The National Restaurant Association's Restaurant Performance Index was stable in June at 101.4, the same as May and higher than one year ago. The current situation component improved to 101.5 driven by gains in same-store sales, customer traffic, labor, and capital expenditures. However, expectations fell to 101.3. Hog production costs are predicted to rise substantially in 2012-2013, with losses of $8/head predicted for 2012 and $12.23/head for 2013. Producers' financial positions are precarious as accumulated profits per head have declined 81% from their 2007 peak.

1. Vol. 10, No. 148 August 1, 2012
The National Restaurant Association’s Restaurant Per- NRA CURRENT SITUATION, EXPECTATIONS &
formance Index (RPI) was stable in June but the positive driver of COMPOSITE RESTAURANT PERFORMANCE
that stability operators’ view of current business conditions. The INDECES
106.0
RPI for June stood at 101.4, the same as in May and 0.8 points higher
than one year earlier. The Current Situation component of the index Current Situation Component
improved by 0.7 points to 101.5 during the month. That figure is a full Expectations Component
104.0
point higher than one year ago. The Expectations Component fell by Restaurant Performance Index
0.7 points to 101.3 but even that lower measure remains well above
102.0
last year’s level of 100.6. As can be seen in the chart at right, restau-
rant conditions deteriorated quickly after April 2011 and spent all sum-
mer near 100 level, the index value that, by design, indicates no 100.0
growth or contraction. These mark the highest June levels for all three
indexes since 2007 when the RPI was also 101.4. 98.0
The similarity between the Current Situation and Expecta-
tions components continues a trend that goes back to mid-2011. For
over two years prior to that point, operators’ expectations were far 96.0
higher than actual performance indicated. While optimistic outlooks
are indeed admirable, they resulted in an overall index that was proba- 94.0
bly more rosy for the sector than was warranted. This month’s strong J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12
Current Situation index was driven by improvements in all four of its Source: National Restaurant Association
sub-components: Same-Store Sales, Customer Traffic, Labor and
Capital Expenditures. The first three of those are now above 100 and ACTUAL & PREDICTED HOG
MUCH higher than last year while the last remains at 99.5, the same PRODUCTION COSTS* AND PRICES
level as for June 2011. $/cwt carcass
To put yesterday’s discussion of potential sow herd liq- Actual Costs
8/1/2012
110
uidation in context, consider the bottom chart at right and the Predicted Costs
chart on page 2. The chart at right shows historic prices and costs for 100 Forecast Costs
Futures-Implied IA-MN Price
Iowa farrow-to-finish operations per Iowa State University’s long- 90
Hog Price -- Ia/Mn & National
running costs and returns estimates. Cost predictions for the remain- 80
der of 2012 and 2013 are based on a regression of those historical 70
costs on corn and soybean meal prices and futures prices for those
60
two items as of Tuesday morning at 7:00 a.m. The Future-Implied Ia-
Mn hog price is based on Lean Hogs futures at the same time. The 50
model assumes cash purchases of all feed ingredients and cash sales 40
of hogs—no hedging or other risk management activities are included. 2011 Profits = $4.59/hd.
30
It is obvious that 2012 has turned sour big time. Back in Feb- Forecast 2012 Profits = -$7.88/hd.
20
ruary, this model was showing profits of nearly $19/head for 2012. Forecast 2013 Profits = -$12.23/hd.
Producers felt good about the future. The sow herd was growing slow- 10
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13‐17.18
ly with gains of just under 1%, year-on-year, in December 2011 and *Based on relationsip between ISU Estimated Costs & Returns data and historic Omaha corn and Decatur soybean meal prices ‐12.42
March 2012. The June herd was 1% larger than last year.
The model now shows losses of nearly $8/head for the year savings account into which the return to one pig is placed each month.
and indicates monthly losses of $23, $33, $39 and $34/head for Sep- As can be seen, the quantum changes in feed costs of 2008
tember through December. Profits in 2013, based on current futures and 2009 drained nearly 80% of the profits that had been accumulated
prices, are even worse with the average being a loss of $12.23/head. as of September 2007. Further the “good” years of 2010 and 2011 did
But the biggest reason that the industry may move quickly not even allow the recovery of half of the ‘08-’09 losses (a level repre-
from slow expansion to liquidation is its precarious financial position. sented by the red line). And current corn, soybean meal and hog fu-
The chart on page 2 shows the accumulated profits of an average tures prices indicate that this measure will set successive new lows in
Iowa farrow-to-finish operation on a per head basis since January October, November and December of next year. While this cost crisis
1991. Dr. John Lawrence, former extension livestock economist and is not the permanent shift of 2008 and will likely last, at least at this
now assistant dean at Iowa State, first used this back in the crisis of severe level, until next year’s crop is harvested, we expect a quick
1998. The measure simply adds the profit earned by selling one pig reaction due to this lack of financial resources. How large the reaction
per month over the entire time period. Think of it as the balance of a will be remains to be seen.
The Daily Livestock Report is published by Steve Meyer and Len Steiner. To subscribe/unsubscribe visit www.dailylivestockreport.com.
Disclaimer: The Daily Livestock Report is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any
commodities or securities whatsoever. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are
attempted. Futures trading is not suitable for all investors, and involves the risk of loss. Past results are no indication of future performance. Futures are a leveraged investment, and because only a percentage of a con-
tract’s value is require to trade, it is possible to lose more than the amount of money initially deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their life-
style. And only a portion of those funds should be devoted to any one trade because a trader cannot expect to profit on every trade.
CME Group is the trademark of CME Group, Inc. The Globe logo, Globex® and CME® are trademarks of Chicago Mercantile Exchange, Inc. CBOT® is the trademark of the Board of Trade of the City of Chicago. NYMEX,
New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange. Inc. COMEX is a trademark of Commodity Exchange, Inc. Copyright © 2012 CME Group. All rights reserved.

2. Vol. 10, No. 148 August 1, 2012
ACCUMULATED PROFITS
IOWA FARROW-TO-FINISH OPERATIONS
(Sum of the profits from selling one pig per month since January 1991)
$900
Top to Bottom: Peak in Sept '07 = $786.87
$800
Sept '07 to Feb '10
$700 Lost $639.68
$600 81% of peak amount
$500
8 years
$400
$300
$200
$100
$-
$(100)
June '12 = $384.26
$(200)
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Paragon Economics, Inc. using data from Estimated Costs and Returns, Department of Economics, Iowa State University
The Daily Livestock Report is published by Steve Meyer and Len Steiner. To subscribe/unsubscribe visit www.dailylivestockreport.com.
Disclaimer: The Daily Livestock Report is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any
commodities or securities whatsoever. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are
attempted. Futures trading is not suitable for all investors, and involves the risk of loss. Past results are no indication of future performance. Futures are a leveraged investment, and because only a percentage of a con-
tract’s value is require to trade, it is possible to lose more than the amount of money initially deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their life-
style. And only a portion of those funds should be devoted to any one trade because a trader cannot expect to profit on every trade.
CME Group is the trademark of CME Group, Inc. The Globe logo, Globex® and CME® are trademarks of Chicago Mercantile Exchange, Inc. CBOT® is the trademark of the Board of Trade of the City of Chicago. NYMEX,
New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange. Inc. COMEX is a trademark of Commodity Exchange, Inc. Copyright © 2012 CME Group. All rights reserved.