J.S. Ferraro Q3 2021 Big Picture Market Outlook Webinar

Q3 BIG PICTURE
OUTLOOK
HOSTED BY: J.S. Ferraro
DATE: July 21, 2021
Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2021. Not for distribution.
WEBINAR
Preparing for a Post
Pandemic World

Meat Procurement Advisors.
We deliver strategies to help meat users manage
markets, risk, sourcing, and logistics.
ABOUT J.S. FERRARO
2 |

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, 2021. Not for distribution.

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 Principal 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.

1. MARKET OUTLOOK | CATTLE & BEEF
• US Market
• Canadian Market
2. MARKET OUTLOOK| HOGS & PORK
• US Market
• Canadian Market
3. LIVE Q&A
DISCUSSION OUTLINE

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

• SUPPLY, DEMAND & PRICING
• INSIGHTS
Q3 BIG PICTURE MARKET OUTLOOK
CATTLE & BEEF | US

8 |
US Beef Market Lower After Very Strong Spring
• US beef prices have been
trending lower following a peak
in early June
• As the pandemic subsided,
consumers were able to do
things besides cook at home and
that led to beef demand turning
lower
• We see the downtrend
continuing through summer, but
the rate of decline should slow
• However, prices are likely to
average above pre-pandemic
levels

9 |
Cattle Prices Firm, Packer Margins Very Strong
• Although beef prices have been working lower, the cash cattle
market has been steady-to-higher
• Lack of labor created a bottleneck in the system this spring,
reducing plant throughput and stifling cattle prices
• Soaring beef prices this spring caused packer margins to
swell to over $1000/head
• Margins are now in decline as beef moves lower, but will
likely remain well above pre-pandemic levels through the
second half of 2021

10 |
Poor Grading Boosts Choice-Select Spread
• High corn prices have cattle feeders looking to limit
feed costs and that is causing cattle grading to slip
• The grade is not yet back down to 2019 levels, but
may continue in that direction as long as the corn
market remains elevated
• Consumer demand for Choice beef was exceptionally
strong this spring and the Choice-Select spread hit an
all-time high near $40/cwt
• Look for the spread to remain elevated through the
balance of 2021

Fed Slaughter To Tighten in August
• Here we compare the forecast
for weekly average S&H
slaughter with the three-year
average prior to the pandemic
• In June, holidays and labor woes
kept S&H slaughter lighter than
needed
• Our flow model suggests that
there should be enough fed
cattle ready to slaughter to
support weekly kills around 530k
• But from August onward, fed
kills should be smaller and may
end up being below the three-
year average
11 |Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2021. Not for distribution.

High Corn Prices Could Limit Feedyard Placements
• Feeder cattle and corn prices
typically move opposite to one
another. When corn prices are
high, cattle feeders reduce
their bids for feeder cattle
• High corn prices encourage
diversion into backgrounding
programs where pounds can
be put on cheaper with grass
• This has the potential to limit
feedyard placements over the
next few months and thus
tighten up the fed cattle supply
later in the year or early next
year

Carcass Weights Finally Appear Under Control
• High corn prices also impact carcass weights as producers shift
toward other feedstuffs and lower the energy content of rations
• The bottom in S&H weights came unusually late this year, but
now weights appear to be heading higher
• The de-trended and de-seasonalized carcass weights are
currently around -10 lbs, which is a big change from this
spring
• This should improve feedyard leverage and limit the packer’s
ability to push cattle prices lower

Beef Demand Declining, But Still Strong
• The price-quantity scatter diagram for July shows
demand in 2021 stronger than it has ever been
• However, the 2021 data point is expected to move
back closer to the long run average (green line) in
coming months
• The bar chart to the right shows our calculated demand
index through time and the strong demand surge posted
this spring
• The forecast calls for demand to pull back to more normal
levels in the latter part of the year

Beef Pricing Is Attractive Relative to Pork
• In the spring, beef was really cheap
relative to pork because the pork price
rally started about two months prior
to the rally in beef
• It is a normal seasonal pattern for beef
to become cheaper relative to pork in
the summer
• Currently the price relationship
between the two proteins has dipped
well below historical norms
• As pork supplies expand this fall, beef
prices will likely gain on pork prices
and thus retailers may focus more on
pork features for their ads

What is the Outlook for Beef Demand ?
Stimulus Money Ended, but Child Tax Credit coming
Added Unemployment Compensation Ending
High Pork Prices 2-3 more months
High Personal Savings Rate 2-3 more months
Equity Market Gains 2-3 more months
High Protein Diets 5-6 more months
16 |
PERCEIVED DURATION:
DEMAND FACTOR:
We are already beginning to see demand softening as stimulus money is spent and unemployment
compensation is cut. Look for slow steady erosion in demand over the next 2-6 months as the other
factors fade. Perhaps by Q1, demand will be approaching historical levels.

Deferred Futures Look too High at Present
• Packer margins are still so large
that there is little reason to
pressure cattle prices lower
between now and August
• Futures traders seem to be
extrapolating today’s demand
environment into the fall, but we
think demand will be softer than
what we are seeing now
• High deferred cattle futures have
the potential to attract more
cattle into feedyards this summer
• Some October cattle may get
“pulled forward” into Aug/Sep,
which would reduce the Oct over-
pricing

INSIGHTS: Cattle & Beef Main Take-Aways
• The extremely strong demand environment that propelled prices to extraordinary levels this
spring is beginning to fade. It will be a slow process and could take until the end of the year
to dissipate completely.
• Beef production in July will be large and continue to exert pressure on prices. By August
however, supplies should moderate somewhat and provide a chance for prices to stabilize or
perhaps increase somewhat.
• Carcass weights are still trending lower and it looks like feedyard currentness is greatly
improved.
• Beef packer margins remain extremely large, but are working lower and should continue to
decline into the fall.
• Deferred live cattle futures appear too rich. Traders seem to be extending demand strength
further into the future than is warranted

• FOODSERVICE UPDATE
• INSIGHTS
CATTLE & BEEF | CAD

Foodservice Update
• Foodservice
opening in
Canada
• Rapid gains
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
J F M A M J J A S O N D
Billions
$
Canadian Foodservice Sales
Monthly 2020, 2021, 2015-2019 Avg
2015-2019 average 2020 2021 2021 Estimate/Forecast

Supermarket Update
• Sales similar to last year in spring/summer.
• Canada-U.S. inflation rate merging.
5.0
6.0
7.0
8.0
9.0
10.0
Billions
Source: Statistics Canada
Canadian Supermarket Sales
Monthly 2020, 2021, 2015-2019 Average
2015-2019 Average 2020 2021 2021 Estimate/Forecast 0%
1%
2%
3%
4%
5%
6%
Jn Jl Au Se Oc Nv De 2021 Fe Mr Ap My
Year
over
Year
Change
Source: StatsCan, U.S. Bureau of Labor Stats
Food From Stores Inflation Canada and United States
Monthly Latest 12 Months
United States Canada

Cdn Quarterly Cattle Slaughter
2019-2021
• Q2 +25% (more than
expected)
• Q3 ample supplies
(cow slaughter
growing)
500
550
600
650
700
750
800
850
900
Q1 '19 Q2 Q3 Q4 Q1 '20 Q2 Q3 Q4 Q1 '21 Q2 Q3
Thousand
Head

Alberta and Ontario Steer Price Spread
-20
-15
-10
-5
0
5
10
15
20
25
JA FE MR AP MY JN JL AU SE OC NV DE
C$/cwt
Source: Canfax and USDA
Alberta-Nebraska Price-Spread
Weekly 2020, 2021, 2015-2019 Average
2015-2019 Avg 2020 2021
-30
-20
-10
0
10
20
30
JA FE MR AP MY JN JL AU SE OC NV DE
C$/cwt
Live
Souce: Beef Farmers of Ontario, USDA
Ontario-Nebraska Fed Steer Price-Spread
Weekly 2020, 2021, 2015-2019 Average
2015-19 Avg 2020 2021

Confidential. © Copyright Retail Ready Foods Inc. All Rights Reserved, 2018. Not for distribution.
24
Alberta Packer Gross Margins
0
200
400
600
800
1000
1200
C$/head
source: Canfax, USDA and Grier Calculations
Alberta Packer Gross Margins,
Weekly 2020, 2021 and 2015-2019 Average
2015-2019 Average 2020 2021

Beef Wholesale Costs vs Competing Meats
0%
20%
40%
60%
80%
100%
May 29 June 5 June 12 June 19 June 26 July 03 July10 July 17
Price
Differential
Canadian Beef Versus Chicken and Pork Wholesale Price
Differential Compared to the 2017-2019 Average Differential
Beef-Chicken Beef-Pork

Retail Beef Margins
-25%
-20%
-15%
-10%
-5%
0%
Margin
vs.
Average
Retail Grocery Beef Margins Weekly
Compared to 2017-2019 Average

Ontario Beef Feature Share
-25%
-20%
-15%
-10%
-5%
0%
5%
Jl Au Se Oc Nv De 2021 Fe Mr Ap My Jn
Ontario Beef Features Monthly Share of Fresh Meat
Features Vs 2015-2019 Average Share

INSIGHTS: Beef Summary Points
• Cdn beef supplies should stay abundant
in Q3
• Fighting to gain back merchandising
share

• INSIGHTS
HOGS & PORK | US

The Pork Complex Finally Turns Lower
• Pork buyers quickly pulled back from the market and that
caused the cutout to move lower over a two-week period
• Finally, the cutout stabilized and started to claw higher on
very small production
• Buyers couldn’t stay out of the spot market for long
• Shortly after the June futures contract expired, the cutout
crumbled, mostly as a result of some very low reported belly prices
• For 2 days during mid-June, the cutout printed close to $107 on the
belly collapse
• The drop from $120 to $107 was the largest single-day decline ever
recorded

Packing Margins Quickly Turn from Strong to Weak
• As the cutout collapsed in mid-
June, packer margins went from
over $25/head to -$15/head over
the course of 2 weeks
• Packers slashed the kill in response
to this development and that
pushed the cash hog market lower
and helped to stabilize the cutout
• Packer margins have recovered to
about $12/head and we expect
them to remain positive and
increasing from now through fall

Hog Slaughter Near Annual Lows
• Currently, the industry is slaughtering the Dec/Feb
pig crop, which was reported nearly even with the
same period in 2019
• June saw a smaller than expected kill and that is
continuing into July, raising questions about the
accuracy of the Dec/Feb pig crop estimate
• After tracking well above 2019 in Q1, hog slaughter in
Q2 has been much closer to to 2019 levels
• Holiday weeks have been removed from the above chart
to make it easier to see the longer-run pattern

Hog Producers Profitable Since March
• The hog and pork complex has been in
rally mode since late 2020, taking hog
prices from $60/cwt to over $120/cwt
• Breakevens have increased also, mostly
due to rising corn and soymeal prices
• Current estimates put breakevens on
hogs killed today at about $93/cwt
• After suffering deep losses in Jan-Feb,
producers have been profitable since
early March.
• Producer margins peaked at $57/hd in
June, well below the all-time record of
$120/hd seen during PEDv episode in
2014

Carcass Weights Near Annual Low
• The DTDS weights reached an all-time low of -5 pounds
in late June
• This points to producers being very current on their hog
marketings
• Barrow and gilt carcass weights are now 4 pounds below last year
and 2 pounds below 2019
• Weights are approaching their seasonal low, which should come
sometime in July
• High corn prices have likely altered rations

Q3 Pork Production to Fall Below Last Year
• Q2 pork production has been
above last year’s covid-disrupted
levels
• However, lighter slaughter and
potentially lighter carcass weights
in Q3 suggests pork production
could be 3% below last year
• Q4 pork production will be driven
by the Mar/May pig crop which
was reported 2.5% below last year
• Labor shortages in packing plants
pose a risk for Q4 production. If a
bottleneck develops during the
highest production period of the
year, hog markets could come
under intense pressure
+4.5%
-3.1%
-0.1%

Cold Storage Stocks Remain Very Low
• Users drew down stocks of pork in cold
storage back in May, 2020 as covid
infections shut down packing plants
• Stocks have yet to recover by any
appreciable amount
• High price levels in the first half of
2021 probably discouraged stock
rebuilding
• Frozen stocks act as a buffer—keeping
prices from getting too high or too low.
With low stocks, price volatility is likely
to be higher
• Belly stocks are particularly low, down
about 40% below the 5-year average

Super Strong Pork Demand Starting to Fade
• Retailers have been raising pork prices aggressively and that will
help to cool down consumer interest in pork. Those retail
prices are unlikely to decline much this fall
• Now it seems that strong pricing is being driven more by tight
supply rather than exceptional demand
• The scatter diagram above for Q2 shows 2021 demand
nearly as strong as in 2014 when PEDv cut supply sharply
and sent buyers scrambling for coverage
• We expect the Q3 data point to be much closer to average
(the green line)

Producers Demonstrate Tepid Expansion
• The recent Hogs and Pigs report
showed a slight quarter-over-
quarter increase in the breeding
herd
• Strong profitability in the recent
past is likely to prompt producers
to keep expanding over the next
few quarters
• Much will depend upon China’s
demand for US pork. If that
demand declines, then we may
not see the kind of growth
forecasted here
• High corn prices, should they
persist, may also crimp producers’
expansion plans

Pork Exports Starting to Look Weak
• Weekly shipments to China are tracking solidly
lower in the past 2 months
• Chinese pork prices have moved sharply lower and
are now slightly below the cost of landing US pork in
China
• The weekly export data has not been encouraging.
Total exports have been trending down since April
• The book of orders that haven’t shipped yet is down
30% from last year at this time

Deferred Hog Futures Still Look Too Rich
• As with cattle, futures traders seem
to want to project the current
demand strength into the second
half of the year. We don’t think that
is warranted
• If corn prices remain elevated, it is a
good bet that hog and pork prices
will be higher than normal, but not
as high as what the futures curve
currently indicates
• Pork buyers are advised to remain
close bought as the market is
expected to decline in late summer
and early fall
• Rapidly declining beef prices should
soon start to weigh on pork

INSIGHTS: Hogs & Pork Main Take-Aways
• The number of hogs available for slaughter is very near the annual low and should begin to
increase in August toward a peak in early December. Hog weights are simultaneously quite
light, but should also begin to increase in August
• Demand has been super strong during the first half of 2021, but is now beginning to fade as
the pandemic wanes
• Hog and pork prices are projected to trend lower into fall, but packer margins should expand.
Solving the labor shortage in packing plants will be crucial to preventing a hog price collapse
this fall when hog supplies swell
• Pork buyers are advised to remain relatively close bought as Labor Day approaches
• Deferred hog futures still appear over-priced, but less so than a month ago

• INSIGHTS
HOGS & PORK | CAD

Cdn Quarterly Hog Slaughter
2019-2021
• Q1 +2%
• Q2 -4%
• Q3 -4-5%
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Q1 '19 Q2 Q3 Q4 Q1 '20 Q2 Q3 Q4 Q1 '21 Q2 Q3
Million
Head

Canadian Pork Exports Monthly
• China down
• Most others up
big
75
85
95
105
115
125
135
Million
Kilograms
2015-2019 Average 2020 2021

45 |
Chinese Exports Monthly 2017-2021
0
10
20
30
40
50
60
2017 My Se 2018 My Se 2019 My Se 2020 My Se 2021 My
Million
KGs

Domestic Availability
Quarterly 2018-2021
100
120
140
160
180
200
220
240
260
280
2018 2019 2020 2021
000
t

Canadian Producer and Packer Margins
-50
-25
0
25
50
75
100
May 29 June 5 June 12 June 19 June 26 July 3 July 10 July 17
C$/head
Source: Ontario Pork, R.A. Chisholm, Grier calculations
Ontario Producer and Packer Margins Latest 8 Weeks
Packer Producer

Weekly Canadian Pork Wholesale
Price Differential vs Average
-40%
-30%
-20%
-10%
0%
Price
Differential
Pork-Beef Pork-Chicken

Retail Fresh Pork Margins
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
Margin
vs.
Average
Retail Grocery Fresh Pork Margins Weekly
Compared to 2017-2019 Average

INSIGHTS: Pork Summary Points
• Production fragility
• Domestic Availability issues

Q&A SESSION
?
?
?

52 |
AUDIENCE QUESTIONS
Reports originating from China -
how accurate do you think they
are?
“

53 |
AUDIENCE QUESTIONS
Could you discuss the implications of
the PRRS 1-4-4 virus on hog numbers
and sow mortality??
“

54 |
AUDIENCE QUESTIONS
Which markets should Canadian plant-based protein
manufacturers target? (China, Europe, any specific
country). Should it be only in the ingredient side, or
should they think to add value and export finished
plant-based food products??
“

55 |
AUDIENCE QUESTIONS
Is there a way to measure how much of the labor
shortage in plants is a true shift in labor force?
(meaning some workers have moved on to other
industries and are not coming back.)
“

56 |
AUDIENCE QUESTIONS
Will the prices in USA continue
their upward trend?
“

57 |
AUDIENCE QUESTIONS
What do you make of the Biden
administration’s announcement of $500M
in assistance to help expand meat &
poultry capacity?
“

58 |
AUDIENCE QUESTIONS
Are there some lessons or insights from
other commodity markets that
experienced a disconnected marketplace
similar to beef in recent past?
“

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.
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AUDIENCE QUESTIONS:
Rob, you focused a lot on the weakness in pork exports to China. What about the surge in exports to Mexico
that has been an offset? Do you expect strength in exports to continue in the coming months?
DR. ROB MURPHY
When you say surge in exports to Mexico, I assume you are talking about the monthly ERS data for April and May, which showed an average 75%
YOY increase in movement to Mexico over those two months. However, that big increase is largely a function of very small volumes going to
Mexico in April and May of 2020, due to the plant shutdowns. If we look at the YTD numbers, Mexico has taken 743 million pounds through the
first five months of 2021. For the years 2017-2019, Mexico took an average of 722 million pounds in the first five months. So, movement to
Mexico is up somewhat from normal, but not a huge increase. Now, the weekly FAS data for the last six weeks (June and part of July) shows
pretty strong movement to Mexico, which seems counterintuitive since Mexico tends to be a price-sensitive buyer and US price levels were pretty
high during that period. Hams are the primary item of interest to Mexico and we are seeing some pretty pricey hams in the last few weeks, so my
guess is that at some point we will start to see movement into Mexico subside. I have Q3 total pork exports up 10% YOY, but don’t think we will
match last year’s numbers in Q4 (down 3%). That would probably be considered a fairly strong export forecast for the second half of 2021, but I’m
concerned about the downtrend in movement to China. If China pulls back to pre-ASF levels, it will leave a hole too big for other destinations to
fill and will push a lot of additional pork into domestic channels. Maybe China will come back strong after Labor Day, but right now the trend
doesn’t look good.

AUDIENCE QUESTIONS:
You mention potential expansion in the sow herd, but there continues to be ongoing labor challenges. Now, we
are closing the Gwaltney plant and the line speed reduction that will further limit kills later this year. Do you
still expect producers to expand, particularly given the uncertainties associated with Prop 12 and what that
could mean for our existing herd? It seems like it’s tough to forecast any increase.
DR. ROB MURPHY
I see profitability as the primary driver of herd size and there has been extraordinary profitability so far in 2021. That makes me feel pretty good
about expansion for at least the next 2 quarters, but you are correct that there are headwinds on the horizon. Prop 12, high corn, and slower line
speeds would all work against producer profitability and thus against further expansion. High corn prices might not last—it always seems that the
crop exceeds midsummer expectations when it gets harvested. The line speed reduction will reduce throughout for sure, but there should be
enough capacity to get all the hogs dead this fall if packers can get back to full staffing levels and that is what I worry about the most. If we have a
train wreck in November because the industry can’t manage a kill over 2.65 million head per week, then producers are likely to go deep in the red
and that probably cancels a lot of expansion plans. Prop 12 is also a big wild card and it is unclear how that is going to play out. It would seem to
me that if everyone follows the rules, the people of California are going to eat a lot less pork and prices there will be sky high come January. That
creates a lot of incentive to skirt the rules and I’m not sure how well California is going to be able to enforce them. Or maybe selling into California
is going to be so wildly profitable that producers will find it advantageous to rapidly adopt the expanded farrowing space. All of these things
create a lot of uncertainty as to how much expansion can occur. Right now, the futures curve is dangling a strong profitability carrot in front of
producers. If they do decide to expand, my recommendation would be to hedge that output now while the futures board is still generous.

AUDIENCE QUESTIONS:
Beef 50’s Q3 and Q3 prices outlook in the USA? We are currently at all-time highs for this time of year, do you
expect that to continue?
DR. ROB MURPHY
Yes, beef 50s are really high right now, but so are a lot of other sources of fat. Pork 42s, soybean oil, etc. It is not unusual to see fat prices
increase when corn gets expensive. It takes energy to grow fat and right now the energy source (corn) is expensive. I always get a bit nervous
when I see the price of 50s skyrocket because it often points to an underlying supply side issue—either the cattle are not fat enough or there are
not enough cattle being slaughtered to meet the demand for fat at a reasonable price. Sometimes a rise in the price of 50s is a precursor to a
jump in the cash cattle market. Carcass weights will be increasing from now through October, so that should improve the supply of 50s gradually.
However, if corn surges higher then weights might not increase as much as we expect and that would be supportive to the 50s. I would vote for a
few more weeks of 50s prices at or above current levels and then a gradual decline as fall approaches. Even so, buyers should be prepared for
above-average price levels on both beef 50s and pork 42s for the remainder of 2021.

J.S. Ferraro Q3 2021 Big Picture Market Outlook Webinar

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