Dr. Steve Meyer - Markets, Economic Situation, and Outlook

From information, knowledge
Paragon Economics, Inc.
Steve R. Meyer, Ph.D.
World Pork Expo – June 2014
Economic Situation & Outlook

Current situation is the culmination . . .
 Quantum upward shift of grain prices in
2007 – directly attributable to biofuels
 The Great Recession and its impact on
demand -- foodservice/retail split
 Drought conditions in cow/calf areas for
much of the past decade – and 2011-12!
 History catches up with the 2012 crop
 PEDv
6/16/2014 2
. . . of along series of events/mishaps

Key Issues for 2014 and beyond
 Grain Prices and Costs – Are The Bad
Times Really Over For Good?
6/16/2014 3

Feed ingredient prices moving downward
 Note relative drop in corn vs. SBM –
disadvantage to poultry first, then hogs
 Planting risk, SB competition premiums are
gone from corn – some weather risk remains
6/16/2014 4

‘14 production costs are hanging near $82 . .
6/16/2014 5
. . . And back into the $70s for 2015

World corn prod & cons are record high. . .
6/20/2013 6
. . . And stocks have grown – best in 12 years

U.S. biofuels policy fueled growth and . . .
6/20/2013 7
. . . new, ongoing world corn competition

World soybean supply situation is similar . . .
 World output +6.2% in ‘13-’14
 Consumption +4.4%
 Ending stocks +20%, S/U tied for 3rd high
. . . Record high output, consumption, stocks

But SB prices are still over $12 . . .
. . . largely due to China’s appetite & means

Planting intentions reflect relative prices
6/16/2014 10

Planting, emergence, condition are GOOD!
 80% of corn is emerged (vs. avg of 80)
 Corn 76% G/E vs. 5-yr avg of 63%
 50% of beans have emerged (avg. is 45%)
6/16/2014 11

USDA’s May WASDE – 50% higher Y/E stocks
6/16/2014 12
USDA
April
USDA
May
% Chng
vs '12-13
Acres Planted Mil A 97.2 95.4 NA 91.7 -3.9%
Acres Harvested Mil A 87.4 87.7 NA 84.3 -3.9%
Yield Bu/A 123.4 158.8 NA 165.3 4.1%
Beginning Stocks Mil Bu. 989 821 NA 1146 39.6%
Production Mil Bu. 10780 13925 NA 13935 0.1%
Imports Mil Bu. 162 35 NA 30 -14.3%
Total Supply Mil Bu. 11932 14781 NA 15111 2.2%
Feed & Residual Mil Bu. 4329 5300 NA 5250 -0.9%
Ethanol for fuel Mil Bu. 4648 5050 NA 5050 0.0%
Non-Ethanol FSI Mil Bu. 1403 1385 NA 1385 0.0%
Exports Mil Bu. 731 1900 NA 1700 -10.5%
Total Usage Mil Bu. 11111 13635 NA 13385 -1.8%
Carryover Mil Bu. 821 1146 NA 1726 50.6%
Stocks/Use Pct. 7.4% 8.4% NA 12.9% 53.4%
Nat. Wtd. Avg. Farm Price $/Bu. 6.89 4.50 - 4.80 NA 3.85 - 4.55 -9.7%
Source: USDA World Supply and Demand Estimates
U.S. CORN SUPPLY AND UTILIZATION -- MAY
Units 2012/13 2013/14
2014/15

USDA’s price is in line with recent demand
6/16/2014 13

May WASDE soybean S&D – BIG supply help!
6/16/2014 14
USDA
April
USDA
May
% Chng
vs '13-14
Acres Planted Mil A 77.2 76.5 NA 81.5 6.5%
Acres Harvested Mil A 76.2 75.9 NA 80.5 6.1%
Yield Bu/A 39.8 43.3 NA 45.2 4.4%
Beginning Stocks Mil Bu. 169 141.0 NA 130 -7.8%
Production Mil Bu. 3034 3289.0 NA 3635 10.5%
Imports Mil Bu. 36 90.0 NA 15 -83.3%
Total Supply Mil Bu. 3239 3519.0 NA 3780 7.4%
Crushings Mil Bu. 1689 1695.0 NA 1715 1.2%
Exports Mil Bu. 1320 1600.0 NA 1625 1.6%
Seed Mil Bu. 89 95.0 NA 92 -3.2%
Residual Mil Bu. 1 0.0 NA 18 #DIV/0!
Total Usage Mil Bu. 3099 3390.0 NA 3450 1.8%
Carryover Mil Bu. 141 130.0 NA 330 153.8%
Stocks/Use Pct. 4.5% 3.8% #VALUE! 9.6% 149%
Nat. Wtd. Avg. Farm Price $/Bu. 14.40 13.10 NA 9.75 - 11.75 -0.8%
Soybean Oil Price Cents/lb. 47.13 40.00 NA 37.00 - 41.00 -2.5%
Soybean Meal Price $/ton 468.11 485.00 420 - 465 450 - 490 -3.1%
Source: USDA World Supply and Demand Estimates
U.S. SOYBEAN SUPPLY & UTILIZATION - MAY
Units 2012/13 2013/14
2014/15

Key Soybean issue: Meal is carrying the value!
August SBM
Futures
August
Soybean
Oil Futures
6/16/2014 15

BIGGEST current risk is bean meal . . .
 USDA’s Y/E soybean
stocks are 130 mil. bu.
– smaller than last
year!!!!
 Summer SBM highs of
$415 & $438 last 2
years
 ‘14 yr-end S/U=3.8%!
 Some plants will run
out of beans!
 Lock in basis if
possible
6/16/2014 16

 Demand – Can We Make This Last?
6/16/2014 17

Data Source: U.S. Bureau of Economic Analysis
U.S. economy is still slow – but growing yr/yr!
. . . Q1 was LOWER than Q4-13 though – Weather?
6/16/2014 18

Some decent employment gains in 2013 . . .
6/16/2014 19
. . . Jan slowed but Feb, Mar & April are >200k

Data Source: Bureau of Labor Statistics
Unemployment is falling -- 6.3% in April . . .
. . . U-6 is down to 12.3% but was 10% in 2008
6/16/2014 20

2013 RPDI growth averaged 0.1% . . .
. . . January was good but growth has slowed
6/16/2014 21

Per cap cons.: -10% vs. ‘04, flat thru ’15 . . .
6/16/2014 22
. . . But this is a function of PRODUCTION!

The evidence of strong demand is PRICES . . .
. . . Records set in 2013 and already in ‘14 with more to come
6/16/2014 23

Demand indexes were ALL higher for 2013!
6/16/2014 24
. . . First time that has ever happened

Meat/Poultry RPCE was higher all of 2013
6/16/2014 25

January meat/poultry RPCE was soft . . .
6/16/2014 26
. . . Feb was better and March was very good

March was a positive yr/yr month . . .
6/16/2014 27

“People will stop eating pork/beef at these prices!”
 Some will stop and some will eat less BUT
THEY MUST because less is available
 Habits, though, are important!
6/16/2014 28
Price
Quantity/Time
P2
P1
Q1Q2
D
S1
S2

Pork exports exploded in March . . .
6/16/2014 29

March pork: Japan back on top, Mexico +43%
. . . China/HK +62% yr/yr & +44% YTD, Others
6/16/2014 30

 Demand – Can We Make This Last?
 Beef and Chicken Supplies – Biofuels,
Drought and Production Challenges
6/16/2014 31

Broiler flock +4-5% from July-Nov . . .
6/16/2014 32
. . .down 0.3% & 0.4% last 2 mos. -- AGING!!!

Old flock = fewer, lower quality eggs, placements near yr ago
6/16/2014 33

Slaughter, production are UNCHANGED vs. 2013. . .
6/16/2014 34

Chicken prices have finally improved . . .
6/16/2014 35

Beef herd: Full expansion mode IF POSSIBLE
 Will range/pasture conditions be good enough in critical areas???
6/16/2014 36

Jan Cattle report: Expansion begins . . .
6/16/2014 37
2013 2014
Pct of Yr
Ago
Average Range
All Cattle & Calves 89,300 87,730 98.2 98.6 98.0 - 99.1
Cows & Heifers That Have Calved 38,515 38,251 99.3 98.9 98.7 - 99.3
Beef Cows 29,297 29,042 99.1 98.5 98.3 - 99.1
Dairy Cows 9,218 9,209 99.9 99.9 99.8 - 100.0
Heifers 500 Pounds & Over 19,134 18,751 98.0 99.0 97.9 - 99.6
Beef Cow Replacements 5,381 5,471 101.7 103.1 102.4 - 103.5
Dairy Cow Replacements 4,551 4,539 99.7 100.3 98.9 - 101.1
Other Heifers 9,203 8,741 95.0 95.9 93.2 - 97.1
Steers 500 Pounds & Over 15,813 15,415 97.5 98.4 97.3 - 99.6
Bulls 500 Pounds & Over 2,056 2,035 99.0 99.0 98.4 - 99.7
Heifers, Steers & Bulls Under 500 Pounds 13,782 13,278 96.3 97.9 97.0 - 99.1
January 1 Cattle On Feed, All Feedlots 13,364 12,695 95.0 95.0
Rev 2012 2013
Calf Crop 34,279 33,930 99.0 97.9 97.7 - 98.1
Source: USDA National Agricultural Statistics Service, Urner Barry
Pre-Report Estimates*
JANUARY 1, 2014 -- U S CATTLE INVENTORY

. . . Feeder supply is down 3%, yr/yr – record low
6/16/2014 38
Livestock Marketing Information Center
Data Source: USDA-NASS
Placements are coming from a TIGHT supply

Feb placements were +15%, March & April were -5%
6/16/2014 39

Beef consumption/supply will be -5.3% yr/yr . . .
6/16/2014 40
. . . And down another 3% in 2015!
Livestock Marketing Information Center
Data Source: USDA-NASS

RECORD-HIGH cutout values – again this week!
 Weekly averages have returned to $220s
 We expected $215-$225 for cutouts thru June
– but Choice was $233 last week!
 Pork prices are now HELPING beef
6/16/2014 41

What we knew about PEDv in March . . .
 IA and MN were slowing by March 1
 IL, IN, OH, NC and KS were still
troubling
6/16/2014 42

. . . But they are likely do represent TIMING
6/16/2014 43
NHF article
was based
on data thru
January!
Accessions were not useful for NUMBERS lost . .

My computations through February . . .
 Weights will add 3-4% -- but prod will still be
down near 10% in July, 12% in Aug
 Price flexibility of -2 to -3 put prices +25-
30% from ‘13
6/16/2014 44
PIG LOSS COMPUTATIONS PCT OF PRIOR YR. SLGHTR ADJUSTMENTS TOTAL
Birth
Month
Monthly
Share
Pigs lost
(000 Hd.)
Slghtr
Month
'13 Slghtr
+2.5%*
Percent
loss
Cull
reduction Sows
Non PED
prod'ty
'14 Slghtr
Change
May
Jun 1.6% 90.16 Dec 9705.8 0.93% 1.00% -1.00% 2.00% 1.07%
Jul 1.5% 104.22 Jan 10209.3 1.02% 1.00% -1.00% 1.90% 0.88%
Aug 6.7% 386.12 Feb 8809.3 4.38% 1.00% -1.00% 1.80% -2.58%
Sep 4.6% 334.60 Mar 9551.8 3.50% 1.00% -1.00% 1.80% -1.70%
Oct 10.4% 630.27 Apr 9596.5 6.57% 1.00% -1.00% 1.70% -4.87%
Nov 10.4% 703.45 May 9445.6 7.45% 1.00% -1.00% 1.50% -5.95%
Dec 13.8% 890.22 Jun 8405.1 10.59% 1.00% -1.00% 1.30% -9.29%
Jan** 21.9% 1256.62 Jul 9307.1 13.50% 1.00% -1.00% 1.25% -12.25%
Feb** 29.0% 1683.81 Aug 9796.1 17.19% 1.00% -1.00% 1.20% -15.99%
*Added to account for grow/finish death loss and thus compare directly to the pig crop
**Used 90% of monthly share to reflect higher number of smaller farms
What
About
PRRS?

Rabobank made me look like an OPTIMIST!
6/16/2014 45

March H&P: Bearish vs. expectations!
6/16/2014 46
Inventories on March 1*
All hogs and pigs 65072 62899 96.7 94.6 2.1
Kept for breeding 5836 5851 100.3 99.4 0.9
Kept for marketing 59236 57048 96.3 94.1 2.2
Under 50 lbs. 18852 18101 96.0 93.5 2.5
50-119 lbs. 16251 15717 96.7 94.2 2.5
120-179 lbs. 13169 12793 97.1 94.1 3.0
180 lbs. and over 10965 10436 95.2 95.2 0.0
Farrowings**
Dec-Feb sows farrowed 2,788 2,867 102.8 100.0 2.8
Mar-May Intentions 2,816 2,884 102.4 100.5 1.9
June-Aug Intentions 2,902 2,960 102.0 100.9 1.1
Dec-Feb Pig Crop* 28,099 27,316 97.2 96.4 0.8
Dec-Feb pigs saved per litter 10.08 9.53 94.5 96.4 -1.9
*Thousand head ** Thousand Litters Source: Urner Barry
Category 2013 2014
'14 as
Pct of
'13
Pre-
Report
Est's
Actual -
Est
USDA QUARTERLY HOGS & PIGS REPORT
March 28, 2014
. . . But definitely picked up some impact

Monthly data – BIG drop in litter size but . . .
6/16/2014 47
. . . a slight (curious) improvement for Feb

The devil is in the details, though . . .
 March H&P would put quarterly 2014 slghtr totals
down 2.1, 3.4, 4 and 2.9% yr/yr.
- IMPLICATION: Higher weights would leave ‘14
production very near 2013 levels
 March slaughter was down 6.7% while 180+
inventory was down 4.8%
- AND SEP-NOV PIG CROP WAS UNCHANGED
 Dec-Feb pig crops in MN, IA and IL were + 5, +2
and +3% yr/yr IN SPITE OF WIDESPREAD PEDV
LOSSES
6/16/2014 48

Latest PEDv info – thru May 10 – shows some improvement
 U.S.: new low of 187 wk. ended 5/17
 IA has seen another big drop, so too with MN
 Some improvement in IL, others stable
6/16/2014 49

Latest data still imply HUGE Jul-Sep cuts . . .
 Assumes 58% of sows infected
 2.7 pigs lost per sow -- conservative
 Total loss is now near 8 million pigs
6/16/2014 50
PIG LOSS COMPUTATIONS PCT OF PRIOR YR. SLGHTR ADJUSTMENTS
Birth
Month
Monthly
Share
Small Farm
Adjustment
Pigs lost,
thousands
Slaughter
Month
Slghtr Yr
Ago +2.5%
Percent
Change
Cull
reduction Sows
Non PED
productivity
TOTAL
CHANGE
May 4.16% 274.50
Jun 6.51% 492.04 Dec 9705.8 -5.07% 1.00% -1.00% 2.00% -3.07%
Jul 3.62% 336.35 Jan 10205.3 -3.30% 1.00% -1.00% 1.90% -1.40%
Aug 4.52% 352.62 Feb 8806.0 -4.00% 1.00% -1.00% 1.80% -2.20%
Sep 3.62% 306.51 Mar 9549.1 -3.21% 1.00% -1.00% 1.80% -1.41%
Oct 7.05% 519.71 Apr 9592.3 -5.42% 1.00% -1.00% 1.70% -3.72%
Nov 4.52% 404.16 May 9440.7 -4.28% 1.00% -1.00% 1.50% -2.78%
Dec 7.23% 545.21 Jun 8401.1 -6.49% 1.00% -1.00% 1.30% -5.19%
Jan 11.75% 90% 884.27 Jul 9304.3 -9.50% 1.00% -1.00% 1.25% -8.25%
Feb 19.89% 90% 1489.15 Aug 9794.2 -15.20% 1.00% -1.00% 1.20% -14.00%
Mar 16.27% 90% 1372.51 Sep 9249.5 -14.84% 1.00% -1.00% 1.15% -13.69%
Apr 10.85% 90% 960.22 Oct 10680.5 -8.99% 1.00% -1.00% 1.10% -7.89%

Actual slaughter declines have been larger
6/16/2014 51
CHECK AGAINST ACTUAL SLAUGHTER
TOTAL
CHANGE
Slaughter
Month
Total
Slaughter
Pct. Chng.,
yr/yr
Barrow/Gilt
Slaughter
Pct. Chng.,
yr/yr
-3.07% Dec 9730.1 -2.14% 9397 -2.01%
-1.40% Jan 9791.2 -1.66% 9459 -1.39%
-2.20% Feb 8668.2 0.90% 8366 1.10%
-1.41% Mar 8674.6 -6.89% 8356 -6.92%
-3.72% Apr 8855 -5.38% 8527 -5.32%
-2.78% May
-5.19% Jun
-8.25% Jul
-14.00% Aug
-13.69% Sep
-7.89% Oct
. . . Partially due to delayed mktg/higher wts

U.S. sow slaughter is down 5.8% YTD . . .
 94k sounded like a lot of growth from December
through February but the females were available
 Immune sows have value – an incentive to keep
them!!!
6/16/2014 52
. . . Gilt share of slaughter mix surged in April ?

Bigger hogs is a long-term trend, recent increase
6/16/2014 53
. . is unusual -- but so were the steady wts. of ‘07-’08, ‘12

Cutout and hog values have likely TOPPED . . .
 Year-ago prices were too low — Russia, China
 Summer highs were originally expected at $105-
$110
 I’m still at $120-$125 given PEDv losses
6/16/2014 54
. . . Peaks at $130+ were too high – time rationing?

Slaughter forecasts – per March Hog & Pigs
6/16/2014 55
Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge
2013 Q1 27.870 -0.8%
Q2 26.778 0.4%
Q3 27.668 -1.1%
Q4 29.808 0.8%
Year 112.124 -1.0%
2014 Q1 27.134 -2.6% 27.134 27.134 -2.6% 27.134 -2.6%
Q2 25.420 -5.1% 25.787 -3.7% 25.572 -4.5% 25.020 -6.6%
Q3 26.147 -5.5% 26.423 -4.5% 26.285 -5.0% 24.980 -9.7%
Q4 28.817 -3.3% 29.540 -0.9% 29.952 0.5% 28.300 -5.1%
Year 107.545 -4.1% 108.884 -2.9% 109.023 -2.8% 105.434 -6.0%
2015 Q1 27.921 2.9% 27.934 2.9% 26.800 -1.2%
Green figures are actual data from USDA.. Blue figures are estimated using USDA data 4/28/14
March 2014 Hogs & Pigs -- Commercial Slaughter Forecasts
Mizzou ISU LMIC Paragon

My weekly slaughter forecasts for 2014 . . .
6/16/2014 56

Actual, USDA and Paragon only . . .
6/16/2014 57

Price forecasts for March Hogs & Pigs . . .
6/16/2014 58
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
2013 Q1 83.53 80.83 81.08 82.73 83.34**
Q2 91.80 88.06 89.32 90.83 90.66**
Q3 97.90 94.34 95.25 98.00 98.98**
Q4 84.99 82.57 82.98 85.26 83.93**
Year 89.56 86.45 87.16 89.21 89.23**
2014 Q1 93.10 91 - 92 92.44 90.28**
Q2 115 - 125 122 - 128 120 - 125 108 - 112 116.88
Q3 111 - 121 110 - 118 120 - 127 116 - 120 123.61
Q4 90 - 100 90 - 95 86 - 95 94 - 98 100.61
Year 102 - 110 104 - 110 102 - 106 113.70
2015 Q1 81 - 91 84 - 95 95 - 98 89.85
Green figures are actual data from USDA. Blue figures are estimated using USDA data **CME Lean Hog Index 6/3/14
March 2014 Hogs & Pigs -- Price Forecasts

Closing thoughts . . .
 PEDv is not just a short-term hit
- No proven effective vaccine in sight
- What about NEXT winter?
- When does the industry decide it is endemic and
build production capacity to overcome it?
- What happens when a solution is then found?
 Beef per cap supply/consumption will be
permanently smaller
 Chicken output/consumption could make another
quantum leap
6/16/2014 59

Questions or Comments?
6/16/2014 60

Dr. Steve Meyer - Markets, Economic Situation, and Outlook

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Dr. Steve Meyer - Markets, Economic Situation, and Outlook