profit prospects for pork producers 2010 and beyond · 2014-09-16 · world pork expo -- 2010...

From information, knowledge

Paragon Economics, Inc.

Steve R. Meyer, Ph.D.Paragon Economics, Inc.

World Pork Expo -- 2010

Profit Prospects for Pork Producers

– 2010 and Beyond



Profit outlook for 2010 and 2011 . . .

GOOD!

REALLY GOOD!!

FINALLY!!!!



Profits for the foreseeable future because:

Lower – but NOT LOW – costs with even lower input prices possible

- EXCELLENT planting season

- Acres are good, condition is good at present

- It‟s up to Mother Nature – and maybe the EU

Hog price recovery – better than expected

- Slightly lower supplies

- Stronger wholesale and farm demand

- Help from competitors – but will it last?



Short-term risks to consider:

Weather – the crop is not made YET

Economic turmoil in Europe and the impact on $US and exports

Domestic demand if the “recovery” softens

Fast supply response to profits

A host of potential goofy occurrences



Grain and feed cost outlook – Issues:

Record-early corn planting and very good crop condition

Weak ethanol margins – may not be supportive of corn

Modest increase in corn exports -- $US???

Expectations on E-15 decision

El Nino – La Nina???

Thursday‟s report: Nothing big expected

BIG REPORTS: June 30



Corn planting and conditionCORN CROP PROGRESS

Percent Planted, 18 States

0

10

20

30

40

50

60

70

80

90

100

4/4 4/11 4/18 4/25 5/2 5/9 5/16 5/23 5/30 6/6 6/13 6/20

2005: Fastest since 1990

1993: Slowest since 1990

'05-'09 Average2009

2010

Corn planting is

complete – but

look when the

bulk occurred!

CORN CROP CONDITIONPercent rated Good or Excellent

30

40

50

60

70

80

90

5/23 5/30 6/6 6/13 6/20 6/27 7/4 7/11 7/18 7/25 8/1 8/8 8/15 8/22 8/29 9/5 9/12 9/19 9/26

2002: Worst annual

rating since 1990

1994: Best annual

rating since 19902010

2009

10-yr average

Crop condition

is the best ever

for 1st week of

June



Planting progress, though . . .

CORN -- YIELDS VS. MID-MAY PLANTINGS

-20%

-15%

-10%

-5%

0%

5%

10%

15%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Year

Pct

Yie

ld D

evia

tio

n f

rom

Tre

nd

30

40

50

60

70

80

90

100

Pe

rce

nt

Pla

nte

d

Yield Deviation

Mid-May Planting

. . . Is NOT a good yield predictor

R2 for yield deviation = 0.3, for yield = 0.17



June 2010 WASDE forecast by USDA

2008/09 2009/10 2010/11

USDA,

June

% Chng.

vs '08-.09

USDA,

June

%Chng

vs. '09-'10

Acres Planted Mil A 86.0 86.5 0.6% 88.8 2.7%

Acres Harvested Mil A 78.6 79.6 1.3% 81.8 2.8%

Yield Bu/A 153.9 164.7 7.0% 163.5 -0.7%

Beginning Stocks Mil Bu. 1624 1673 3.0% 1603 -4.2%

Production Mil Bu. 12092 13110 8.4% 13370 2.0%

Imports Mil Bu. 14 10 -28.6% 10 0.0%

Total Supply Mil Bu. 13729 14793 7.8% 14983 1.3%

Food, Seed & Ind Mil Bu. 1316 1340 1.8% 1360 1.5%

Ethanol for fuel Mil Bu. 3677 4550 23.7% 4700 3.3%

Feed & Resid Mil Bu. 5205 5350 2.8% 5350 0.0%

Exports Mil Bu. 1858 1950 5.0% 2000 2.6%

Total Usage Mil Bu. 12056 13190 9.4% 13410 1.7%

Carryover Mil Bu. 1673 1603 -4.2% 1573 -1.9%

Stocks/Use 13.9% 12.2% -12.4% 11.7% -3.5%

Nat. Wtd. Avg. Farm Price $/Bu. 4.06 3.45-3.65 -11.3% 3.30-3.90 -2.8%

U.S. CORN SUPPLY AND UTILIZATION - JUNE



Usage - graphically

U.S. CORN USAGE BY CATEGORY

0

1000

2000

3000

4000

5000

6000

7000

1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Million bu.

Ethanol

FSI-Non Ethanol

Feed & Residual

Exports

USDA Forecasts, May 2010



Ethanol margins have fallen -- again



Corn export pace has been SLOWU.S. CORN EXPORTS

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

S O N D J F M A M J J A

1000 Bu.

2009

2008

Avg. '04-'08

U.S. CORN EXPORTS, PCT. OF ANNUAL

0%

20%

40%

60%

80%

100%

120%


Percent

2009

2008

Avg. '04-'08



2010 forecast is in line with ‟09 corn demand

U.S. CORN PRICE VS. S/U RATIO

1990-2008

19901991

1992

1993

1994

1995

1996

19981999 2000

2001

20022003

20042005

2006

2009

2008

2010

2007

1997

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0% 5% 10% 15% 20% 25% 30%

Ending Stocks/Use Ratio

$/bu

Note: Data label is

the year of the

Latest information: 5/11/2010



Implications and risks

Season-average price of $3.50 implies an Iowa harvest price of $3.00 to $3.10/bu

USDA yield of 163.5 bu/acre is 1.7 bu above the ‟96-‟07 “biotech” trend

Good crop conditions, lagging export pace will push corn lower through late summer



And new-crop futures are near life lows

But those “lows” are

still at $3.56 for Dec

and $3.88 for March!






Good crop conditions will push corn lower through late summer

Remember -- Season lows were in Sept in „‟06, early Oct in ‟07 and July in ‟09







Remember that season lows were in Sept in „‟06, early Oct in ‟07 and July in ‟09

Strong $US could keep oil prices – and ethanol prices -- in check



Oil is back near $70 – less support for corn







Remember that season lows were in Sept in „‟06, early Oct in ‟07 and July in ‟09

Strong $US could keep oil prices – and ethanol prices in check

E-15 (or E-11 or E-12) decision



Corn strategies

Given the price outlook for hog --

- “Higher” corn prices can be handled

- Extreme corn prices, as always, cannot!

Start filling storage EARLY in harvest –hand to mouth – having physical corn in hand is, I think, a good thing

Buy “insurance” out-of-the-money calls if your balance sheet is still weak



Soybean planting and early conditionSOYBEAN CROP PROGRESS

Acres Planted, 18 States

0

10

20

30

40

50

60

70

80

90

100

5/2 5/9 5/16 5/23 5/30 6/6 6/13 6/20 6/27 7/4 7/11 7/18

Percent

2000: Fastest since 1990

1993: Slowest since 1990

'03-'08 Average

2009

2010

SOYBEAN CROP CONDITIONPercent Rated Good or Excellent

30

40

50

60

70

80

90

6/6 6/20 7/4 7/18 8/1 8/15 8/29 9/12 9/26 10/10

1994 = Best

since 1990

1993 = Worst

since 1990

2009

10-yr Average

2010

Soybean planting

has been slowed

by rain – still 1

week ahead of „09

Initial crop rating

this week is

RECORD HIGH at

76% Good/Exc.



June USDA WASDE – 2X on year-end S/U ratio

2008/09

Est.

USDA,

May

% Chng

vs '08-'09

USDA,

May

% Chng

vs '09-'10

Acres Planted Mil A 75.7 77.5 2.4% 78.1 0.8%

Acres Harvested Mil A 74.7 76.6 2.5% 77.1 0.7%

Yield Bu/A 39.7 44.0 10.8% 42.9 -2.5%

Beginning Stocks Mil Bu. 205 138 -32.7% 185 34.1%

Production Mil Bu. 2967 3359 13.2% 3310 -1.5%

Imports Mil Bu. 15 15 0.0% 10 -33.3%

Total Supply Mil Bu. 3187 3512 10.2% 3505 -0.2%

Crushings Mil Bu. 1662 1740 4.7% 1640 -5.7%

Exports Mil Bu. 1280 1435 12.1% 1350 -5.9%

Seed Mil Bu. 95 91 -4.2% 88 -3.3%

Residual Mil Bu. 11 42 281.8% 66 57.1%

Total Usage Mil Bu. 3049 3323 9.0% 3144 -5.4%

Carryover Mil Bu. 138 185 34.1% 360 94.6%

Stocks/Use 4.5% 5.6% 23.0% 11.5% 105.7%

Nat. Wtd. Avg. Farm Price $/Bu. 9.97 9.50 -8.2% 8.00-9.50 -7.9%

Soybean Oil Price Cents/lb. 32.16 36.00 11.9% 34 - 38 0.0%

Soybean Meal Price $/ton 331.17 295.00 -10.9% 230-270 -15.3%

U.S. SOYBEAN SUPPLY & UTILIZATION - JUNE2009/10 2010/11



Bean exports have been robust!!

U.S. SOYBEAN EXPORTS

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000


1000 Bu.

2008

2009

Avg. '04-'08

. . . Could leave supplies tight in July-Aug



Pace relative to annual is slower . . .

U.S. SOYBEAN EXPORTS, PCT. OF

ANNUAL

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Percent

2009

2008

Avg. '04-'08

. . . will they exceed expected 1.435 bil. bu.?



Remember where cash SBM went . . .

. . . The past two summers on tight suppliesCASH SBM PRICE, DECATUR, WEEKLY

100

150

200

250

300

350

400

450

500

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

$/ton



2011 futures are at the BOTTOM . . .

CASH SBM PRICE, DECATUR, WEEKLY

100

150

200

250

300

350

400

450

500

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

$/ton

Decature 48% SBM

6/9/2010 SBM Futures

. . . of the apparent “new normal” range



Factors to consider

As is the case for corn, good weather could push prices lower in late summer

So could a slowdown in the torrid export pace

2011 prices: Will Brazil and Argentina raise another bumper crop?

How wrong can you be with SBM hedged at $250 or maybe even $230?



A word about DDGS prices . . .

DDGS $ PER LB / CORN $ PER LB

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ratio

DDGS is competitive with corn in

hog diets in this range

. . . Larger supplies = Pricing “into” hog diets



PORK AND HOG OUTLOOK



Summary

Hog supplies have been CLOSE to levels expected from March H&P

Prices have exceeded levels a) expected and b) consistent with supply changes and stable farm-level demand

Conflicting signals:- Near-record cutout values and hog prices

STRONG packer margins

- “Okay” exports – at least through March

- But SOFT consumer-level demand



Summary (continued)

Feed cost outlook is positive – depending on weather

Few signs of expansion yet- Sow slaughter is low but not exceptionally so

as a percent of the BH

- Gilt slaughter frequently above 49.5%

But – anecdotal expansion evidence- Some repops in the works

- 473k sows cut since Dec ‟07 – Estimate that 1/4th could be repopped – 2% growth



COMPETITORS



Chicken production capacity is growing . . .

BROILER HATCHERY FLOCK

30,000

35,000

40,000

45,000

50,000

55,000

60,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Thousand Hens

October 2009:

Smallest flock since

Sept '97 at 52.366

million

April '10: +2.4% Yr/Yr



Current output measures are positive . . .WEEKLY BROILER EGG SETS

180,000

185,000

190,000

195,000

200,000

205,000

210,000

215,000

220,000

J F M A M J J A S O N D

Thousand

2010

2009

Average '04-'08

y

YTD 2010: +1.4%

U.S. FI BROILER SLAUGHTER, WEEKLY

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000


Thous. Hd.

2010

2009

2008

Avg. '03-'07

2010: 3.4%

FI BROILER PRODUCTION, WEEKLY

600.00

650.00

700.00

750.00

800.00

850.00

900.00

950.00

1000.00


Mil. lbs. RTC

2010

2009

Avg. '04-'08

YTD 2010: +4.9%



But chicken prices are near-record high

BROILER PRICES12-City Composite, Weekly

68

73

78

83

88

93

JAN

APRJU

LOCT

Cents Per Pound

Avg.2004-08

2009

2010



Driven by a resurgence in breast prices

WHOLESALE CHICKEN BREAST PRICESSkinless/Boneless, Northeast, Truckload, Weekly

100

110

120

130

140

150

160

170

180

JAN

APRJU

LOCT

Cents Per Pound

Avg.2004-08

2009

2010



Cattle slaughter: Closer and closer to „09

U.S. FI CATTLE SLAUGHTER, WEEKLY

450

500

550

600

650

700

750


Thous. hd.

2009

2010

Average, '04-'08



Sharply lower weights have limited outputFI CATTLE CARCASS WEIGHTS

740

750

760

770

780

790

800

810


Pounds

2009

2010

Avg. '04-'08 FI BEEF PRODUCTION, WEEKLY

350

400

450

500

550

600


Mil. lbs. carc.

2009

2010

Avg '04-'08

YTD 2010: -0.3%



Cutout near record-high . . .

600-900# CHOICE BEEF CUTOUT VALUE

75

100

125

150

175

200

99 00 01 02 03 04 05 06 07 08 09 10

$/cwt carcass

. . . But has likely peaked for the year



Impact of competitors

Positive – chicken and beef prices have been very supportive so far in ‟10

Will be less supportive in months to come

- Beef is in a seasonal price decline but sup-plies will get tighter, higher fed prices in „11

- Chicken may be at its peak – expansions by Pilgrim, Sanderson, others in ‟11 and ‟12

Trade developments will help chicken –nothing has moved to Russia yet



Actual slghtr has been -1% from March H&P

FI HOG SLAUGHTER, WEEKLY

1500

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500


Thous. Hd.

Actual 09

Pred '10

Actual 10

Pred '11

Based on USDA Hogs & Pigs Report, March '10

These 2011 forecasts may

be revised as the impact

of

winter performance is

determined over Q2.

. . and -2.7% from ‟09 -- -4.5% yr/yr coming



Weights: YTD equal to 2009, +1# recently . . .

FI CARCASS WEIGHTS, HOGS

192

194

196

198

200

202

204

206

208


Pounds

2008

2009

2010

Avg '04-'08

. . . Payoff of larger hogs, slack space



Output is still down 3.6% from last year . . .

FI PORK PRODUCTION, WEEKLY

280

320

360

400

440

480

520


Mil. lbs. carc.

2009

2008

2010

Avg '04-'08

YTD 2010: -3.6%

. . . Implies prices +8 to 12%



Record-high hog prices -- +30% from „09

U.S. NEG'D NET PRICE, WTD. AVERAGE

40

45

50

55

60

65

70

75

80

85

90

95

100


$/cwt carcass

2009

2008

2010

Avg '04-'08



Why the discrepancy in prices?

‟09 prices were artificially depressed

- H1N1 aftermath

- High weights driven by unusual weather

- An “unrepresentative base from which to compute prices

Positive impact of other species

- Using a price flexibility considers only own-quantity impacts

- Cross-price elasticities are smaller but not zero!



Exports +1.3% thru March . . .

MONTHLY U.S. PORK EXPORTS

-

100,000

200,000

300,000

400,000

500,000

600,000

J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10

Thous. lbs. carc.

March 2010 exports were

LARGER THAN

March 2008 exports!

'04-'07 Trend



Competitors: EU has gained an advantage

U.S. EXPORT COMPETITORS'

CURRENCIES VS. $U.S.

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 10

Euro & $Can/$US

0.9

1.3

1.7

2.1

2.5

2.9

3.3

3.7

4.1

Real/$US

Euro

Canadian $

Real



Customers: Recent changes, Japan & Mexico

U.S. EXPORT CUSTOMERS' CURRENCIES

VS. $U.S.

0

20

40

60

80

100

120

140

160

180

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 10

Yen/$US,

Peso/$10US

Renminbi/$10US

400

600

800

1000

1200

1400

1600

1800

2000Won/$USPesos/$10 Yen/US$

Renminbi/$10 Won/US$



Pork demand: conflict with hogs & whlsle . .

PORK DEMAND INDEX

80

90

100

110

120

130

70 73 76 79 82 85 88 91 94 97 00 03 06

Index, '85=100

Pork Demand

declined 4.2% per

year -- 1979 -1985

2010: -5.3%

. . . I suspect the retail price data!



Pork and chicken don‟t make sense!

RETAIL MEAT PRICES, USDA

0

50

100

150

200

250

300

350

400

450

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cents/lb.

All-Fresh Beef

Choice Beef

Pork

Composite Broiler

Turkey



Profits are back – in a BIG way!!!

PROFIT PER HEAD

IOWA FARROW-TO-FINISH OPERATIONS

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

$/HD.

Source: Estimated Costs and Returns, Dr. John Lawrence, Department of Economics, Iowa State University



But financial positions are generally weak

ACCUMULATED PROFITS

IOWA FARROW-TO-FINISH OPERATIONS(Sum of the profits from selling one pig per month since January 1991)

$(200)

$(100)

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Peak in Sept '07 = $786.87

Top to Bottom:

Sept '07 to Feb 2010

Lost $639.68

81% of peak amount

Source: Paragon Economics, Inc. using data from Estimated Costs and Returns, Dr. John Lawrence, Department of Economics, Iowa State

University

March '10 = $156.02

8 years



Sow slaughter is lower – 3 to 4% since April

U.S. SOW SLAUGHTER

40

45

50

55

60

65

70

75


Thousand Hd.

2009

2010

Avg. '04-'08



But slaughter of US sows is equal to ‟09 . . .

FI SLAUGHTER OF U.S. SOWS As a Percent of Previous Quarter's Breeding Herd

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%


Percent

2009

2010

Avg. '07-'09

. . . YTD ‟10 = 16.4% vs. 16.3% in „09



YTD gilt slaughter: +0.1% vs. ‟09, -0.1 vs. „08

GILTS AS A PERCENT OF TOTAL

BARROW/GILT SLAUGHTER

47.0

48.0

49.0

50.0

51.0

52.0

53.0


Percent

2009

2010

Avg. '00-'09



Futures: Profits of $16/hd for ‟10 . . .

. . . and nearly $20 for remainder of the year ACTUAL & PREDICTED HOG

PRODUCTION COSTS* AND PRICES

10

20

30

40

50

60

70

80

90

100

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

$/cwt carcassActual Costs per ISU - Carcass

Predicted/Forecast Costs - Carcass

Cash Hog Price

Futures-Implied IA-MN Price

*Based on relationsip between ISU Estimated Costs & Returns data and historic Omaha corn and Decatur soybean meal prices

6/4/10

Forecast 2010 Profits

$16.25/head

C



Slaughter forecasts

Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge Mil. Hd % Chnge

2009 Year 113.583 -2.7%

2010 Q1 27.631 -3.1% 27.631 -3.1% 27.631 -3.1% 27.631 -3.1%

Q2 26.575 -1.8% 26.395 -2.5% 26.198 -3.2% 26.139 -2.6%

Q3 27.425 -3.5% 27.860 -2.0% 27.807 -2.2% 27.175 -4.4%

Q4 28.775 -2.8% 28.726 -3.0% 28.973 -2.2% 28.184 -2.3%

Year 110.406 -2.8% 110.612 -2.6% 110.609 -2.6% 109.129 -3.9%

2011 Q1 27.493 -0.5% 27.132 -1.8% 27.983 1.3%

Green figures are actual data from USDA. 3/2/10

March 2010 Commercial Slaughter ForecastsMizzou LMIC MeyerISU



Price forecasts

Missouri ISU LMIC Meyer CME

Producer-Sold

Net Carcass

Ia-S. Mn. Live

Price1

National Wtd

Avg. Base Price

National Net

Neg'd Price,

Wtd. Avg.

CME Lean

Hog Futures

6/4/10

2009 Q1 60.43 56.48 58.11 57.22 $58.14**

Q2 61.76 58.39 59.45 58.19 $59.03**

Q3 56.68 52.60 54.01 52.39 $54.18**

Q4 57.64 55.92 55.57 55.81 $56.60**

Year 59.11 55.84 56.87 55.90 $56.98**

2010 Q1 68.60* 70.41* 65.95* 68.75* 69.38**

Q2 71 - 75 77 - 81 74-75 81.98* 80.70**

Q3 73 - 77 72 - 75 70-74 76 - 78 77.51

Q4 66 - 70 61 - 65 67-71 68 - 70 71.04

Year 70 - 73 70 - 73 69-71 73 - 74 74.66

2011 Q1 63 - 67 70-75 66 - 70 70.131Converted to carcass using a yield of 75% *Partial USDA data **Average of CME Lean Hog Index

March 2010 Hogs & Pigs Price Forecasts



My expectations

June Hogs and Pigs may show small BH growth from March but still down 2-3% from ‟09; lower market supplies.

Hog supplies will be supportive of prices in the upper $70s to low $80s for the rest of the summer

Q4 prices in the upper $60s

Little or no expansion, 2011 numbers very close to 2010, prices depend on demand!



QUESTIONS & DISCUSSION?

profit prospects for pork producers 2010 and beyond · 2014-09-16 · world pork expo -- 2010...

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