://www.kevingrier.com/

https://www.kevingrier.com/





https://ca.linkedin.com/in/kevingrier

https://ca.linkedin.com/in/kevingrier

GUEST SPEAKER | DAVE WEABER

DAVE WEABERVice President of Beef AnalyticsExpress Markets Inc.http://www.emimarkets.com/

Dave joined EMI Analytics and Express Markets, Inc in April 2016 as Vice-President of Beef Analytics and is responsible for leading and growing the company’s efforts in beef supply chain analytics. This includes supply and demand side analysis and forecasting of cattle numbers and beef supplies as well as domestic and international trade impacts. Factoring in these variables and their combined effects to price forecasts for various classes of cattle and beef cuts, the group desires to assess margin impacts and shifts and strives to better the economic position clients in all areas of the supply chain. In 2019, he took on responsibility for managing the company’s broiler, turkey, egg, and pork analytics, as well as the sales and support staff.

Before joining Express Markets, Inc, Dave served as Economist, leading the Market Insights Team in the Strategic Sourcing and Supply Chain Analytics Group of Delhaize America, the eleventh largest grocery retailer in the United States. In this role, Dave was responsible for analysis and strategy guidance in the meat, poultry, dairy, grains and vegetable oil commodities as well as commodity risk assessment and management for the banner stores from 2007 to early 2016.

From February 2005 through March 2007, Dave was employed by Swift & Company as Director of Market Analysis. He was responsible for market research and forecasting in the cattle, beef, hog and pork markets as well tracking changes in the other commodity and competing meat markets. Dave also worked in the analysis of foreign markets and trade.

Prior to joining Swift & Company, Dave spent seven years at Cattle-Fax, most recently in the position of Director of Research and Special Projects where he was responsible for analysis of Cattle-Fax feedlot inventory data, short and long term projections, special research projects and supervising the Research Department.


http://www.emimarkets.com/



http://www.emianalytics.com/

http://www.emianalytics.com/

https://www.linkedin.com/in/dave-weaber-a87bb34/

https://www.linkedin.com/in/dave-weaber-a87bb34/

1. MARKET OUTLOOK | HOGS & PORK• US Market – 3 Factors Impacting Supply, Demand and Pricing• Canadian Market Insights• Speaker Panel Discussion

2. MARKET OUTLOOK | CATTLE & BEEF• US Market – 3 Factors Impacting Supply, Demand and Pricing• Canadian Market Insights• Speaker Panel Discussion

3. LIVE Q&A

DISCUSSION OUTLINE


WEBINAR REMINDERS

Type questions in the chat box in your ClickMeeting control panel.

60 min session + 10 min Q&A

Need to drop off early? You can email our panelists directly.

Please feel free to connect/follow us and our speakers on LinkedIn OR Twitter.

TIMING:

QUESTIONS:

SESSION SLIDES:

CONNECT:

Session recording and slide deck will be available 24-48 hours after the session.

TECHNICAL DIFFICULTIES:Use the chat function for help or email us at: [email protected]

All microphones will be muted for the session.


• SUPPLY, DEMAND & PRICING• 3 THINGS TO WATCH FOR IN 2020

Q1 BIG PICTURE MARKET OUTLOOK

HOGS & PORK | US


• US pork exports to China and Hong Kong surged in November to 165 million pounds.

• This strong movement is likely tied to Chinese New Year’s celebrations which start on Jan 25.

• December exports are expected to be less than November, however.

• Total pork exports in November were 623 million pounds, a new monthly record.

• JSF is forecasting strong pork exports throughout 2020, up 19% from last year.

• Futures continue to price hogs as though 2020 pork exports will be up close to 50%.


EXPORTS STRONG AHEAD OF CHINESE NEW YEAR

• November is the most recent month for which complete data exists to calculate per capita consumption.

• Since that calculation removes exports, it can provide a picture of US domestic pork demand.

• Domestic demand looked very strong in November.

• Early indications suggest December and January were a bit weaker with respect to domestic demand.

DOMESTIC DEMAND STRONG IN NOVEMBER


• Another tool we use to gage overall demand is the combined producer + packer margin.

• When demand is very strong this combined margin will be high, reflecting the idea that wholesale prices strengthen to a level capable of generating good margins for both segments.

• The last demand cycle peaked in November and has been softening since.

• Look for demand to turn higher with the next 30 days.


PORK SUPPLY CHAIN MARGINS POINT TO GOOD DEMAND

• The breeding herd is the production engine that fuels future pork supplies.

• It has been steadily increasing over the past five years.

• On Dec 1, the USDA reported the breeding herd up 2.1% from last December.

• The most recent pig crop, born in the Sep/Nov quarter was up almost 2%.

• These are hogs that will be slaughtered in the March-May period of 2020.


PIG HERDS CONTINUE TO GROW IN THE US

+4.2%

+3.8% +2.9%

• With ever-increasing breeding herd and pig crops, hog slaughter in 2020 is almost sure to exceed 2019.

• JSF projects 2020 barrow and gilt slaughter up 3.1% from last year.

• The biggest YOY increase should come in Q2, but every quarter should register a gain.

• Note that the quarterly percentage changes have been adjust to reflect the fact that 2020 is a leap year and Q1 contains 1 additional day than in prior years.

B&G SLAUGHTER BY QUARTER, 2018-2020


• Weights should be mostly flat until about May when they start to decrease heading into summer.

• The removal of ractopamine from production systems has the potential to cause a temporary dip in weights.

• By de-trending and de-seasonalizing (DTDS) carcass weights, we can get a picture of the “irregular” component of weights.

• Values of the DTDS close to zero or above can signal hogs backing up in the pipeline.


DTDS WEIGHTS SHOW NO SIGNS OF CURRENTNESSISSUES

+4.0%

+5.5%

• Pork production is the product of the number of animals killed and their weight.

• Q1 could easily see a 5.5% YOY increase in total pork production.

• For 2020 as a whole, JSF has pork production forecasted to be up 4.3%.

• Since pork demand is very inelastic, small amounts of additional production can have a large negative influence on price levels.

+4.5%

PORK PRODUCTION BY QUARTER, 2018 - 2020


• JSF forecasts the pork cutout to hold in the mid to high $70s through February before working higher seasonally.

• The summer price top should be in the upper $80s, up about $4 from last year.

• If exports fail to live up to expectations, there is a lot of downside risk to these forecasts.

• In Q1, all primals except bellies are expected to see YOY price increases.

• Hams are seeing very good export interest

• Large cold storage stocks will likely keep the bellies at or below last year’s level in Q1.


PORK CUTOUT REMAINS STRONG WITH TOPS IN THE $80 RANGE

• Packer margins are running just a tad above last year and should remain close to last year through Q1.

• JSF forecasts average packer margins for all of 2020 to be close to $12.50, down about $2 from 2019.

• JSF sees cash hog prices rising slowly from current levels and remaining above last year through March.

• Q2 hog pricing should be below last year, but Q2 of 2019 was inflated by the futures market surge on ASF fears.

• Summer price tops around $80 are forecast.


CASH HOGS VALUES TO OUTPERFORM IN Q1

• Deferred lean hog futures have kept a large “ASF premium” built in.

• Traders are anticipating huge exports to China.

• In the last 5 futures expirations futures have been forced lower into expiration in order to converge with the under-performing cash market.

• All of the lean hog futures on the board are currently trading “too rich” relative to the JSF fundamental forecast.

• Caution is warranted however because the distant JSF forecasts are based on pig crops that haven’t happened yet.


FUTURES REMAIN TOO RICH

1. US Pork Exports: China will need to take an incredible amount of pork out of the US if hog and pork prices are to achieve the levels currently indicated by the futures market.

2. Amount of Expansion in the U.S. Hog Herd: Producers could begin to add sows at a faster-than-expected rate. This supply response has the potential to weigh heavily on hog and pork prices in the second half of 2020.

3. Signs of further weakening in the US and global economies: The global economy is already slowing and the US economy could get caught up in that also. Recession tends to hurt meat demand, and while it might impact beef more than pork, pork demand would not escape a recession unscathed.

3 THINGS TO WATCH FOR IN 2020


• INSIGHTS


HOGS & PORK | CAD


CDN QUARTERLY HOG SLAUGHTER 2018-2020

• Q4 +1%• Q1 +1%• Q2 +2%


CANADIAN PORK CUTOUT 2019 AND 2014-2018 AVERAGE


WEEKLY CANADIAN PORK WHOLESALE PRICE DIFFERENTIAL TO BEEF AND CHICKEN VS 2017-2019 AVG


-15%-10%

-5%0%5%

10%15%20%25%30%

Nov 16 Nov 23 Nov 30 Dec7 Dec14 Dec21 Dec28 Jan 4 Jan 11 Jan 18

Pric

e Di

ffere

ntia

l

Pork-Beef Pork-Chicken

Q3 RETAIL PORK MARGINS VS 2017-2019 AVERAGE


PORK SUMMARY POINTS

• Gradual increases in production• Questions on availability



PANEL DISCUSSION


• MARKETS OVERVIEW• 3 THINGS TO WATCH FOR IN 2020


CATTLE & BEEF | US


LONG STANDING DROUGHT CONDITION IN AUSTRALIA HAS LED TO FIRES BURNING MORE THAN 15 MILLION ACRES (SIZE OF WV).

• About 9% of Australian cattle herd in in areas significantly affected by fires and another 11% in regions partially affected.

• Impacting about 80,000 properties in the main affected regions.

• Most active fires near coastal regions of Victoria and New South Wales.

• Near record Australian COF in late 2019, but reports of water shortages affecting feedlots continue.

• Australian exports +9% in ’19. Exports to China nearly double in ‘19 vs ’18.

• YTD slaughter thru October was up 7%. Females +18%. Beef production +4%

28 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.Images courtesy USMEF and MLA

SLAUGHTER NUMBERS

• Beef cow slaughter surges higher, largest weekly slaughter since late 2012 (near liquidation pace)

• ’19 beef sltr +5.4% (+4.5 in Nov)

• Dairy +2.0%, Total +3.6%

• ‘19 Heifer slaughter +6.9%

• Steer slaughter -2.3% (-1.5% 5 mo. Ago)

• Fed slaughter +1.0%


BEEF REPLACEMENT & COW INVENTORY

• Beef replacement peaked Jan 1, 2017, 2018 -4.1%, 2019 -3%, 2020 -4% (5.69 mil hd

• Beef cow inventory expected to decline slightly Jan 1, 2020 at 31.735, -31K hd vs YA

• Total cattle inventory expected lower as slight liquidation underway for beef and dairy cow herds

• Inventory on Jan 1, 2020 expected at 93.868 mil hd, -1%


• COF remains above YA, Jan 1 +1.7%, Dec placements even

• Marketings +5.5%

• Dec ‘19 one more day vs. YA

• Jan-Mar placed against +2.1% (Jan -4.4%, Feb +7.3%, Mar +3.6%)


PLACEMENTS POTENTIALLY LARGER IN JANUARY

• Slaughter 2019 +1.7% or +543 hd to 33.548 mil. Hd

• 2020 +1.6% or +552K to 34.070 mil. Hd

• Beef production ‘19 +1.1%, ‘20 +2.4%


SLAUGHTER TO INCREASE 1.6% IN 2020

NOVEMBER EXPORTS & IMPORTS

November exports -8.2%• Mexico -8.2%• Japan -13.9%• South Korea -5.3%• Canada -14.8%• China +18.6% @

3.17 million pounds cwe, 1.3% of total exports

November imports +11.5%• Australia +3.5%• New Zealand -39.7%• Mexico +11.0%• Canada +11.8%• Brazil +43.4%



• 2019 packer gross margins $425/hd

• Up $50/hd from 2018

• 2020 YTD $233.50/hd -$65/hd vs. YA

BEEF PACKER MARGINS WERE HUGE IN 2019

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• Basis narrowing/futures stall, shift underway>

• ‘19 avg $116.90/cwt

• ‘20 ~$115.50

• Cutout finds support as Saturday hours being eliminated

• ‘19 avg $222.60/cwt

• ‘20 avg ~$219/cwt

• Ch-Se spread narrows

BASIS NARROWING


• 50CL rebounds seasonally but limited by heavier fed weights

• 90CL prices supported at $240 likely to increase as increased cow slaughter can’t offset limited imports from Australia and New Zealand

TRIM REMAINS TIGHT

1. Trim Market Risk: Australia’s record drought and bush fires are limiting potential slaughter and beef production as Australia’s cow herd shrinks to 30 year lows. Chinese demand for lean grass fed product will support 90CL trim in the world market and in US. Phase 1 deal potential for US lean cow beef and cuts exports versus fed beef. Trim support could spill into end cuts as grinding demand.

2. Contraction in the U.S. Beef Herd: During 2019, producers appear to have marketed enough beef cows and heifers to signal the beginning of the liquidation phase of the US beef cattle cycle. Poor reproductive performance and lack of profitability at the ranch level are key drivers. Adding more heifers to fed slaughter mix likely to continue and limit upside potential for US beef and fed cattle prices.

3. Phase 1 works to eliminate non-tariff trade barriers: The recent Phase 1 trade deal moves the US closer to broader shipments of US beef to China. It sets residue levels for the three most common products that had caused China to compete with natural beef programs for cattle. Also potential to accept ractopamine and unclear on current source verification requirements.

3 THINGS TO WATCH FOR IN 2020


• INSIGHTS


CATTLE & BEEF | CAD


CDN QUARTERLY CATTLE SLAUGHTER 2018-2020

• Q4 +4%

• Q1 +3-4%

• Q2 +2%


CANADIAN BEEF CUTOUT MONTHLY 2019 AND 2014-2018 AVG


BEEF WHOLESALE PRICE DIFFERENTIAL WEEKLY NOV-JAN


RETAIL BEEF MARGINS VS 2017-2019 AVERAGE OCT-JAN


CHRISTMAS ADS


BEEF SUMMARY POINTS

• Production continues higher• Pricing becomes more competitive


• INSIGHTS


CHICKEN & POULTRY | CAD


• Most competitive• Best margins• Increasing merchandising focus


PANEL DISCUSSION



Q & A SESSION


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Progressive thinking and precise quantitative modelling are the cornerstones of our margin management solutions.


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