Supply, Demand and How to Make Money in the ... - FarmEcon LLC

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Oct 28, 2013 (4 years and 16 days ago)

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FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

State of The
Agricultural Economy

Dr. Thomas E. Elam

President

FarmEcon LLC

November 8, 2011

1

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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.

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Declining real costs relative to average goods
and services

Efficiency increases

Gains in real incomes


Combined = Production expansion incentives

Why has protein consumption and
feed volume grown?

3

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

More Spending = More Meat, Globally and Locally

On average +10% Spending = +9% more meat

Sources:
Consumer Spending:
World
Bank;
United Nations. Meat Production: UN/FAO

$
1 trillion
increase in spending =
9
mmt

more meat produced

R
2

=
0.9988

4

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Corn Prices Matter Too: Real Price Index

5

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Corn Prices and Income Growth

6

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Macroeconomic Headlines

Real U.S. GDP growth is 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

7

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Total (U6) unemployment rate %

U1 + marginally attached + discouraged potential workers

Does not include those who have totally given up looking for work

8

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Labor force participation rate, %

9

Employed + unemployed divided by adult population

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Employed as % of the Population

10

Employed divided by total population

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Work = consumer income = spending =
MEAT DEMAND

Weak 2011/12 protein demand increase

Turkey demand may be an exception

2010/12 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

Why you need to care…

11

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Informa Model Turkey Margins

12

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Informa Model Broiler Margins

13

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Farrow
-
Finish Returns, IA State Budget

14

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Yearling Steer Returns, IA State Budget

15

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

We may have reached “peak meat”

Certain for the next 2
-
3 years

Likely for the next decade

Feed cost volatility here to stay

Low carryover stocks

Feed costs now linked to energy prices

The future looks like the recent past

16

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

185
190
195
200
205
210
215
220
225
2005
2006
2007
2008
2009
2010
2011f
2012f
Pounds/Person

2006
-
2012 Per Capita Total Meat
Consumption: 10% Reduction

17


Recession and slow recovery


Lower availability driving pricing up


Root causes:


Higher Costs


Lower Production


Export growth

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

CHICKEN/TURKEY/EGG

OUTLOOK

2011/12

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FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

What are the Underlying Issues?

19

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Chicken Cold Storage 2007
-
2011

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Turkey Cold Storage 2007
-
2011

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

UB Turkey Egg Sets and Placements

4 Week YoY %Change Moving Averages

Feed Costs Spike

22

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

U.S. Broiler Chicken Egg Sets and Placements

3 Week YoY %Change Moving Averages

Feed Costs Spike

23

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

U.S. Cumulative Potential Egg
-
Type Layer Placements

Relative to Current Supply Flocks 7
-
18 Months Earlier

Feed Costs Spike

24

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Poultry Feed Costs


New Records!

25

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Turkey supply in line with demand

Excellent exports have helped

Prices have responded to lower domestic supply

Outlook is for positive margins through mid
-
2012

Chicken supply still too high

Lack of export growth has hurt

Cutbacks just starting to take hold

Egg supply reductions will help by 2012

Supply Reductions are Helping

26

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Turkey Price Improvement Has
Outpaced Supply Reduction

27

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Chicken Wholesale Price Scatter

28

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

29

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Broiler Feed Cost Outlook

Includes transportation basis
for
corn, and soybean meal

Based
on
1.9:1
FCR,
55%
corn,
35%
SBM,
10% Other

30

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

2012 Turkey Forecast Summary

(Production, Use and Stocks in Million Pounds)

31

2000
-
2008 Average: 42.7¢

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

2012 Broiler Forecast Summary

(Production, Use and Stocks in Million Pounds)

32

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

2012 Egg Industry Forecast

33

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

34

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Price outlook driven by exports and production

Exports will remain strong

Competitor countries declining exports

Global beef demand growing

U.S. production will decline in 2012
-
13

Southwest drought and herd reductions

Higher feed costs

Beef cattle outlook

35

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Major Beef Exporter Volumes:


Only U.S./India Growing

36

Source: USDA/FAS Production, Supply, Demand database

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

2012 Cattle Forecast

37

Record high prices, lowest production since 2005, lowest per

capita consumption in records that go back to 1970!



FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

PORK OUTLOOK

2011/12

38

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

“Steady as she goes” theme for 2012

Recent USDA numbers show no swings
coming in sow numbers or pig crop

Export demand seen growing in 2012

Prices likely to set new records, but not by
much

Remember though, VOLATILITY!

Pork Summary

39

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

2012 Pork Forecast

40

Record high prices, higher production, record exports and
second lowest per capita consumption in records that go
back to 1970! Prior low was 42.9 pounds in 1975.



FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

2012 Feed Cost Outlook


41

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Something Changed!

42

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Correlations: Monthly Average Prices, Omaha

#2 Yellow Corn; Petroleum Blender Gasoline and Ethanol


43

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Regression for Season Average Corn Price,
Feedgrain Crops of 1990
-
2009


R
2

= 89%

Forecast 2010 crop price was $5.47/bushel, above the USDA $5.18 average

Forecast 2011 crop price is $6.46/bushel, vs. the USDA $6.20
-
$7.20 range

Lower stocks, higher ethanol prices, and ethanol production all important drivers

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. The next year

l
ooks like more of the same at this point.

44

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Feedgrains Balance

* September 1 Crop Year

45

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

* September 1 Crop Year

Soybean Outlook Detail to
2011/2012*

46

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Corn/SBM/DDGS Feeding

47

Lower feed availability & higher protein

exports are squeezing consumption

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

If Ethanol Tax Credit Goes Away?

48

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

RFS is the
Real

Policy Issue

49

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

Summary:

Any scenario has large up and downside risk

Realistic potential exists for:

$9+ corn

$6 corn

$450 soymeal

$300 soymeal

Prices will be volatile and will depend

Macroeconomics

Crop size (U.S. and global)

Energy prices

Potential biofuel policy changes

50

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

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

Likely winners and losers

51

FarmEcon LLC

A source of information on global
farming and food systems

Thomas E. Elam, PhD

President

U.S. Meat Protein Shares Reflect Long Term
Market Competition

Sources: USDA/ERS

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