Looking Ahead: 2014 Livestock and Grain Economic Outlook

Looking Ahead: 2014 Livestock and Grain Economic Outlook February 2014 Lee Schulz Assistant Professor & Extension Livestock Economist Department of Economics Iowa State University lschulz@iastate.edu (515) 294-3356

Key Drivers of Pork Producer Profits What will input prices and production costs be? How many hogs will the market see and how big will they be? Much anticipated USDA Hogs and Pigs Report(s) What do inventories suggest? What do sows farrowing (and intentions) suggest? What do pigs saved per litter suggest? What do pig crops suggest? What will hog slaughter be? What will hog weights be? in 2014 How will pork demand hold up?

Input Prices and Production Costs

U.S. Corn Supply and Use Data Source: USDA/WAOB, February 10, 2014

Data Source: USDA/WAOB, February 10, 2014

World Corn Production Data Source: USDA/WAOB, February 10, 2014

Feb 2014 WASDE Forecast Data Source: USDA/WAOB, February 10, 2014

Data Source: USDA/WAOB, February 10, 2014

Data Source: Barchart.com, February 21, 2014

Ethanol Operating Margins Ethanol: $1.98/gallon Corn: $4.35/bushel Natural Gas: 6.92/mmBtu Data Source: ISU CARD, February 14, 2014

Corn Grind For Ethanol Data Source: Chad Hart, February 17, 2014

DDGS, $/ton Corn, $/bu 02/08/2014 $181.50 $4.33 02/15/2014 $195.00 $4.32 02/22/2014 $203.50 $4.42 DDGS is competitive with corn in hog diets in this range Source: USDA/AMS, February 22, 2014

Current Corn Futures Prices Data Source: CME Group, February 21, 2014

Data Source: CME Group, February 21, 2014

U.S. Soybean Supply and Use Data Source: USDA/WAOB, February 10, 2014

2013 = 43.3 bu/acre -1.4% vs Linear (Actual Yield) -2.7% vs 1979-2011 Trend -1.7% vs 1995-2011 Trend Data Source: USDA/WAOB, February 10, 2014

World Soybean Production Data Source: USDA/WAOB, February 10, 2014

Feb 2014 WASDE Forecast Data Source: USDA/WAOB, February 10, 2014

Data Source: USDA/WAOB, February 10, 2014

Data Source: Barchart.com, February 21, 2014

Current Soybean Futures Prices Data Source: CME Group, February 21, 2014

Data Source: CME Group, February 21, 2014

Est 2012 Profits = -$3.54 Est 2013 Profits = -$0.89 Forecasted 2014 Profits = +$41.80 Forecasted Jan-July 2015 Profits = +$26.06

Wheat, Corn, and Soybean Prices Expected to Fall from Recent Highs Wheat, corn, and soybeans in dollars per bushel. Numbers in red denote record levels.

Feed Grain Plantings Expected to Fall Reflecting Lower Prices Data Source: USDA/WAOB, February 20, 2014

Crop Acreage (million acres) Crop Shifts 100 90 80 70 60 50 40 30 Corn Soybeans Wheat Hay Other Data Source: USDA/NASS

$/acre 1997 2013 % Chg Pasture value: $615 $3,400 453% Improved perm pasture: $32 $80 150% Unimproved perm pasture: $23 $51 122% Farmland value: $1,837 $8,716 374%

Corn Revenues vs Costs Data Source: USDA/NASS, Compiled & Analysis by Mike Duffy

Soybean Prices vs Costs Data Source: USDA/NASS, Compiled & Analysis by Mike Duffy

1950-2006 2007-2012 2013 Hogs 8% 5% 6% Cattle 22% 16% 17% Corn 7% 15% 15% Soybeans 6% 10% 10% Data Source: USDA/ERS

Hog Supplies

Data Source: USDA/NASS

2013 Sow Slaughter 2013 Gilt Slaughter* 2014-YTD Gilt Slaughter* -2.9% (vs. 2012) -1.8% (vs. 2012) -3.0% (vs. 2013) -8.9% (vs. 2007-11) * University of Missouri 2014-YTD Sow Slaughter -5.6% (vs. 2013) -12.6% (vs. 2008-12) Thou. Head 70 65 60 55 50 45 40 SOW SLAUGHTER Federally Inspected, Weekly Avg. 2007-11 2012 2013 35 30 JAN APR JUL OCT H-S-15 02/14/14 2014 Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS

Mil. Head 32 30 28 26 24 22 20 Projections Pig % Change Crop From Year Ago Dec-Feb 2013/14 = Farrowing x Commensurate = 28,476 to 28,789 +1.3% to +2.5% Mar-May 2014 = Intentions Pigs per Litter = 29,435 to 30,083 +1.4% to +3.6%???? PIG CROP Quarterly?% to?% Growth % 2013/2012 Dec-Feb 1.1 Mar-May 2.2 Jun-Aug 2.0 Sep-Nov 0.1 18 1988 1991 1994 1997 2000 2003 2006 2009 2012 H-N-57 12/27/13 Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS

Data Source: USDA/AMS

Incorrect data from APHIS 2014-YTD Feeder Pigs -13.8% (vs. 2013) Data Source: USDA/AMS & APHIS

Thou. Head 2,500 2,400 2,300 2,200 2,100 2,000 1,900 HOG SLAUGHTER Federally Inspected, Weekly 2013 Hog Slaughter -1.0% (vs. 2012) 0.1% (vs. 2007-11) 2014-YTD Hog Slaughter -0.3% (vs. 2013) -2.5% (vs. 2008-12) Avg. 2007-11 2012 2013 1,800 1,700 JAN APR JUL OCT H-S-05 02/14/14 2014 Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS

Data Source: USDA/AMS

Mil. Pounds 525 500 475 450 425 400 375 PORK PRODUCTION Federally Inspected, Weekly 2013 Pork Production -0.3% (vs. 2012) 2.2% (vs. 2007-11) 2014 YTD Pork Production 2.4% (vs. 2013) 1.5% (vs. 2007-11) Avg. 2007-11 2012 2013 350 325 2014 JAN APR JUL OCT M-S-19 02/18/14 Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS

Quarterly Hog & Pork Forecasts (LMIC:02/21/2014) Change Average Change Commercial Change Change Year Commercial from Carcass from Pork from Per Capita from Quarter Slaughter Year Ago Weight Year Ago Production Year Ago Consumption Year Ago (1,000 hd) (%) (lbs) (%) (mil lbs) (%) (retail wt) (%) 2012 I 28,105 2.3 209 0.2 5,858 2.4 11.1-2.6 II 26,661 2.1 207 0.6 5,519 2.8 10.9-1.2 III 27,965 2.1 201 0.3 5,631 2.7 11.2 1.8 IV 30,433 1.8 206-0.8 6,244 0.9 12.7 3.6 Year 113,163 2.1 206 0.1 23,253 2.2 45.9 0.5 2013 I 27,874-0.8 208-0.5 5,777-1.4 11.5 3.1 II 26,778 0.4 206-0.5 5,519-0.0 11.3 3.0 III 27,668-1.1 204 1.2 5,624-0.1 11.4 2.0 IV 29,808-2.1 211 2.6 6,278 0.5 12.8 0.6 Year 112,126-0.9 207 0.7 23,197-0.2 46.9 2.1 2014 I 27,831-0.2 213 2.5 5,922 2.5 11.8 2.7 II 26,579-0.7 209 1.5 5,566 0.9 11.1-1.6 III 27,990 1.2 205 0.6 5,735 2.0 11.3-0.7 IV 30,502 2.3 211 0.2 6,449 2.7 12.8-0.1 Year 112,902 0.7 210 1.2 23,672 2.0 47.0 0.1 2015 I 28,467 2.3 215 0.8 6,107 3.1 12.0 2.2 II 27,214 2.4 212 1.0 5,757 3.4 11.3 1.8 III 28,765 2.8 207 1.1 5,956 3.9 11.6 2.1 IV 31,474 3.2 213 0.8 6,709 4.0 13.1 2.5 Year 115,920 2.7 212 0.9 24,529 3.6 48.0 2.2

Data Source: USDA/ERS

Commercial Production (Year/Year Changes) 2014 = +2.6% 2019 = +0.9% 2015 = +3.2% 2020 = +0.9% 2016 = +1.9% 2021 = +0.8% 2017 = +1.8% 2022 = +0.8% 2018 = +1.1% 2023 = +0.8% Data Source: USDA/ERS

Pig and Hog and Pork Prices

Data Source: USDA/AMS

Wean to Finish Crush Margin The Crush Margin is the return remaining after accounting for the weaned pig, corn, and soybean meal that is used to cover the other more constant expenses. The Crush Margin is based on the following assumptions: Carcass weight: 200 pounds Pig price: 50% of 5-month out LHF Corn: 10 bu/hd SBM: 150 lbs/hd Data Source: ISU Livestock Crush Margins

BARROW AND GILT PRICES Iowa - So. Minnesota, Carcass Base Price, Weekly $ Per Cwt. 110 100 CME (02/21/14) Futures Apr-14 = $99.350 May-14 = $107.000 Jun-14 = $108.025 Jul-14 = $107.550 Aug-14 = $105.975 Oct-14 = $92.050 Dec-14 = $85.925 Avg. 2008-12 90 80 2013 70 60 2014 50 JAN APR JUL OCT H-P-09 02/10/14 Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Data Source: CME Group, February 21, 2014

Pork Demand

Data Source: USDA/ERS

Data Source: USDA/ERS, BLS

Pounds per Capita $ per Pound 2013.Q1 +3.1% - 0.2% 2013.Q2 +3.0% +4.0% 2013.Q3 +2.0% +7.4% 2013.Q4 +0.7% +9.2% 2013 +2.1% +5.1% Data Source: USDA/ERS & USDL/BLS, Compiled & Analysis by Lee Schulz

Year/Year increases in last 5 quarters (since Q4 of 2012): 2013 = +6.3% Actual Quantity & Price Changes: 2013: 46.9 lbs (per capita consumption) $3.64 (nominal price) $1.56 (real price) 2013: Per Capita Consumption = +2.1% (Year/Year) Real Prices = +3.6%% IF Real Prices -2.6% = 0% Demand Change Data Source: USDA/ERS & USDL/BLS, Compiled & Analysis by Lee Schulz

International Trade

Bil. Pounds 6.0 U S PORK EXPORTS Carcass Weight, Annual 5.0 4.0 3.0 2.0 1.0 0.0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC I-N-05 02/11/14

Data Source: USDA/ERS

U.S. Pork Exports, Jan-Dec 2013 Data Source: USDA/ERS

USDA s Pork Long-Term Trade Projections (as of Feb 2014) Data Source: USDA/ERS

Data Source: Policy Analysis Computing & Information Facility In Commerce

USDA s Pork Long-Term Trade Projections (as of Feb 2014) Data Source: USDA/ERS

Data Source: Policy Analysis Computing & Information Facility In Commerce

Economic Outlook PEDv Pork production direction is relatively certain Magnitude of impact is relatively uncertain Operation-level impact vs market-level impact Inelastic demand for pigs Contract barns are a sunk cost If no pigs go into the barns payments still made Buying pigs (even at high prices) to fill these barns makes sense for some in the industry Even at a loss

Data Source: AASV.org

Wean to Finish Pig Pricing Simulation 50% 5-month out LHF Seller s Buyer s Returns Returns Average $7.31 $3.03 Std Dev $5.68 $16.97 Minimum -$6.39 -$36.67 Maximum $18.91 $35.23

Wean to Finish Pig Pricing Simulation 60% 5-month out LHF Seller s Buyer s Returns Returns Average $15.12 -$4.78 Std Dev $6.94 $16.11 Minimum -$2.83 -$44.00 Maximum $27.43 $27.56

Wean to Finish Pig Pricing Simulation 70% 5-month out LHF Seller s Buyer s Returns Returns Average $21.58 -$11.24 Std Dev $6.90 $16.51 Minimum $1.71 -$51.33 Maximum $29.95 $24.74

Next 12-18 months What does this all mean for the pork industry? Profit opportunities should be on the horizon if: Domestic demand can hold Export demand can hold Modest rebound in crop demand and continued moderation in input prices Who will enjoy what share of the profits (producers, packers, retailers) less certain Operation-level impact vs market-level impact of PEDv Strategic opportunities for pork

Next 10 years + What does this all mean for the pork industry? Will the industry continue to gain more production capacity? If so, how fast? Don t see large domestic demand changes Projected increased importance of export market Export market fragile be prepared for disruptions The world is diverse with marked variation in preferences (varied importance of price, cut preference, quality, phytosanitary issues, etc.) Changing landscape across production Factors beyond base fundamentals rising in importance Views and comparative advantages will determine the ability to profit and shape the industry Next generation has a hungry and increasingly affluent world population to feed Let s keep up the great work!!!

Thank You! More information available at: Iowa Farm Outlook & News www.econ.iastate.edu/ifo/ Ag Decision Maker www.extension.iastate.edu/agdm/ ISU Estimated Livestock Returns www.econ.iastate.edu/estimated-returns/ ISU Livestock Crush Margins www.econ.iastate.edu/margins/