Sask Pork Symposium November 2012 Economic and World Outlook Steve R. Meyer, Ph.D.
Critical Issues Input prices and production costs
An unprecedented situation... A wonderful beginning to the 2012 crop year Early onset of dry, hot conditions Now classified as the worst drought in over 50 (or 80?) years Comes on top of a huge buildup in corn usage since 2006 and low carryouts The market must ration a limited supply among various usages potentially brutal
Should have come as no surprise Policies, usage, Mother Nature Nothing is changing at least YET -- to keep it from happening again Result: - ALWAYS hand to mouth on corn and beans - HUGE risks for animal proteins - BIG REWARD for risk management skills more important than husbandry by far!
World corn supply tight and tighter!
Late April concerned about N. Ia-S. Minn...... But subsoil moisture was short!
Minn improved while rest of U.S. worsened..... 8/21: 77% drought, 44% severe or worse
Hurricane Isaac helped SE and Ohio Valley...... But western plains remain VERY dry
Sandy further helped ECB but...... But the Plains and SE have worsened
Largest deviation from trend yield since 88... What is the new trend? 157.5 for 13
Same for soybeans down 13.1% vs. trend
Nov WASDE: Very close to expected...... Slightly higher prod, still tight stocks U.S. CORN SUPPLY AND UTILIZATION - NOVEMBER 2011/12 2012/13 2010/11 % Chng vs USDA Oct USDA Nov USDA Oct USDA Nov '11-12 Acres Planted Mil A 88.2 91.9 91.9 96.9 96.9 5.4% Acres Harvested Mil A 81.4 84 84 87.7 87.7 4.4% Yield Bu/A 152.8 147.2 147.2 122.0 122.3-16.9% Beginning Stocks Mil Bu. 1708 1128 1128 988 988-12.4% Production Mil Bu. 12447 12358 12358 10706 10725-13.2% Imports Mil Bu. 28 25 29 75 100 244.8% Total Supply Mil Bu. 14182 13511 13515 11769 11814-12.6% Feed & Residual Mil Bu. 4795 4550 4547 4150 4150-8.7% Ethanol for fuel Mil Bu. 5019 5000 5011 4500 4500-10.2% Non-Ethanol FSI Mil Bu. 1407 1390 1426 1350 1367-4.1% Exports Mil Bu. 1834 1550 1543 1150 1150-25.5% Total Usage Mil Bu. 13055 12490 12527 11150 11167-10.9% Carryover Mil Bu. 1128 1021 988 619 647-34.5% Stocks/Use 8.6% 8.2% 7.9% 5.6% 5.8% -26.5% Nat. Wtd. Avg. Farm Price $/Bu. 5.18 6.20-6.30 6.22 7.10-8.50 6.95-8.25 22.2%
All usage estimates are much lower vs 11...
In a nutshell, this boils down to... Who can blink? How quickly can they blink? Who WILL blink? How many times will they blink? What will be the impact of all the blinking?
Can we cut feed usage?... Hog, Cattle, Dairy Cows, Turkey, Chicken
Implications of the animals themselves Beef cow slaughter saves little or NO grain Dairy cow slaughter DOES save grain up to 20-25 lbs. per day per cow All cattle are caught between high grain and poor pasture/lower hay supply Sow slaughter saves very little feed for 6 months Chicken and turkey can respond FAST and have a big impact on feed esp SBM
Implications (continued) One response variable for cattle and hogs is weights! - Cattle FE is 5.5:1 to 6.0:1 on a DM basis - Hog FE is 3 to 3.5 near market weight - Seasonality is critical for weights ONLY POULTRY AND DAIRY CAN REACT QUICKLY - Beef normally could but pasture limits it now - Pork s ability to reduce feed usage is VERY limited only weights for 6 months
Ethanol policy status and terminology! 15% blend is allowed for 2001 & later cars - This is an allowance, not a requirement - Little uptake yet -- logistics? Liability? BTC and Import Tariff expired in Dec 11 still some state subsidies, no federal The current BIG debate is about the RFS - EPA can wave or modify it - Sec of Ag has no direct say and sees nothing wrong with it! - Question: Will waiver make any difference?
RFS is 13.2 bil. gal. in 12, 13.8 bil. in 2013...... 13.55 bil. gal. for 12-13 crop yr = 4.8 bil. bu.
Question: How many RINs are out there?... ~2 to 2.5 bil. gallons will they be used?
Ethanol margins: Gross margin < FC...... Not covering VC short-term shutdown Ethanol: $2.37/gal Corn: $7.07/bu Natural Gas: $3.49/mmBtu
Ethanol margins are TIGHT lower output Will ethanol participate more in rationing? ESTIMATED ETHANOL MARGINS 11/2/11 10/26/12 11/2/12 Prices Corn $/bu 6.27 7.43 7.52 Ethanol $/gal 2.73 2.34 2.31 DDGS $/ton 211.50 269.25 267.00 Ethanol Value @ 2.8 gal/bu $/bu 7.64 6.55 6.47 DDGS Value @ 17.75#/bu. 1.88 2.39 2.37 Total Value 9.52 8.94 8.84 Gross Margin over corn cost 3.25 1.51 1.32 Return over all variable costs 2.21 0.47 0.28 Ethanol Value @ 2.8 gal/bu $/bu 7.64 6.55 6.47 DDGS Value @ 15.#/bu. 1.59 2.02 2.00 Total Value 9.23 8.57 8.47 Gross Margin over corn cost 2.96 1.14 0.95 Return over all variable costs 1.92 0.10-0.09
Ethanol has indeed responded down ~10%... If we stay at 34M/day down 4.6% for 12
Corn is well ahead of oil price now..... When will this reconcile?
Cash corn cheaper but far from cheap...... But a good 13 crop = prices <$5/bu.
World SB situation: Good vs. history but tight
November WASDE slight improvements...... But larger increases in world supplies U.S. SOYBEAN SUPPLY & UTILIZATION - NOVEMBER 2011/12 2012/13 2010/11 % Chng vs USDA Oct USDA Nov USDA Oct USDA Nov '11-12 Acres Planted Mil A 77.4 75.0 75.0 77.2 77.2 2.9% Acres Harvested Mil A 76.6 73.6 73.8 75.7 75.7 2.6% Yield Bu/A 43.5 41.5 41.9 37.8 39.3-6.2% Beginning Stocks Mil Bu. 151 215 215.0 169 169-21.4% Production Mil Bu. 3329 3056 3094.0 2860 2971-4.0% Imports Mil Bu. 14 15 16.0 20 20 25.0% Total Supply Mil Bu. 3495 3286 3325.0 3050 3160-5.0% Crushings Mil Bu. 1648 1690 1703.0 1540 1560-8.4% Exports Mil Bu. 1501 1350 1362.0 1265 1345-1.2% Seed Mil Bu. 87 88 90.0 89 89-1.1% Residual Mil Bu. 43 13 1.0 26 26 2500.0% Total Usage Mil Bu. 3280 3141 3155.0 2920 3021-4.2% Carryover Mil Bu. 215 145 169.0 130 140-17.2% Stocks/Use 6.6% 4.6% 5.4% 4.5% 4.6% -13% Nat. Wtd. Avg. Farm Price $/Bu. 11.30 12.45 12.50 14.25-16.25 13.90-15.90 22.0% Soybean Oil Price Cents/lb. 53.20 51.75 51.90 53.00-57.00 51.00-55.00 6.0% Soybean Meal Price $/ton 345.52 360.00 393.53 485-515 470-500 34.7%
LARGE increase for Brazilian soybean output
Where will SBM go? Depends on Brazil... We have actually reached the $433 gap!
Total grains for F/R DOWN 37% since 2004
Add in DDGS and you are STILL down 21%
What will it take to recover?
Situation is much better in just one month
And more improvement in the Cornbelt
Hog production costs have moderated...... But are still record high for 2013
Futures-implied losses of $38-$45 this fall..... But 2013 keeps creeping upward
Another view bad but not as bad as 09-10
Critical Issues Input prices and production costs Demand domestic and exports
Real PDI growth improved to 1.2% Sept...... still lags pre-recession level
Persistent unemployment, poor sentiment..... Slow & declining consumption growth
RPI fell again in September....... Labor & cap ex are weak, sales are strong
Grocery store sales growth is slowing Grocery stores Yr/Yr growth has been less than 3% since March F/S data support the RPI slowed to 5.5% yr/yr growth in September
Monthly real per capita expenditures... Lower per cap consumption for beef in September 3% P growth for chicken in September Strong Q for pork in Sept without big price decline
Domestic demand indexes are mixed...... Pork improved & beef softened in Sept.
Per cap cons <200# for first time since 90... But this is a SUPPLY issue
Prices are increasing as supplies tighten
Further proof: Record high expenditures
Breeder flock is smallest since 1996...... now 3.5% lower than one yr ago.
Sets and placements: Very close to 11 levels DOWN 2.6% YTD 2012, have been near 2011 levels since July. Oct 16 was lowest level since 2001 Are -2.1% YTD 2012 and will also remain near 2011 levels
Broiler cutout has fallen below $100 again..... Seasonal high is in records again in 13
Chicken summary Any move toward expansion ended in late summer due to high feed (esp. SBM) prices Breeder flock will very likely shrink a bit more to 47-48 million by Nov or Dec Egg sets, placements close to 2011 levels (much lower than 10) remainder of 2012? No growth but no big cuts soon, esp. vs. 2011 -- Lower per cap availability in 2013 Record-high prices -- again
Beef: Situation began with the 2011 drought State Beef Cows (Thousand) TX 5025 OK 2036 KS 1478 FL 926 CO 727 AL 659 GA 502 MS 495 NM 488 LA 461 NC 351 SC 184 AZ 180 Total 13512 Share 43.8%
55% of pastures are poor/very poor...... West, Cornbelt, North Plains are BAD
Smallest U.S. beef cow herd since 1946
Smallest U.S. calf crop since 1949...... And not the higher rate of decline!
Tight supplies of cattle outside feedlots...... Down 1.7%, 2.7% and 3.3% last 3 years
Sept placements were 19% LOWER than 11..... After -10 & -10.6 in July & Aug
COF lower, yr/yr for 3 nd time in last 28 mos...... Structure/sample issues, MORE TO COME
Beef cow slaughter: -13.2% yr/yr YTD...... double-digit below 2011 until October
Cuts are coming in the dairy sector...... +11.8%, +13% 1 st 2 wks of Oct, +6.3% YTD
No turn-around in sight for availability...... Per-cap down 2-3% in 12 and 3%+ in 13
Choice cutout is back above $190 -- $200?...
Beef summary... Lower cattle numbers partially offset by higher weights but lower beef supplies Weights remain high Zilmax & Optiflexx? Short term: more dairy cows will offset fewer beef cows -- SOME; higher grinds Longer term: Tighter and tighter per cap supplies, higher prices thru 2015? Will beef cease to be a habit for anyone below the middle class?
Pork exports are still up 7.8% YTD vs. 2011..... Sept was -1.7%; must stay within 20% of 11
China/HK was below yr. ago in Sept but...... +39% YTD; Mexico is +14%, Canada +17%
Exchange rates Real is the big mover among competitors Peso and won have improved but are still weaker than one year ago Strong yen, record high renminbi
Demand summary Demand indexes mixed show no clear change in preferences Exports will likely grow exchange rates will be critical Higher beef and chicken prices will be positive for pork demand Biggest concern: Consumer income and expenditures
Critical Issues Input prices and production costs Demand domestic and exports Hog Supplies
USDA: World slaughter +0.09% in 2013... NO big reductions even in the EU????
Take out China, US and EU 27...
Sept H&P report close to expectations... USDA QUARTERLY HOGS & PIGS REPORT September 28, 2012 12 as Pct Category 2011 2012 of '11 Pre- Report Actual - Estimate Inventories on Sept 1 All hogs and pigs 67234 67472 100.4 100.7-0.3 Kept for breeding 5806 5788 99.7 99.9-0.2 Kept for market 61428 61684 100.4 100.8-0.4 Under 50 lbs. 19761 19653 99.5 99.9-0.4 50-119 lbs. 17884 17675 98.8 100.1-1.3 120-179 lbs. 12822 12899 100.6 100.8-0.2 180 lbs. and over 10961 11457 104.5 102.6 1.9 Farrowings 2 June-Aug sows farrowed 2927 2892 98.8 99.2-0.4 Sep-Nov Intentions 2929 2850 97.3 98.7-1.4 Dec-Feb Intentions 2864 2821 98.5 98.4 0.1 June-Aug Pig Crop1 29355 29286 99.8 100.2-0.4 June-Aug pigs saved per litter 10.03 10.13 101.0 100.9 0.1 *Thousand head **Thousand litters
Litter size growth back to 1% in Q2...... Trend breaker or trend breather?
Aug & Sept blew apart the June report..... Last 5 wks -- +222k from predicted level?
Surge was due to feed saving and MC>MR...... Weights are higher but -3.5 lbs. yr/yr
YTD pork production is +2.4% yr/yr...... Rest of 12: Unchanged to lower????
Result: Heavy pressure on cutout value...... But rebounded since mid-sept to ~$87
National Net hogs has gained over $15...... We don t expect an average of $78-$82
Slaughter forecasts September 2012 Hogs & Pigs - Commercial Slaughter Forecasts Mizzou ISU LMIC Paragon Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge 2011 Q1** 27.486-0.5% Q2 26.113 0.1% Q3 27.374 1.6% Q4* 29.892 0.9% Year 110.862 0.5% 2012 Q1 28.104 2.2% 28.104 2.2% 28.104 2.2% 28.104 2.2% Q2 26.659 2.1% 26.707 2.3% 26.659 2.1% 26.659 2.1% Q3* 27.970 2.2% 27.702 1.2% 27.896 1.9% 28.024 2.4% Q4** 30.500 2.0% 30.340 1.5% 30.468 1.9% 30.450 1.9% Year 112.655 1.6% 112.854 1.8% 113.127 2.0% 113.237 2.1% 2013 Q1 27.500-2.1% 27.767-1.2% 27.700-1.4% 27.970-0.5% Q2 26.290-1.4% 27.823-1.0% 26.149-1.9% 26.300-1.3% Q3 28.360 1.4% 27.459 3.0% 27.676-0.8% 27.880-0.5% Q4 30.525 0.1% 29.633-2.7% 30.310-0.5% Year 112.675 0.0% 111.158-1.7% 112.460-0.7% Green figures are actual data from USDA. Blue figures are estimated using USDA data 10/8/12 *Quarter has one LESS slaughter day vs. year ago **Quarter has one MORE slaughter day vs. year ago
Price forecasts September 2012 Hogs & Pigs - Price Forecasts Mizzou ISU LMIC Paragon CME Producer-Sold Net Price, All Methods Ia-Mn Wtd. Avg. Base Lean Hog National Wtd Avg. Base Price National Net Neg'd Price, Wtd. Avg. CME Lean Hog Futures 2011 Q1 80.54 78.92 79.74 80.91 81.54** Q2 92.36 89.37 89.53 94.89 93.97** Q3 95.59 92.31 92.25 97.61 97.49** Q4 87.39 85.94 85.17 87.92 88.11** Year 88.97 86.64 86.67 90.33 90.28** 2012 Q1 86.56 84.27 84.36 86.11 86.44** Q2 87.66 83.67 85.22 86.67 86.64** Q3 87.21 85.05 84.74 84.97 86.64** Q4 74-78 82-83 80-85 78-82 81.47 Year 84-85 84-85 84-85 84-85 85.30 2013 Q1 79-83 79-82 82-88 80-84 86.78 Q2 93-97 87-90 86-92 94-98 96.47 Q3 93-97 89-92 89-94 94-98 94.48 Q4 83-87 81-86 84-88 86.07 Year 85-89 85-90 88-92 90.95 **Average of CME Lean Hog Index 11/13/12
After another surge in September..... Sow slaughter has plunged the last 4 wks.
Gilt slaughter surge in September => cuts...... But <48% weeks imply GROWTH
My model says finances are weak...... But lenders believe status is not this bad!
How many sows will be liquidated?... My 3% by March is LIKELY TOO BIG!!!
What do we expect re. liquidation? Sows bred through October will produce pigs to sell in June thru August 2013 futures near $100 = profits of $10-$17/hd. Expected more sows in Nov-Dec but... - Fall 13 losses are now < $8/hd. - Optimism about next year s corn crop - Better financial position = staying power Breeding herd reduction may not reach 1% If so 2012 slaughter will be larger, prices lower
The key for Canada still the exchange rate
Hog exports have stabilized...... Would grow SOME with MCOOL reform
Long-term issues Costs, costs, costs = Prices, prices, prices - Consumer incomes and spending - How much less meat/poultry/dairy consumed? Animal welfare Chronic challenges - Stalls -- can this be won? What will it cost? - Castration, tail docking, - Ultimately: Indoor production Risk management skills Policy farm bill, antibiotics
Questions or Comments?