Presentation Transcript

1. Poultry Prices and Feed Costs, 2012 Outlook

   Dr. Thomas E. Elam President FarmEcon LLC September 15, 2011
2. First, the lawyer told me to say… The information contained herein is currently believed to be reliable and the views expressed within this document reflect judgments at this time and are subject to change without notice. FarmEcon LLC does not warrant that the information contained herein is fully accurate or complete, and it should not be relied upon as such. Any business decisions made based on this information and analysis are the sole responsibility of the decision maker.
3. Headline Issues for 2012 Good: Chicken production declining Good: Chicken stocks will decline Good: Turkey demand has grown Good: Lower available supplies of red meat Bad: Economy slowing, unemployment is not declining REALLY Ugly: Feed costs – low stocks, high prices/volatility, huge risks, through 2012 and into 2013
4. Why has protein consumption grown? Declining real costs relative to average goods and services Efficiency increases Gains in real incomes
5. Reminder: More Spending = More MeatOn average +10% Spending = +9% more meat $1 trillion increase in spending = 9 mmtmore meat produced R2 = 0.9988 Sources: Consumer Spending: World Bank; United Nations. Meat Production: UN/FAO
6. U.S. Corn: Real Price Index
7. Corn Prices and Income Growth
8. Major drivers impacting poultry consumption growth rate 1991-2006 1991-2006: Both factors positive, promoted consumption growth 2007-Mid 2008: Real income a declining positive, real costs a negative Mid 2008-2009: Real income and real costs both negative 2010-2011: Real costs and real income both rising, intense price pressures
9. Major drivers impacting poultry consumption growth rate 2008-2009 1991-2006: Both factors positive, promoted consumption growth 2007-Mid 2008: Real income a declining positive, real costs a negative Mid 2008-2009: Real income and real costs both negative 2010-2011: Real costs and real income both rising, intense price pressures
10. Major drivers impacting poultry consumption growth rate 2010-2011 1991-2006: Both factors positive, promoted consumption growth 2007-Mid 2008: Real income a declining positive, real costs a negative Mid 2008-2009: Real income and real costs both negative 2010-2011: Real costs and real income both rising, intense price pressures
11. Macroeconomic Headlines Real U.S. GDP growth appears to be slowing Why? Unprecedented government borrowing and market interference = uncertainty Labor market is not recovering U1 Unemployment rate down from recession low Because people are dropping out of the labor force Real U6 unemployment rate stuck at about 16% Almost no private sector job growth Therefore, no real improvement in earnings of people who buy consumer goods
12. Total (U6) unemployment rate % U1 + marginally attached + discouraged potential workers Does not include those who have totally given up looking for work
13. Labor force participation rate, % Employed + unemployed divided by adult population
14. Employed as % of the Population Employed divided by total population
15. Why you need to care… Work = consumer income = spending = MEAT DEMAND Weak 2011/12 protein demand increase Turkey demand may be an exception 2010/11 protein price strength almost totally due to lower supply/higher exports If meat supplies increase or exports decline in the face of low income growth, prices will decline
16. Informa Model Turkey Margins
17. Informa Model Broiler Margins
18. Farrow-Finish Returns, IA State Budget
19. Yearling Steer Returns, IA State Budget
20. 2006-2012 Per Capita Total Meat Consumption: 10% Reduction Recession and slow recovery Lower availability driving pricing up Root causes: Higher Costs Lower Production Export growth
21. Chicken/Turkey/EggOutlook2011/12
22. 2012 Outlook Features Record low Jan 1 turkey cold storage stocks YTD 2011 turkey exports growing well Chicken production rate declining Layer numbers falling through 2012 2012 turkey production up only 1-2% 2012 chicken production likely down 2-3% Strong red meat pricing compared to 2010 Strengthening broiler pricing over time Positive outlook, but losses of volume More bankrupt producers are likely
23. What are the Underlying Issues? Higher feed costs driving production down Weak U.S. demand growth Russia and China broiler trade issues It’s both supply and demand Production needs to adjust to a new reality Prices need to increase to cover higher costs
24. Chicken Cold Storage 2007-2011
25. Turkey Cold Storage 2007-2011
26. How Important are Turkey Stocks? Regress seasonality and stocks of whole turkey and “other turkey parts” (2003-2011) on breasts, thigh and whole bird prices As stocks increase, all prices decline 50 million pounds each of “other” and whole birds stocks increases: 50 cents/lb. decline in breast meat price 13 cents/lb. decline in thigh meat price 7.5 cent/lb. decline in whole bird price
27. UB Turkey Egg Sets and Placements4 Week YoY %Change Moving Averages Feed Costs Spike
28. U.S. Broiler Chicken Egg Sets and Placements3 Week YoY %Change Moving Averages Feed Costs Spike
29. U.S. Cumulative Potential Layer PlacementsRelative to Current Supply Flocks 7-18 Months Earlier Feed Costs Spike
30. Turkey Price Improvement Has Outpaced Supply Reduction
31. Chicken Wholesale Price Scatter
32. Poultry Feed Costs – New Records!
33. Turkey Feed Cost Outlook Includes transportation basis for corn, soybean meal, MBM and grease. Based on 2.6:1 FCR, 65% corn, 22.5% SBM, 5% meat and bone meal, 5.5% grease diet
34. Broiler Feed Cost Outlook Includes transportation basis for corn, and soybean meal Based on 1.9:1 FCR, 55% corn, 35% SBM, 10% Other
35. Why Feed Costs Matter
36. 2012 Turkey Forecast Summary(Production, Use and Stocks in Million Pounds) 2000-2008 Average: 42.7¢
37. 2012 Broiler Forecast Summary(Production, Use and Stocks in Million Pounds)
38. 2012 Egg Industry Forecast UEP/HSUS proposal will have long term cost impact 2011 margins have been tight Layer numbers forecast to decline, and remain 1-2% under year-earlier through 2012 Exports likely to grow modestly in 2012 Table eggs and egg product prices likely to set new records in 2012 Will be needed to offset feed costs
39. 2012 Poultry Outlook Summary Demand vs. production cost a major challenge Economy expanding, but not a typical recovery rate Red meat domestic supplies shrinking in 2011 and 2012 Chicken supplies are declining due to incredible losses How much chicken reduction needed for profitability? 2012 prices and profitability factors: Feed costs Continued economic recovery – no double-dip Poultry production levels Extreme feed cost risk level will (hopefully) temper 2012 production plans

40. Now, Since So Much Depends On It:2012 Feed Cost Outlook

41. Ethanol is Not Everything Weather and acreage still play a major role 2011 yields down from 2010 Export and feed demand also still important Prices elasticities – in decreasing rank Ethanol is near 0 Food and seed use near 0 Exports – do respond to price Feed use – major adjustments happen here
42. Protein Meal Overview – 2011/2012 Better balance than corn, but no surplus 2012 soybean factors: About 2 million acres diverted to corn Yield about flat vs. 2010 Exports and crush also flat Soybean meal prices supported by corn But correlations are not all that high
43. Correlations: Monthly Average Prices, Omaha #2 Yellow Corn; Petroleum Blender Gasoline and Ethanol
44. Something Changed!
45. Regression for Season Average Corn Price, Feedgrain Crops of 1990-2009 Ethanol production growth in excess to 4 billion gallons, ethanol prices over $2/gallon, and low stocks are all combining to drive corn prices up. Next year looks like more of the same at this point. R2 = 89% Forecast 2010 crop price was $5.65/bushel, above the USDA $5.20-$5.30 range Forecast 2011 crop price is $6.50/bushel, vs. the USDA $6.50-$7.50 range Lower stocks, higher ethanol prices and higher ethanol production all important
46. Feedgrains Balance * September 1 Crop Year
47. Soybean Outlook Detail to 2011/2012* * September 1 Crop Year
48. Corn/SBM/DDGS Feeding Lower feed availability & higher protein exports are squeezing consumption
49. Portion of Bar Above Line at Risk
50. We are at the E10 Blend Wall
51. Harvested acres since 1990:Acres down in 2011, partly due to drought
52. If Ethanol Tax Credit Goes Away? About $5.8 billion of revenue goes away Including DDGS, total ethanol plant sales are about $43 billion Most of credit stays with blender But that much money has a corn price effect Maximum effect is about $1/bushel Real effect will be less
53. RFS is the Real Policy Issue Sets price insensitive floor for corn demand Inflates corn, DDGS and ethanol prices Absent RFS and tax credit, ethanol priced near BTU-parity to gasoline: 67% of gasoline Wholesale gasoline at $3.00 = $2.00 ethanol $2.00 ethanol = $4.75 corn and $150 DDGS
54. Summary: Any scenario has large up and downside risk Realistic potential exists for: $10+ corn (higher in California) $6 corn $450 soymeal (higher in California) $300 soymeal Prices will depend Macroeconomics Crop size (U.S. and global) Energy prices Potential biofuel policy changes
55. Strategic issues: Feed costs on new, higher, terrain The new terrain has high mountains, low valleys, and covered with fog Value of efficiency gains at all-time high Protein production declines to continue But, customer value creation still the name of the game! Value is both desired by the consumer and profitable for the producer
56. Likely winners and losers Higher feed costs = feed efficiency wins share Broilers 2:1 (or better) Aquaculture (as low as 1:1) Turkeys 2.6:1 Hogs 3:1 (including sows, at best) Fed cattle 6:1 Grass fed cattle 0:1 Cow and sow herds likely to shrink for 4-5 years Total protein production can increase if the mix changes enough! That is, less beef and pork and more poultry
57. U.S. Meat Protein Shares Reflect Long Term Market Competition Sources: USDA/ERS