PPIC/RAC – September 2010

1. PPIC/RAC – September 2010 Ethanol Update, Pork Industry Economic Outlook, GIPSA Rule

2. ETHANOL IS STILL A BIG DEAL FOR LIVESTOCK AND POULTRY PRODUCERS! AND FINALLY – MEAT AND POULTRY CONSUMERS!

3. 210 plants, capacity of 14.18 bil. gal. • Cellulosic: 16.9 mil. gal. – 1% of the total • 346 mil. gal. still under construction • Full output would use 5.05 bil. bu. of corn

4. Ethanol plants are in the black – for now Nearby corn: $4.83/bu. Ethanol: $2.15/gal. Nat. Gas: $4.02/mmBtu

5. Reason: Big recovery in ethanol price

6. Why the rally? -- Seasonal? Octane?

7. RFS is 12 bil. gal. this year, 12.6 in 2011 . . . . . . Slower growth (600 mil./yr.) thru 2015

8. Ethanol now uses over 30% of corn supply

9. Corn above ethanol+DDGS rising SLOWLY

10. Important policy issues this fall/winter • Renewal of the BTC and Import Tariff • Both are questionable • Could lower BTC • Must keep it close to Tariff or Brazil, et. al. will almost surely challenge in WTO • 15% blend allowance • Or 12%? • May approve for 2007 and later models – but what about logistics? Liability?

11. Sept WASDE: Lowest S/U ratio since ‘96

12. Record-large crop and record-high price!

13. Cash corn is now above the “new” range . . . . . . And harvest has barely begun!

14. We have survived the tight stocks . . . . . SBM futures now in UPPER half of new range

15. Result: Highest feed index since early ‘09

16. Average costs for ‘11 > $70/cwt carcass

17. Consider BE costs of new price ranges • “New” range for corn $3.10 to $4.20 and “new” range for SBM is $250 to $350 • $3.10 corn and $250 SBM = $61.62/cwt • $3.65 corn and $300 SBM = $67.15/cwt • $4.20 corn and $350 SBM = $72.52/cwt • Since 11/1/2007: • SBM has been >$300/ton 106 of 148 weeks! • Corn has been >$3.65/bu. 80 of 148 weeks! • <$3.65 and <$300 look like good buys

18. Competing Meats -- Briefly • Beef production is falling • Smallest calf crop since 1950 • Smallest beef cow herd since 1962 • Weights will not likely increase given $5 corn • I expect record-high (‘03??) cutout values in 2011 • Chicken output is growing again • SBM is providing a relative advantage • Composite is still near record-high ~ $85 • Breasts $180, Leg qtrs >$40, Wings >$120

19. PORK AND HOG OUTLOOK

20. Key Issues for rest of 2010 and 2011: • Feed costs – have reduced profit outlook by over 50% since June • Q4 hog numbers – Sept H&P report says there are few hogs “backed up” • Expansion • Some evidence that we added sows but the BH was lower in Sept than in June • Limiting factor: Risk – feed and rules • Demand • Domestic – soft past 12 mos. but improving • Exports – July was disappointing

21. Financial positions are improving . . . . . . Futures suggest 50% loss recovery by July

22. Actual slghtr has been -1.9% from June H&P . . . And -5.4% from ’09 since June 1 Since 7/17: -336k head vs. Jun H&P

23. September Hogs and Pigs Report

24. Supplies slowly getting back to yr/yr levels

25. Weights are NOT GROWING yet implying . . . . . We are going deep into supply – new corn?

26. Production declines early in ‘10 & recent. . . . . . Yr/yr change is getting MORE negative

27. Freezer stocks are very tight – esp. pork!

28. BIG cutout rally – 2 NEW RECORD HIGHS . . . Will the normal seasonal prevail?

29. Hog price rally was smaller . . . . . . But could keep prices above $70 this fall

30. Exports +18.6% in May, +22% in June . . . . . . But -7.1% in July, still +5.1%YTD

31. Japan fell sharply in July from record highs . . . . .Mexico is still strong, Russia up 4X in May

32. All demand indexes are lower for 12 mos. . . . . . . July indexes were better & the trend is up! July monthly index vs. ‘09: Pork – +1.26% Chick – +3.92% Beef – +3.67%

33. Reason: Retail prices are finally rising . . . . . . At or near record highs and more to come!

34. Sow slaughter is lower – down 10-20% . . . . . . But slaughter surged last summer

35. Slaughter of US sows is now trailing ’09 . . . . . . YTD ’10 = 28.8% vs. 29.6% in ‘09

36. YTD gilt slaughter: -0.2% vs. ’09, -0.3% vs. ‘08

37. Futures: Profits of ~$12.03/hdfor all of ’10 . . . . . . ~ $7.08 for rest of ’10, but only $4.15in ‘11

38. Slaughter forecasts based on Sept H&P . . . . . . Growing supplies through 2011

39. Price forecasts

40. Short-term risks to consider: • Feed costs – Yields? Harvested acres? Exports? What about NEXT SPRING AND SUMMER? • Domestic demand – strengthening but what if we have a double-dip recession? • Appears that BH is not growing but how large will productivity growth be? • Any of a host of goofy occurrences – remember H1N1?

41. PROPOSED GIPSA RULE

42. Addresses 5 requirements of 2008 Farm Bill : • Criteria to be considered in deciding whether an undue or unreasonable preference or advantage has been given. • Conditions constituting reasonable notice of suspension of delivery of birds • Whether a requirement of additional capital investments are a violation of the Act • Whether a reasonable time period has been given to remedy a breach of contract • Arbitration opt-out and “fair” arbitration

43. 1. Undue/Unreasonable Preference Contract terms/prices based on number, volume, etc. must be offered to all individuals and groups that can meet terms Premiums for quality, time and prod methods must not be discriminatory against prods or groups Information regarding procurement methods must be disclosed to all when it is disclosed to one or more

44. 3. Capital investments as unfair practice Can grower decide against it? Is it the result o f coercion or threats? Does packer plan to reduce or stop operations within 12 months? Are some required while others are not? Age of recent upgrades or investments Can investment be expected to be recouped in a reasonable time period? Is reasonable time give to implement?

45. Definition of “capital investment” • Investment of $25,000 or more for equip-ment, goods, prof services, labor, interest • Initial or additional • “Additional capital investment” defn. • The term does NOT include maintenance or repair costs • Provides no guidance on differentiating maintenance from repair from capital investment

46. 4. Reasonable time to remedy a breach • Packer/contractor must provide: • Written notice upon initial discovery • Description and time of the act or omission • How the breach can be satisfactorily remedied • Reasonable deadline to remedy • Failure to provide notification within 90 days waives packer’s/contractor’s rights to terminate the contract due to the breach

47. 5. Fair arbitration process, opt-out choice • Clearly disclose • all costs to be paid by grower/producer • steps of the process and limitations on rights and remedies • Requires • impartial neutrals as arbitrators • Grower/producers be given opportunity to engage in “reasonable discovery process” • A reasoned, written opinion provided to all • Chance to opt out of binding arbitration

48. GIPSA went well beyond the Farm Bill • GIPSA has the authority to write rules to necessary to enforce the Act – Are these “necessary”? • Competitive injury – conduct that distorts competition in the market channel or marketplace. • What is the competitive “norm”? • Significance of any deviation? • Gains (such as economies of scale) to offset?

49. Likelihood of competitive injury • Packer/contractor raising rivals’ costs • Foreclosing competition through • exclusive dealing • misusing market power to restrain competi-tion • Depressing prices paid below market value • Impairing a producer’s/grower’s ability to: • Compete with other producers/growers • Receive the reasonable expected full economic value from a market transaction

50. Records and justification requirement • Requires written records that provide “justification” for any prices or contract terms that deviate from standard prices or terms • What is “standard”? • Apparently ANY deviation • No time period for records retention • No idea of what an acceptable “justification” may be