Situation and Outlook Cattle Market 2008 and Beyond John D. Lawrence Extension Livestock Economist Iowa State University 1
Situation and Outlook Outlook for production and price Energy policy Feed cost Regional competitiveness Emerging issues 2
Bil. Pounds TOTAL RED MEAT & POULTRY PRODUCTION Quarterly 24.0 23.0 Avg. 2002/06 2007 22.0 21.0 2008 20.0 2009 19.0 JAN-MAR APR-JUN JUL-SEP OCT-DEC Higher feed costs not limiting supply yet!!!!! But, signs that chicken and pork are starting to cut back 3
Broiler supplies higher through April Mil. Eggs 225 220 215 BROILER EGGS SET Weekly Look for Broiler supply to decline in the weeks ahead 210 205 200 195 Thou. Head 80 SOW SLAUGHTER Federally Inspected, Weekly 190 JAN APR JUL OCT 75 70 65 Hog breeding herd March 1 and Sow Slaughter in next 5 weeks 60 55 50 45 2007 2008 % Chg Hd Chg Brdg herd 6110 6138 0.5% 28.0 5 weeks 324 356 10.1% 32.6 40 JAN APR JUL OCT 4
1000 MT 9 8 7 6 5 4 3 2 1 0 U.S. EXPORTS OF BEEF MUSCLE CUTS Weekly Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Canada Japan Mexico Korean Rep. Livestock Marketing Information Center 5
Mil. Head 12.5 12.0 11.5 CATTLE ON FEED US Total, Monthly April 1, COF Steers -1.2% Heifers +3.2% Avg. 2002-2006 2007 11.0 10.5 2008 10.0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Livestock Marketing Information Center Data Source: USDA/NASS 6
Pounds 870 STEER DRESSED WEIGHT Federally Inspected, Weekly 860 850 840 Avg. 2002-06 830 820 2007 810 800 790 2008 780 JAN APR JUL OCT 7
Placement of lighter cattle ahead of 2007 Up 158,000 or 7.6% Mil. Head 1.8 1.6 1.4 1.2 1.0 0.8 0.6 CATTLE PLACED WEIGHING LESS THAN 700 POUNDS 1,000 Plus Capacity Feedlots, U.S., Monthly Mil. Head CATTLE PLACED WEIGHING MORE THAN 700 POUNDS 1,000 Plus Capacity Feedlots, U.S., Monthly 0.4 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Avg. 2002-06 2007 2008 Placement of heavier cattle behind 2007 Down 221,000 or -6.9% 0.6 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 8
$ Per Cow ESTIMATED AVERAGE COW CALF RETURNS Returns Over Cash Cost (Includes Pasture Rent), Annual 150 100 50 0-50 -100 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 9
50 45 40 35 30 25 20 15 10 5 Mil. Head JANUARY 1 COW INVENTORY U.S., Annual Beef cows Dairy cows 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Mil. Head 7.0 Beef Cows -1% Beef Heifers -3.5% HEIFERS HELD AS BEEF COW REPLACEMENTS January 1, U.S. Smallest beef cow inventory since 1990 6.5 6.0 5.5 Livestock Marketing Information Center Data Source: USDA/NASS 5.0 4.5 4.0 3.5 3.0 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 10
First 14 weeks of 2008 Heifer slaughter +3.6% Steer slaughter -0.9% Thou. Head 230 220 210 200 190 180 170 160 HEIFER SLAUGHTER Federally Inspected, Weekly Thou. Head BEEF COW SLAUGHTER Federally Inspected, Weekly 150 JAN APR JUL OCT 80 75 70 65 60 55 50 45 Avg. 2002-06 2007 2008 First 14 weeks of 2008 Total cow slaughter +3.2% Milk cow 0.0% Beef cow +6.0% 40 JAN APR JUL OCT 11
Mil. Head 55 CALF CROP U.S., Annual 50 45 40 35 Smallest calf crop since 1950 2007 = 37.4 Million Head -0.4 Percent 30 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 Livestock Marketing Information Center Data Source: USDA/NASS 12
ANNUAL AVERAGE CATTLE PRICES $ Per Cwt 135 125 115 105 95 85 75 65 500-600lb Steer Calves 700-800lb Feeder Steers Fed Steers 55 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 13
CHANGE IN BEEF COW NUMBERS JANUARY 1, 1998 TO JANUARY 1, 2007 (1000 Head) -120 Alaska Hawaii -107-35 -5 3-3 US Total -6-47 -991-11 -160-111 -131 Livestock Marketing Information Center Data Source: USDA/NASS +28 33 50 10-45 -124 41 2 0-10 -13-51 39 101 42-207 2007 to 2008-339 65-14 45-133 -86-4 93-105 -9 5-216 -39-27 15-60 -30-3 0 32-15 -2.6-1 MA -1 RI 0 CT 0 NJ -5 DE 1 MD 1 5 to 101 (13) 1 to 5 (4) -11 to 1 (13) -51 to -11 (10) -207 to -51 (10) C-N-29 02/02/07 14
Cattle Market Summary Large losses in feedlots currently Optimism about fall futures have feeder cattle bid well above hedgeable returns Korea announcement likely slow to materialize Cowherds pressured from both sides Excess capacity in feedlots will keep feeders higher than they should be 16
Ethanol Economics and Feed Price Implications 17
DRY MILLING-WDG(+S) Abengoa Bioenergy, York, NE GRAIN FERMENTATION GRIND, WET, COOK YEAST, ENZYMES STILL ALCOHOL & CO 2 STILLAGE 1/3 each DISTILLERS GRAINS WDG, DDG WDGS DDGS DISTILLERS SOLUBLES 18
Corn Used for Feed and Ethanol 19 Source: Renewable Fuels Association
Billion Gallons Renewable Fuel Standard by Fuel Type, December 2007 Energy Bill 40 35 30 25 20 15 10 5 0 2009 2010 2011 Corn-based Ethanol Biodiesel 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cellulosic Biofuels Additional Advanced Biofuels 20
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Ethanol Production Plans BGY BBu MTon Operation-Expansion 6.7 2.4 20.6 Operation-Construct 11.6 4.1 35.1 Operation-Broke grd 14.3 5.1 43.3 Operation-Planned 36.2 5.1 43.3 Target for corn based ethanol is 15 BGY by 2022 Target for total biofuels is 36 BGY by 2022 22
Ethanol Economics Gal/bu 2.8 Ethanol $/gal $2.52 DDGS $/t $170 Revenue $/bu $8.50 Corn Cost $5.61 Return over Corn $2.89 Estimated operating cost per bu $1.73 Estimated fixed costs per bu $.67 23
$6.00 Omaha Corn Prices $5.00 $4.00 Sep 1998 - Aug 2006 Corn Averaged $2.00 $3.00 $2.00 $1.00 $- Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 24
Feedstuff Prices Crop Years 99-04 2006 Corn Price ($/bu) $2.04 $3.19 SBM Price ($/ton) $194.70 $198.40 Hay Price ($/ton) $96.10 $114.80 DDGs price ($/ton) $107.61 WDGs Price ($/ton) $35.41 25
Percentage Change in Feed Cost, Crop Years 2006 v. 99-04 Average 60% 50% 40% No Low High 30% 20% 10% 0% Feedlot Dairy Swine Layers Low = 20% for feedlots, 10% for dairy and swine and 7.5% for layers High = 40% for feedlots, 20% for dairy and swine and 15% for layers 26
1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 IowaBeefCenter.org Price Ratio DDG/Corn Chicago Year ending March 11 averaged.92 1/4/2000 7/4/2000 1/4/2001 7/4/2001 1/4/2002 7/4/2002 1/4/2003 7/4/2003 1/4/2004 7/4/2004 1/4/2005 7/4/2005 1/4/2006 7/4/2006 1/4/2007 7/4/2007 1/4/2008 27
Converting Fiber to Ethanol 6/27/2007, POET produces cellulosic ethanol from corn cobs First, the fiber that comes from our fractionation process will provide 40 percent of our cellulosic feedstock from the corn kernels that we are already processing in our facility. 28
Implications for Corn Market Integrated gas and corn markets Higher price level Implied volatility impacts option premiums 1997 to 2005 yearly average was below 22% 2006 was 28.8% 2007 was 32.4% New crop 2008 in February 2008 was 35% 29
CARD, February 2008 Baseline scenario 90 million acres of corn and trend yield National average corn price $4.97 Mandate Relax Keep Drought 88 113 bu $6.42 $7.99 Bumper 04 169 bu $4.06 $4.07 Remove $.51 credit $4.15 $5.20 30
Breakeven Purchase Price to Pay for 650# Steer Calf Corn Fed Cattle Selling Price Price $85.00 $90.00 $95.00 $100.00 $105.00 $110.00 $4.00 90.68 100.26 109.84 119.42 129.00 138.58 $4.50 87.31 96.89 106.47 116.05 125.63 135.21 $5.00 83.93 93.51 103.09 112.67 122.25 131.83 $5.50 80.56 90.14 99.72 109.30 118.88 128.46 $6.00 77.19 86.77 96.35 105.93 115.51 125.09 $6.50 73.81 83.39 92.97 102.55 112.13 121.71 $7.00 70.44 80.02 89.60 99.18 108.76 118.34 $7.50 67.07 76.65 86.23 95.81 105.39 114.97 $8.00 63.69 73.27 82.85 92.43 102.01 111.59 $80/t MDGS, 8% Int, $30 freight, $0.35 yardage 31
Oil Price and Bioeconomy Higher energy prices Supported ethanol production Increased freight rates Increased fertilizer prices Corn deficient region price is Midwest PLUS freight 32
120% Percent Change in Rail Rates for Selected Cities from Omaha or Chicago, June 2003 is Base 100% Amarillo, TX 80% Sterling, CO 60% Dodge City, KS 40% Los Angeles, CA 20% Raleigh, NC Athens, GA 0% -20% Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Buffalo, NY 33
600 IowaBeefCenter.org Average US Farm Prices, April each Year ($/ton) 500 400 300 200 100 0 2002 2003 2004 2005 2006 2007 AA Super Phosphate Potassium Chloride 34
$1.00 Annual Average Fed Steer Basis to TXOK, Not Adjusted for Grade or Shrink $0.50 $- $(0.50) $(1.00) $(1.50) IA NE KS CO 2002 2003 2004 2005 2006 2007 35
Emerging Issues 36
Swift/JBS Purchases Rank Company Head/Day Share 1 JBS Swift 20,500 National Beef Packing 14,000 Smithfield Beef Group 8,050 42,550 31.10% 2 Cargill Meat Solutions 29,000 21.20% 3 Tyson Foods 28,700 21.00% 4 American Foods Group 6,500 4.70% 5 Greater Omaha Packing 2,800 2.00% 6 Nebraska Beef 2,600 1.90% 7-13 10,100 7.38% Smaller 14,605 10.67% Total 136,855 Source: CME DLR 37
Factors to Consider Those numbers are total cattle not fed cattle The 31% is similar to Smithfield in hogs Impact Likely varies with location Retailers have fewer sellers Competition title of Farm Bill Ban on packer ownership Restrictions on contracts 38
Role of Science in Food Consumers have other sources of information Trust NGOs more than government or universities Asking value-based questions We respond with science-based questions 39
Changing Consumers Changing demographics Aging Boomers eat less meat Wealthy Boomers want more choice Brands are the new regulations Different rules for different brands Growth of natural, green, organic, local Is mainstream inferior How to document and prove 40
800 Pound Gorilla Lee Scott, president and chief executive officer of Wal-Mart Stores Inc. s "In the next three years we would like to build a very different system. We believe that there should be one framework of social and environmental standards for all major global retailers. And there should be one third-party auditing system for everyone. This will ensure improvement will occur across the board on a level playing field." (MEATPOULTRY.com, January 30, 2008) by Keith Nunes 41
Take Home The world in which you operate has fundamentally changed. How have you changed your business??? 42
Thank you! Any Questions? www.iowabeefcenter.org www.econ.iastate.edu/faculty/lawrence/ 43