Successfully reported this slideshow.
Your SlideShare is downloading. ×

Surviving market dislocation in the wake of covid 19

Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Ad
Loading in …3
×

Check these out next

1 of 73 Ad

Surviving market dislocation in the wake of covid 19

Download to read offline

Join expert meat and livestock industry analysts, Dr. Rob Murphy and Kevin Grier as they do a deep-dive into the lasting impact of #COVID19 on the markets. These slides include both of their outlooks for what's to come for the protein industry heading into Q3, 2020.

Join expert meat and livestock industry analysts, Dr. Rob Murphy and Kevin Grier as they do a deep-dive into the lasting impact of #COVID19 on the markets. These slides include both of their outlooks for what's to come for the protein industry heading into Q3, 2020.

Advertisement
Advertisement

More Related Content

Slideshows for you (20)

Similar to Surviving market dislocation in the wake of covid 19 (20)

Advertisement

Recently uploaded (20)

Surviving market dislocation in the wake of covid 19

  1. 1. Q3 BIG PICTURE OUTLOOK Surviving Market Dislocation in the Wake of COVID-19 HOSTED BY: J.S. Ferraro DATE: July 23, 2020 Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. WEBINAR
  2. 2. 2 | An integrated sustainable food brand committed to creating the best-tasting fresh protein experience. Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. Providing market intelligence, risk management and meat procurement solutions for the meat and livestock industry. ABOUT J.S. FERRARO
  3. 3. PANELIST | DR. ROB MURPHY DR. ROB MURPHY, BS, MS, PhD Agri Economics Executive Vice President, Research and Analysis J.S. Ferraro www.jsferraro.com An agricultural economist and business leader with over 27 years in the industry, Dr. Rob Murphy has a wealth of experience in the North American meat and livestock industries studying, analyzing and predicting market movements. His expertise spans commodity analysis, econometric modelling, forecasting, futures markets, hedging, and risk management. Rob holds a Ph.D. in Agricultural and Applied Economics from Virginia Tech and has developed his market expertise over the past three decades by serving as an economist with the Chicago Mercantile Exchange, Sparks Companies and Informa Economics. At Informa, Rob held two senior leadership roles (Senior VP of Livestock, Meat, Dairy and Poultry group and Vice President) over 13 years. He focused on the development of risk management programs and directed the division’s work in commodity analysis in the protein sector. He has spoken internationally on many topics, including agri supply chain-development and international protein demand. Currently, Rob is the Executive Vice President, Research and Analysis at J.S. Ferraro & Co. leading the team in commodity analysis, financial modelling, and the development of trading and risk management strategies. 3 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  4. 4. PANELIST | KEVIN GRIER KEVIN GRIER Market Analyst Kevin Grier Market Analysis & Consulting www.kevingrier.com Kevin Grier is a noted Canadian Agriculture & Food Market Analyst providing economic and market outlook for livestock, meat and grocery industries over the last 20+ years. His critical market insight and analysis helps his clients - from government and producer groups to small to large businesses - drive profitable bottom line decisions. Kevin is a regular contributor and respected expert across media platforms throughout North America - Global News, CTV, National Post, Globe & Mail, National Hog Farmer and Grocery Business. Kevin speaks with clarity on a range of topics including market analysis, economic impacts, consumer trends and commodity analysis. He provides regular commentaries on the market and is a national and international keynote speaker known for his approachable yet pragmatic style. His breadth of knowledge was developed over 18 years at the George Morris Centre, a leader in economic research in the agriculture and food industry. Prior to that Kevin was a manager with the Ontario Farm Products Marketing Commission, the supervisory body of the provincially regulated marketing boards. Currently, Kevin is managing director of Kevin Grier Market Analysis and Consulting, a company specializing in livestock, meat, poultry and grocery industry market insight and analysis working across a breadth of organizations internationally. 4 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  5. 5. 1. MARKET OUTLOOK | CATTLE & BEEF • US Market • Canadian Market • Panel Discussion 2. MARKET OUTLOOK | HOGS & PORK • US Market • Canadian Market • Panel Discussion 3. LIVE Q&A DISCUSSION OUTLINE 5 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  6. 6. Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.6 | HOUSEKEEPING Questions can submitted within the Q&A box at the bottom of your screen Participants video and microphones will be muted for the presentation Technical questions can be submitted using the CHAT box at the bottom of the screen. Contact HELP & SUPPORT participant Use the side-by-side view to easily see the speakers and presentation
  7. 7. • SUPPLY, DEMAND & PRICING • INSIGHTS Q3 BIG PICTURE MARKET OUTLOOK CATTLE & BEEF | US 7 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  8. 8. Assessing the Backlog in Fed Cattle Supplies • The covid-related plant shutdowns in April and May resulted in a large number of un-slaughtered cattle that were market ready • We compare actual monthly slaughter with what was implied by past placements and our pipeline model • Packers actually got ahead in slaughter during the first three months of the year. • April saw a 565,000 head deficit and May had a 325,000 head deficit • Packers played catch-up in June and are expected to continue that pattern in July and August 8 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  9. 9. • By our calculation, the backlog reached a high point close to 800,000 head in May • Since then, that backlog has been trimmed as packers managed to get their plants operating back near full capacity • As of this week, the backlog stands at close to 460,000 head • That should narrow further and by the end of August would expect it to be less than 400,000 head • Of course all of this relies on plants continuing to operate at near capacity So Where Does the Backlog Stand Today? 9 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  10. 10. Sharp Reduction in Spring Placements Indicates Tighter Cattle Supplies Ahead • Cattle feeders reacted to the covid-related plant shutdowns by sharply reducing placements in March and April • Over the 3-month period of Feb, Mar, Apr, placements were down an average of 17.5% from the year prior • These are cattle that will finish from August to October. • This creates a “hole” in fed cattle supplies that should be only partially filled by any cattle leftover from the backlog • In total, this coming gap equates to about one million head of cattle 10 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  11. 11. Carcass Weights are Very Heavy and Adding to Beef Production • The plant shutdowns in April and May disrupted the normal seasonal pattern of declining carcass weights • Steer carcass weights are now 35lbs over last year or about 4.1% heavier • This factor is greatly adding to fed beef production presently • As the backlog gets cleared, carcass weights should move much closer to last year’s level. That should be apparent by September or October • Heavy cattle limit producer’s bargaining power with packers in the fed cattle market 11 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  12. 12. De-Trended and De-Seasonalized Carcass Weights Now Are Declining • By removing the long-term trend in carcass weights and the seasonal pattern, we can examine the “irregular” component of carcass weights • This represents the portion of carcass weights that are caused by things such as slow or fast marketing rates and weather influences • This can be used to gauge how current feedyards are in their marketings • The DTDS steer weight peaked at +30 during the height of the plant shutdowns and is now declining. That indicates that the worst is behind us and feedyard currentness is improving 12 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  13. 13. Packer Margins Have Retraced, but Remain Very Large • As the plant shutdowns took hold, beef prices skyrocketed and cattle prices did not follow • That created huge packer margins, which peaked at over $2000/hd. • As plants came back online, margins fell and today they are running just over $300/head • Given that a backlog of cattle still exists and carcass weights are so heavy, we expect packer margins to remain really wide ($250-$350/hd) for the balance of summer • To be fair, packers are not villains here. They did not cause this situation and have incurred a lot of additional costs because of COVID-19 13 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  14. 14. Retail Beef Prices Reached an All-Time High in June • Retailers got squeezed by rapidly rising wholesale beef prices during the plant shutdowns and responded by sharply increasing retail prices • There is a lag effect at work here with retail pricing moving higher in June even though most plants were back online by then • These high retail prices will stifle movement at a time when the industry really needs to push backlogged product through the system • Retail prices have now started working lower in July, but remain relatively high • Beef feature activity slowed to a crawl during the height of the crisis but is now slowly returning to more-normal levels 14 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  15. 15. Retail Beef Features Were Sharply Curtailed, Now Rebounding • Beef feature activity dropped off sharply during the stockpiling event, then improved • Feature activity took another hit after plants shutdown and wholesale prices skyrocketed • At the same time, retail feature prices escalated to almost $7/lb. • Those trends are now reversing, but are not nearly back to normal. That will take several more weeks. 15 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  16. 16. The Recession is Expected to Temper Beef Demand in the Second Half of 2020 • The US unemployment rate stands at 11.1% after running at a very low 3.5% prior to the COVID-19 crisis • High unemployment means less disposable income that can be spent on beef. Recessions typically see a softening in beef demand • JSF’s forecasts for the second half of 2020 impound about a 4% decline in beef demand • Not all cuts will be affected equally. Consumers will likely “trade down” from high priced middle meats toward lower priced end cuts and grinds 16 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  17. 17. Beef Exports Look Sluggish at Present • The US economy is not the only economy to be crippled by the COVID-19 crisis. Almost all other countries are in recession as a result of this global pandemic • That means consumers in nations that traditionally import US beef have less disposable income and fewer can afford high priced US beef • USDA reported beef exports in May down over 30% from last year • Of course beef pricing was extraordinarily high during May, so that played a major role • JSF sees beef exports improving as price levels come down but for 2020 as a whole beef exports may only be flat with 2019 17 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  18. 18. Beef Cutouts are Expected to Bottom in July and Slowly Work Higher • The Choice cutout averaged $263/cwt in April and $420/cwt in May, by far the highest monthly beef prices ever seen • As plants re-opened and production increased, the cutouts moved quickly lower • July is expected to be the low point, with prices slowly increasing as fall approaches • Price strength in October and November is expected to arise from tighter supplies caused by the elimination of the backlog and the “hole” created by light placements this spring • Soft demand due to the recession could limit how high beef prices can get in Q4 18 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  19. 19. As Supplies Tighten this Fall, Cash Cattle Prices Should Recover • Cash cattle markets bottomed near $95/cwt in early July and now appear to be slowly improving • Gains will be small in July and August and their may be some setbacks along the way, but the general direction should be higher • As cattle supplies tighten this fall, packer margins should compress, implying that cash cattle prices strengthen • Packer margins are not expected to go negative, but they could be cut in half from today’s level 19 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  20. 20. The Futures Market Isn’t Buying It (Yet) • Given the supply and demand fundamentals laid out in this presentation, the front four futures contracts look too cheap relative to what our read on the fundamentals suggests • Since packers reference the futures market when setting pricing for fixed-price forward deals, this means that beef buyers should be able to lock in advantageous pricing for fall right now • The reliability of these price forecasts declines considerably beyond Dec since the 2021 supply depends upon feedyard placements that haven’t happened yet. 20 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  21. 21. INSIGHTS: Cattle & Beef Main Take-Aways • The cattle and beef complex has returned to near normalcy following a tumultuous spring, but a backlog of un-slaughtered cattle hangs over the market. • We expect the backlog to be cleared by October, with help from a “hole” in cattle supplies that was created this spring as cattle feeders slashed placements in response to the COVID-19 crisis • Between now and the end of summer beef pricing is expected to stay relatively soft as packers slaughter aggressively in order to clear out the backlogged cattle • Both domestic and international demand are expected to be soft due to the global recession spawned by the crisis, but the tighter supply situation this fall is expected to dominate weaker demand and thus push price levels higher • The futures market is still not fully reflecting the impact of tighter supply this fall and thus beef buyers may find it advantageous to book fall needs now while the futures are relatively low • With COVID-19 infections on the rise again in many parts of the US, market participants need to be on guard for plant slowdowns due to covid. We think the probability of that is low, but it is not zero. 21 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  22. 22. • SUPPLY, DEMAND & PRICING • INSIGHTS Q3 BIG PICTURE MARKET OUTLOOK CATTLE & BEEF | CAD 22 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  23. 23. Foodservice Update • First glimpse of data on lockdown impact 23 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  24. 24. Cdn Quarterly Cattle Slaughter 2018-2020 • Q2 -20% • Q3 +10%? 400 500 600 700 800 900 1,000 Q1 '19 Q2 Q3 Q4 Q1 '20 Q2 Q3 ThousandHead 24 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  25. 25. 550 650 750 850 950 1050 1150 1250 J F M A M J J A S O N D c$/CKG Canadian Beef Cutout Monthly 2019, 2020 2014-2018 Average 2014-2018 Average 2019 2020 Canadian Beef Cutout Monthly 2020, 2019 and 2014-2018 Avg 25 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  26. 26. Weekly Beef Wholesale Price Differential vs 2017-2019 Average -20% 20% 60% 100% 140% 180% 220% Apr 4 Apr 11 Apr 18 Apr 25 May 2 May 9 May 16 May 23 May 30 June 6 June 13 June 20 June 27 July 4 July 11 July 18 PriceDifferential Beef-Chicken Beef-Pork 26 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  27. 27. Retail Beef Margins vs 2017-19 Average Weekly Feb-April -55% -45% -35% -25% -15% -5% 5% 15% 25% May 2 May 9 May 16 May 23 May 30 Jun 6 Jun 13 Jun 20 Jun 27 Jul 4 Jul 11 Jul 18 Marginvs.Average 27 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  28. 28. Ontario Beef Feature Share Monthly vs 2014-2018 Average -25% -20% -15% -10% -5% 0% 5% 10% 15% 2019 Mr Ma Jl Se No 2020 Mr Ma 28 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  29. 29. Front Page Flyer Activity
  30. 30. Ontario Chicken Feature Share Monthly vs 2014-2018 Average -20% -10% 0% 10% 20% 30% 40% 2019 Mr Ma Jl Se No 2020 Mr Ma 30 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  31. 31. INSIGHTS: Beef Summary Points • Suddenly very competitive on costs • Suddenly very competitive on margins • Beef merchandising should increase in Sept and Q4 31 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  32. 32. • SUPPLY, DEMAND & PRICING • INSIGHTS Q3 BIG PICTURE MARKET OUTLOOK HOGS & PORK | US 32 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  33. 33. March-May Slaughter Levels Greatly Depressed by Plant Shutdowns • The slaughter deficiency started in mid-April as COVID-19 infections forced plants to close • The deficit was the largest in the last week of April when packers under-killed the pig crop by a million head in a single week • Slowly plants came back online and slaughter levels increased, but even at the end of May hog slaughter was short of what the prior pig crop implied 33 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  34. 34. June-Aug (Q3) Slaughter Rebounds as Plants Recover • Finally, in mid-June packers were able to over-kill the pig crop and start clearing some of the backlogged hogs • That should continue through July, but the number of hogs killed above what the pig crop implied is too small to put much of a dent in the backlog • August may not see any over-kill because more pigs were targeted to that month than in June and July 34 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  35. 35. The Backlog has Been Eased Slightly But It Is Still Huge • At its worst, the hog backup reached about 3.8 million head • Strong kills in June and July whittled away at some of that backlog but it is still estimated to be over 3 million head • The prospects for further clearing of the backlog look poor beyond July because kills would normally expand moving from July to August • With the new COVID protocols, chain speeds are slower and plants won’t be able to reach the same level of slaughter as they could prior to COVID • This could be a problem in Nov/Dec when kills above 2.8 million head will be necessary 35 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  36. 36. The June Hogs & Pigs Report Indicated a High Level of “Other Disappearance” • The “other disappearance” category is a calculated number from Hogs & Pigs inventory data that captures the normal death loss in the production sector • Q2 saw an abnormally high level of other disappearance and we must assume that this reflects hogs that were euthanized by producers • By this measure, producers may have euthanized up to 1 million hogs, still leaving over 2 million in the backlog • Expect another big number in this category for Q3 • By the time Q4 rolls around, we expect that backlog will be gone. Some hogs may just simply vanish 36 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  37. 37. • With such a large backlog of hogs in the system, one would expect to see excessively heavy carcass weights • This was observed up until about the middle of June, but since then carcass weights have resumed their normal seasonal downtrend • Since the heaviest hogs are killed first, this offers a partial explanation • Also, producers changed hog rations to slow or stop weight gains in the wake of the plant shutdown • Still, these data lead me to believe that perhaps the backlog of hogs is not as severe as advertised Hog Carcass Weights Don’t Support a Huge Backlog 37 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  38. 38. De-Trended and De-Seasonalized Carcass Weights Slightly Elevated • The de-trended and de-seasonalized (DTDS) carcass weight series for hogs clearly shows the bulge in carcass weights as plants shutdown this spring • However, the recovery has been quick and DTDS weights are rapidly approaching the zero line • We won’t consider weights to be back to “normal” until the DTDS reaches -2. That could take 6-8 weeks. • DTDS weights are a good indicator of producer currentness and as they fall, producers gain leverage with packers and hog prices rise 38 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  39. 39. Packer Margins Are Abnormally Strong for Summer • As packing plants were forced to shutdown, packer margins swelled to $100/head • When plants started to reopen, packer margins retraced, mostly due to the falling cutout rather than any increase in cash hog prices • Margins now sit at about $35/head, which is well above what is normally seen in the summer months • Large margins are needed to incentivize packers to keep the kill high • JSF sees margins remaining in the $25- $35/head range through August 39 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  40. 40. Hog Producers are Suffering Financially • We calculate farrow-to-finish margins at about -$45/head currently • Summer is normally the best margin time of year for producers, but not this year • Producers have not had a positive margin since August of last year. That has created a lot of financial strain • Don’t look for much margin improvement until more of the backlog is cleared. It’s entirely possible that producers will be in the red for the remainder of 2020 • This financial stress has caused producers to pare back the breeding herd, which will mean tighter pork supplies in 2021 40 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  41. 41. The Economic Signals are Clear: The US Hog Herd Needs to Be Smaller • USDA reported the breeding herd down 1.3% in the June Hogs & Pigs report • This was the first YOY decline in the breeding herd since the PEDv event back in 2014. • Producers had ramped up their herd in anticipation of meeting huge export demand from China, but that has not brought the financial benefits many envisioned • We see this as the first of several quarters where the breeding herd will decline. This will bring tighter hog and pork supplies in 2021
  42. 42. Pork Exports to China Have Disappointed Recently • Pork exports to China are still very large by historical standards • Exports were trending higher in Q1, but it looks like that trend has reversed here in Q2 • The trend reversal coincides with the point where plants began to shutdown and pork prices were escalating • The YOY comparisons will get much tougher in the second half of 2020 due to strong numbers in 2019 • Perhaps low pricing in the balance of summer and fall will attract renewed interest from Chinese buyers 42 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  43. 43. The Biggest YOY Gains in Pork Exports are Behind Us • Total pork exports are up 33% year-to-date, but recent months have posted much smaller increases • We see a weak summer for pork exports, largely based on what we’ve seen so far in the weekly export data • Pork exports to China have posted large YOY gains, but a good portion of that has been offset by weak movement to other destinations • S. Korea, down 18% YTD; Mexico flat with last year; Canada flat with last year • JSF projects 2020 pork exports to be up somewhere in the 15-20% range 43 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  44. 44. Retail Pork Features Were Sharply Curtailed, Slow to Recover • Pork feature activity has been on a downtrend since the mid-March stockpiling event • There are signs that it is recovering, but very slowly • Pork feature prices have increased, but are highly variable • With retail prices high and featuring low, it will be difficult to clear all of the pork currently being produced
  45. 45. • Pork supplies are expected to remain abundant as long as a backlog exists • Domestic pork demand is currently weak and expected to remain that way through the remainder of summer • Fall could see some moderate price increases as the backlog is cleared, but unless plants start to close again, prices are not expected to run-away to the upside • The recession influence on pork demand is unknown at this time, but our forecasts impound a relatively weak demand environment this fall Pork Cutout Projected to Remain Weak into September 45 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  46. 46. Lean Hog Futures Look Too Cheap from December Onward • August futures look a little too optimistic given the backlog that needs to be worked through • Futures traders are projecting the current supply problems well into 2021 and that looks like a mistake. One way or another the backlog will be gone by then and the hog herd will be smaller • Of course, some of the weakness in deferred futures could be based on the idea that recessionary pressures will keep demand soft for a long time • Buyers should remain close bought into September and then consider booking late-year needs if the futures are still attractively priced 46 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  47. 47. INSIGHTS: Hog & Pork Main Take-Aways • The hog and pork complex is currently struggling due to hogs backed-up in the pipeline and that will take some time to clear. However, we suspect that the backlog will be gone by the time Q4 arrives and price levels should improve • The COVID-in-packing-plants problem has largely been solved, but users should continue to be vigilant as the virus is surging again in many parts of the US • Domestic pork demand is expected to be weak through the dog days of summer and recessionary pressures could also weigh on demand this fall • Pork exports are up considerably compared to last year, but that hasn’t been enough to lift US pork prices to the level that would make hog producers profitable • The industry is in the process of scaling back its production base and that will lead to stronger pricing in 2021 • As long as the backlog of hogs remains in place pork buyers would do well to remain close bought, but should consider forward pricing for late 2020 needs 47 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  48. 48. • SUPPLY, DEMAND & PRICING • INSIGHTS Q3 BIG PICTURE MARKET OUTLOOK HOGS & PORK | CAD 48 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  49. 49. Cdn Quarterly Hog Slaughter 2018-2020 • Q2 +3% • Q3 +4% 3.0 3.5 4.0 4.5 5.0 5.5 6.0 Q1 '19 Q2 Q3 Q4 Q1 '20 Q2 Q3 MillionHead 49 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  50. 50. Canadian Pork Exports Monthly • YTD up 17% • China up 55% 75 80 85 90 95 100 105 110 115 120 125 J F M A M J J A S O N D MillionKilograms 2014-2018 Average 2019 2020 50 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  51. 51. Domestic Availability 2018-2020 Jan to March • -18% 2020 YoY 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 2018 2019 2020 Tonnes 51 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  52. 52. Canadian Pork Cutout 2020, 2019 and 2014-2018 Average 130 150 170 190 210 230 250 J F M A M J J A S O N D c$/CKG 2014-2018 Average 2019 2020 52 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  53. 53. Weekly Canadian Pork Wholesale Price Differential vs 2017-2019 Avg -200% -150% -100% -50% 0% 50% May 2 May 9 May 16 May 23 May 30 June 6 June 13June 20June 27 July 4 July 11 July 18 PriceDifferential Pork-Beef Pork-Chicken 53 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  54. 54. Retail Fresh Pork Margins vs 2017-2019 Average Feb-April -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% May 2 May 9 May 16May 23May 30 June 6 June 13 June 20 June 27 July 4 July 11 July 18 54 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  55. 55. INSIGHTS: Pork Summary Points • Robust production • Export Focus • Domestic Availability? • Competitive 55 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  56. 56. Q3 BIG PICTURE MARKET OUTLOOK Q & A SESSION 56 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. ? ? ?
  57. 57. 57 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: What pricing method is used in calculating hog producer margin? DR. ROB MURPHY We calculate the producer's breakeven using corn and meal cash prices (basis Western Iowa) over the production period, including an amount for fixed costs (labor, etc.), then subtract that from the Lean Hog Index and put it on a per-head basis using current carcass weights.
  58. 58. 58 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: Rob, with the larger numbers of feeder cattle outside feedlots, when do they come into the feedlots and when do they get shipped to the slaughter plants? What is your outlook for Q1 2021 beef supplies? DR. ROB MURPHY I think those feeder cattle will come into the feedyards in a big way during October, November & December. By then, the backlog should be cleared and cattle prices will be higher, providing some optimism for cattle feeders. They will respond by placing aggressively in Q4. Right now, I'm projecting Q1 2021 commercial beef production to be down 2.5% from the year prior. I have per capita disappearance in Q1 down 4%.
  59. 59. 59 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: Where did non-placed feeders go? Did they disappear? DR. ROB MURPHY KEVIN GRIER They did not disappear. They are currently out on pasture and will likely be moved into feedyards this fall. I expect larger numbers than usual will be marketed in the fall that should have been placed in the early spring.
  60. 60. 60 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: How much do promotions impact sales at the food service level vs. volumes? Will there be a lot of discounting to get consumers back into restaurants? DR. ROB MURPHY I'm not sure that there will be a lot of discounting at foodservice in order to bring customers back. If consumers fear for their health, discounting won't do much to bring them back in. That said, I would expect that QSRs, which have drive- thru capability, would be more likely to discount than dine-in operations.
  61. 61. 61 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: Do you think the US pork industry will run into a capacity constraint in Q4? DR. ROB MURPHY Great question. I think its possible. Right now pork packers don't seem to be able to do more than 2.6 million head per week, likely because COVID protocols have reduced chain speeds. If 2.6 million is the most they can handle, then there will be some capacity problems this fall because my models project that the industry will need several weeks of 2.7-2.8 million head kills to clear all of the animals targeted to Q4.
  62. 62. 62 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: What is the actual level of governmental support that US hog producers receive? DR. ROB MURPHY This is hard to quantify because there have been several rounds of assistance provided to hog producers and there may be more to come (it’s an election year after all). My best guess at this point is somewhere between $30-50/head, all total, but not all producers received assistance.
  63. 63. 63 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: Will we see further relief in lean trimmings both domestic (USA / Canada) and imported (Australia, New Zealand et al.)? DR. ROB MURPHY I think lean trim prices will continue to work slowly lower, both domestic and imported. Bigger cow kills in North America this fall will help to make that happen. Of course the risk is that the recession causes consumers to up their demand for ground beef as they trade down from higher-priced options. So, supply gets bigger but demand could also be stronger as the recession deepens. I see supply winning, but not by much, and thus prices drift very slowly lower.
  64. 64. 64 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: How will pork exports to Mexico be impacted for the remainder of the year? DR. ROB MURPHY I think pork exports to Mexico will strengthen as we move into fall. Right now those exports are about flat with last year, but I could easily see us finishing 2020 with exports to Mexico up somewhere in the 3-6% range YOY.
  65. 65. 65 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: What effects will there be from packers asking pork families to settle for a lower price mechanism, understanding that these families have been seeing losses since Aug. 2019? DR. ROB MURPHY Unfortunately for hog producers, their bargaining power is limited at present. With packers in the driver's seat, they will attempt to negotiate pricing mechanisms that are less favorable for producers. In many cases, producers don't have a lot of options for places to sell their hogs and thus could be forced to accept less favorable terms. The only thing I can recommend to producers is to keep the contract short, because hog numbers should be tighter in 2021 and thus they will have more leverage when it comes time to re-up the contract.
  66. 66. 66 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: How long will it be before the cattle backlog to be negated? DR. ROB MURPHY KEVIN GRIER With the impending "hole" in cattle supplies that was caused by the sharp reduction in placements this spring, I would argue that the backlog should be gone by early October, maybe sooner. Alberta should be clear by October at the latest.
  67. 67. 67 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: Do you anticipate the Canadian pork breeding herd to shrink like it did in the US? KEVIN GRIER The Canadian herd did not grow as fast as the U.S. Growth in Canada has been tepid. I would be surprised if the Jan. 2021 herd is down more than 3%.
  68. 68. 68 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: What are your Q4 pork export projections to China? How much euthanization of the US hog herd do you believe occurred during the packing plant closures? Do you believe US weekly hog slaughter can get 100% to pre-COVID levels by Q4? DR. ROB MURPHY I think China will remain a major export destination for US pork for a long time to come. I have total US pork exports in Q4 up 13% and it's likely that Q4 exports to China alone will be up 20% or more. The risk there is if trade frictions between the US and China flare up again before we get to Q4. Right now, I'd say the government data suggests that a little over 1 million hogs were euthanized during Q2. I believe that COVID will still be a problem in Q4 and packing plants will still find it necessary to keep precautions in place. Thus it's not likely that plants will be running at 100% of their COVID speed even in Q4.
  69. 69. 69 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: What’s the estimated backlog of finished cattle in Canada? USA? When can we expect the backlog to end? DR. ROB MURPHY KEVIN GRIER Right now, I estimate the cattle backlog in the US to be about 450,000 head. I think Kevin indicated that for Canada it was between 80,000 and 90,000 head. My guess is that the backlog will be eliminated by October, if not sooner. I estimate about 80,000 head in Alberta now and cleared by October.
  70. 70. 70 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. AUDIENCE QUESTION: What impact will COVID have on meat consumption overall and by category (beef, pork and chicken)? DR. ROB MURPHY In the meat business, consumption is a direct result of production. We consume everything we produce and don't throw any away. So the real question is how will COVID affect production. Beef herds are on the decline in the US and pork producers are also likely to scale back production. Chicken may take up some of the slack, but probably not all of it. Overall, I'd expect COVID to reduce red meat production and thus reduce red meat consumption.
  71. 71. You can email our panelists directly at: • Rob.Murphy@jsferraro.com • Kevin@KevinGrier.com Please complete our brief survey to help us continue to shape great discussions. ADDITIONAL QUESTIONS: SESSION SLIDES: SURVEY: Session recording and deck will be emailed to registered participants 24-48hrs after the session. Please feel free to connect/follow us and our speakers on LinkedIn OR Twitter CONNECT: 71 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. THANK YOU
  72. 72. THANK YOU J.S. Ferraro 130 Adelaide Street, Suite 810 Toronto, Ontario M5H 3P5 CANADA 43.6496° N -79.3838° W T: (416) 306-8787 E: marketintel@jsferraro.com | W: www.jsferraro.com 72 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
  73. 73. We provide members of the meat & livestock industry with complimentary market intelligence to make smarter procurement decisions. As part of our service suite, access: Red Meat Outlook: monthly market intelligence reports for both Cattle & Beef and Hogs & Pork markets; Big Picture Market Outlook: quarterly market outlook webinars featuring prominent North American meat & livestock analysts; Automated Market Alerts: reliable and timely information (supply, demand & pricing) to stay abreast of the market. Subscribe Now 73 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution. JSF MARKET INTELLIGENCE SERVICES Weekly Meat Wrap Newsletters: Weekly analysis on beef and pork markets delivered right to your inbox;

×