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Food Cost Inflation

Good afternoon, welcome to today’s webinar . . .

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Food Cost Inflation

Brad HolcombSenior Director, Business DevelopmentTyson Foods, Inc.

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Protein Production Drivers

• Contract grower

• Feed conversion

• 1.92 : 1 

• 3.7 bushels corn to produce 100 lbs boneless skinless meat

• Independent producer

• Feed conversion• 3.5 : 1 

• Approximately 8 bushels corn to produce 100 lbs boneless skinless meat

• Independent feedlot

• Feed conversion• 7‐9 : 1 

• Yearling (750#)      fed beef (300 #) 11 bushels corn to produce 100 lbs boneless fed beef

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Driving Influences on Grain

• Insistence to lessen dependency on foreign oil

• Government tax incentive for ethanol and alternative fuel

• Stable acreage against shift in demand (36% of 2010 US corn crop went to ethanol production, expect 40%+ this year)

• Demand shift for corn will drive consumer goods upward in exchange for reduced future fuel costs

• Russian wheat shortage will drive all grain markets higher

• Global demand for protein growing

• Weak US Dollar driving demand for American agricultural products

• Financial speculation

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Grain News

• Record rainfall in the Midwest and South has severely hampered corn planting. If farmers can’t plant soon, they will plant soy beans instead.

• As of May 22nd 79% of US corn crop was planted versus 92% last year and versus 87% for the 5 year average. As of May 15th

21% of the crop had emerged versus 53% last year and versus 39% as a 5 year average.

• Livestock producers substituting wheat for corn in feed.

• Some experts believe that feed mills will “run out” of corn this summer.

• One poultry producer was forced to stop feeding their birds.

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Grain Prices May 24, 2011

• Corn $7.33/BU vs. last year $3.70. 98%Increase

• Soy meal $358/Ton vs. last year $265. 35%Increase

• Wheat $7.80/BU vs. last year $4.87. 60%Increase

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Corn Prices(

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Impact of the Corn Market

2006 = $2.30

Current = $7.33

June 2010 = $3.60

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Impact of the Corn Market

Conversion Table: for Chicken

• Every $.30/bu. change in corn = $.01 change in live cost (1)

• Market Change $3.60/bu. to $7.33/bu. = $.1233 change to live cost

• Conversion of live to dressed whole bird = $.1393/lb

(whole bird value)

• Every $.10/bu. change in corn = $.015/lb. in B/S Breast cost

• Whole bird value impact of corn $.1393/lb.

• B/S breast impact of corn $0.56/lb.

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Prices have spiked since mid-2010. On Apr 4, 2011, old crop prices were the highest on record eclipsing 2008 highs.

Corn Futures History

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Wheat, Soy Meal and Cotton Futures

Recent periods have experienced tremendous price volatility. How will the acres be planned for 2011?

Wheat Futures* Soymeal Futures*

Cotton Futures*

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Livestock Feed

• US ethanol production has increased rapidly since the implementation of energy independent policy in 2005

• The share of corn grinded for ethanol surged from only 5% in 1990’s to now at about 40%

• The share of corn usage for feed gradually declined from around 55% - 60% in the last two decades to now only 40%

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Livestock Feed, Cont.

• This has caused tightened stocks, high corn prices, world food inflation, and political unrest in developing nations

• The ethanol industry has started to get less support from the Congress; on 2/19/11, the House voted to block the EPA from using federal money to cover the cost of raising ethanol in gasoline from 10% to 15%

• The extension of ethanol tax credit and import tariff will be the next challenge.

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Acreage Battle

• 2010/11 US corn carryout near 1995/96’s record low stocks to use ratio.

• Ethanol corn grind record large.

• Feed/residual use inflated by early harvest.

• USDA reported planting intentions for 2011 corn acres at 92.2 million on March 31.

• Modest stock building in 2010/11 leaves little room for supply or demand shock.

US Corn Supply and Demand(Million Bushels/Million Acres)

2008/09 2009/10 2010/11 2011/12USDA Informa USDA Informa

Planted Acres 86.0 86.4 88.2 88.2 92.0 92.2Harvested Acres 78.6 79.5 81.4 81.4 84.9 84.8Yield 153.9 164.7 152.8 152.8 161.7 163.7Carryin 1,624 1,673 1,708 1,708 675 575Production 12,092 13,092 12,447 12,447 13,730 13,876 Total Supply 13,729 14,774 14,175 14,175 14,425 14,466Feed & Residual 5,182 5,140 5,200 5,200 5,150 5,200Food/Seed/Ind 5,025 5,939 6,350 6,450 6,410 6,510 Ethanol for Fuel 3,709 4,568 4,950 5,050 5,000 5,100Exports 1,849 1,987 1,950 1,950 2,000 1,925 Total Use 12,056 13,066 13,500 13,600 13,560 13,635Carryout 1,673 1,708 675 575 865 831Stocks/Use 13.9% 13.1% 5.0% 4.2% 6.4% 6.1%Futures ($/Bu.) 3.93 3.72 6.55 6.30Farm Price ($/Bu.) 4.06 3.55 5.15-5.65 5.50 5.60 5.85

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Are There Enough Acres?

Big Conclusion:United States:• 40% of world corn production• 22% of world corn acres• 35% of world bean production• 30% of world bean acres• 9% of world wheat production

United States Exports Meat

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Domestic Availability of Protein

Domestic prices are dependent on “Domestic Availability” i.e. the supply available to consume domestically.

Domestic Availability = Production

+ Imports

- Exports

+ Freezer Inventory

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Total Domestic Meat Availability Per Capita

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Protein Supply Chain Timelines

Pullet placed

Birth to breeding

Birth to breeding

Hogs = 19 months

Broilers = 9 months

Cattle = 39 months

Pullet Lay

Hatch House

Birth to Breeding

Birth to Breeding

Gestation

Gestation

Wean Finish

Wean FeedlotStocker

Significant lead time to increase production

5 months 1.5 .75 2

8 months 14 2 4.5

13 months 10 8 3 4.5

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Beef Cow Inventory

The decline in the beef cow herd has largely been driven by the steady increase in animal weights. With the added lbs, fewer individual animals are needed to maintain beef production levels. Consequently, fewer cows are needed to produce calves. Since 2008, the decline in the beef cow herd accelerated due to increased costs of grains which have discouraged breeding , as well as the strong price levels being paid for slaughter cows. The beef cow herd reported as of January 1, 2011 showed a continued decline in the herd, with the reported head being the lowest on record at 30.865 million head.

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Dairy Cow Inventory

Similarly, the dairy cow herd has declined over the last few decades due to steady gains in productivity, thereby requiring fewer animals to maintain needed milk production levels. The dairy cow herd reported as of January 1, 2011 showed a modest year over year increase of 0.7% for the dairy herd.

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Beef and Dairy Cow Inventory

(Side by Side comparison)

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US Calf Crop

Lowest Level in 60 Years!

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U.S. and Canada Swine Breeding Herds

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Cold Storage: Chicken, Beef, Pork

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Chicken Domestic Availability 2011

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Chicken Market Prices

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Chicken Market Prices

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Beef Domestic Availability 2011

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Beef Market Prices

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Beef Market Prices

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Pork Domestic Availability 2011

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Pork Market Prices

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Pork Market Prices

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Pork Market Prices

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Summary of Protein Supply and Demand

• Beef supply will be lower

• Pork supply will be lower

• Demand for protein will shift to available supply

• Revised industry forecast of 2.2% increase chicken supply. Not sufficient to offset beef and pork declines.

• Input costs will be higher

• Protein pricing must shift higher on input costs

• Less inventory, less protein production, higher grain inputs and steady demand point toward higher market prices in 2011

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Transportation Cost

• Diesel is currently $3.99/gallon vs. last year $3.09/gallon. An increase of $0.90/gallon or 29%. Experts expect diesel prices could top $5.00/gallon this summer. Unleaded gasoline national average is $3.83/gallon vs. last year $2.79/gallon. An increase of $1.04/gallon or 37%.

• Crude oil price is currently $99.47/barrel vs. last year $74.54/barrel. An increase of $24.93/barrel or 33%.

• New Department of Transportation driver regulations will force companies to add more trucks and drivers to carry the same weight over the same miles. Increased demand for trucks and drivers will increase cost.

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Cooking Oil Costs March 2010 vs. March 2011

• Soybean oil $0.39 vs. $0.56. Increase of $0.17 or 44%

• Corn & Salad oil $0.48 vs. $0.65. Increase of $0.17 or 35%

• Soy Salad oil $0.41 vs. $0.59. Increase of $0.18 or 44%

• Corn oil $0.45 vs. $0.62. Increase of $0.17 or 38%

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• US needs to stop subsidizing ethanol production to lower grain prices.

• Unrest in the Middle East will continue to drive crude oil prices higher.

• Higher gas and food prices reduce disposal income slowing economic recovery. (Experts believe we will see $4.25 gas this summer and possibly $5 by summer 2012)

• Droughts in Australia and Russia last year affected world wheat prices.

• Japanese earthquake and nuclear crisis.

• Increasing middle class in China and India driving increased demand for protein, steel, oil, etc.

World Economic Outlook

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Conclusion Protein Supplies (Domestic Availability)

•Have declined 7% in 3 years and will likely decrease going forward!•Meat exports have continued to grow and will likely stay on the same trend

Decrease in Supplies•Driven by Producer Profitability • Slow lag out, Slow lag in

Feed Costs (Costs to Produce)•Main driver in US Protein Supply/Demand fundamentals 

Feed Costs Inflation •40% US Corn Crop to Ethanol• 15% US World Corn Crop to Ethanol• Competing Acres 

Food Inflation has Accelerated•Creates more margin shifts•Disruption supply chain 

Government Policies have profound influence on protein/feed/food Supply/Demand Fundamentals

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Food Cost Inflation

Thank You!Contact Information:

brad.holcomb@tyson.commeredith.austin@tyson.com

(479) 290 4196

lmason@nacufs.org(517) 332-2494