Executive Report Released January 23, 2012 (Version )

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1 Market Recaps Executive Report Released January 23, 2012 (Version ) Cattle and Beef What will be remembered most about the last quarter of 2011? Will it be historical prices of beef and cattle? Will it be that a large retailer of beef had decided to sell higher quality beef, thereby changing some market fundamentals? How about export demand? Certainly all of the aforementioned played a role in the beef market in Q While a main storyline coming out of Q was the drought in the southern states which played havoc with the cattle markets, most newsworthy in Q was the effect of a new retail beef program that a large domestic retailer implemented in Q The program offered upper 2/3rds choice product, rather than their typical offerings of lower quality grade beef. The roll out of the new retail beef program not only removed quite a bit of choice product from the wholesale market which firmed choice values, but affected the choice vs. select pricing spread which moved to as high as $19.40 in November and averaged $17.48 for the quarter. The domestic buying sector of the beef market looked at decreased availability of product in Q The amount of available supply of U.S beef onto the domestic market was about 3% lower in Q when compared to Q and also approximately 3% down when analyzed with Q Exportation of U.S. beef during 2011 increased nearly 27%, with trading partners such as South Korea, Japan, Mexico, and Canada remaining as key players in the export market. The most recent data about Q exports shows that November was 4 percent higher in volume and 17 percent increased in value when contrasted with November 2010 data. Not only was the volume of exports sharply higher throughout 2011, but when the final results are posted for December exports, the total value of the beef export market will show it hit an historical high of over $5 billion. Industry participants received news in Q that Japan may soon revise their protocol for acceptance of U.S. beef, which they currently only allow product fabricated from animals that are 21 months or younger. Beef processors continued the struggle to keep pace with cattle markets, and at times during the 4th quarter of the year found their operating margins deeply mired in negative territory given the cost of front end supply. During Q4 2011, the CattleFax 6-State Fed Steer Price averaged $122.03/cwt, contrasted with the 3rd quarter of 2011 price of $113.45/ cwt. Q saw the average sale price land just above $99/cwt. The higher cost of wholesale beef lent to the USDA s Retail Prices staying at historically high levels. Urner Barry s Yellow Sheet Beef Index in Q average price was $183/cwt, approximately 3% above the previous quarter, and nearly 19% above Q The price of USDA s Choice Beef according to the update on 12/16/2011 came in at $5.00 lb; the All Fresh pricing was reported at $4.50/lb. As a result of a decreased amount of Federally Inspected Cattle entering the slaughter mix in Q4 2011, Commercial Beef Production for the quarter dipped about 3 percent from levels seen in Q Production could have seen a larger decline in the quarter, but the steer dressed carcass weight came in about 6 pounds higher in the fourth quarter of 2011 over weights recorded in Q Beef processors edged their Federally Inspected Slaughter lower in Q when compared to both Q and Q Approximately 4 percent less fed cattle were harvested in Q when analyzed against the prior quarters data. A 3 percent decline was seen in Slaughter when contrasted with the same period in Fresh 50s opened Q4 with prices trending higher in both October and November. October s average price of $97.98 was up about $2/cwt compared to September, and up about 38% compared to November experienced an astounding 62.26% increase compared to the prior year. Q4 did end with prices moving a little lower as December s average price dropped to $103.74/ cwt. Strength in that market was attributed to active demand. The fourth quarter of 2011 opened with leaner boneless beef prices that continued to move lower. October s monthly average for fresh 90s was $174.17/cwt; that was roughly $3.50/cwt lower than September s average price. November s price of $183.98/cwt was about 23.5% higher than the equivalent time period for Prices continued to climb in December where the average price for that month was assessed at $194.90/cwt. Premiums in that market were credited to a combination of strong demand and limited availability of imported beef. Obsono s Executive Report A publication of Obsono, LLC P.O. Box 312, Bayville, NJ 08721

2 Hogs and Pork If there is one thing that we should take away from this year in the pork industry, it is that exports have become an even more dominant factor that can often cause more of an impact in prices than many domestic events. We have seen that even when demand within the borders of the United States falters, the consistent need for pork from countries such as China, Mexico, Japan, Canada, South Korea and others can fully support, and on numerous occasions, lead to sharp premiums across various lines. According to estimates provided by the USDA, exports are expected to total billion pounds for This figure would represent a 17.8 percent increase from total exports in To add further perspective, the same report estimates growth in domestic pork production at 1.3 percent for This results in exports as a percentage of domestic production at percent, compared to percent in These figures, and future estimates, signify less pork available for domestic consumption. The U.S. inventory of all hogs and pigs on December 1 was 65.9 million head, up 2 percent from December 1, 2010, yet down 1 percent from Q3. Breeding inventory at 5.8 million head was up slightly from last year, but down less than 1 percent from the previous quarter. Market hog inventory, at 60.1 million head, was up 2 percent from last year yet down 1 percent from the past quarter. According to the USDA National Average of Direct Hogs, the average price for hogs during the fourth quarter of 2011 was $87.91, a percent decrease from the third quarter average of $97.78/head. In comparison, hog values fell by over 18 percent in 2010 during the same period. The less pronounced discounting in hog values can be attributed to the continuous demand for pork abroad, limiting the downside prospects of live hogs for The average number of pigs per litter for the September-December 2011 period was 10.02, a 1.31 percent increase from the average of 9.89 of the same period last year. The average dressed weight of a hog notably increased from the third quarter after weather eased from the oppressive heat seen during the summer. In the final quarter of 2011, the dressed weights averaged pounds, compared to pounds last quarter and pounds the year prior. In perspective, however, this increase of approximately 11.2 percent from Q3 to Q4 is almost identical to the 2010 increase of 11 percent. Hogs in Q3 of 2010 only weighed half a pound heavier than in 2011, a result of a more mild summer that year. The pork cutout which is a composite of pork cuts, trimmings and variety meats retraced to more normal levels from the record highs seen in the third quarter of The cutout ranged between $85.26 and $98.21, averaging $ This figure represents a 7.11 percent decrease from the previous quarter. Operating margins improved substantially from last quarter due to lower feed costs and higher wholesale values. According to the Dow Jones Pork Packer Margin Index, standard operating margins ranged between $.30 and $17.18, while averaging $10.08 for the quarter. Compared to last quarter, margins were up a much improved percent, while down over 110 percent from last year. After reaching record highs during the summer, ham values continuously Commercial production for the 4th Quarter of 2011 increased by percent from the previous quarter. In comparison to 2010, this increase is nearly.6 percent less than that of the same period a year ago. The summer of 2011 provided producers with record hog prices, which as a result boosted production in the 3rd quarter, providing a less dramatic increase from Q3 to Q4 of The export data available for the end of the year shows that trends for the three largest destinations of U.S. pork remained in place throughout Totals for Japan and Mexico have tracked generally sideways for several years while inflationary issues and an overall boom in pork demand have resulted in Chinese exports growing by a staggering percent between the January-November periods of 2010 and 2011 eroded throughout the fourth quarter. Holiday demand was fair at best through the Thanksgiving and Christmas periods, however, export interest to Mexico made up for less than optimal domestic business. Values of heavy hams traded between $72 and $92/cwt in Q4, with an average price of $76.29/cwt. This average was 4.95 percent less than the previous quarter, yet over 10 percent greater than a year ago. After one of the most dramatic third quarters in recent history, pork bellies traded in a much tighter range for Q4. Demand is historically low during this time period, resulting in the majority of belly trade destined for the freezer. As such, the primary sizes of bellies (14/16) traded between $1.05 and $1.30/cwt, averaging $1.16 for the quarter. This figure is over 11 percent less than the previous quarter, yet a substantial percent higher than Much like bellies, the market for pork trim is typically somewhat lackluster for the fourth quarter, as BBQ season is over and hotdog and pizza topping sales for Super Bowl have yet to occur. As such, fresh 50 s averaged $53.73 for the period; a nearly 33 percent decrease 2

3 from Q3 yet 46.8 percent more expensive than the same period in Similarly, Fresh 80 s traded with an average price of $83.87 over the fourth quarter, which is 16.3 percent less than Q3 but percent greater than the previous year. Like most items, trimmings were hard pressed to recover from the summer s record prices, remaining supported by exports even as domestic interest faltered. Among retail pork products, double-digit gains were seen in all major categories; both on a year-to-year basis and when compared to the 5-year average. Just like most of the aforementioned items in this report, export is the underlying and motivating factor in support of higher retail pork products. A lesser concern, but still a factor despite the increases, is pork s ability to remain competitive in domestic markets when compared to other protein choices. Pork s still-attractive price points compared to the price points of other proteins uniquely position it for success at retail. Fresh breast meat experienced strong prices during fourth quarter The lack of frozen inventories to pull from lead to stability in the markets through the year s end. Turkey The final months of 2011wound down without event. Whole birds started the fourth quarter in a record high position and continued on an upward price path until early November. Urner Barry s quotations exceeded 2010 s record high levels attaining yet another historical mark by early November at $ Fill-in demand wasn t aggressive but it did serve to clean up frozen offerings and absorb fresh turkey supplies. Following Thanksgiving the market started declining and closed the year at $1.06/lb.--an historical peak. Breast meat stayed solid through most of the fourth quarter finally experiencing some pressure in December to close the year at $2.50, about where 2010 left off. Breast meat freezer stocks were in a fairly close balance all year despite demand that was at times only hit or miss. When needs arose there were no frozen inventories to pull from leading to market stability through the year s end. Parts were a 2011 focus of attention as most ran at or near record highs. The fourth quarter however, experienced withdraw in export demand which immediately put pressure on the values of drums and wings as December drew to a close. Nevertheless these items still exhibited strong values. The production discipline displayed by the industry during 2010 gave way to modest increases during Turkeys slaughtered through the end of November were up about two percent with live weight up three percent. Final 2011 figures are expected to be somewhat more moderate. During the fourth quarter egg sets were down shy of two percent from YTD figures were up about two percent. December 31 whole bird storage holdings closed at 52 million pounds; not at the record low point of 2010 but nevertheless very manageable. Total turkey stocks were million pounds. Looking ahead flat to moderate increases in slaughter and continued strong market values are expected to characterize Chicken Last quarter we concluded our commentary with the phrase, Looking ahead, the management of production will be extremely important The value of whole body turkeys during the fourth quarter exceeded 2010 s record high levels attaining yet another historical mark by early November at $ Following Thanksgiving the market began its seasonable trek downward closing the year at $1.06/lb. another milestone among many during if the overall position of the market is to remain stable to better. The fourth quarter more or less proved this statement true as production remained culled and the majority of the items making up the chicken complex portrayed sturdy market conditions overall. Especially given the time of year, items such as cutlets, tenders and some dark meats defied the odds and remained flat to even a bit improved throughout the last three months. Tenders, in fact, advanced by $0.32/lb. in that time frame. Wing quotations also improved during the fourth quarter of the year but this happening is not so unusual for October December. The significance of the improvement could be considered out of the ordinary however. The value of wings moved up from $1.09/lb. on the first of October to $1.61/lb. to end the year. That s a bump of $0.52/ lb. in only three months time! It s worth noting that December s end price of $1.61/lb. was only $0.13/lb. off the record high which was set two years prior. Looking ahead, of course production, whether high or low, will be a pertinent influencer of the overall market picture. Another truism around the industry is that any sort of uptick in demand will be a necessity for market improvement. 3

4 Omaha Corn, U.S. 2 Yellow (Cash Prices) Cash corn prices averaged $6.26/bu basis Omaha, Nebraska during the fourth quarter, averaging $0.79/bu lower than the third quarter of 2011 and $0.91/bu higher than the fourth quarter of The January reports released by the USDA included a flurry of fundamental news for the market to digest. The USDA increased the 2011 U.S. corn production to billion bushels (+0.3%). Quarterly corn stocks on December 1, 2011 were pegged at billion bushels, which was larger than expected and drove futures price limit-down ($0.40/bu) on the day of the report. The USDA also released the monthly balance sheet revisions for the domestic and global markets. On the global front, the USDA revised corn production for Argentina 10 percent lower from the previous estimate, which will still be record large if realized. Production estimates have been trimmed over the past thirty days amid hot/dry growing conditions. Projected global corn stocks to use levels improved from 14.6 to 14.8 percent, sustaining the higher trend in place since last summer. U.S. stocks to use levels were unchanged at 6.7 percent as an increase in projected exports offset the larger production number. Corn used for ethanol was left unchanged at 5.0 billion bushels. Old crop corn stocks to use levels remain historically low and are expected to range from % into the spring. Corn prices basis Omaha, Nebraska are expected to now find strong resistance near $6.50/bu into the spring with support in the $5.25-$5.50/bu range. % % ($/bsh) 2010 Chng 2011 Chng 2012 % Chng Q % % % Q % % % Q % % % Q % % % Production and Price Projections Production Projections (pounds in billions) 2010 % Chng 2011 % Chng 2012 % Chng USDA Commerical Production, Beef % % % USDA Commerical Production, Pork % % % USDA Chicken Slaughter RTC % % % USDA Turkey Slaughter RTC % % % Cutout/Index Projections ($/lb) 2010 % Chng 2011 % Chng 2012 % Chng YS Beef Cutout Choice Light ($/cwt) % % % YS Pork Cutout ($/cwt) % % % UB Chicken Index % % % UB Turkey Index % % % 4

5 Production and Price Commentary OBSONO S EXECUTIVE REPORT Cattle and Beef Prices for fed cattle continued to trade at record levels last quarter as strong exports and better than expected beef demand kept cattle sellers firm. Prices are anticipated to increase during the first quarter of 2012 as supplies will tighten as the quarter progresses and demand will increase as the weather starts to warm with the onset of spring. Exports are expected to eclipse year ago levels as well, adding to the strength. The overall cattle herd continues to shrink. The drought has eased somewhat in the southern plains, but ranchers do not have enough grass to expend the herd at this point. If we continue to receive some timely rains though look for cow slaughter to be reduced which could add to trimming prices. Beef imports are forecast to grow modestly in the first half but with the weak U. S. dollar but may not grow enough to offset the smaller domestic cow slaughter. During the 1 st quarter of 2012, look for fed cattle prices to work to or slightly above the $130 level by late in the quarter which would be another new record high. Beef prices would need to move to $2.05 to $2.10 on the Choice cut-out to sustain these levels, so if this forecast is to be correct demand and retail prices will also have to improve further which may be a struggle at this point. Profitability could be limited at the packer and cattle feeder level for much of Hogs and Pork Wholesale pork prices were up 14% and live hog prices were up 21%, while pork production was up 1% in This combination would suggest that wholesale pork and live hog demand was very strong through Due to profits within the industry, stabilization and some mild expansion was noted in 2011 which will lead larger pork production levels in From January through November, U.S. pork exports were up 22%. Increases were noted to China, South Korea, Japan, Canada, Russia, and Australia, with declines noted to Hong Kong and the Philippines. In 2012 pork exports are expected to be larger than year earlier levels. Chicken Young broiler production (ready-to-cook weight) is expected to total 8.89 billion pounds in the fourth quarter of 2011, declining 6.2 percent compared to the fourth quarter of Production in the first quarter of 2012 is projected at 8.91 billion pounds, down 4.1 percent compared to the first quarter of First quarter slaughter levels are projected to decline 4.3 percent compared to last year. Heavier average slaughter weights are expected to partially offset the decline in slaughter levels. Wholesale chicken prices, basis the UB Chicken Index, averaged $0.69 per pound during the fourth quarter, which up 6 percent compared to the third quarter of 2011 and up 14 percent compared to the fourth quarter of Prices during the first quarter of 2012 are expected to rise sharply above 2011 levels. Turkey Young turkey production (ready-to-cook weight) is projected at 1.47 billion pounds for the fourth quarter of 2011, declining 1.7 percent compared to the fourth quarter of 2010 and rising 4 percent above the third quarter of Production levels are forecast to rise 2 percent above year-ago levels during the first quarter of The UB Turkey Index averaged $1.16 per pound during the fourth quarter of 2011, rising 5 percent above the third quarter of 2011 and rising 5 percent above the fourth quarter of

6 Price History and Projections Cattle and Beef Cattle-Fax Live Cattle, 6-State Fed Steer Price % % % % Fabricated Boxed Beef Cutout-Total Value Dn Choice NOTE: Jan 08 Changed to 600/900 Total Value CH % % % % 112A 3 Rib, Ribeye Roll, Lip-On Up CH % % % % 50% Fresh Chemical Lean FOB River % % % % 90% Fresh Chemical Lean FOB River % % % % 6

7 Price History and Projections cont. Hogs and Pork OBSONO S EXECUTIVE REPORT Processing Items Select Hams 17/ % % % % Processing Items Select Hams 20/ % % % % Processing Items Sq. Cut Bellies 14/ % % % % Sausage Materials (TL) Trim (42%) Fresh % % % % Sausage Materials (TL) Trim (72%) Fresh % % % % 7

8 Price History and Projections cont. Chickens UB NE Bnls/Sknls Brsts Tender Out % % % % NE Line Run Breast Tenders Clipped % % % % Turkey Turkey Meat - Breast, Tom, Fresh % % % % Obsono, LLC 182 Queens Blvd. Bayville, NJ Pencil it in!! May 9, 2012 (Tenative) Q1, 2012 Obsono Webinar 8