Turkey and Protein Sector Outlook 2010

1. Turkey and Protein Sector Outlook 2010 Dr. Thomas E. Elam President FarmEcon LLC February 11, 2010

2. Disequilibrium: A situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term byproduct of a change in variable factors or a result of long-term structural imbalances.

3. Protein markets in adjustment • Two major disequilibrium drivers • Higher feed costs still not fully reflected in protein prices • 2008/2009 recession • Both imply lower protein production • Poultry has made adjustments • Red meats & dairy slower to respond • Those who adjusted have been rewarded • Those who have not are still in pain

4. Feed cost pressures continue 1/22/2010

5. Why the higher feed costs? • Reduced global grain stocks • Support from subsidized ethanol demand • Historically high crude oil prices • High ethanol prices • Increases value of corn • Corn pulls other feeds up • Dollar devaluation

6. Some key correlations

7. Corn/gasoline price relationship(Through 1/20/2010)

8. Protein sector profitability has suffered – Product prices relative to feed costs

9. Estimated profit/loss per unit Sources: Fed Cattle: Iowa State fed yearling budget Market Hogs: Iowa State farrow-finish budget Broilers: Informa Economics broiler margin model Turkeys: Informa Economics turkey margin model Dairy: Penn State milk margin model 2010 Forecast: FarmEcon LLC

10. Estimated 2009 total profit/loss Profit/Loss for primary production only, does not include value added operations past RTC, carcass or raw milk

11. Current breakevens and prices Turkey and broiler price is weighted average of whole birds and parts

12. What does this tell us? • 2010 red meat production will decline • Milk production likely to decline • Broiler production likely to grow • Turkey production about the same • Wholesale prices for all likely to increase • Red meat and dairy more than poultry • Turkey more than broilers

13. 2010 Protein Production Outlook Sources: 2005-2009, USDA/FAS PS&D database; 2010, FarmEcon forecast)

14. Per Capita Meat Disappearance First 3 year decline since 1920s

15. Factors in the per capita numbers • Production declines, lack of profitability • Exports • Strong 2005-2008 growth • 2009 decline • 2010 (forecast) to increase • 2009 frozen stocks reduction – not to be repeated in 2010 • 1%/year population increase

16. 2010 Turkey sector outlook

17. 2009 Outlook(Feb, 2009 NTF Presentation) Summary: Declining production sets the stage for higher prices, feed costs likely to be less volatile, but export and U.S. demand remain a huge question mark.

18. 2010 Turkey Outlook Overview • Surplus cold storage stocks worked down • Production cuts helped prices late in 2009 • Q1: production 2-4% lower than 2009 • Q2: production +1 to -2% compared to 2009 • Q3/Q4: production likely to increase 1-3% • Exports expected to grow modestly • Lower total competing meat supply • More stable feed costs (?)

19. Inventories = production/use balance Record Inventory Reduction! Record Whole Bird Use!

20. FarmEcon Model: RTC Value Per Pound and Feed Costs Based on FarmEcon LLC model of 70% cut-up and 30% whole bird marketing mix. Prices are USDA/AMS. Does not include value-added products.

21. Exports Lose the Gains of 2008 Jan.-Nov. Source: U.S. Census Exports, converted to RTC weight by USDA/FAS

22. Export Value Drops With Volume Jan.-Nov. Source: U.S. Census Exports, declared value

23. U.S. Market RTC Turkey Consumption

24. RTC Turkey Consumption Per Capita Note the similar patterns: 2000 to 2004 and 2006 to 2010 Unprofitable Profitable Turkeys are generally profitable at 17 pounds per capitaor less - and not profitable at 17.5 pounds or more.

25. 2009 Recession Effect: Turkeyprices down despite reduced consumption

26. Why under 17 pounds in 2010? • Production down slightly, entire reduction in Q1/Q2 • Limited potential to reduce inventory again • Limited downside on exports vs. 2009 • Result is 16.9 pounds per capita, down 3%

27. Weekly UB Poult Placements Point to Lower Jan-May 2010 Production Placements through week of Jan. 20, 2010

28. 2010 Turkey Forecast Detail(Production, Use and Stocks in Million Pounds)

29. Feed Cost Outlook2009/2010

30. Mandated Corn-based Ethanol Production And Corn Required

31. Corn/gasoline price relationship(Through 1/20/2010)

32. Corn Stocks/Price Curve Shifts Up

33. Corn/Meal Price Outlook – 2009/20010 Corn prices remain at $3.30-$4.25, meal at $275-325, through May-June* Weather and acres drive prices after that Ethanol production will grow due to RFS 2010 RFS is 12 bg vs. 10.5 for 2009 Ethanol use mandate = ethanol price mandate Volatile energy prices are critical to outlook More volatility in feed ingredients likely *Central Illinois cash prices

34. Corn prices – average and variability Note increases in both average price and volatility!

35. Turkey Feed Cost Outlook – 2010 Added $0.60/bu. for corn and $25/ton for soybean transportation and handling Based on 2.6:1 FCR, 70% corn, 18% SBM, 5% meat and bone meal, 6% grease diet

36. 2010 Turkey Outlook Summary: • The 2009 “Double-Whammy” • Lower production was required for higher prices to cover higher feed costs • Also needed to reduce inventories • Production down more than needed in long run • 2010: Still adjusting to higher feed costs, and… • Stocks issues have been addressed • 2010 outlook for improved demand and prices • Slightly lower feed costs • Cost volatility lower, but an ongoing issue • RTC production should be close to 2009 • Consumption will drop to about 17 pounds

37. Questions? Comments?