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Steve R. Meyer, Ph.D. Paragon Economics, Inc.

Pig Ski Conference – February 2009

Economic Outlook: Heidi Klum or The Witch of the West?

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COMPETITORS

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Current market shares of broiler companies

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’08 broiler slaughter: DOWN 0.7% . . . . . . On equal number of weeks! Q4: -4.7%

YTD ’09: -6%

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Higher weights offset some of the reduction . . . production still grew – but only 1.2% in ‘08

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But HUGE cutbacks are on the way w/ sets . . . . . . down 2.9% for ’08, 7.6% for Q4-08, 7.1% YTD

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Prices ARE better this year . . . . . . but are not good enough to cover costs

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Signs of longer-term reductions . . .

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Dec 2008 COF was 6.2% lower than in ’07 . . . . . . and COF was yr/yr lower from July on in ‘08

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Jan 1 COF was down 7.1% from Jan 2007

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But the July Cattle Inventory said . . . . . . there are plenty of cattle still out there

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January Cattle report due out tomorrow . . . . . . still a lot of feeder cattle vs. placements

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Delayed placements due to feed costs . . . . . . mean larger cattle in and out of lots

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Longer term – fewer beef cows . . . . . . Canadian cows are ~30% of this increase

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FEED PRICES AND COSTS

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Ethanol producers are hurting – Ohhhhhh.

“The ethanol industry is on its back despite the billions of dollars they have gotten in taxpayer assistance AND a guaranteed market.”

Amy Myers Jaffe Energy Analyst Rice University

In the New York Times, February 12

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Forget cellulosic. Will the RFS be met in ’09?

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And now E-10 will cost MORE than gasoline?

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But these guys are STILL DANGEROUS!

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Corn and oil correlation is breaking down . . . . . Speculative? Necessary for acres?

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Corn prices have likely made a bottom . . . . . . Future a function of soybeans, weather

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Corn must keep up with beans . . . . . . And is not doing very well at the moment

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Weekly chart: Now in ’06-’07 trading range. . . . . . But $3 to $4.50 is VERY wide, historically

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SBM futures: Confirmed double bottom . . . . . . Now a function of Brazil, Arg, U.S. weather

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Feed costs have risen since early December

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DEMAND

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Demand indexes are down for all meats . . . . . . And ALL have had a tough 3 years

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An alternate demand measure: RPCE

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Monthly RPCE clearly shows ’08 problem . . . . . . retail price did not make up for exports

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Huge growth in pork exports -- +49.7% in ‘08 . . . Nov & Dec: up only 0.5% & 3.2% from ‘07

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Exports to China are down 80% from June. . . . . . other markets are holding pretty well

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Impact 1: Exports pulled up low value cuts . . . but we are back to “normal” now

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Impact 2: Record high by-product values . . . but those are returning to “normal”, too

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How will a stronger $US impact exports? . . . $US is still WEAK in historic terms

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HOG SUPPLIES

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Profits plunged again in Nov & Dec . . . . . . To -$45 & -$40, -$27.86/hd in January

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2008 will be the second worst year EVER . . . . . . At $-21.78, second only to 1998

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Producer wealth is now at ’97 and ’06 levels

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December H&P Report: A hodge-podge

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Lower hog supplies are on the way . . . . . . with significant reductions in Q2 & Q3

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Fewer Canadian market hogs -- MCOOL & $C . . . down 76% year-to-date

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FP imports: 6.7 mil in ’08, 5 to 5.2 mil in ’09?

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MCOOL: What the (*&^)*(#@ is going on?   Government rules were pretty well

understood – until the final rule and Secretary Vilsack’s muddying the waters! -  Big concern: Consumers Union and Food &

Water Watch were cited in stories on “voluntary” rules

  The final rule provides LOADS of flexibility – probably too much for MHs

  The final rule changes came from the office of U.S. Trade Rep – avoid trade war

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The ultimate judge will be the consumer   Wild card: Consumer reaction to multi-

country label -  Will “Canada” on label be a problem? -  “Mexico”, “Uruguay”, etc. may be – beef

  My expectation: Consumer will NOT dis-criminate against “U.S & Canada” label -  Canadian feeders/weaners will be wanted -  But will they be available?

» Shrinking Canadian herd » Renewal of Canadian feeding -- Hytek

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Breeding herds are falling rapidly . . . . . . But the incentives have changed

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Oct Canada-U.S. BH was smallest since 1986

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Sow slaughter slowed markedly in late ‘08

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Quarterly slaughter forecasts . . .

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Price forecasts based on Dec H&P . . . . . . w/ futures lower re. cash forecasts

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2009 prices are not “BAD” hog prices!!! . . . but they’ve fallen $5 since Jan 1

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2009: Futures prices are back to breakeven

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July & Aug: About 50% of seasonal rally . . . . . . comes after January – mid to upper $80s

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Supply and price expectations   HIGHER meat prices LED by chicken this

winter – Ethanol’s impact on food is finally here!

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Retail meat prices may flatten in short run . . . . . but they still must rise to cover all costs!

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Supply and price expectations   HIGHER meat prices LED by chicken this

winter   Hog prices – GOOD but not good enough.

Profits Q2 and Q3, losses Q1 and Q4   More breeding herd reduction – Canada’s

is slowing but will U.S. cut back more?   Weights constant to growing slightly   Productivity is increasing sharply -- Will

the cutbacks be enough to keep the industry profitable?

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Risks   Demand, both domestic and international, given

the financial crisis   Exports – Declining growth rate is virtually

certain but will they actually fall? -  Yes: Exchange rates – esp. Mexico -  No: Output reductions by competitors (mainly EU) -  Wild card: China?

  Productivity growth may out-strip breeding herd/flock reductions

  A new round of cost increases in ’09 -- bidding for acres? weather?

  MCOOL – impacts?

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CME’s Daily Livestock Report www.dailylivestockreport.com

National Hog Farmer’s North American Preview

www.nationalhogfarmer.com

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Price forecasts based on Dec H&P . . . . . . w/ futures lower re. cash forecasts