Prices and Profitability: Economic Outlook - Dr. Steve Meyer, Express Markets Inc., from the 2017 Iowa Pork Congress, January 25-26, Des Moines, IA, USA. More presentations at http://www.swinecast.com/2017-iowa-pork-congress

1. Steve R. Meyer, Ph.D.
Vice-President, Pork Analysis
EMI Analytics
Iowa Pork Congress – January 2017
Pork Industry Economics Update

2. A matter of urgency . . .
How many hogs did you
negotiate a price for this
week?

3. Most of you believe, I think, that this guy. . .
. . . is doing the negotiating for you

4. But it very well could be this guys . . .

5. If you answer “none”, you are part of . . .
 The countdown to zero!!!
 2016: Only 2.4% of hogs were negotiated

6. Higher chance of S/D mismatch . . .
. . . And sharp drop in Neg’d, SPF prices

7. Solutions?
 BY FAR THE BEST: producers to simply
solve the problem by negotiating more
hogs!
 Move to the cutout value – basically abdi-
cates responsibility but is a good solution
 Market solution – charge the data users,
pay the data producers, set the rate to
get a desired percentage
 The “M” word – for both sellers and
buyers

8. Beyond price negotiations, key issues for ‘17 . . .
 Domestic supply – big increase coming
 Domestic demand – remarkably strong
but will/can it continue?
 World situation – pork supply, economic
activity, trade environment
 Exchange rates and trade relationships
 Regulations – GIPSA rule, WOTUS,
Organic Rule
 2018 Farm Bill – Help or mischief?

9. ‘16 & ‘17: Silver lining was and is production costs
. . . but they have been creeping higher

10. Worldwide agriculture can produce a lot of stuff!

11. Small downward changes for ‘16 corn crop . . .
. . Still a record-large crop, “new normal” price
USDA
Dec
USDA
Jan
% Chng
vs '15-'16
Acres Planted Mil A 90.6 88 94.5 94 6.8%
Acres Harvested Mil A 83.1 80.8 86.8 86.7 7.3%
Yield Bu/A 171.0 168.4 175.3 174.6 3.7%
Beginning Stocks Mil Bu. 1232 1731 1738 1737 0.3%
Production Mil Bu. 14216 13602 15226 15148 11.4%
Imports Mil Bu. 32 67 50 55 -17.9%
Total Supply Mil Bu. 15479 15401 17013 16940 10.0%
Feed & Residual Mil Bu. 5280 5131 5650 5600 9.1%
Ethanol for fuel Mil Bu. 5200 5206 5300 5325 2.3%
Non-Ethanol FSI Mil Bu. 1401 1429 1435 1435 0.4%
Exports Mil Bu. 1867 1898 2225 2225 17.2%
Total Usage Mil Bu. 13748 13664 14610 14585 6.7%
Carryover Mil Bu. 1731 1737 2403 2355 35.6%
Stocks/Use Pct. 12.6% 12.7% 16.4% 16.1% 27.0%
Nat. Wtd. Avg. Farm Price $/Bu. 3.70 3.61 3.05 - 3.65 3.10 - 3.70 -5.8%
Source: USDA World Supply and Demand Estimates
U.S. CORN SUPPLY AND UTILIZATION - JANUARY '17
Units 2014/15
2015/16
Estimate
2016/2017

12. Ethanol usage is now flat . . .
. . . And feed availability is growing with output!

13. World wheat supplies have set 3 straight records
. . . And stocks will keep a lid on corn prices

14. We still have nearby corn futures near $3.50

15. Key issue for ‘17: Cash returns & planted acreage

16. Soybeans - - accelerating output growth . . .
. . . Prices supported by remarkable demand

17. MONSTER bean crop – but strong exports . . .
. . . Note the relative changes in price and S/U ratio
USDA
Dec
USDA
Jan
% Chng
vs '14-15
Acres Planted Mil A 83.3 82.7 83.7 83.4 0.8%
Acres Harvested Mil A 82.6 81.7 83.0 82.7 1.2%
Yield Bu/A 47.5 48.0 52.5 52.1 8.5%
Beginning Stocks Mil Bu. 92 191.0 197 197 3.1%
Production Mil Bu. 3927 3926.0 4361 4307 9.7%
Imports Mil Bu. 33 24.0 30 25 4.2%
Total Supply Mil Bu. 4052 4140.0 4588 4528 9.4%
Crushings Mil Bu. 1873 1886.0 1930 1930 2.3%
Exports Mil Bu. 1842 1936.0 2050 2050 5.9%
Seed Mil Bu. 96 97.0 95 95 -2.1%
Residual Mil Bu. 50 25.0 32 33 N/A
Total Usage Mil Bu. 3862 3944.0 4108 4108 4.2%
Carryover Mil Bu. 191 197.0 480 420 113.2%
Stocks/Use Pct. 4.9% 5.0% 11.7% 10.2% 104.7%
Nat. Wtd. Avg. Farm Price $/Bu. 10.10 8.95 8.70 - 10.20 9.00 - 10.00 6.1%
Soybean Oil Price Cents/lb. 31.60 29.86 34.50 - 37.50 34.00 - 37.00 18.9%
Soybean Meal Price $/ton 368.49 324.56 305 - 345 305 - 345 0.1%
Source: USDA World Supply and Demand Estimates
U.S. SOYBEAN SUPPLY & UTILIZATION - JANUARY '17
Units 2014/15
2015/16
Estimate
2016/17

18. SBM near $350 until S. A. crop is available . . .

19. The same is true of meat and poultry supplies . . .

20. U.S. production will set records as well . . .

21. Per capita protein consumption is rising again . . .
. . . big jump was in ‘15 – but more growth ahead

22. Pork has returned to its “normal” 50 lbs/person . . .

23. Q3 revised GDP grew at 3.5% . . .
. . . Buy yr/yr percent change is just 1.7%

24. RPDI growth has slowed steadily: ’16 = 1.9% . . .

25. The other part of demand is retail price . . .
. . . & pork prices have fallen – lowest since ‘13

26. DEMAND – 3-species is down, yr/yr . . .
. . . But the comparison is to a very strong 2015

27. Nov was not good for pork -- but YTD is still ok

28. November exports were record large! . . .
. . . Up 18% from yr ago, YTD total now +3.5% yr/yr

29. The big driver was MEXICO – up 23%, yr/yr . . .
. . Japan (+21%), Korea (+1%), Other Markets (+41%)
Mex -6%, Jap -4%, chk+135

30. DX has trended back to its recent trading range . . .
. . . Will the new admin push through a fiscal stim?

31. Total frozen meat/poultry grew in December . . .
. . . And was back above year-ago level

32. But pork is NOT the problem . . .

33. Profit outlook is not good – but MUCH better . . .
. . . vs. Nov. & good enough to sustain growth!

34. December Hogs and Pigs report -- BEARISH . . .
Inventories on Dec 1
All hogs and pigs 68,919 71,500 103.7 101.7 2.0
Kept for breeding 6,002 6,090 101.5 100.2 1.3
Kept for marketing 62,917 65,410 104.0 102.0 2.0
Under 50 lbs. 20,008 20,882 104.4 101.4 3.0
50-119 lbs. 17,262 18,037 104.5 101.8 2.7
120-179 lbs. 13,370 13,911 104.0 102.0 2.0
180 lbs. and over 12,276 12,580 102.5 102.8 -0.3
Farrowings
Sep-Nov sows farrowed 2,929 3,043 103.9 100.4 3.5
Dec-Feb Intentions 2,927 2,968 101.4 99.6 1.8
Mar-May Intentions 2,968 2,997 101.0 100.5 0.5
Sep-Nov Pig Crop 30,848 32,333 104.8 101.5 3.3
Sep-Nov pigs saved per litter 10.53 10.63 100.9 101.1 -0.2
*Thousand head ** Thousand Litters 1
Source: Urner Barry
Category 2015 2016
'15 as
Pct of
'14
Pre-
Report
Est's1
Actual
minus
Est.
USDA QUARTERLY HOGS & PIGS REPORT
December 23, 2016
. . . But futures rallied ~$3 until this week

35. Dec 1 BH of 6.090 mil. hd. is, we think, reasonable . .
. . largest since June 2008, look for +1 to +1.5% in ‘17

36. Dec report & revisions drove litter/BA up sharply
. . . 11.963 mil.
litters in ‘16
2016* 0.6% 5994 1.996 11,963
2017 1.5% 6039 1.980 11,958
2018 -1.0% 6009 1.980 11,898
*Actual farrowings per USDA, Dec-Nov
Litter
Rate/Brdg
Brdg Herd
Growth
Annual
Farrowings
Avg. Brdg
Herd

37. Mar-May pig crop revised up 2.4% -- long pattern!
. . . Average revision since Jun-Aug ‘14 is +2.4%

38. Key issue is still litter size -- likely understated . . .
. . . We expect near 2% -- in 4-5 yrs will be 3%+

39. What if USDA had revised litter sizes, not farr’s . . .
. . . to account for pig crop shortfalls?

40. ‘16 FP imports from Canada: +332k hd (7.7%) . . .
. . . MH imports are -174k, (-25%), S&B are -8k, (2%)

41. Pending packing capacity increases . . .
 Triumph/Seaboard & Clemmons are on track
to open this summer – July?
 MoonRidge (MO) is at 800-1000/day
 Prime Pork (MN) has been delayed to March
or April ‘17
Daily Hd Ann Hd Daily Hd Ann Hd Daily Hd Ann Hd Daily Hd Ann Hd
Pleasant Hope, MO 2,500 625,000 2,500 625,000 2,500 625,000 2,500 625,000
Windom, MN 4,000 1,000,000 4,000 1,000,000 4,000 1,000,000 4,000 1,000,000
Sioux City,IA 12,000 3,000,000 12,000 3,000,000 20,000 5,000,000
Coldwater, MI 10,000 2,500,000 10,000 2,500,000 10,000 2,500,000
Wright County, IA 10,000 2,500,000 10,000 2,500,000
Total 2,500 625,000 28,500 7,125,000 38,500 9,625,000 46,500 11,625,000
Head per week 12,019 137,019 185,096 223,558
Pct of '15 avg = 2.195 mil. 0.5% 6.2% 8.4% 10.2%
Pct of '15 max = 2.507 mil. 0.5% 5.5% 7.4% 8.9%
9/26/2016
Fall 2018 - TSF Doubled
U.S PACKING CAPACITY UNDER CONSTRUCTION
Fall 2016 Fall 2017 Fall 2018

42. ‘16 capacity is 454,320/day, 2.453 million/week

43. Packer margins: Record wide, driving expansion!

44. Last week 2.389 mil. – after short week . . .
. . . Expect slaughter to remain sharply higher

45. Weights remain well below year-ago . . .
. . . But will catch up by late spring

46. Pork production up 1.8% in ’16 and 3.9% in ‘17 . . .
. . . but Q4s up 3.1% and 5.3%, respectively, yr/yr

47. Cutout has held remarkably well this fall . . .
. . . And we see more improvement in ‘17

48. Slaughter forecasts: More BIG growth in ‘17
Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge
2014 106.876 -4.7%
2015 115.426 8.0%
2016 Q1** 29.240 1.8% 29.597 3.0% 28.860 0.5% 29.259 1.9%
Q2 27.971 0.4% 28.100 0.9% 27.604 -0.9% 28.111 0.9%
Q3 29.038 2.0% 28.875 1.4% 28.662 0.7% 29.316 3.5%
Q4 31.365 3.3% 30.773 1.3% 31.540 3.4% 31.516 3.8%
Year* 118.051 2.3% 117.459 1.8% 118.226 2.4% 118.202 2.4%
2017 Q1 30.069 2.8% 30.241 3.4% 30.457 4.1%
Q2 29.410 4.6% 29.136 3.6% 29.078 5.3%
Q3*** 30.034 2.5% 29.555 0.8% 29.613 1.0%
Q4 32.436 2.9% 32.153 2.0% 32.780 4.0%
121.950 3.2% 121.085 2.4% 121.929 3.2%
*Annual total uses actuals to-date plus forecasts for the rest of the year. ** 1 more day in qtr vs. yr. ago
Red figures are analysts' last FORECAST for the given quarter (Q1 done in Dec, Q2 done in Mar, etc.)
Blue figures are estimated using USDA data *** 1 less day in qtr vs. yr. ago 1/17/2017
ISU LMIC EMI ACTUAL
December 2016 Hogs & Pigs -- Commercial Slaughter Forecasts

49. We have revised ‘17 upward – demand strength . . .
. . . But futures are still higher – look to price hogs!
ISU LMIC EMI CME
Ia-Mn
Producer-Sold
Neg'd Base
National Wtd
Avg. Base Price
National Net
Neg'd Price,
Wtd. Avg.
CME Lean Hog
Futures/Index
2014 102.50 100.31 102.95 104.99
2015 67.08 69.69 68.49 70.09
2016 Q1 59.67 62.15 60.14 63.13
Q2 73.46 73.38 73.15 75.36
Q3 62.30 68.31 66.25 69.31
Q4 46.79 53.08 47.61 52.43
Year 60.56 64.23 61.79 65.06
2017 Q1 59 - 63 55 - 58 54 - 58 66.46
Q2 67 - 71 65 - 69 66 - 70 74.50
Q3 68 - 72 65 - 70 66 - 70 76.03
Q4 56 - 60 53 - 59 56 - 60 65.04
Year 62 - 66 60 - 64 60 - 64 70.51
Blue figures are estimated using USDA data 1/25/17
December 2016 Hogs & Pigs -- Hog Price Forecasts

50. Risks to the forecasts – an important practice!
 Major export disruption
- FMD, ASF, CSF – small probability, HUGE impact
- PT is high probability, unknown impact
 Diseases -- focus now is on winter – PEDv is
good, some recent PRRS activity
 Feed costs – ‘16-’17 is okay; price ‘17-’18???
 Demand: Growth in ‘17?
- Domestic: Prefs? Wages/incomes?
- Exports: CHINA/HK? Mexico? $US?
 Impact of competition for hogs in H2, 2017?
 Pork prices if plants are full in ‘18?

51. QUESTIONS & DISCUSSION?