A Producer Perspective of the Hog Sector

1. A Producer Perspective of the Hog Sector USDA Agricultural Outlook Forum February 24, 2012 Jon Caspers

2. Producer Issues 2012 Exports � Exchange rates, trade policy, disease status U.S. demand � U.S. economy Feed prices � S. American crops, moisture situation, 2012 acreage/yields

3. Producer Issues 2012 Hog/pork supplies -- Productivity (farrowings, litter size), herd health, weights, packer capacity Industry Financial Condition � Volatility, Price Pressures, Risks

4. Exports

5. Top Pork Exporters U.S. continues to be a dominant and growing pork exporter. EU has grown recently, but� U.S. continues to be a dominant and growing pork exporter. EU has grown recently, but�

6. Longer Term Pork Export Trends Exports from the EU are forecast to decline and U.S. domination continues to grow. FTA�s with Korea, Columbia and Panama will continue to build exports. TPP, especially if Japan is included, will continue to expand export demand.Exports from the EU are forecast to decline and U.S. domination continues to grow. FTA�s with Korea, Columbia and Panama will continue to build exports. TPP, especially if Japan is included, will continue to expand export demand.

7. Percent of Production Exported U.S. continues to increase the percent of production exported. Growing exports, while driving demand and profits higher, place the U.S. at greater risk from trade disruptions (trade policy, FAD, etc.)U.S. continues to increase the percent of production exported. Growing exports, while driving demand and profits higher, place the U.S. at greater risk from trade disruptions (trade policy, FAD, etc.)

8. Major Pork Importer Currencies Compared to the U.S. Dollar Our two largest customers (China and Japan) have seen their currencies strengthen, driving U.S. exports higher. Other major customer currencies are stable compared to two years ago. Our two largest customers (China and Japan) have seen their currencies strengthen, driving U.S. exports higher. Other major customer currencies are stable compared to two years ago.

9. Major Pork Exporter Currencies Compared to the U.S. Dollar With stronger currencies, with the exception of the EU, our competitors are at a disadvantage. The weaker Euro has boosted exports from the EU. Currency fluctuations can have major impacts on trade.With stronger currencies, with the exception of the EU, our competitors are at a disadvantage. The weaker Euro has boosted exports from the EU. Currency fluctuations can have major impacts on trade.

10. U.S. Demand

11. GDP growth: Improving again� but still slow Continued small but positive GDP growth boosts demand.Continued small but positive GDP growth boosts demand.

12. Lower domestic consumption, due to larger exports, boosted deflated prices to near record.Lower domestic consumption, due to larger exports, boosted deflated prices to near record.

13. Feed Prices

14. Last Major Drought Was In 1988 15 years of relatively stable production.15 years of relatively stable production.

15. But� How Long Will This Last? Severe drought in Southern MN and NW 1/3 of IA Corn and SB areas.Severe drought in Southern MN and NW 1/3 of IA Corn and SB areas.

16. Cost of Production Record High in �11� Forecast Near That in 2012 Cost of production skyrocketed from 2007 forward.Cost of production skyrocketed from 2007 forward.

17. Hog/Pork Supplies

18. Dec H&P Report: Continued slow growth . . . All Hogs & Pigs � 101.5% Kept for Breeding � 100.4%All Hogs & Pigs � 101.5% Kept for Breeding � 100.4%

19. Litter size growth 2.0% over past 4 years Phenomenal productivity improvements since 2006.Phenomenal productivity improvements since 2006.

20. Carcass weights are almost as large as live weights when I got out of college.Carcass weights are almost as large as live weights when I got out of college.

21. Packer margins under pressure Margins have weakened substantially from year ago but, with modest expansion and productivity improvements, will packer capacity be tested and margins improve later in 2012?Margins have weakened substantially from year ago but, with modest expansion and productivity improvements, will packer capacity be tested and margins improve later in 2012?

22. Industry Financial Condition

23. It took 8 years for the industry to recover the losses from 98 � 99. After the losses of 2008 and 2009, the producers have still not returned to the point they were at the end of 97.It took 8 years for the industry to recover the losses from 98 � 99. After the losses of 2008 and 2009, the producers have still not returned to the point they were at the end of 97.

24. Volatile Markets High feed costs have been a huge challenge for producers Continued tight supplies increase price and availability risks Increased production/pork supplies in 2012 Will demand hold? � economy, consumers Fall 2012 slaughter capacity?

25. Pork Price Volatility in 2011 Pork prices in many of our major customer countries are more volatile than the U.S.Pork prices in many of our major customer countries are more volatile than the U.S.

26. Risks The U.S. economy World economy $US vs. other currencies 2012 corn and soybean crops Oil prices � corn is hitched to it

27. Risks HSUS - McDonald�s, state activities RFS waiver/reduction plan Export disruption Foreign animal disease � unlikely but HUGE impact Another �swine flu� type scare

28. Conclusion Little incentive / interest in expansion Continued incremental growth Producers focused on productivity improvements Industry still recovering from 98-99 and 08-09 Lender liquidity � capital available if interest / ability to expand Increased use of hedging / risk management

29. Thanks to: Steve R. Meyer, Ph.D. Paragon Economics, Inc. Erin Daley Borror, U.S. Meat Export Federation