Feed: Sourcing, Pricing and Evaluating

Bart BorgMurphy Brown LLC

Ames, Iowa

Outline

• Shuanghui International purchase of Smithfield Foods

• Key decision points for:– Feed pricing– Feed sourcing– Feed quality and efficiency evaluation

• Wrap up

Transaction Overview

• On September 26, 2013, Smithfield became a wholly-owned subsidiary of Shuanghui International Holdings Limited, creating a leading, vertically integrated global pork enterprise

• Smithfield will continue to operate as Smithfield Foods and under its existing brand names

Who is Shuanghui?• Shuanghui International Holdings Limited is a Hong

Kong-based holding company, which owns a variety of businesses that include food and logistics

• Shuanghui International and its subsidiaries are the majority shareholders of China’s largest meat processor, Henan Shuanghui Investment & Development Co.

• Shuanghui began operating a single meat processing plant in Luohe City, part of Henan Province, China, in April of 1969

• Shuanghui International counts among its shareholders CDH Investments, Goldman Sachs, New Horizon, Kerry Group, and Temasek, as well as Shuanghui employees and management

4

The Same Old Smithfield, But Better!

• No changes expected in how Smithfield does business operationally in the U.S. and throughout the world

• Shuanghui is committed to maintaining Smithfield operations, staff and management:– Headquarters will remain in Smithfield, VA – No closures at facilities and locations– Management teams and workforces will continue in

place• Smithfield will continue to work with the same U.S.

producers and suppliers

5

Who is Shuanghui?

7

Partnership that is all about Growth

• China has 1.35 billion people, many of whom are moving rapidly into the middle class and desire more and better-quality protein in their and their family’s diets

• Pork is by far the leading protein in the Chinese diet, representing over 60 percent of all protein consumed

• Chinese consume more than 20 pounds more pork per capita per year than Americans

• Over the last 15 years, Chinese per capita consumption has grown by 25 percent and US per capita consumption has shrunk by 10 percent

• Pork is the number three protein in the US, but the number one protein in China

• China is responsible for 50 percent of the world’s pork consumption and their demand is still growing, whereas pork demand in the US has been declining for almost 15 years

8

Improving the Agricultural Environment in US and China

• Growing exports is a key strategic objective for this partnership

• Exports currently account for 30 percent of Smithfield’s fresh pork revenue

• Exports are also critical to the US industry on a whole

• China is the fastest-growing and largest overseas market in terms of potential demand

Corn Harvest in Henan Province, China

Feed: Largest Variable Cost

Mar

-09

Apr-09

May

-09

Jun-0

9

Jul-0

9

Aug-09

Sep-0

9

Oct-0

9

Nov-09

Dec-0

9

Jan-1

0

Feb-1

0

Mar

-10

Apr-10

May

-10

Jun-1

0

Jul-1

0

Aug-10

Sep-1

0

Oct-1

0

Nov-10

Dec-1

0

Jan-1

1

Feb-1

1

Mar

-11

Apr-11

May

-11

Jun-1

1

Jul-1

1

Aug-11

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%Fe

ed a

s % o

f tot

al c

osts

Source AgriStats, 2011

Sensitivity Analysis – Hog Production

Feed Energy Content and Cost of Production

Feed Energy Content

Average Daily GainFeed ConversionFeed milling and transport capacity

Cost of Production

Routine Ingredient Price Monitoring

• Important to bench mark alternative ingredients to a standard (i.e. corn)

• Three scenarios:– Seasonal ingredient price flux relative to corn-

midds– Little flux relative to corn – DDGS– Opportunities in particular regions and significant

change over time - fat

Oil removal occurring across plants at a rapid rate

Feed Source Modeling Output

Feed Sourcing Considerations• Unbundle the cost of feed delivered to the

farm• Feed milling costs

– Pellets or mash; micron size of grain

• Feed transportation costs • Feed ingredient costs

– Highly influenced by grain micron size– Alternative ingredient opportunities

• The combination of the three is our eventual cost of feed at each site

Feed Processing Opportunities

Grinding• Reducing particle size of grain increases

surface area• Improved digestion – improved feed

conversion• Reduces diet costs to achieve the same dietary

energy content

ME Content of Corn with Differing Micron Size

315 6003800

3850

3900

3950

4000

4050

4100

Micron size

Kca

l/kg

, DM

-- U of IL/Renessen, 2008

5% ME difference

Diet Cost per Ton at Various Corn Costs and Micron Sizes *

Corn Cost, $/bu

Corn Micron Size 3.00 6.00

400 164.04 255.85

600 169.72 266.36

800 175.12 276.33

* Isocaloric diets using fat addition to standardize energy content and fat prices held at 350% of corn

Cost/pig fed would differ by approximately $3.30/pig

Milling Energy and Pellet Durability Across Various Corn Micron Size

Micron Size1,000 800 600 400

Pellet durability, %

78.8 79.4 82.4 86.4

Milling energy, Kwh/ton

2.66 3.06 3.81 8.09

Milling cost, $/ton

.213 .244 .306 .647

Wondra et. al., 1992Electricity at $.08/kwh

Evaluation of Pelleting• Production considerations;

– Feed conversion impact or diet cost reduction– Potential for improved ADG– Mortality change with some genotypes??– Opportunity to use increased amounts of

ingredients that may cause bulk density or flow challenges

• Fine ground grain• Alternative ingredients – bakery by-product, wheat

midds, etc.

Estimated net financial value is $12-13 per ton compared to mash

Effect of Diet Form on Finishing Feed Conversion

Meal 90% Pellets 70% Pellets 50% Pellets 30% Pellets2.30

2.35

2.40

2.45

2.50

2.55

2.60

SEM = .05; Quadratic response P<.008Murphy Brown LLC, 2003

$2.60/ head opportunity

--Stark, NC State, 2011

Feed Evaluation• Nutrient content monitoring and validation

– Are you getting what you’re expecting• Simple moisture, protein, fat and macro mineral

analysis

• Mycotoxin testing and monitoring– Set maximum allowable mycotoxin specification

from the feed source and/or verify through periodic testing

• Efficiency of use (i.e. feed conversion)

Projected Feed Cost Savings,$ per market pig

Corn price, $/bushel*:Feed efficiency improvement:

$5.00 $6.00 $7.00

6%$ 4.12 $ 4.89 $ 5.66

8% $ 5.50 $ 6.52 $ 7.55

10% $ 6.87 $ 8.15 $ 9.44

*Assumes a constant price ratio of corn to SBM and fat

Feed Efficiency:• Outcome metric not a lead indicator• Marginal metric for effective benchmarking• Requires extensive standardization adjustments

– Mortality – Dietary nutrient levels (ME and AA density)– Physical form– Market weight– Paylean use– Place weight

Drivers of Feed Conversion Change• Dietary energy/nutrient content

– Use of pellets or mash feed - Enzymes??– Grain micron size

• Lean deposition rate– Sex - Improvest– Genetics - Paylean

• Placement and sale weight• Health status- livability

• When your plan for any of the above varies, the outcome based Feed/Gain expectation can vary tremendously.

Making Sense of Feed Conversion in a Production System

Example of Standardized Feed Efficiency• Plan 2.775• Actual 2.718 Difference 0.057 better than plan• Adjusted plan 2.685 Difference -0.033 worse than plan Estimated cost variance $-0.36 per cwt• The key is being able to define as much of the

variance of adjusted plan to actual as is possible.

Average Daily Lactation Feed Intake

Weaned Pig Weight

Lactation Feed Conversion

Summary• Feed sourcing decisions become much more clear

when the delivered to the farm cost is unbundled into milling, delivery and ingredient costs.

• Monitoring key ingredients relative to corn can help in identifying opportunity purchases.

• Grain micron size if a key driver in overall diet digestibility and resulting costs.

• Many variables effect the feed conversion metric. It is important to understand their individual impacts and adjust expectations accordingly.