2009-10 Beef Outlook Webinar July 27, 2009 David Maloni Principal American Restaurant Association Inc. 888-423-4411 www.americanrestaurantassociation.com David.Maloni@AmericanRestaurantAssociation.com 2009 American Restaurant Association Inc. This presentation is protected under U.S. copyright law. Please do not redistribute without permission from American Restaurant Association Inc. Thank you. *This data and these comments are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this entire presentation, including it s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. Covered Parties is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.
Table of Contents Grain Price Inflation What s going on? Ethanol and Biodiesel US and World Cattle Herds Beef Production Slaughter Weights Beef Demand Domestic International Beef Outlook Beef Trimming, Choice Middle Meat, Choice End Cut, Prime Middle Meat Forecasts
Grain Inflation Annual US Grain Prices, Source NASS Price e(bushel) 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 Why? Inflated crude oil Limited acreage and crop shortfalls Biofuels US dollar Wheat Corn Soybeans 3
Ethanol Update As of July 14 th, per the Renewable Fuels Association, ethanol capacity in the US was roughly 12.7 billion gallons per year with an additional 1.8 billion gallons per year of capacity under construction. Current ethanol capacity 0.800 has more than doubled since 2005. 0600 0.600 12.7 billion gallon at full capacity would 0.400 utilize an estimated 4.5 billion bushels 0.200 of corn. The 1.8 billion gallons of 0.000 capacity under construction could 0.200 utilize an additional 630 million 0.400 bushels of corn. 0.600 Is ethanol profitable? Margins have greatly improved as of late. Hedge positions i and DDG sales have likely l caused profitability to be better than the model suggests. Crude, corn and natural gas prices will impact margins going gforward. $ per gallon US Ethanol Producer Profitability Source ARA Ethanol profitability in notable trouble 4
Economic Incentive Roughly 5.5 billion gallons are mandated to be blended per the Clean Air Act. The rest is driven by economics does it make more money to blend gasoline with ethanol? Roughly 20% of the ethanol capacity in the US is reported to be idled. Gasoline blenders trading Renewable Identification Numbers (RIN s) to get around the 10.5 billion gallon mandate in 2009 and 12 billion gallon mandate in 2010. Ethanol imports will help as well. Ag Secretary Vilsack is in favor of increasing the blend percentage of ethanol in gasoline. This needs to be monitored. Decision is made by the EPA. Current USDA forecast is for 3.65 billion bushels of use from the 2008/09 crop. 4.1 billion forecasted for 2009/10. Do ollars per gallon 2.000 1.500 1.000 0.500 0000 0.000 0.500 Economic Incentive to Blend Gasoline with Ethanol 11/2/06 1/2/07 3/2/07 5/2/07 7/2/07 9/2/07 11/2/07 1/2/08 3/2/08 Source ARA 5/2/08 7/2/08 9/2/08 11/2/08 1/2/09 3/2/09 5/2/09 7/2/09 5
Soybeans Existing soybean supplies are historically tight. Ending stocks per use ratio less than 5%. Argentina farmer/government dispute. Drought reduced crop in Argentina 2009/10 soybean acreage forecasted at 77.5 million which is a record and 2.4% more than the prior crop. 2009/10 soybean harvest forecasted at 3.26 billion bushels- 10% more than last year and a record Soybean supplies should improve with the new crop. 2009/10 crop soybean meal forecasted at $290 a ton, 9% less than the 2008/09 crop World Soybean Ending Stocks as a Percent of Use 30 25 20 15 10 5 Source USDA, ARA 0 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 6
Corn Existing corn supplies are adequate. 2009/10 corn acreage forecasted at 86 million, virtually even with last year. 2009/10 harvest forecasted at 12.3 billion bushels, 2% more than the current crop. Stocks should be adequate with the new crop. Ethanol use may gain steam Corn price forecasted at $3.65 a bushel, 8% less than the current crop US Corn Harvest, Source NASS 15000000 1000 Acres 13000000 11000000 9000000 7000000 5000000 Source USDA, ARA 7
4.5 4 35 3.5 3 2.5 2 1.5 1 0.5 0 Structural Shift US Annual Average Farm Corn Price, Source USDA Ethanol 33 years World War II 29 years Exports open to Asia 34 years Pr ice(bushel) 1908 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008e 8
US Cattle Herd July 1 US Cattle and Calf US cattle herd is slowly contracting down 1.5% in July 2009. Inventory, Source NASS July 1 st heard the smallest since 1973 3000 115000 2000 Expansion was cut short by 1000 110000 Challenged pasture conditions 0 105000-1000 Inflated feed costs 100000-2000 Poor demand also impacting cattle -3000 95000 supply 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1500 1000 500 0-500 -1000 July 1 US Calf Crop, Source NASS 33000 32000 31000 30000 29000 28000 27000 26000 25000 Annual Change Inventory 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annual Change Inventory 9
World Cattle Herd World Cattle Herd, Source FAS World Calf Crop, Source FAS (1,000 0 head) 1000000 995000 990000 985000 980000 975000 970000 2005 2006 2007 2008 2009Apr (1,0 000 head) 296000 294000 292000 290000 288000 286000 284000 282000 2005 2006 2007 2008 2009Apr 10
Cattle on Feed July 1 st cattle on feed inventory was 5.3% less than last year. June cattle placements were 8.4% smaller than the prior year and at mostly lighter weights. August 1 st near slaughter ready cattle inventory is estimated to be 2.4% less than the 3 year average for the date. Thousand Head US Near Slaughter Ready Cattle Supply Projections 4000.000 3500.000 3000.000 2500.000 2000.000 1500.000 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 2009 2008 3 Year Avg Source NASS, ARA 11
Cattle Placement Weights Lighter cattle placement weights typically lead to lighter slaughter weights Lighter cattle weights can also impact grading percentages. 740 Average Placement Weight 730 720 710 700 690 2007 2008 2009 680 670 12
Percentage of Cattle Grading Choice and Prime Percentage of Cattle Grading Choiceand Prime 64.00% 3.40% 62.00% Choice above average 3.20% 60.00% 00% 300% 3.00% Choice 58.00% 56.00% Prime near average 2.80% 2.60% Prime 54.00% 2.40% 52.00% 2.20% 50.00% 2.00% 2009 Prime 5 Year Avg Prime 5 Yr Avg Choice 2009 Choice 13
Choice and Prime Cattle Slaughter 20.00% 15.00% 10.00% 5.00% 0.00% 5.00% Percentage Gain in Prime and Choice Cattle Slaughter through April 20th 10.00% 2005 2006 2007 2008 2009 Prime Choice Total Steer and Heifer Slaughter 14
Beef and Dairy Cow Herds 250 200 150 100 50-50 0-100 -150-200 -250 July 1 US Dairy Cow Herd, Source NASS Both herds are declining Dairy cow farmers 9000 8800 experiencing poor profitability 8600 Less heifers producing less cows. 1500 1000 500 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0-500 -1000 Annual Change Inventory July 1 US Beef Cow Inventory, Source NASS 10000 9800 9600 9400 9200 37000 36000 35000 34000 33000 32000 31000 30000 19 991 19 92 19 93 199 94 19 95 199 96 19 97 199 98 199 99 200 00 20 01 200 02 200 03 200 04 200 05 200 06 20 07 200 08 200 09 15 Annual Change Inventory
Beef Production Outlook Annual Cow Slaughter 6500 6000 Thousand head 5500 5000 4500 4000 Beef production forecasted to decline 1.1% in 2009, 2.7% in 2010 Cow slaughter forecasted to decline 7% in 2010 to its lowest level since 2007 Beef production could be down 2% or so in 2011. 16
World Demand and Exports World Beef Consumption (1,000 metric tons) 58500 58000 57500 57000 56500 56000 55500 55000 2005 2006 2007 2008 2009Apr World consumption expected to decline in 2009 to its lowest level in 4 years US beef exports forecasted to decline 7.6% this year Modest recovery anticipated in 2010 of 9%. World economy o and dollar valuation will be important t to monitor 17
US Imports Australian Dollar and 90% Beef Trimmings Market 0.95 0.9 0.85 0.8 075 0.75 0.7 0.65 0.6 190 180 170 160 150 140 130 120 03/17/2008 04/01/2008 04/15/2008 04/29/2008 05/13/2008 05/28/2008 06/11/2008 06/25/2008 07/10/2008 07/24/2008 08/07/2008 08/21/2008 09/05/2008 09/19/2008 10/03/2008 10/17/2008 10/31/2008 11/14/2008 12/01/2008 12/15/2008 12/30/2008 01/14/2009 01/29/2009 02/12/2009 02/27/2009 03/13/2009 03/27/2009 04/13/2009 04/27/2009 05/11/2009 05/26/2009 06/09/2009 06/23/2009 07/07/2009 Australian Dollar 90% Beef Trimmings World exports expected to decline US imports forecasted to grow 12% this year. May see a downturn in 2010 depending on the dollar A large portion of US beef imports is lean boneless beef. 18
Domestic Beef Demand Beef fdissapearance s Million Pounds 28200 28000 27800 27600 27400 27200 27000 26800 2005 2006 2007 2008 2009 2010 US consumption waning especially at food service Retail prices are declining Deleveraged reduced net worth consumers and less business travel hurt beef demand. 19
Beef Outlook Production and cattle herd declining Imports expected to remain tepid Consumption to remain soft Watch the economy Could be a while before food service consumption comes back. Modest upward pressure expected on the beef markets. Cattle futures should provide opportunities for buying Cattle prices forecasted at $.85 in 2009, $90 in 2010. US Live Cattle Market 0.960 0.940 Could be a good time to contract 0.920 0.900 0.880 0.860 0.840 0.820 0.800 1/4 2/4 3/4 4/4 5/4 6/4 7/4 8/4 9/4 10/4 11/4 12/4 06-08 Avg 2009 Forecast 2010 Forecast 20
90% Beef Trimmings 90% Beef Trimmings Price(lb b.) 1.950 1.850 1.750 1.650 1.550 1.450 1.350 1.250 1.150150 2008 2009 Forecast 1/4 2/22 4/12 5/31 7/19 9/6 10/25 12/13 90% Beef Trim 06-08 Avg 2008 2009Change from 2008 2010Change from 2008 Qtr 1 1.394 1.410 1.400-0.7% 1.508 7.7% Qtr 2 1.450 1.607 1.438-10.5% 1.557 8.3% Qtr 3 1.497 1.787 1.463-18.0% 1.598 9.2% Qtr 4 1.314 1.395 1.425 2.2% 1.403-1.5% Ann 1.414 1.550 1.432-7.6% 1.516 5.7% 21
Choice End Cuts 167a Choice Beef Knuckle ice(lb.) 2200 2.200 2.100 2.000 1.900 1.800 1.700 1.600 1.500 1.400 1.300 2008 2009 Forecast 2010 Forecast 1/4 2/ /22 4/ /12 5/ /31 7/ /19 9/6 10/ /25 12/ /13 Pri 167a Choice Knuck 06-08 avg 2008 2009 Change from 2008 2010 Change from 2009 Qtr 1 1.87 1.825 1.782-2.4% 1.899 6.6% Qtr 2 1.705 1.867 1.581-15.3% 1.666 5.4% Qtr 3 1.791 1.978 1.688-14.7% 1.808 6.7% Qtr 4 1.823 1.928 1.812-6.0% 1.835 1.3% Ann 1.797 1.899 1.716-9.6% 1.802 5.0% 22
Choice Middle Meats lb.) Price( 7.000 6.500 6.000 5.500 5.000 4.500 4.000 3.500 3.000 180 0x1 Choice Beef Strip 2008 2009 Forecast 2010 Forecast 1/4 2/22 2 4/12 5/31 7/19 9/6 10/25 12/13 180 Choice 0x1 Strip 06-08 avg 2008 2009Change from 2008 2010Change from 2008 Qtr 1 5.359 4.978 4.242-14.8% 4.560 7.5% Qtr 2 6.314 5.944 5.605-5.7% 5.907 5.4% Qtr 3 5.373 5.086 4.449-12.5% 4.775 7.3% Qtr 4 4.602 4.113 4.119 0.20% 4.173 1.5% Ann 5.412 5.03 4.604-8.50% 4.854 5.4% 23
Prime Middle Meats 112a Prime Beef Ribeye (Heavy) Price e(lb.) 9.500 9.000 8.500 8.000 7.500 7.000 6.500 6.000 5.500 2008 2009 Forecast 2010 Forecast 1/4 2/22 4/12 5/31 7/19 9/6 10/25 12/13 112a Prime Ribeye 06-08 avg 2008 2009Change from 2008 2010Change from 2009 Qtr 1 8.068 8.219 6.545-20.4% 7.215 10.2% Qtr 2 8.127 6.891 6.496-5.3% 6.982 7.5% Qtr 3 8.355 8.102 6.731-16.9% 7.353 9.2% Qtr 4 8.215 7.311 7.488 2.4% 7.228-3.5% Ann 8.191 7.631 6.815-10.6% 7.195 5.6% 24
Beef Contracting 25
Summary Grain Price Inflation Watch ethanol and the dollar. $3.65 corn and $290 soybean meal forecasted Cattle herds are declining Beef production expected to decline the next few years Pork and chicken output may decline as well. Beef Demand Exports and food service demand could continue to struggle Retail could be good at times Overall consumption trend is downward Beef Outlook Modestly higher beef prices in the coming months Watch the economy, dollar value, imports. 26
Thank You David Maloni is the Principal and Chief Commodity Analyst for American Restaurant Association Inc., a food commodity research, consulting and risk management organization founded in 1996 specifically directly to the US food service industry supply chain. His proficiency is directed to the protein, dairy, grain and biofuels markets and their impacts on the US food service industry especially in relation to restaurant and hotel buying. David is also a nationally distinguished food commodity market analyst, consultant and author with his expertise featured in The Weekly Commodity Report, The Food Commodity Outlook Report as well as several news sources and publications. David is a series 3 licensed commodity trader and the Principal and founder of ARA Trading Inc., a commodity brokerage directed to the US food service industry to assist clients in managing food commodity market and contracting risk. 2009 American Restaurant Association Inc. This presentation is protected under U.S. copyright law. Please do not redistribute without permission from American Restaurant Association Inc. Thank you. *This data and these comments are provided for information purposes p only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this entire presentation, including it s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. Covered Parties is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.