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Dr. Steve Meyer - Pork Industry Economic Update
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Dr. Steve Meyer - Pork Industry Economic Update

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Pork Industry Economic Update - Dr. Steve Meyer - Paragon Economics, from the Swine Forecast 2011 webinar, December 1, 2010.

Pork Industry Economic Update - Dr. Steve Meyer - Paragon Economics, from the Swine Forecast 2011 webinar, December 1, 2010.

http://www.swinecast.com/swine-forecast-2011

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Dr. Steve Meyer - Pork Industry Economic Update Dr. Steve Meyer - Pork Industry Economic Update Presentation Transcript

  • Steve Meyer Paragon Economics Des Moines, IA Swine Forecast 2011 Dec. 1, 2010
  • Swine Forecast 2011 Pork Industry Economic Update
  • Key factors for 2011 and beyond Ethanol and biofuels policy Grains and costs of production Policy decisions GIPSA rule Mandatory Price Reporting – esp. for pork Antibiotics Macro-economic situation – esp. $US Last month’s elections Committee chairs
  • 210 plants, capacity of 14.18 bil. gal. Cellulosic: 16.9 mil. gal. – 1% of the total 346 mil. gal. still under construction Full output would use 5.05 bil. bu. of corn
  • Ethanol plants are in the black – for now Nearby corn: $4.85/bu. Ethanol: $2.09/gal. Nat. Gas: $4.27/mmBtu
  • RFS is 12 bil. gal. this year, 12.6 in 2011 . . . . . . Slower growth (600 mil./yr.) thru 2015
  • Ethanol will use over 1/3 of this year’s crop
  • Corn above ethanol+DDGS rising SLOWLY . . . . . . but is offset by lower milo, barley, wheat
  • Important policy issues this fall/winter 15% blend allowance for 2007 and later Approval for 2001-2006 now pushed to Jan. But what about logistics? Liability? This is an allowance , not a requirement Renewal of the BTC and Import Tariff Both are questionable – esp. with election Proposal to lower BTC, spend on infrastructure Must keep BTC close to Tariff or Brazil, et. al. will almost surely challenge in WTO
  • And now – Al Gore to a conference in Greece Al Gore –who invented the internet AND discovered global warming “ It is not good policy to have these massive subsidies for first generation ethanol” “ The energy conversion ratios are, at best, very small.” “ I had a certain fondness for farmers in Iowa because I was about to run for president.” “ The percentage of corn being used for etha-nol definitely has an impact on food prices.”
  • November WASDE: Lowest S/U ratio since ‘96
  • Record-large crop and record-high price!
  • Corn is now FAR above the “new” range . . . . . . So much for harvest-time seasonal lows!
  • Good SB crop but STRONG demand. . . . . SBM futures moving to TOP of new range
  • Hog feed is now $50-$70 higher than yr. ago
  • BE costs for 2011 are now at $74.81/cwt
  • And the big problem may be NEXT year HUGE battle for acres next spring – corn, wheat, soybeans – even cotton NO margin for error next growing season Planting or growing problems would force rationing the already-small 2011 carryout RFS will force 200 mil. bu. MORE to ethanol Problem next summer could cause an AVAILABILITY problems in 2012 – Add animal welfare problems to high costs!
  • PROPOSED GIPSA RULE
  • ‘ 08 Farm Bill – Thou shalt write rules on: U ndue or unreasonable preference or advantage Reasonable notice of suspension of delivery of birds When a required additional capital investment is a violation of the Act When a reasonable time period has been given to remedy a breach of contract What makes for a “fair” arbitration process
  • GIPSA went well beyond the Farm Bill Restrictive competitive injury definition Likelihood of competitive injury definition Raising rivals’ costs – new tech? bidding higher? Foreclosing competition through exclusive dealing – marketing agreements? Requires written “justification” of any prices or contract terms that deviate from standard prices or terms -- but no guidance as to what an acceptable “justification” may be
  • More rules beyond the Farm Bill . . . Conduct can violate the P&S Act without a finding of harm to competition – BIG DEAL Contradicts 8 Circuit Courts and Congress! Legislation by regulation!! HORRIBLE precedent for ALL citizens A sweeping definition of unfair and deceptive practices – some okay, some not Bans packer purchase from other packers or “affiliated companies” – Triumph, USPB
  • More rules beyond the Farm Bill . . . Submission of all “unique” contracts within 10 days of execution GIPSA may post them on website Personal, confidential, identifiable info? Restrictions on contract lengths – long enough to recoup 80% of investment Many restrictions on terms if an investment – whether initial or additional -- of $25,000 or more is required
  • Impacts Homogenization – no premiums other than carcass (???), lower producers prices Higher costs and risks of using contracts Significant written documentation required Opens possibility of challenge after challenge BIG difficulties for some packers and owners of packing plants Legislation by regulation – BAD precedent Uncertainty and liability = costs!
  • Impacts -- continued Variations and individual needs will be ignored due to required justifications Will limit the gains of good negotiators “Treat all the same” regardless of needs Likely to lead to further vertical integration Production contracting too expensive – own your buildings Marketing contracting too expensive – own your hog supply Next action: Ban/limit vertical integration
  • Mandatory Price Reporting Reauthorization System is in place for another 5 years – no problems this time Added wholesale pork prices and volumes Goal: Broaden the base for the cutout value
  • VERY low percent of cuts is reported
  • Mandatory Price Reporting Reauthorization System is in place for another 5 years – no problems this time Added wholesale pork prices and volumes Goal: Broaden the base for the cutout value Not available any time soon -- Negotiated rule-making will take 12-18 months Startup – 4-6 months Will NOT catch anywhere near 100% of pork cuts Added weekly pork exports
  • PORK AND HOG OUTLOOK
  • Key Issues for rest of 2010 and 2011: Feed costs – have reduced profit outlook by over 50% since June Q4 hog numbers – Sept H&P report says there were few hogs “backed up” on 9/1 Expansion Some evidence in summer but the BH was lower in Sept than in June Limiting factor: Risk – feed and rules Demand Domestic – soft past 12 mos. but improving Exports – YTD good, J-A-S were lower yr/yr
  • All demand indexes are lower for 12 mos. . . . . . . But monthly indexes have strengthened September monthly index vs. ‘09: Pork: +1.6% Chicken: +3.5% Beef: +2.5%
  • Reason: Retail prices are finally rising . . . . . . At or near record highs and more to come!
  • Financial positions have improved . . . . . . Futures suggested 46% recovery by July
  • September Hogs and Pigs Report
  • Since mid-Oct: Slghtr up 4% from expected . . . VERY close to weekly slghtr capacity
  • Record-high market hog weights . . . . . . New corn, weather, near capacity
  • Cutout value fell sharply in Sept-Oct . . . . . . But has firmed in past 4 weeks – bottom?
  • Ditto for hog prices – but MUCH deeper . . . . . . These, too, have turned – early bottom?
  • One result – VERY good packer margins. . . . . Room for price recovery, expansion??
  • Sow slaughter has risen – no expansion . . . . . . But will stay lower than historical levels
  • Futures: ‘10 & ‘11 profits have improved but . . . . . . risk will keep expansion at bay – for now
  • Slaughter forecasts based on Sept H&P . . . . . . Larger supplies in 2011
  • Price forecasts
  • Canada and N. America herds still falling
  • Rate of decline is slowest since ‘07 . . . . . . I still expect it to stabilize at 1.2 mil. or so
  • Questions & Discussion CME’s Daily Livestock Report www.dailylivestockreport.com National Hog Farmers’ North American Preview www.nationalhogfarmer.com