Profit Prospects for Pork Producers 2010 and Beyond

Transcription

1 World Pork Expo Profit Prospects for Pork Producers 2010 and Beyond Steve R. Meyer, Ph.D.

2 Profit outlook for 2010 and GOOD! REALLY GOOD!! FINALLY!!!!

3 Profits for the foreseeable future because: Lower but NOT LOW costs with even lower input prices possible - EXCELLENT planting season - Acres are good, condition is good at present - It s up to Mother Nature and maybe the EU Hog price recovery better than expected - Slightly lower supplies - Stronger wholesale and farm demand - Help from competitors but will it last?

4 Short-term risks to consider: Weather the crop is not made YET Economic turmoil in Europe and the impact on $US and exports Domestic demand if the recovery softens Fast supply response to profits A host of potential goofy occurrences

5 Grain and feed cost outlook Issues: Record-early corn planting and very good crop condition Weak ethanol margins may not be supportive of corn Modest increase in corn exports -- $US??? Expectations on E-15 decision El Nino La Nina??? Thursday s report: Nothing big expected BIG REPORTS: June 30

6 Corn planting and condition CORN CROP PROGRESS Percent Planted, 18 States 2005: Fastest since 1990 '05-'09 Average : Slowest since 1990 Corn planting is complete but look when the bulk occurred! /4 4/11 4/18 4/25 5/2 5/9 5/16 5/23 5/30 6/6 6/13 6/20 Crop condition is the best ever for 1 st week of June CORN CROP CONDITION Percent rated Good or Excellent 1994: Best annual rating since : Worst annual rating since yr average 30 5/23 5/30 6/6 6/13 6/20 6/27 7/4 7/11 7/18 7/25 8/1 8/8 8/15 8/22 8/29 9/5 9/12 9/19 9/26

7 Pct Yield Deviation from Trend Percent Planted Planting progress, though Is NOT a good yield predictor CORN -- YIELDS VS. MID-MAY PLANTINGS 15% % 90 5% 80 0% 70-5% 60-10% -15% Yield Deviation Mid-May Planting % R2 for yield deviation = 0.3, for yield = 0.17 Year

8 June 2010 WASDE forecast by USDA U.S. CORN SUPPLY AND UTILIZATION - JUNE 2008/ / /11 USDA, June % Chng. vs ' USDA, June %Chng vs. '09-'10 Acres Planted Mil A % % Acres Harvested Mil A % % Yield Bu/A % % Beginning Stocks Mil Bu % % Production Mil Bu % % Imports Mil Bu % % Total Supply Mil Bu % % Food, Seed & Ind Mil Bu % % Ethanol for fuel Mil Bu % % Feed & Resid Mil Bu % % Exports Mil Bu % % Total Usage Mil Bu % % Carryover Mil Bu % % Stocks/Use 13.9% 12.2% -12.4% 11.7% -3.5% Nat. Wtd. Avg. Farm Price $/Bu % %

9 Usage - graphically Million bu. U.S. CORN USAGE BY CATEGORY Ethanol FSI-Non Ethanol Feed & Residual Exports USDA Forecasts, May

10 Ethanol margins have fallen -- again

11 Corn export pace has been SLOW 1000 Bu. 2,500,000 U.S. CORN EXPORTS 2,000,000 1,500, Avg. '04-'08 1,000, ,000 0 S O N D J F M A M J J A Percent 120% 100% 80% U.S. CORN EXPORTS, PCT. OF ANNUAL Avg. '04-'08 60% 40% 20% 0% S O N D J F M A M J J A

12 2010 forecast is in line with 09 corn demand U.S. CORN PRICE VS. S/U RATIO $/bu Latest information: 5/11/ Note: Data label is the year of the % 5% 10% 15% 20% 25% 30% Ending Stocks/Use Ratio

13 Implications and risks Season-average price of $3.50 implies an Iowa harvest price of $3.00 to $3.10/bu USDA yield of bu/acre is 1.7 bu above the biotech trend Good crop conditions, lagging export pace will push corn lower through late summer

14 And new-crop futures are near life lows But those lows are still at $3.56 for Dec and $3.88 for March!

15 Implications and risks Season-average price of $3.50 implies an Iowa harvest price of $3.00 to $3.10/bu USDA yield of bu/acre is 1.7 bu above the biotech trend Good crop conditions will push corn lower through late summer Remember -- Season lows were in Sept in 06, early Oct in 07 and July in 09

16 Implications and risks Season-average price of $3.50 implies an Iowa harvest price of $3.00 to $3.10/bu USDA yield of bu/acre is 1.7 bu above the biotech trend Good crop conditions will push corn lower through late summer Remember that season lows were in Sept in 06, early Oct in 07 and July in 09 Strong $US could keep oil prices and ethanol prices -- in check

17 Oil is back near $70 less support for corn

18 Implications and risks Season-average price of $3.50 implies an Iowa harvest price of $3.00 to $3.10/bu USDA yield of bu/acre is 1.7 bu above the biotech trend Good crop conditions will push corn lower through late summer Remember that season lows were in Sept in 06, early Oct in 07 and July in 09 Strong $US could keep oil prices and ethanol prices in check E-15 (or E-11 or E-12) decision

19 Corn strategies Given the price outlook for hog -- - Higher corn prices can be handled - Extreme corn prices, as always, cannot! Start filling storage EARLY in harvest hand to mouth having physical corn in hand is, I think, a good thing Buy insurance out-of-the-money calls if your balance sheet is still weak

20 Soybean planting and early condition Percent SOYBEAN CROP PROGRESS Acres Planted, 18 States 2000: Fastest since '03-'08 Average : Slowest since 1990 Soybean planting has been slowed by rain still 1 week ahead of /2 5/9 5/16 5/23 5/30 6/6 6/13 6/20 6/27 7/4 7/11 7/18 90 SOYBEAN CROP CONDITION Percent Rated Good or Excellent Initial crop rating this week is RECORD HIGH at 76% Good/Exc = Worst since = Best since yr Average 30 6/6 6/20 7/4 7/18 8/1 8/15 8/29 9/12 9/26 10/10

21 June USDA WASDE 2X on year-end S/U ratio U.S. SOYBEAN SUPPLY & UTILIZATION - JUNE 2008/ / /11 Est. USDA, May % Chng vs '08-'09 USDA, May % Chng vs '09-'10 Acres Planted Mil A % % Acres Harvested Mil A % % Yield Bu/A % % Beginning Stocks Mil Bu % % Production Mil Bu % % Imports Mil Bu % % Total Supply Mil Bu % % Crushings Mil Bu % % Exports Mil Bu % % Seed Mil Bu % % Residual Mil Bu % % Total Usage Mil Bu % % Carryover Mil Bu % % Stocks/Use 4.5% 5.6% 23.0% 11.5% 105.7% Nat. Wtd. Avg. Farm Price $/Bu % % Soybean Oil Price Cents/lb % % Soybean Meal Price $/ton % %

22 Bean exports have been robust!! 1000 Bu.... Could leave supplies tight in July-Aug U.S. SOYBEAN EXPORTS 1,400,000 1,200,000 1,000, Avg. '04-'08 800, , , ,000 0 S O N D J F M A M J J A

23 Pace relative to annual is slower will they exceed expected bil. bu.? Percent 100% 90% 80% 70% U.S. SOYBEAN EXPORTS, PCT. OF ANNUAL Avg. '04-'08 60% 50% 40% 30% 20% 10% 0% S O N D J F M A M J J A

24 Remember where cash SBM went The past two summers on tight supplies $/ton CASH SBM PRICE, DECATUR, WEEKLY

25 2011 futures are at the BOTTOM of the apparent new normal range $/ton CASH SBM PRICE, DECATUR, WEEKLY Decature 48% SBM 6/9/2010 SBM Futures

26 Factors to consider As is the case for corn, good weather could push prices lower in late summer So could a slowdown in the torrid export pace 2011 prices: Will Brazil and Argentina raise another bumper crop? How wrong can you be with SBM hedged at $250 or maybe even $230?

27 A word about DDGS prices Larger supplies = Pricing into hog diets Ratio DDGS $ PER LB / CORN $ PER LB DDGS is competitive with corn in hog diets in this range

28 PORK AND HOG OUTLOOK

29 Summary Hog supplies have been CLOSE to levels expected from March H&P Prices have exceeded levels a) expected and b) consistent with supply changes and stable farm-level demand Conflicting signals: - Near-record cutout values and hog prices STRONG packer margins - Okay exports at least through March - But SOFT consumer-level demand

30 Summary (continued) Feed cost outlook is positive depending on weather Few signs of expansion yet - Sow slaughter is low but not exceptionally so as a percent of the BH - Gilt slaughter frequently above 49.5% But anecdotal expansion evidence - Some repops in the works - 473k sows cut since Dec 07 Estimate that 1/4 th could be repopped 2% growth

31 COMPETITORS

32 Chicken production capacity is growing... Thousand Hens 60,000 BROILER HATCHERY FLOCK 55,000 50,000 45,000 40,000 October 2009: Smallest flock since Sept '97 at million April '10: +2.4% Yr/Yr 35,000 30,

33 Current output measures are positive... WEEKLY BROILER EGG SETS U.S. FI BROILER SLAUGHTER, WEEKLY Thousand Thous. Hd. 220, ,000 YTD 2010: +1.4% 215, , , , ,000 y 150, , , , , : 3.4% 190, , , ,000 Avg. '03-'07 Average '04-'08 100, ,000 J F M A M J J A S O N D J F M A M J J A S O N D FI BROILER PRODUCTION, WEEKLY Mil. lbs. RTC YTD 2010: +4.9% Avg. '04-'08 J F M A M J J A S O N D

34 But chicken prices are near-record high Cents Per Pound 93 BROILER PRICES 12-City Composite, Weekly Avg JAN APR JUL OCT

35 Driven by a resurgence in breast prices Cents Per Pound 180 WHOLESALE CHICKEN BREAST PRICES Skinless/Boneless, Northeast, Truckload, Weekly Avg JAN APR JUL OCT

36 Cattle slaughter: Closer and closer to 09 Thous. hd. 750 U.S. FI CATTLE SLAUGHTER, WEEKLY Average, '04-'08 J F M A M J J A S O N D

37 Sharply lower weights have limited output Pounds 810 FI CATTLE CARCASS WEIGHTS Avg. '04-'08 J F M A M J J A S O N D Mil. lbs. carc. 600 FI BEEF PRODUCTION, WEEKLY YTD 2010: -0.3% Avg '04-'08 J F M A M J J A S O N D

38 Cutout near record-high But has likely peaked for the year $/cwt carcass # CHOICE BEEF CUTOUT VALUE

39 Impact of competitors Positive chicken and beef prices have been very supportive so far in 10 Will be less supportive in months to come - Beef is in a seasonal price decline but supplies will get tighter, higher fed prices in 11 - Chicken may be at its peak expansions by Pilgrim, Sanderson, others in 11 and 12 Trade developments will help chicken nothing has moved to Russia yet

40 Actual slghtr has been -1% from March H&P.. and -2.7% from % yr/yr coming FI HOG SLAUGHTER, WEEKLY Based on USDA Hogs & Pigs Report, March '10 Thous. Hd Actual Pred ' Actual 10 Pred ' These 2011 forecasts may be revised as the impact of winter performance is determined over Q2. J F M A M J J A S O N D

41 Weights: YTD equal to 2009, +1# recently... Pounds Payoff of larger hogs, slack space FI CARCASS WEIGHTS, HOGS Avg '04-'08 J F M A M J J A S O N D

42 Output is still down 3.6% from last year Implies prices +8 to 12% FI PORK PRODUCTION, WEEKLY Mil. lbs. carc YTD 2010: -3.6% Avg '04-'08 J F M A M J J A S O N D

43 Record-high hog prices % from 09 $/cwt carcass U.S. NEG'D NET PRICE, WTD. AVERAGE Avg '04-'08 J F M A M J J A S O N D

44 Why the discrepancy in prices? 09 prices were artificially depressed - H1N1 aftermath - High weights driven by unusual weather - An unrepresentative base from which to compute prices Positive impact of other species - Using a price flexibility considers only ownquantity impacts - Cross-price elasticities are smaller but not zero!

45 Exports +1.3% thru March... Thous. lbs. carc. 600, ,000 MONTHLY U.S. PORK EXPORTS March 2010 exports were LARGER THAN March 2008 exports! 400, , ,000 '04-'07 Trend 100,000 - J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10

46 Competitors: EU has gained an advantage Euro & $Can/$US 2.2 U.S. EXPORT COMPETITORS' CURRENCIES VS. $U.S. Real/$US Euro Canadian $ Real

47 Customers: Recent changes, Japan & Mexico Yen/$US, Peso/$10US Renminbi/$10US U.S. EXPORT CUSTOMERS' CURRENCIES VS. $U.S. Pesos/$10 Renminbi/$10 Yen/US$ Won/US$ Won/$US

48 Pork demand: conflict with hogs & whlsle..... I suspect the retail price data! Index, '85= PORK DEMAND INDEX Pork Demand declined 4.2% per year : -5.3%

49 Pork and chicken don t make sense! Cents/lb All-Fresh Beef Choice Beef Pork Composite Broiler Turkey RETAIL MEAT PRICES, USDA

50 Profits are back in a BIG way!!! $/HD PROFIT PER HEAD IOWA FARROW-TO-FINISH OPERATIONS Source: Estimated Costs and Returns, Dr. John Lawrence, Department of Economics, Iowa State University

51 But financial positions are generally weak ACCUMULATED PROFITS IOWA FARROW-TO-FINISH OPERATIONS (Sum of the profits from selling one pig per month since January 1991) $900 $800 $700 $600 $500 $400 $300 $200 $100 $- $(100) $(200) Top to Bottom: Sept '07 to Feb 2010 Lost $ % of peak amount 8 years Peak in Sept '07 = $ March '10 = $ Source: using data from Estimated Costs and Returns, Dr. John Lawrence, Department of Economics, Iowa State University

52 Sow slaughter is lower 3 to 4% since April Thousand Hd. 75 U.S. SOW SLAUGHTER Avg. '04-'08 J F M A M J J A S O N D

53 But slaughter of US sows is equal to Percent 1.20% 1.10% 1.00% 0.90% 0.80%... YTD 10 = 16.4% vs. 16.3% in 09 FI SLAUGHTER OF U.S. SOWS As a Percent of Previous Quarter's Breeding Herd 0.70% 0.60% 0.50% 0.40% 0.30% Avg. '07-'09 J F M A M J J A S O N D

54 YTD gilt slaughter: +0.1% vs. 09, -0.1 vs. 08 Percent GILTS AS A PERCENT OF TOTAL BARROW/GILT SLAUGHTER Avg. '00-' J F M A M J J A S O N D

55 Futures: Profits of $16/hd for and nearly $20 for remainder of the year $/cwt carcass ACTUAL & PREDICTED HOG PRODUCTION COSTS* AND PRICES Actual Costs per ISU - Carcass Predicted/Forecast Costs - Carcass Cash Hog Price Futures-Implied IA-MN Price *Based on relationsip between ISU Estimated Costs & Returns data and historic Omaha corn and Decatur soybean meal prices C Forecast 2010 Profits $16.25/head 6/4/10

56 Slaughter forecasts March 2010 Commercial Slaughter Forecasts Mizzou ISU LMIC Meyer Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge 2009 Year % 2010 Q % % % % Q % % % % Q % % % % Q % % % % Year % % % % 2011 Q % % % Green figures are actual data from USDA. 3/2/10

57 Price forecasts March 2010 Hogs & Pigs Price Forecasts Missouri ISU LMIC Meyer CME National Net Ia-S. Mn. Live National Wtd Neg'd Price, Price 1 Avg. Base Price Wtd. Avg. Producer-Sold Net Carcass CME Lean Hog Futures 6/4/ Q $58.14** Q $59.03** Q $54.18** Q $56.60** Year $56.98** 2010 Q * 70.41* 65.95* 68.75* 69.38** Q * 80.70** Q Q Year Q Converted to carcass using a yield of 75% *Partial USDA data **Average of CME Lean Hog Index

58 My expectations June Hogs and Pigs may show small BH growth from March but still down 2-3% from 09; lower market supplies. Hog supplies will be supportive of prices in the upper $70s to low $80s for the rest of the summer Q4 prices in the upper $60s Little or no expansion, 2011 numbers very close to 2010, prices depend on demand!

59 QUESTIONS & DISCUSSION?