dr. steve meyer - us pork industry economic situation and outlook

From information, knowledge

Paragon Economics, Inc.

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

BI NC Health Seminar -- August 2014

U.S. Pork Industry Economic Situation & Outlook



U.S Livestock -- Readers’ Digest version . . . U.S. crop conditions are among the

best EVER – maybe 180 bu. corn, 50 bu. beans

CORN: LOWEST SINCE ’10, BEANS: SINCE ’12

- CASH GRAIN: The gravy/ethanol train is GONE!

LH futures: Aug >$115, Above $86 thru Aug ’16 – and all have been MUCH higher

STILL ALL-TIME RECORD-HIGH U.S. REVENUE!!! $US is HALF of its ‘84 high and only

+13% from its March ‘08 lowTRADE REMAINS A POSITIVE!

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Conclusion Number 1 . . .

EVEN THIS GUY WOULD HAVE A HARD TIME SCREWING THIS UP!!!

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Conclusion Number 2 . . .

BUT THIS GUY – MAYBE???

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THIS MARKET HAS A LOT OF MOVING PARTS!

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. . . economists/analysts feel like this guy!



Key Issues for 2014 and beyond Grain Prices and Costs – Are The Bad

Times Really Over For Good? Demand – Can We Make This Last? Beef and Chicken Supplies – Biofuels,

Drought and Production Challenges Hog Supplies – PEDv’s Long Tail?

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In early June – ’14 costs were near $82 . . .

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. . . And ‘15 costs were above $77



Friday -- <$80 for ‘14, <$70 for ‘15!!!!

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The corn supply situation is vastly different

Record high world output & consumption

Projected Y/E stocks the highest in 15 yrs.

MAJOR increase in non-U.S. production

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USDA June 30 report highlights . . .

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USDA Aug Corn S&D – yield of 167.4 . . .

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USDA July

USDA August

% Chng vs '13-14

Acres Planted Mil A 97.2 95.4 91.6 91.6 -4.0%Acres Harvested Mil A 87.4 87.7 83.8 83.8 -4.4%Yield Bu/A 123.4 158.8 165.3 167.4 5.4%Beginning Stocks Mil Bu. 989 821 1246 1181 43.8%Production Mil Bu. 10780 13925 13860 14032 0.8%Imports Mil Bu. 160 35 30 30 -14.3%Total Supply Mil Bu. 11929 14781 15136 15243 3.1%Feed & Residual Mil Bu. 4325 5175 5200 5250 1.4%Ethanol for fuel Mil Bu. 4648 5120 5050 5075 -0.9%Non-Ethanol FSI Mil Bu. 1405 1385 1385 1385 0.0%Exports Mil Bu. 730 1920 1700 1725 -10.2%Total Usage Mil Bu. 11108 13600 13335 13435 -1.2%Carryover Mil Bu. 821 1181 1801 1808 53.1%Stocks/Use Pct. 7.4% 8.7% 13.5% 13.5% 55.0%Nat. Wtd. Avg. Farm Price $/Bu. 6.89 4.40 - 4.50 3.65 - 4.35 3.55 - 4.25 -12.4%Source: USDA World Supply and Demand Estimates

U.S. CORN SUPPLY AND UTILIZATION - AUGUST

Units 2012/13 2013/142014/15

. . . Lower than expected – but will get larger



USDA’s yield model – note coefficient sizes

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’94 & ‘04 deviations imply 179-181 bu/acre!

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. . . “Big crops get bigger” likely applies



USDA yield estimates – Big crop gets bigger!

Year July* Aug Sept Oct Final 1994 125.

4128.4

129.0

133.8

138.6

2004 145.0

148.9

149.4

158.4

160.4

2014 165.3

167.4

180??

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Key development is FLAT ethanol usage . . .

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. . . E10 “blend wall”, flat RFS make exports key



World prod, cons and stocks are record high

The reason is still China – now takes over 60% of world soybean trade

And still growing!

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. . . & S/U is 2nd highest ever – but $11 beans



Bean acres are up by 5 million . . .

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. . . But half of growth is in ND, MN, SD and NE



USDA’s July WASDE soybean S&D . . .

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USDA July

USDA August

% Chng vs '13-14

Acres Planted Mil A 77.2 76.5 84.8 81.5 6.5%Acres Harvested Mil A 76.2 75.9 84.1 80.5 6.1%Yield Bu/A 39.8 43.3 45.2 45.2 4.4%Beginning Stocks Mil Bu. 169 141.0 140 140 -0.7%Production Mil Bu. 3034 3289.0 3800 3816 16.0%Imports Mil Bu. 41 80.0 15 15 -81.3%Total Supply Mil Bu. 3243 3509.0 3955 3971 13.2%Crushings Mil Bu. 1689 1725.0 1755 1755 1.7%Exports Mil Bu. 1317 1640.0 1675 1675 2.1%Seed Mil Bu. 89 99.0 92 92 -7.1%Residual Mil Bu. 8 -94.0 19 19 -120.2%Total Usage Mil Bu. 3103 3369.0 3541 3541 5.1%Carryover Mil Bu. 141 140.0 415 430 207.1%Stocks/Use Pct. 4.5% 4.2% 11.7% 12.1% 192%Nat. Wtd. Avg. Farm Price $/Bu. 14.40 13.00 9.50 - 11.50 9.35 - 11.35 -20.4%Soybean Oil Price Cents/lb. 47.13 38.50 36.00 - 40.00 35.00 - 39.00 -3.9%Soybean Meal Price $/ton 468.11 470.00 355 - 395 340-380 -23.4%Source: USDA World Supply and Demand Estimates

U.S. SOYBEAN SUPPLY & UTILIZATION - AUGUST

Units 2012/13 2013/142014/15



Consider yield deviations in ‘94 and ‘04 . . .

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A problem for meal users: Cheap SBO

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SB oil is equivalent to HO – think “burn rate”

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. . . & it can’t fall much, if any – good for SBM



Summary of grains . . . Do I think corn will be $3 and beans

will be $8?- NO – but $3.50 and $9 are definitely in

play- $9 beans would push meal to near

$300/ton Key issues

- Temperatures have been, if anything, low

- Still need August rain to fill corn and make a bean crop – very doable given soil moisture

- Both crops are somewhat susceptible to an early frost – especially beans

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Implied cash prices – Omaha, Decatur

Both corn and SBM are back in the ’07-’10 range

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Times Really Over For Good? Demand – Can We Make This Last?

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Today’s Econ 101 lesson . . . No, you can’t leave now!!! The change of a good’s price does not

change its demand It does change the quantity demanded

– but that’s good!

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Price

Quantity/Time

P2

P1

Q1Q2

D

S1

S2



Factors NOT in the chart will move demand . . . Incomes – Positive Prices of

substitutes – Positive

Prices of comple-ments – Negative but insignificant for meats

Consumer tastes and preferences – Positive or negative04/11/20

2326

Price

Quantity/Time

D1 D2D3



Consider the determinants of demand. . . Incomes

- More money = more quantity purchased at a given price or higher price for a given quantity for “normal” goods

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Data Source: U.S. Bureau of Economic Analysis

U.S. economy is still slow – but growing yr/yr!. . . Q1 revised to +1.9%, Q2 came in

at +2.4%

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July job gains slowed to +209k but . . .

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. . . Feb-July is best 6 months since APRIL 2006!



Data Source: Bureau of Labor Statistics

Unemployment ticked up to 6.2% in lyne . . . . . . U-6 is down to 12.1% but was

10% in 2008

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2013 RPDI growth averaged 0.1% . . .. . . 2014 has been improving -- +1.7%

avg. YTD

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- Current Situation: Not hindering demand but not providing robust help, either.

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- Current Situation: NOT HELPING DEMAND

Prices of substitutes and complements- Meat prices rose more than CPI in 2013- Beef lost, chicken gained, pork was a

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Drought and Production Challenges

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Broiler flock +4-5% from July-Nov but up . . .

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. . . Small growth Apr-June, July +2.2%



Old flock = fewer, lower-quality eggs have left . .

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. . . Sets and placements near yr-ago, YTD



Chicken output virtually even with ’13 . . .

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Surprise, surprise – chicken prices steady!

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Cattle numbers: Long-term downtrend

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Beef: Unprecedented cow/calf profits!!!!

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MUCH better pasture conditions . . .

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. . . Especially in S. Plains



. . . Feeder supply is down 3% vs. ‘12– record low

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Livestock Marketing Information CenterData Source: USDA-NASS

Placements are coming from a TIGHT supply



What do FC supplies mean? – Consider . . .

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. . . Feedlot costs of GAIN have fallen 32%



But total fed cattle cost is skyrocketing. . .

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. . . Due to the feeder market at $200+



May & June plcmts were -7%, March & April were -5%

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Beef prod is down 5.7% YTD & cow is –12.4%

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Beef consumption/supply will be -5.3% yr/yr . . .

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. . . And down another 3% in 2015!

Livestock Marketing Information CenterData Source: USDA-NASS



RECORD-HIGH cutout values – again this week!

Weekly averages at and above $260!!! We expected $215-$225 for cutouts thru

June – usually the seasonal low point! Pork prices helped – but we think beef is

now helping pork again04/11/2023 48



Conclusions about incomes and other goods Incomes – Slightly positive and

gaining- Improving but the gains are SLOW- Still a lot of uncertainty, mistrust

Substitute prices -- Positive- Record-high beef, higher-than-expected

chicken are both helping pork- Important but cross-elasticities are

small The only demand-shifting factor

left is consumer tastes and preferences

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And things are MUCH better for animal fats . . .

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. . . protein is in, carbs are out – BIG CHANGE!



So what we are seeing now is . . . Some reduction in Supply that would

cause a nominal price increase And a BIG boost from Demand!

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Price

Quantity/Time

P2

P1

Q1Q2

D1

S1

S2

D2



Per cap cons.: -10% vs. ‘04, flat thru ’15 . . .

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. . . But this is mainly due to PRODUCTION!



The evidence of strong demand is PRICES . . . . . Beef, pork records but increases

are slowing

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Demand indexes were ALL higher for 2013!

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. . . First time that has ever happened



Meat/Poultry RPCE was higher all of 2013

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January meat/poultry RPCE was soft . . .

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. . . But it began picking up in February



Pork and beef (red meats) are the big factors. . .

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U.S. pork exports exploded in March and . . . . . . But have softened markedly

since- PRICES

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Mexico may overtake Japan as #1 U.S customer . . . Mexico, Korea and Russia have

grown in ‘14

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Drought and Production Challenges Hog Supplies – PEDv’s Long Tail?

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March H&P: Bearish vs. expectations!

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Inventories on March 1*

All hogs and pigs 65072 62899 96.7 94.6 2.1Kept for breeding 5836 5851 100.3 99.4 0.9Kept for marketing 59236 57048 96.3 94.1 2.2

Under 50 lbs. 18852 18101 96.0 93.5 2.550-119 lbs. 16251 15717 96.7 94.2 2.5

120-179 lbs. 13169 12793 97.1 94.1 3.0180 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 1.1Dec-Feb Pig Crop* 28,099 27,316 97.2 96.4 0.8Dec-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 REPORTMarch 28, 2014

. . . But definitely picked up some impact



Monthly data – BIG drop in litter size but . . .

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. . . a slight (curious) improvement for Feb



The devil was in the details, though . . . March H&P would put quarterly 2014 slghtr

totals down 2.1 (3.6), 3.4 (4.4), 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

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Latest PEDv info – thru 7/12 shows some gains

U.S.: New low of 79 weeks of 7/5 & 7/19 IA had the largest number of accessions IA, MN & IL are only ones in double

digits04/11/2023 64



But HOW MANY pigs were being lost? Early on – observers kept a tally of

sows- Oklahoma – pretty easy- North Carolina – not too hard since you

actually TALKED to each other!- Iowa and Midwest - -No hope of

keeping up Developed some “rules of thumb” on

numbers lost per sow infected- 2.5 to 3.5, depending on the time

horizon- Some farms with lingering issues had

higher losses

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If we have a total, then need timing. . .

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. . . I used suckling pig accessions



May-June data still imply HUGE fall cuts . . . Assumes 58% of sows infected since

5/13 2.7 pigs lost per sow -- conservative Total loss is now over 8 million pigs

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PIG LOSS COMPUTATIONS PCT OF PRIOR YR. SLGHTR ADJUSTMENTSBirth Month

Monthly Share

Small Farm Adjustment

Pigs lost, thousands

Slaughter Month

Slghtr Yr Ago +2.5%

Percent Change

Cull reduction Sows

Non PED productivity

YR/YR SLGHT

May 0.00% 0.00Jun 0.85% 56.31 Dec 9705.8 -0.58% 1.00% -1.00% 2.00% 1.42%Jul 0.79% 65.08 Jan 10205.3 -0.64% 1.00% -1.00% 1.90% 1.26%Aug 3.47% 241.13 Feb 8806.0 -2.74% 1.00% -1.00% 1.80% -0.94%Sep 2.38% 208.96 Mar 9549.1 -2.19% 1.00% -1.00% 1.80% -0.39%Oct 5.42% 393.60 Apr 9592.3 -4.10% 1.00% -1.00% 1.70% -2.40%Nov 5.42% 439.31 May 9440.7 -4.65% 1.00% -1.00% 1.50% -3.15%Dec 7.19% 555.94 Jun 8401.1 -6.62% 1.00% -1.00% 1.30% -5.32%Jan 11.40% 90% 859.96 Jul 9304.3 -9.24% 1.00% -1.00% 1.25% -7.99%Feb 15.11% 90% 1168.37 Aug 9794.2 -11.93% 1.00% -1.00% 1.20% -10.73%Mar 15.90% 90% 1276.42 Sep 9249.5 -13.80% 1.00% -1.00% 1.15% -12.65%Apr 13.95% 90% 1159.60 Oct 10680.5 -10.86% 1.00% -1.00% 1.10% -9.76%May 12.13% 90% 1009.69 Nov 9882.4 -10.22% 1.00% -1.00% 1.05% -9.17%Jun 5.97% 90% 576.05 Dec 9973.4 -5.78% 1.00% -1.00% 1.00% -4.78%



Rabobank made me look like an OPTIMIST!

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. . . As they had Aug at -15%, Sept at -20%



Actual slaughter declines have been larger

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. . . Partially due to delayed mktg/higher wts

YR/YR SLGHT

Slaughter Month

Total Slaughter

Pct. Chng., yr/yr

Barrow/Gilt Slaughter

Pct. Chng., yr/yr

1.42% Dec 9730.1 -2.14% 9397 -2.01%1.26% Jan 9791.2 -1.66% 9459 -1.39%

-0.94% Feb 8668.2 0.90% 8366 1.10%-0.39% Mar 8674.6 -6.89% 8356 -6.92%-2.40% Apr 8855 -5.38% 8527 -5.32%-3.15% May 8619.7 -1.96% 8311 -1.72%-5.32% Jun 8099.5 -5.89% 7795 -5.85%-7.99% Jul 8392 -6.80%

-10.73% Aug-12.65% Sep-9.76% Oct-9.17% Nov-4.78% Dec

CHECK AGAINST ACTUAL SLAUGHTER



A bullish June Hogs and Pigs report . . .

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Inventories on June 1*

All hogs and pigs 65188 62128 95.3 97.0 -1.7Kept for breeding 5884 5855 99.5 101.6 -2.1Kept for marketing 59304 56273 94.9 96.6 -1.7

Under 50 lbs. 19135 17999 94.1 98.1 -4.050-119 lbs. 17078 16071 94.1 96.3 -2.2

120-179 lbs. 12414 11931 96.1 95.3 0.8180 lbs. and over 10678 10271 96.2 96.4 -0.2

Farrowings** Mar-May sows farrowed 2,806 2,797 99.7 102.5 -2.8

June-Aug Intentions 2,890 2,893 100.1 102.1 -2.0 Sep-Nov Intentions 2,780 2,880 103.6 102.6 1.0Mar-May Pig Crop* 28,921 27,361 94.6 97.7 -3.1Mar-May pigs saved per litter 10.31 9.78 94.9 95.2 -0.3*Thousand head ** Thousand Litters Source: Urner Barry

USDA QUARTERLY HOGS & PIGS REPORTJune 27, 2014

Category 2013 2014'14 as Pct of

'13

Pre-Report

Est's

Actual minus

Est.



Where are we now? Since June 1 . . .

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. . . FI hog slaughter -6.2%, barr’s/gilts -5.9%



Given current and future profitability . . .

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. . . Why have we seen no growth as of June?



Reasons for slow growth . . . USDA has likely missed some growth

– IA down 30k? MN down 10k? TX unchanged?

Hedges – Those who hedged haven’t seen the extreme profits of the cash market

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Neg’d prices: +$30 in March, +$20 in June . . .

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. . . Hedged prices still record high vs. history



Reasons for slow growth . . .

“Alligators” – PEDv has been all-consuming

Gilt availability – multiplier and GP herds

Time – It’s pretty quick to have expanded

04/11/2023 75

USDA has likely missed some growth – IA down 30k? MN down 10k? TX unchanged?

Hedges – Those who hedged haven’t seen the extreme profits of the cash market

Capital – Millions sent to CME to cover margins – not available for expansion now



U.S. sow slaughter is down 6.0% YTD . . .

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. . . Gilt share has been very normal since June



Bigger hogs is a long-term trend but . . .

04/11/2023 77

. . . Recent growth: Costs, profits, hog numbers



Question: Will weights fall much more?

USDA estimated weights: Steady for 6 wks.

Packer operations exerting big influence

MPR weights fell 0.1 lb. last week Normal seasonal bottom is in mid-Aug04/11/2023 78



Cutout set a new YTD high in mid-July . . .

We had summer highs at $120-$125 – and the market beat those

Last three weeks – another adjustment to “normal”??? Look at 5-yr average pattern!

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. . . so did hogs but sharply lower since



Cuts – now on seasonal the down side of all!

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. . . Loins, bellies steady; hams $106, trim $116



Slaughter forecasts – per June Hogs & Pigs . . .

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Mil. Hd % Chnge 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 27.580 -1.0% 27.428 -1.6% 27.214 -2.4% 27.320 -2.0% 27.134 -2.6%

Q2 25.420 -5.1% 25.787 -3.7% 25.572 -4.5% 25.020 -6.6% 25.649 -4.2%

Q3 26.459 -4.4% 26.340 -4.8% 26.173 -5.4% 25.520 -7.8%

Q4 28.348 -4.9% 28.198 -5.4% 28.372 -4.8% 28.000 -6.1%

Year 107.525 -4.1% 107.753 -3.9% 107.253 -4.3% 105.860 -5.6%

2015 Q1 27.000 -0.5% 26.184 -3.5% 27.642 1.9% 26.600 -2.0%

Q2 26.241 2.3% 25.316 -1.3% 26.637 3.9% 25.550 -0.4%

Q3 27.362 3.4% 27.496 5.1%

Q4 29.957 5.7% 29.975 5.6%

Year 110.557 2.8% 111.750 4.2%Red figures are analysts' last FORECAST for the given quarter (Q1 done in Dec, Q2 done in Mar, etc.) 7/1/14

Blue figures are estimated using USDA data

Mizzou ISU LMIC Paragon ACTUALJune 2014 Hogs & Pigs -- Commercial Slaughter Forecasts

. . . I fudged a bit: PRRS? Relapses? USDA regard

FI slaughter Q2 to-date: -7.4%, yr/yr



BIG yr/yr slaughter reductions since 7/1. . .

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. . Aug will be closer due to pulled-ahead mktgs



Price forecasts per June Hogs & Pigs . . .

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Mizzou ISU LMIC Paragon CME

Producer-Sold Net Price, All

Methods

Ia-Mn Producer-Sold

Neg'd Base

National Wtd Avg. Base Price

National Net Neg'd Price,

Wtd. Avg.

CME Lean Hog Futures

2013 Q1 83.53 80.63 81.08 82.73 83.34**Q2 91.80 89.30 89.32 90.83 90.66**Q3 97.90 95.58 95.25 98.00 98.98**Q4 84.99 81.28 82.98 85.26 83.93**Year 89.56 86.70 87.16 89.21 89.23**

2014 Q1 93.10 93.10 91.44 92.44 94.91**Q2 113.46 115.38 111.70 116.74 117.48**Q3 125 - 130 120 - 128 117 - 121 124 - 130 114.27Q4 99 - 109 98 - 104 94 - 99 100 - 106 92.45Year 107 - 111 106 - 110 104 - 106 108 - 111 104.78

2015 Q1 90 - 100 87 - 97 92 - 98 92 - 98 86.83Q2 91 - 101 90 - 96 95 - 102 95 - 101 88.93Q3 85 - 95 92 - 100 93 - 99 86.43Q4 77 - 87 79 - 88 82 - 88 75.69Year 85 - 95 90 - 97 90 - 96 84.47

Green figures are actual data from USDA. Blue figures are estimated using USDA data **CME Lean Hog Index 8/15/14

June 2014 Hogs & Pigs -- Price Forecasts



What do I expect over the next 2 years? Low costs vs. ‘10-’13 except for

drought- Corn $4 to $5 with some $3s and,

maybe, $6s- Meal $300-$400 with some top side risk- ISU (old) cost model: $70-$80/cwt

carcass Demand will stay strong barring an

export disruption or major food safety event- Positive views of protein and animal fats

and bad view of carbs and trans-fats continue

- Beef prices will stay high through 2016- Exports will grow but at a slow(er) rate



What do I expect over the next 2 years? Slow BH growth this fall—previous

factors Regardless of PEDv development I

expect rapid growth (3-4%) in 2015 – with siting challenges being the potential roadblock

2015 and beyond depends heavily on PEDv prevalence, vaccine, management

Weights will stay high until space is tight – and maybe from now on!

A potential MESS in 2016 – supplies, capacity in Q4



If you would like more of my work . . .

CME’s Daily Livestock Reportwww.dailylivestockreport.com

National Hog Farmers’ North American Preview

www.nationalhogfarmer.com

http://www.dailylivestockreport.com/



Questions or Comments?

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dr. steve meyer - us pork industry economic situation and outlook

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