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May 1, 2012 Sponsored by:

May 1, 2012 Sponsored by:. Presenter: Dr. Glynn Tonsor, Kansas State University. WEBINAR OVERVIEW. Broad Economic Outlook Overview Beef Demand Update: LFTB and BSE Impacts U.S. Cattle ID – Comparative Global Status. Economic Outlook Overview: Cow-Calf. Recent calf price pullback; BUT

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May 1, 2012 Sponsored by:

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  1. May 1, 2012 Sponsored by: Presenter: Dr. Glynn Tonsor, Kansas State University

  2. WEBINAR OVERVIEW • Broad Economic Outlook Overview • Beef Demand Update: LFTB and BSE Impacts • U.S. Cattle ID – Comparative Global Status

  3. Economic Outlook Overview: Cow-Calf • Recent calf price pullback; BUT • Continued beneficiary of tight supplies and expanded heifer retention… • Returns over cash costs may set historic records • 2013 may prove to be “peak return year” …

  4. As of: 4/30/12 12’ Strong Basis = +/- $6/cwt miss on current calves…

  5. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

  6. Economic Outlook Overview : Stockers • Expected margins squeezed this spring by run on calves • Historically strong basis on calves… • Accounting and economic profit divergence • Varied valuations of consumed forage …

  7. “Buy-Sell” spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) • 4/30/12’ Salina, KS Situation: • BeefBasis.com forecasted price of 750 lb steer August 3, 2012 is $150.99/cwt • What is break-even purchase price of a 550 lb steer purchased on May 4, 2012? • forecasted price is $166.14/cwt

  8. “Buy-Sell” spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) Expected Return: +$0.10/head [2.0 *($166.19-$166.14)] Feeding COG $80 = +$6.76/head Expected Return Feeding COG $100 = -$6.56/head Expected Return But “true” expected purchase price may not be $166 …

  9. Economic Outlook Overview : Feedlots • Excess capacity concerns remain… • Forecasted losses persist…

  10. Feedlot Capacity – to - Calf Crop Ratio Assuming: 2011 Calf crop of 35.3 mil. hd Assuming: 2021 Calf crop of 40.6 mil. hd

  11. Stronger Basis Recently than Historic Patterns…

  12. NAIBER (http://www.naiber.org/) 4/30/12’ Forecasts: 750 lb KS Steer placed on 5/4 & sold at 1,262 lbs on 10/4/12’ = - $126/hd; Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

  13. QUARTERLY FORECASTS (LMIC:4/27/12)

  14. QUARTERLY FORECASTS (LMIC: 4/27/12)

  15. Beef Demand Overview : • Domestic meat prices have been rising relative to other household items… • Domestic demand has surprised analysts… • Reduced per capita consumption does not necessarily mean reduced demand … • Export success “tempered” but bullish prospects in longer-term remain…

  16. Livestock Marketing Information Center Data Source: Bureau of Labor Statistics

  17. Livestock Marketing Information Center Data Source: Bureau of Labor Statistics

  18. Year-over-Year increases in last 7 quarters (since Q3 of ’10); Q1.2012 = +5.99% Actual Quantity & Price Changes: 1990: 67.8 lbs (per capita cons.);$2.15 (real choice price) 2011: 57.3 lbs (per capita cons.);$2.15 (real choice price) Q1.2012 (year-over-year) : Per Capita Consumption = -0.19% Real Choice Beef Prices = +6.24% Available at: http://www.agmanager.info/livestock/marketing/Beef%20Demand/default.asp

  19. Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS

  20. Beef Demand Overview : • Discussion on demand “getting complicated” • Growing interest in “how my food is produced” • Animal welfare, food safety, antibiotics, hormone use, local, organic, traceability… • Customer vs. consumer distinction importance growing… • LFTB (lean finely textured beef) discussion… • 4th domestic BSE case (4/24 – CA dairy cow)

  21. Source: March 12, 2012 TIME magazine

  22. LFTB Impact Duration…References available in April 9th article: http://www.lmic.info/memberspublic/InTheCattleMarket/CattleMktsframe.html • 3-6 month demand response duration common in research literature examining media impacts… • 2009 H1N1 case parallels • Extensive media; “catchy” phrases, industry experts contending no scientific basis for public concern… • Supply chain response likely will persist beyond “short-term” demand response… • imports, labeling, relative cost of higher-lean beef…

  23. LFTB Price Impacts To-Date … Source: USDA-AMS LM-XB460 Nat’l/Reg. Weekly Boneless Processing Beef & Beef Trimmings

  24. 4/24/12’ BSE Event Impact So Far… • Past experiences: • Dec 2003 event: loss of Japan & S. Korea in 04’=$45-$65 per head slaughtered (http://www.agmanager.info/livestock/marketing/bulletins_2/industry/demand/MF2679.pdf) • Comparatively limited response to subsequent two events • Export response to April 24, 2012 report: • Canada, Mexico, Japan, and EU made positive remarks • S. Korea made + remarks; now visits scheduled • current 30 month of age threshold • Thailand and Indonesia are increasing restrictions

  25. U.S. Cattle ID Status • To-date domestic consumer has not pressed • However, 4/27 Bloomberg piece renewed calls for expanded traceability post BSE event • Aug. 11’ comments solicited on USDA’s proposed rules; still awaiting release … • Growing importance for access to global markets • What is “accepted” domestically may/may not be sufficient in export markets… • Host of resources available at: http://www.agmanager.info/livestock/marketing/AnimalID/default.asp • NAIS Benefit Cost study (Jan. 2009) • Cow-calf producer views/preferences thesis project (Lee Schulz; w/ BEEF) • USMEF study – Report submitted March 2011

  26. U.S. Cattle ID – Global Status SOURCE: http://www.animalagriculture.org/Solutions/Proceedings/Annual%20Conference/2012/GAHFST/Clayton,%20Paul.pdf

  27. U.S. Cattle ID – USMEF Study • U.S. is falling behind global export competitors • Aggregate costs of 20% participation in SAV programs could be offset by a 1% increase in exports (2009 base) • +/- 1/7th of what was exported to S. Korea in 2009 • Notable heterogeneity in adoption costs • First 10% = $0.33/hd ($11.3 mil) • Last 10% = $10.23/hd ($115.2 mil) • Results in limited voluntary adoption, industry in-fighting, and significant national implications… • Note impacts of lost/expanded markets influence prices for all…

  28. U.S. Cattle ID – Tonsor’s Current Take • National ID & traceability systems are becoming “a cost of doing business” globally… • Importing countries can require eligible sources to have ID/traceability systems as stringent as those required domestically… • Classic example of dilemma presented when something makes sense for an industry as a whole not always being best for every individual participant… • Is ID among a broader set of issues/drivers leading to a bi-modal cow-calf sector?

  29. Sponsored by:

  30. The next three slides provide supplemental charts and resources to the presented materials.

  31. Feedlot Operations and Marketings

  32. U.S. Cattle ID – Global Status SOURCE: http://www.animalagriculture.org/Solutions/Proceedings/Annual%20Conference/2012/GAHFST/Clayton,%20Paul.pdf

  33. SOURCE: http://www.animalagriculture.org/Solutions/Proceedings/Annual%20Conference/2012/GAHFST/Clayton,%20Paul.pdf

  34. Questions typed by participants during the webinar presentation which were not directly responded to are addressed in the remaining subsequent slides.

  35. Question: “What do you see for cattle movement in the next 12 months? Do you see cattle moving back to the south, Canada, etc?” • Response: • More detail exists within the Feb. 7th webinar if you would like an expanded audio overview regarding regional differences: • http://www.marketingandtechnology.com/repository/webinars/e20/fol.html • Similarly, slides 13-23 this presentation file provide background information regarding regional differences: • http://www.agmanager.info/about/contributors/Presentations/Tonsor/BeefIndustryChangesEconImplications_KSFMRA_02-23-12.pdf • Bottom line: • It appears the current situation is most favorable in the short run (e.g. 12 months) for some expansion in areas north and west of here (KS). I have frequently asserted that aggregate national expansion may be characterized by continued relative movement NW of where the herd used to be. That is, while some rebuilding will likely occur in the Southern Plains, the relative production from north of I-80 and west of IA may arguably continue to grow.

  36. Question: “Do you see any unique advantage in the niche calf cow all grass fed market, selling directly to local consumers?” • Response: • This basic Google search for “US grass fed beef” provides a host of information from groups interested in expanding grass fed production. (http://www.google.com/#hl=en&output=search&sclient=psy-ab&q=us+grass+fed+beef&rlz=1R2ADFA_enUS382&oq=u.s.+grass+fed+&aq=0q&aqi=g-q2&aql=&gs_l=hp.1.0.0i22l2.907.3659.0.5237.15.12.0.3.3.0.205.1504.2j9j1.12.0...0.0.KcCQjwxcmIA&pbx=1&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&fp=a22b68fd5f645ad2&biw=1280&bih=571) • Page 4 in this ERS publication provides a useful overview of grain and grass fed systems: • http://www.agmanager.info/about/contributors/Presentations/Langemeier/Johnson_LDP-M-192.pdf • Bottom line: This is not something I have directly researched as my efforts to-date largely reflect the predominance of grain fed systems in the U.S.

  37. Question: “Do you forsee mandated labeling changes due to the LFTB scare? Have we started studyimg alternative ID's for LFTB?” • Response: • There have been multiple calls for mandatory labeling of LFTB. See this article for some details and an example: • http://nationalhogfarmer.com/resources/fallout-lean-finely-textured-beef-continues • More detail exists within the Feb. 7th webinar regarding mandatory country of origin labeling if you would like an expanded audio overview of broader retail product labeling issues which warrant deeper assessment: • http://www.marketingandtechnology.com/repository/webinars/e20/fol.html • In the May 1st webinar I alluded to a study focused on mandatory labeling of animal welfare information. Resources from that project are available at: • http://www.agmanager.info/livestock/marketing/AnimalWelfare/default.asp • I would encourage the list of pre-implementation considerations noted here to be given parallel thought w/r/t LFTB labeling. • Bottom line: One could possibly expect additional voluntary labeling to develop (e.g. Hy-Vee is facilitating consumer choice) but prospects (and the net benefit-cost presented) for mandatory labeling remain unknown and debatable.

  38. Question: “How much LFTB production has been reduced and how much is that of total lean usage?” • Response: • The April 6, 2012 Congressional Research Service article is a useful reference: • http://www.fas.org/sgp/crs/misc/R42473.pdf • Useful estimates from the CRS article include: • BPI’s daily production of LFTB has been cut by +/- 50% (700,000 lbs/day vs. 1.5 million lbs/day) • Cargill’s FTB, coupled with BPI’s LFTB have been estimated to jointly be produced at volumes between 600 million and 850 million lbs per year. • Estimates are 40%-50% of total beef consumed is ground beef and 2011 commercial beef production was +/- 26.2 billion lbs. Combined this suggests +/- 11.8 bil. Lbs of ground beef are consumed annually. This can be considered along with the LFTB and FTB annual production volumes. • Bottom line: I do not have a firm estimate on the magnitude of production reduction. The use of LFTB previously being combined at rates of 10-20% by volume of ground beef suggests a “ceasing of production” would directly influence 5x or 10x the volume of “non-LFTB” ground beef. Moreover, the indirect impacts on relative values of products varying in leanness, sources of those products, etc. are important to further consider.

  39. Question: “Estimation on calf market over the next 5 years” • Response: • The USDA periodically releases longer term forecasts. This piece includes projections for the next 10 years as of Feb. 2012: • http://www.ers.usda.gov/Publications/OCE121/OCE121e.pdf • Narrowly, see table 30 on page 6 • A broader set of projections is also offered by FAPRI: • http://www.fapri.missouri.edu/outreach/publications/2012/FAPRI_MU_Report_01_12.pdf • Narrowly, see pages 42-43 • Bottom line: I do not typically develop multi-year calf market price expectations and encourage you to review the resources noted above.

  40. Question: “Do you expect a widening of the choice select spread later on this year?” • Response: • The next slide presents a Choice-Select spread chart from LMIC. • The 2006-2010 average depicts the seasonal increase in this spread common for the 2nd and 4th quarters; as well as the fact that recent months seasonally tend to have the narrowest spread. • On a related note, the subsequent slide shows cutout values to provide a feel for the relationship of branded and prime product as well. • Bottom line: • There is no immediately apparent reason leading me to not expect some realization of typical seasonal patterns throughout this year. That is, yes one may expect additional widening from current levels. That said, the C-S spread may not be the only thing to watch as the Prime-C spread is increasingly being the subject of “beef quality” discussions.

  41. Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

  42. Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

  43. Question: “IS DEMAND FOR GRASS FINSIHED BEEF CONTINUING TO EXPAND? IS SUCH DEMAND REFLECTED IN IMPORTS SINCE MORE COUNTRIES ARE GRASS FINISH BASED?” • Response: • Please see slide #36 for a response to a similarly raised question. • We have traditionally (until 2011) been a net beef importer. Moreover, some of our largest import sources are from countries which are predominantly grass finished based. For instance, the average beef import shares (in volume) between Jan. 2009 and Feb. 2012 of Australia and New Zealand were 26% and 21%, respectively. • Bottom line: I have not directly researched grass-finished beef demand as my efforts to-date largely reflect the predominance of grain fed systems in the U.S. However, being aware of differences in global production systems, the traditional role of imported grass finished beef into the U.S. meat supply chain, etc. is important.

  44. Question: “Can you expound on the heifer retention program you mentioned?” • Response: • More detail exists within the Feb. 7th webinar if you would like an expanded audio overview: • http://www.marketingandtechnology.com/repository/webinars/e20/fol.html • The particular resource you likely want to review is the “KSU-Beef Replacements” spreadsheet available at: • http://www.agmanager.info/Tools/default.asp#LIVESTOCK • More broadly, this presentation file overviews a host of decision tools available as aides in management and marketing decision making: • http://www.agmanager.info/Faculty/dhuyvetter/presentations/2012/KCD_Cattle%20Decision%20Tools%20(BI%20Beef%20Summit%20Springfield%20MO%203.13.12).pdf • Bottom line: A host of materials are available on www.AgManager.info.

  45. Question: “The FTLB issue apears to be differenet from other examples in that it has induced many major domestic retailers to declare a discontinuation of use. Do you think conumsers will return to demanding FTLB and pull it back into these outlets?” • Response: • The distinction noted in our webinar w/r/t customer and consumer comes to mind in addressing this question. • One may expect several, if not most retailers (customers) to remain hesitant to “reverse” patterns and resume previous acceptance of LFTB. That is, they may see the marginal gain in lower product prices as not being sufficient to cover perceived risks regarding brand image, being associated with a controversial product, etc. • The interesting real-world experiment on this is to watch and learn from is instances such as Hy-Vee where consumer choice may be facilitated: • http://www.hy-vee.com/company/press-room/press-releases/hy-vee-statement-on-lean-finely-textured-beef.aspx • Bottom line: We are still learning about the market impacts but I suspect eventually some proportion of the previously accepted/transacted volumes of LFTB will characterize the retail market. That is, I’m neither expecting a “full ban” nor a “full recovery” of LFTB volumes even after the dust settles.

  46. Question: “We have heard that the new STEC requirements are going to increase costs of production. Can you give us some projections?” • Response: • I am not aware of an existing study specifically examining the production cost impacts of these new requirements. • That said, I am among a large set of faculty involved with a new, 5-year USDA funded grant investigating a host of issues regarding non-O157 STEC. I suspect this project will directly contribute to understanding the issue you are raising. • http://www.usda.gov/wps/portal/usda/usdamediafb?contentid=2012/01/0021.xml&printable=true&contentidonly=true • Bottom line: I do not have a specific production cost estimate to forward at this time. That said, IF recalls can be reduced there would be benefits in the form of beef demand maintenance/expansion as FSIS recalls have been found to negatively impact demand (http://www.agmanager.info/livestock/marketing/bulletins_2/industry/demand/Beef_Demand_Drivers_January_2009.pdf). The net impact of this possible benefit with the implementation and ongoing production costs (which I do not have insight currently on) will largely form the net impact of the new requirements.

  47. Question: “Given the fact that the LFTB issue removed about 200 loads per week (from what we have heard) of lean beef off of the market, I would have expected the price on 90% lean trim and imported bull meat to spike in order to compensate for the loss of meat. The lack of a price spike leads me to believe that ground beef demand was affected. Please let me know your thoughts. Thank you.” • Response: • Yes, if consumer demand for ground beef in general fell off, that would be expected to erode g.b. prices. Similarly, if industry production costs of offering lean g.b. increase with the reduction/restriction on LFTB use that would put upward pressure (at least eventually if/as demand stabilized) on leaner g.b. prices. • In March the observation of 90% lean trim being flat reflects the relative value to processors as well as consumers. We likely observed these two factors cancelling each other out in March as prices were rather flat. However, in April, prices began to increase consistent with the suspicion noted in your question. • It is import to also recognize most existing demand studies were conducted with aggregate (e.g. beef) data and not primal- much less cut-level data so our understanding of product specific demand is comparatively limited. This was alluded to in a recent CLPER post if you’d like more information: • http://www.agmanager.info/livestock/marketing/CLPER/CLPER_04-12.pdf • Bottom line: If in fact, consumer demand response is short lived (see slide 20 above) and higher production costs persist, we eventually would expect to see higher g.b. prices across various leanness offerings. In the short term interim we are observing a host of responses, including the industry simply gaining insight on adjustment options, possibly altering their g.b. production approaches, etc.

  48. Question: “Regarding LFTB, is it likely that we will see continuing use of that product, or has that been destroyed?” • Response: • See the preceding questions for related information. • Bottom line: We are still learning about the market impacts but I suspect eventually some proportion of the previously accepted/transacted volumes of LFTB will characterize the retail market. That is, I’m neither expecting a “full ban” nor a “full recovery” of LFTB volumes even after the dust settles. Important lessons learned from situations such as that facilitated by Hy-Vee facilitating consumer choice will help guide exactly what portion of previous volume transactions “come back.”

  49. Question: “What have you calculated as the cost to the industry resulting from the LFTB issue?” • Response: • Bottom line: This is not something I personally have calculated so I’m not in position to offer an “industry cost estimate” at this time.

  50. Question: “Have you determined whether heifer retnetion is taking place?” • Response: • Dr. Derrell Peel very recently addressed this issue: • http://www.cattlenetwork.com/cattle-news/Clues-to-beef-herd-rebuilding-149505595.html?ref=595 • In the Feb. 7th webinar a detailed discussion of the January Cattle Inventory report, including estimated heifer retention, was discussed. This report indicated a 1.4% increase (year-over-year) in heifer retention, but note the previous year’s low base: • http://www.marketingandtechnology.com/repository/webinars/e20/fol.html • On July 20th, the USDA is scheduled to release the July Cattle Inventory report: • http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1017 • Bottom line: This is a subject of much discussion with casual observation suggesting states N and W of KS possibly expanding heifer retention while states S and E of here have not necessarily sent this signal. The net impact nationally is less clear. In short, I don’t think the industry has “pulled the trigger” on national expansion yet but only time will tell if my perception is accurate.

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