Dr. Steve Meyer - Economic Update

From information, knowledge
Paragon Economics, Inc.
Steve R. Meyer, Ph.D.
Missouri Pork Congress – February 2015
Pork Industry Economic Outlook

Key Issues
 Fundamental shift in grain/oilseed S & D
 World and domestic economic growth
 Big change in U.S. consumers
 Exports – long-term key to U.S. growth
 Expansion everywhere
- Chicken: Belated but big
- Hogs: Overcoming PEDv
- Cattle: A Loooooong Time Coming
 Risks are NUMEROUS
02/17/15 2

The corn supply situation is vastly improved
 Record high world output & consumption
 Projected Y/E stocks the highest in 15 yrs.
 MAJOR increase in non-U.S. production –
and especially in S. America
02/17/15 3

World SB prod, cons, stocks are record high
 Beans still strong due to China – now
takes over 60% of world soybean trade
 And still growing!
02/17/15 4
. . . & S/U is 2nd
highest ever

Wheat – same story on prod & cons but . . .
 World S/U ratio remains below 30 – not a
“flush” situation but good vs. ’00s
 Ukraine situation creates risk – U.S.
conditions look good

Jan WASDE – Yield reduction was a
surprise. .
02/17/15 6
. . But the market shrugged off crop reduction
USDA
Nov
USDA
Dec
% Chng
vs '13-14
Acres Planted Mil A 97.3 95.4 90.9 90.6 -5.0%
Acres Harvested Mil A 87.4 87.5 83.1 83.1 -5.0%
Yield Bu/A 123.1 158.1 173.4 171.0 8.2%
Beginning Stocks Mil Bu. 989 821 1236 1232 50.1%
Production Mil Bu. 10755 13829 14407 14216 2.8%
Imports Mil Bu. 160 36 25 25 -30.6%
Total Supply Mil Bu. 11904 14686 15668 15472 5.4%
Feed & Residual Mil Bu. 4315 5036 5375 5275 4.7%
Ethanol for fuel Mil Bu. 4641 5134 5150 5175 0.8%
Non-Ethanol FSI Mil Bu. 1397 1367 1395 1395 2.0%
Exports Mil Bu. 730 1917 1750 1750 -8.7%
Total Usage Mil Bu. 11083 13454 13670 13595 1.0%
Carryover Mil Bu. 821 1232 1998 1877 52.4%
Stocks/Use Pct. 7.4% 9.2% 14.6% 13.8% 50.8%
Nat. Wtd. Avg. Farm Price $/Bu. 6.89 4.46 3.20 - 3.80 3.35 - 3.95 -15.9%
Source: USDA World Supply and Demand Estimates
U.S. CORN SUPPLY AND UTILIZATION - JANUARY
Units 2012/13 2013/14
2014/15

USDA price: Consistent with recent demand
. . . But will that demand hold with $50 oil?

Larger crops, flat ethanol usage . . .
. . . Feed/resid + DDGS back to ‘04-’06 levels

HUGE ethanol profits in ‘13 and ‘14 . . .
. . . But lower margins now – ethanol price

Jan SBs: Lower prod and carryout expected. .
02/17/15 10
. . USDA left y/e stocks at 410 mil. – 4X as large
USDA
December
USDA
January
% Chng
vs '13-14
Acres Planted Mil A 77.2 76.8 84.2 83.7 9.0%
Acres Harvested Mil A 76.1 76.3 83.4 83.1 8.9%
Yield Bu/A 40.0 44.0 47.5 47.8 8.6%
Beginning Stocks Mil Bu. 169 141.0 92 92 -34.8%
Production Mil Bu. 3042 3358.0 3958 3969 18.2%
Imports Mil Bu. 41 72.0 15 15 -79.2%
Total Supply Mil Bu. 3252 3570.0 4065 4076 14.2%
Crushings Mil Bu. 1689 1734.0 1780 1780 2.7%
Exports Mil Bu. 1317 1647.0 1760 1770 7.5%
Seed Mil Bu. 89 97.0 92 92 -5.2%
Residual Mil Bu. 16 0.0 23 24 N/A
Total Usage Mil Bu. 3111 3478.0 3655 3666 5.4%
Carryover Mil Bu. 141 92.0 410 410 345.7%
Stocks/Use Pct. 4.5% 2.6% 11.2% 11.2% 323%
Nat. Wtd. Avg. Farm Price $/Bu. 14.40 13.00 9.00 - 11.00 9.45 - 10.95 -19.2%
Soybean Oil Price Cents/lb. 47.13 38.23 32.00 - 36.00 31.00 - 35.00 -5.8%
Soybean Meal Price $/ton 468.11 489.94 330-370 340-380 -28.6%
Source: USDA World Supply and Demand Estimates
U.S. SOYBEAN SUPPLY & UTILIZATION - JANUARY
Units 2012/13 2013/14
2014/15

Implications of current and future costs
 Lower feed ingredient costs will fuel
expansion – across the board – but timing
will differ per species
 FUNDAMENTAL and LONG-TERM
change in grain prices
- We have now caught up with ethanol usage
- Growing oil/gas output will limit ethanol
future growth
- Yields continue to grow – Only cost hikes will
come with drought
02/17/15 11

Today’s WASDE – key is foreign production
Average Range
Corn 189.3 187.60 - 190.93 189.2 172.2
Soybeans 90.4 88.8 - 91.5 90.8 66.2
Wheat 195.8 191.4 - 197.0 196.0 185.8
(million metric tonnes)
Trade Estimates -- 2014/15 World Ending Stocks
USDA WASDE, November 8, 2013
Crop
Analysts' Estimates USDA
Jan
USDA
2013/14
2013/14 2014/15 Pct. Chng.
Wheat Argentina 10.50 12.00 14.3%
Australia 27.01 24.00 -11.1%
Russia 52.09 59.00 13.3%
Corn China 218.49 215.50 -1.4%
Argentina 25.00 22.00 -12.0%
South Africa 14.75 13.50 -8.5%
Brazil 79.30 75.00 -5.4%
Soybeans Argentina 54.00 55.00 1.9%
Brazil 86.70 95.50 10.1%
Source: USDA WASDE, January 2015
USDA WORLD PRODUCTION ESTIMATES
January 2015 WASDE

Costs ~20% lower than 2013 peak and . . .
. . . ~8% lower than ‘14 – will they be < $70?

What do you do now for SBM?
 I am bearish beans & meal – esp new crop
 Record Brazilian crop is on the way
 U.S. acres will be higher by 1 to 1.5 mil.
 410 mil. carryout – what will yields be?

What do you do now for corn?
 Bearish here too -- but not as much as SB
 USDA adjusted world crop, carryout lower
in Jan WASDE but carryout is still +10%
 Lower U.S. acres but questions on
ethanol

Euro zone is still the drag on world economy
Source: Moody's Economy.com
. . . China may be slower but Asia is still good

GDP: Growing but slowed to 2.6% in Q4 . . .
02/17/15 17
. . .Q3 +5% qtr/qtr was best since ‘03!

RPDI growth has been MUCH better in ‘14 . . .
. . .December was +3%, best since March ‘11
02/17/15 18

Consumers’ outlooks are improving, too . . .
02/17/15 19
. . . both indexes highest since 2007

RPI was down slightly in Nov after Oct gain . . .
02/17/15 20
. . . 21 months of >100 which demarks growth

RPI was down slightly in Nov after Oct gain . . .
02/17/15 21
. . . 21 months of >100 which demarks growth

And now – “cheap” oil and sub-$2 gas???
Weekly
Crude
Oil
Futures
Monthly
RBOB
Gasolin
eFuture
s

But the big factor is preferences. . .
 Research: “Low-carb
Diet Better Than
Low-Fat Diet”
 The Big Fat Surprise
by Nina Teicholz
 “Lost Weight on
Bacon and Cream” –
vox.com, Greg
Feren-stein
02/17/15 23
. . . protein is in, carbs are out – BIG CHANGE!

The evidence of strong demand is PRICES . . .
. . New beef records in Nov, lower pork
02/17/15 24

Meat/Poultry RPCE: Yr/yr higher since January
02/17/15 25
. . . And HUGE positive months in Aug - Dec

The big demand strength is for “red meat” . . .
02/17/15 26

Major trend changes for red meat RPCEs . . .
 Pork RPCE is now ahead of 2004 levels
driven by Atkins diet, beef is gaining
 Can this be sustained?
. . . Pork’s $13.74 in Nov highest since Dec ‘90!

Volume has been lower yr/yr since June . . .
. . . But VALUE was up 9.7%, VM value was up 15%
02/17/15 28

Displaced EU pork is a big driver at present
. . . ~40k MT of pork had to find a home!

The U.S. dollar is now an important issue . . .
02/17/15 30

Broiler industry entered ‘14 with an old flock
. . . But increased the flock by ~2% in 2nd
half

Broilers: BIG production challenges in ‘14
So far in 2015:
Egg Sets ~ 205 mil/wk, +2.8%
Placem’ts ~170 mil/wk, +3.6%
Placem’ts/Sets >82%

Challenges limited growth – except for wts!
So far in 2015:
Slaughter ~160 mil/wk. but
-1.1% due to 1st
week
Prod’tion: 700-750 mil., +3.6%
Weights: 4.5-4.6, +4.5%

Expectations for chicken . . .
 GROWTH!!!
- Companies are solving problems and have a
HUGE incentive
- Reports of aggressive expansion – adding
growout barns
 The 3-4% growth I expected this year will
come in 2015
 Lower chicken prices will still be profitable
 Chicken will be very competitive at both
retail and foodservice
02/17/15 34

The key for beef growth is WEATHER!

Beef: Unprecedented cow/calf profits!!!!
02/17/15 36
. . . But will ‘15 be this good: FC down $40+

But cattle numbers are low across the board
02/17/15 37

. . . Feeder supply is down 3% vs. ‘12– record low
02/17/15 38
Livestock Marketing Information Center
Data Source: USDA-NASS
Placements are coming from a TIGHT supply

Friday’s Cattle report -- Bearish
Actual 2014 Revised 2014 2015 Pct. Yr/Yr Average Range
All Cattle & Calves 87,730 88,526 89,800 101.4 99.9 99.7 - 100.0
Cows & Heifers That Have Calved 38,251 38,293 39,000 101.8 100.6 99.9 - 101.5
Beef Cows 29,042 29,085 29,693 102.1 100.6 99.7 - 101.6
Dairy Cows 9,209 9,208 9,307 101.1 100.5 99.9 - 100.9
Heifers 500 Pounds & Over 18,751 18,969 19,240 101.4 99.7 99.3 - 100.0
Beef Cow Replacements 5,470 5,551 5,777 104.1 102.7 101.8 - 103.9
Dairy Cow Replacements 4,539 4,549 4,615 101.5 100.3 100.0 - 100.8
Other Heifers 8,741 8,869 8,847 99.8 97.5 96.0 - 98.5
Steers 500 Pounds & Over 15,415 15,668 15,779 100.7 99.0 97.9 - 99.9
Bulls 500 Pounds & Over 2,035 2,038 2,104 103.2 100.2 99.9 - 100.3
All Calves Under 500 Pounds 13,278 13,558 13,677 100.9 99.0 97.0 - 100.5
All Cattle On Feed 12,695 13,018 13,093 100.6 101.0 100.8 - 101.1
2013 Revised 2013 2014
Calf Crop 33,930 33,730 33,900 100.5 98.5 97.0 - 99.3
Source: USDA National Agricultural Statistics Service *Urner Barry
JANUARY 1, 2015 -- U S CATTLE INVENTORY
USDA Pre-Report Estimates*

Key impact, though, should be long term . . .
 Largest beef cow herd increase since ‘94
 Given cows & heifers in this report, 2015
calf crop could be up 2% from 2014
 Calves from added heifers  beef in ‘16?
+4.1 %
+2.1 Percent
2015 = 29.7 Million Head
+1.1 Percent
2015 = 9.3 Million Head

But short term – FC supplies are still TIGHT

Beef consumption/supply -3.7% in ‘14 . . .
02/17/15 42
. . . & down another 0.6% in 2015 and 1% in 2016!
Livestock Marketing Information Center
Data Source: USDA-NASS

Cattle and beef summary . . .
 Growth – but characteristically slow
- Biology, producer age, capital cost
- Growth means tighter near term
supply
 HIGH prices through 2015 and 2016 will
provide opportunities for competitors
 Recent selloff is a futures/technicals issue
– not supported by product or cattle!
 Long-term impacts of VERY HIGH prices
on beef consumers?
02/17/15 43

Pigs – all PEDv, all the time it seems . . .
 New high wk. of 1/24 at 134 vs. 218 last year
 Many are “monitoring” and at G/F sites
02/17/15 44

KEY DEVELOPMENT: Few sow herd breaks
 Data from 753 sow farm, 16 of 19 large
systems reporting, 2.1 million sows!
 Nov-Dec: 12 breaks vs. ~85 in ‘13
02/17/15 45

Paragon slaughter comps were close . . .
02/17/15 46
. . Thru August but yr/yr declines have fallen
Month
Forecast
Yr/Yr Chnge
(000 Hd.) (Pct. Chnge.) (000 Hd.) (Pct. Chnge.)
Dec 1.45% 9730.1 -2.14% 9397 -2.01%
Jan 1.30% 9791.2 -1.66% 9459 -1.39%
Feb -0.78% 8668.2 0.90% 8366 1.10%
Mar -0.26% 8674.6 -6.89% 8356 -6.92%
Apr -2.17% 8855.0 -5.38% 8527 -5.32%
May -2.89% 8619.7 -1.96% 8311 -1.72%
Jun -4.94% 8099.5 -5.89% 7795 -5.85%
Jul -7.46% 8456.7 -6.80% 8136 -6.81%
Aug -10.04% 8268.1 -9.35% 7952 -9.42%
Sep -11.86% 8828.8 -6.82%* 8497 -6.89%*
Oct -9.13% 9953.1 -4.48% 9588 -4.47%
Nov -8.58% 8812.2 -3.8%** 8509 -3.9%**
Dec -4.82% 9777.5 -3.4%*
Jan -3.52%
Feb -2.18%
*Adjusted for one more work day in Sept & Dec 2014
**Adjustef for one less work day in November 2014
FI Hog Slaughter FI Barr/Gilt Slaughter
PREDICTED HOG SLAUGHTER CHANGE PER
PEDv ACCESSIONS & ACTUAL HOG

PRRS was MUCH quieter in ‘13-’14 – and now

Dec Hogs & Pigs report: GROWTH is coming. . .
02/17/15 48
. . . Larger BH, intentions, pig crop
Inventories on Dec 1
All hogs and pigs 64775 66,050 102.0 101.5 0.5
Kept for breeding 5757 5,969 103.7 103.0 0.7
Kept for marketing 59018 60,082 101.8 101.3 0.5
Under 50 lbs. 18389 19,026 103.5 103.7 -0.2
50-119 lbs. 16080 16,630 103.4 102.7 0.7
120-179 lbs. 12576 12,635 100.5 99.4 1.1
180 lbs. and over 11972 11,791 98.5 97.5 1.0
Farrowings
Sep-Nov sows farrowed 2,780 2,871 103.3 103.8 -0.5
Dec-Feb Intentions 2,763 2,870 103.9 103.8 0.1
Mar-May Intentions 2,810 2,900 103.2 103.9 -0.7
Sep-Nov Pig Crop 28,253 29,373 104.0 103.3 0.7
Sep-Nov pigs saved per litter 10.16 10.23 100.7 99.9 0.8
*Thousand head ** Thousand Litters
1
Source: Urner Barry
Category 2013 2014
'14 as
Pct of
'13
Pre-
Report
Est's
1
Actual
minus
Est.
USDA QUARTERLY HOGS & PIGS REPORT
December 23, 2014

Productivity measure are CRITICAL for ‘15!
 Farrowing intentions are, if anything, low
relative to Dec 1 breeding herd
 Normal litter patterns would put Dec-Feb
& Mar-May up 6.8% & 4.7% from ‘14

Will these changes happen?
 Farrowings growth is VERY likely
- “Overstocking” with females to handle PEDv
has left most units very full
- Question is breeding/farrowing efficiency
following PEDv – some reports of problems
 Litter growth of 6.8% and 4.7% is unlikely
- There will still be some pre-weaning loss
- Re-breaks are occurring – not as bad as in
‘13-’14 but still have losses
- We are using 4.5% and 3.1% in our calcs.

Our opinion – ’15 will look a LOT like ‘13 . . .
. . . Capacity will be tight but not limiting in Q4
4.6, 5.9, 4.1

Weights will be a critical issue in ‘15
 Current supplies are a function of getting
current
- Falling prices – MR < MC and lower tomorrow
- Pig numbers & space needs=FALLING
weights
 We expect weights to take 1-2% off prod’n
02/17/15 52

2014 production ended up down only 1.4%. . .
. . . But is up 4.6% YTD and 5.5% last week

‘14 prices were anything but normal but . . .
 My opinion:
- This market went too high three times this year
- And too low once – in August
 Reason: It was information-starved, groping
for the “right” price – Is it still?
02/17/15 54
. . . values/prices stabilized in Q4 – Normalcy?

2015 profits have fallen sharply since Oct . . .
02/17/15 55
. . . When futures offered $30/hd

Slaughter forecasts from Dec. H&P . . .
Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge
2013 Q1 27.870 -0.8%
Q2 26.778 0.4%
Q3 27.668 -1.1%
Q4 29.808 0.8%
Year 112.124 -1.0%
2014 Q1 27.580 -1.0% 27.428 -1.6% 27.214 -2.4% 27.320 -2.0% 27.134 -2.6%
Q2 25.420 -5.1% 25.787 -3.7% 25.572 -4.5% 25.020 -6.6% 25.574 -4.5%
Q3 26.459 -4.4% 26.340 -4.8% 26.173 -5.4% 25.520 -7.8% 25.554 -7.6%
Q4 28.930 -2.9% 28.795 -3.4% 28.826 -3.3% 28.912 -3.0% 28.755 -3.5%
Year* 107.192 -4.4% 107.057 -4.5% 107.088 -4.5% 107.174 -4.4% 107.017 -4.6%
2015 Q1 27.571 1.6% 27.650 1.9% 27.398 1.0% 27.405 1.0%
Q2 26.660 4.2% 26.725 4.5% 26.425 3.3% 26.725 4.5%
Q3 27.305 6.9% 27.317 6.9% 26.813 4.9% 27.471 7.5%
Q4 30.294 5.4% 30.365 5.6% 30.063 4.3% 30.791 6.5%
Year 111.830 4.5% 112.057 4.7% 110.699 3.4% 112.392 5.0%
Red figures are analysts' last FORECAST for the given quarter (Q1 done in Dec, Q2 done in Mar, etc.) 12/31/14
Blue figures are estimated using USDA data *Annual total uses actuals to-date plus forecasts for the rest of the year.
Mizzou ISU LMIC Paragon ACTUAL
December 2014 Hogs & Pigs -- Commercial Slaughter Forecasts

Price forecasts, December H&P Report . . .
. . . LH futures are FAR below forecasts
Mizzou ISU LMIC Paragon CME
Producer-Sold
Net Price, All
Methods
Ia-Mn
Producer-Sold
Neg'd Base
National Wtd
Avg. Base Price
National Net
Neg'd Price,
Wtd. Avg.
CME Lean Hog
Futures
2013 Q1 83.53 80.63 81.08 82.73 83.34**
Q2 91.80 89.30 89.32 90.83 90.66**
Q3 97.90 95.58 95.25 98.00 98.98**
Q4 84.99 81.28 82.98 85.26 83.93**
Year 89.56 86.70 87.16 89.21 89.23**
2014 Q1 93.10 93.10 91.34 93.80 94.91**
Q2 113.54 115.36 111.61 116.83 117.48**
Q3 111.84 111.77 109.63 114.25 115.70**
Q4 94 - 98 94 - 99 94 - 96 90 - 92 91.85**
Year 105 - 107 104 - 105 102 - 103 103 - 105 104.99
2015 Q1 83 - 87 83 - 88 86 - 89 84 - 88 67.20
Q2 88 - 92 85 - 90 89 - 93 92 - 96 77.50
Q3 84 - 88 81 - 86 86 - 91 88 - 92 81.26
Q4 77 - 81 78 - 83 77 - 83 76 - 80 70.98
Year 84 - 88 82 - 87 85 - 89 85 - 89 74.23
Blue figures are estimated using USDA data **CME Lean Hog Index 2/3/15
December 2014 Hogs & Pigs -- Price Forecasts

So what the *)#$#@_(# is going on now?
 Several factors – ALL NEGATIVE
 West Coast ports
- Began last summer but became critical in Jan
- Product is being backed up/diverted
- Feds can’t step in – not a strike or a lockout
 The dollar – up 20% since July vs. DX
 Futures: Spillover from tech driven cattle
selloff
 Larger-than-expected supplies

We believe LH futures are badly oversold . . .
. . . And will rally with cash hogs into spring

Risks
 Major export disruption – with a capital D!
 PEDv impact on pre-weaning mortality falls
to near zero – we have 1/3 as large as ‘14
 Demand weakening
- Domestic: Newly positive prefs continue?
- Exports: World economy
 How much expansion in pigs and chicken?
 Hogs: Packing capacity – New plant in ‘17
 Diet guidelines & processed meats???

Dr. Steve Meyer - Economic Update

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