Livestock Outlook: Imbalances in the Market

FarmEcon LLCA source of information on global farming and food systems

Thomas E. Elam, PhDPresident

Livestock Outlook:Imbalances in the Market

Dr. Thomas E. ElamPresidentFarmEcon LLCMarch 1, 2008

FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident

First, we need to make sure we are all on the same level of reading comprehension!


First, we need to make sure we are all on the same level of reading comprehension!


What is this data?


2008 OUTLOOKBottom line: A deteriorating balance of higher costs, increasing production, and a more difficult demand growth scenario.


Like 1972-76?

Unprecedented increase in grain demandFood price inflation becomes an issueHuge imbalances in the ag economyFarm income/land prices explodeBut, this time around:

Different cause – biofuels subsidiesNo reserve acres


Food price inflation rate

0%

1%

2%

3%

4%

5%

6%

% C

hang

e, P

rior

Yea

r

Beef & pork price increases yet to come


Imbalances

Feed costs are headed higher, personal income growth slowing

But total meat production increasing

Corn acres likely to dropBut ethanol capacity up 40-50% by year end

Dollar not likely to strengthenGrain export demand likely to increase


USDA total meat production fcst.

80,000

82,000

84,000

86,000

88,000

90,000

92,000

94,000

2002 2003 2004 2005 2006 2007 2008f

Mill

. Lb

s.

+1.8%

+2.4%


Corn available for feed use

4,800

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

Mill

ion

Bus

hels


Light at the end of the tunnel? Yes!

Hint: It’s not the sun (or the moon)Profitability for hogs and cattle bad, and getting worse2008-09 macro outlook not goodOnly apparent solution = less meatHow much less and how soon?


Hogs

Production seems headed 3-5% higherCosts will continue to increaseAlready losing $35+/headWith current outlook, losses increaseOnly question, when does liquidation really get underway?


Paragon Economics, 1-24-08


Comm. Pork vs. CME Lean

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

% C

hang

e

3 Mo. Trailing MA Comm. Prod. 3 Mo. Trailing MA CME Lean Hogs


Comm. Pork vs. CME Lean

-

500

1,000

1,500

2,000

2,500

Mill

. Lb

s, C

omm

. P

rod.

$-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$/C

WT

CM

E L

ean

3 Mo. Trailing MA Comm. Prod. 3 Mo. Trailing MA CME Lean Hogs

Target for profitability


Farrow/finish net returns/head(Iowa State model, 7/08 FarmEcon fcst.)

-$50.00

-$40.00

-$30.00

-$20.00

-$10.00

$0.00

$10.00

$20.00

$30.00

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

$/H

ea

d


What needs to happen

Pork production needs to drop to about 20 to 20.5 billion pounds (-10%)Forecasts for 2008 up 3-4%:

USDA = 23.065Informa = 22.852Plain and Grimes = ~22.9

No signs of major liquidation (yet)


Cattle outlook not any better

Record-large on-feed (12,097,000)Feedlot losses mounting, more pressure on feeder prices

Liquidation takes years to show upFeeder cattle prices taking a hit nowCow budgets showing lossesSlow liquidation (-.5% Jan. 1, 2008 cows)Feeder cattle supply same as 2007

Beef output will not drop until 2009-11


Iowa State yearling budgetProfit/loss per head

-$250.00

-$200.00

-$150.00

-$100.00

-$50.00

$0.00

$50.00

$100.00

$150.00

Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-

07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08


OK City Feeder to Panhandle Steer Ratio

100%

105%

110%

115%

120%

125%

130%

135%

140%

145%

150%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004 2005 2006 2007


Feeders outside feedyards

29,000

29,500

30,000

30,500

31,000

31,500

2001 2002 2003 2004 2005 2006 2007 2008


Beef supply/demand outlook

2008 production up about 1%Exports could absorb most of the increaseEstimated production splits by quarter

Q1 +2 to +3%Q2 -1 to -2%Q3 +.5 to -.5%Q4 +2% to +3%

1/1/2009 beef cow number -1% to -2%?


Bright spot – beef and pork exports

Beef export demand recoveryVolume and price both increasingAverage export value/lb. above 2003

Pork export demand growthVolume almost double 2002Value/lb. up 10% since 2002


Beef export value/price scatter


Beef export volume recovery


Pork export value/price scatter


Balanced pork export volume growth


Feed Cost Outlook2008/2009


It’s not ALL EthanolEnding global grain stocks trending down from 2001Economic growth adding to demandSubsidized ethanol demand on top of robust food demand

0

100

200

300

400

500

600

Mil

lion

Ton

s E

nd

ing

Sto

cks

2000 2001 2002 2003 2004 2005 2006 2007 2008f


Feed Outlook – Ethanol LinksEthanol production has reached a level where price rationing for feed use is happening3 major demand sources:

FeedExportsFood, Seed and Industrial

• Ethanol is the only growing piece• Ethanol demand growth is not market-driven

Who will cut back to make room for ethanol?Additional corn makes little price difference


Biofuels S/D with tax credit/RFSPrice

Quantity Demanded and Supplied

Supply

Demand, no tax credit

RFS

Demand, w/tax credit

Am

ount

of

Tax

Cre

dit

A

B


Feedstock S/D with tax credit/RFSPrice

Quantity Demanded and Supplied

Supply

Dem

and,Biofuel Value

& tax credit

w/R

FS

RFS

Tax credit

A

B


Ethanol Facts

20 gallon tank of E10 = 25 pound turkey or 7 five pound broilers.

Universal E85 in the U.S. = global grain supply

Mandated 2008 U.S. ethanol = Australia + Indonesia grain crops

Current and planned Iowa ethanol plants = Iowa importing corn


Corn/Ethanol Plant Locations - RFA


Corn/Ethanol Plant Locations - DTN


Ethanol cost/revenue driversInputs as % of revenue

Corn 60-65%Natural gas 14-15%Chemicals 4%All other costs 11%

Leaves about 8% for ROI and debt service

Revenue80-87% ethanol12-19% DDGS<1% CO2


Corn Value to Ethanol Producers

Wholesale Gasoline,

$/Gallon, NYC

Wholesale E10 Blend Price equivalent,

same mileage

Value of ethanol, no

subsidy

Ethanol plant corn B/E, no

subsidy, $/Bu.

Ethanol plant corn B/E, with subsidy, $/Bu.

Average Corn Price, 2003-2005

$1.15 $1.11 $0.76 $0.33 $1.88 $2.19 $1.30 $1.26 $0.86 $0.62 $2.19 $2.19 $1.45 $1.40 $0.96 $0.93 $2.52 $2.19 $1.60 $1.54 $1.05 $1.24 $2.85 $2.19 $1.74 $1.68 $1.15 $1.53 $3.16 $2.19 $1.89 $1.83 $1.25 $1.83 $3.49 $2.19 $2.04 $1.97 $1.35 $2.12 $3.79 $2.19 $2.19 $2.11 $1.44 $2.41 $4.10 $2.19 $2.33 $2.25 $1.54 $2.72 $4.43 $2.19 $2.48 $2.40 $1.64 $3.03 $4.76 $2.19 $2.63 $2.54 $1.74 $3.32 $5.07 $2.19 $2.78 $2.68 $1.83 $3.63 $5.39 $2.19 $2.92 $2.83 $1.93 $3.92 $5.70 $2.19 $3.22 $3.11 $2.13 $4.46 $5.89 $2.19


http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/documents/IFO100107_000.pdf

Boom Starts

Boom Stops


Reality check – 2-20-2008

DTN model ethanol plant, “Neeley Biofuels”, South DakotaU.S. average ethanol price = $2.32/galNY regular gasoline = $2.58/galCorn at DTN model plant = $4.80Model plant profit = 18.7¢/gal

http://www.dtnethanolcenter.com/index.cfm


18 cent plant profit, 2-20-2008

Wholesale Gasoline,

$/Gallon, NYC

Wholesale E10 Blend Price equivalent,

same mileage

Value of ethanol, no

subsidy

Ethanol plant corn B/E, no

subsidy, $/Bu.

Ethanol plant corn B/E, with subsidy, $/Bu.

Average Corn Price, 2003-2005

$1.15 $1.11 $0.77 $0.36 $1.92 $2.19 $1.30 $1.26 $0.87 $0.66 $2.23 $2.19 $1.45 $1.40 $0.97 $0.97 $2.56 $2.19 $1.60 $1.54 $1.07 $1.28 $2.89 $2.19 $1.74 $1.68 $1.17 $1.58 $3.21 $2.19 $1.89 $1.83 $1.27 $1.89 $3.54 $2.19 $2.04 $1.97 $1.37 $2.18 $3.85 $2.19 $2.19 $2.11 $1.46 $2.48 $4.16 $2.19 $2.33 $2.25 $1.56 $2.79 $4.49 $2.19 $2.48 $2.40 $1.66 $3.10 $4.83 $2.19 $2.63 $2.54 $1.76 $3.39 $5.14 $2.19 $2.78 $2.68 $1.86 $3.70 $5.47 $2.19 $2.92 $2.83 $1.96 $4.00 $5.78 $2.19 $3.22 $3.11 $2.16 $4.55 $5.98 $2.19

$2.58 $2.32$4.80


Summary:We cannot produce enough corn to depress the price significantly below the level set by the value of corn to ethanol producers. If corn prices drop, ethanol producers will expand until the corn price increases enough to make further expansion unprofitable.


Ethanol ProjectionsEthanol demand limited in short run by distribution and blending capacityLong run limitation is feedstock (corn) supply

Demand is almost unlimited in the long runE85 could use 500+ million acres of corn

Crude oil price and ethanol subsidy level will set long term corn pricesUse of cellulose also has many issues and limitations


Mandated U.S. Ethanol ProductionAnd Corn Required

-

1,000

2,000

3,000

4,000

5,000

6,000

Mil

lio

n B

us

he

ls C

orn

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Bil

lio

n G

all

on

s E

tha

no

l

Grain needed, m. Bu. Ethanol Mandate, bg


Ethanol Refinery Rated Capacity

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Jan. 1...

Mill

. Gal

lons

/Yea

r R

ated

Cap

acity

Ethanol Production Capacity Capacity Under Construction/Expanding

http://www.ethanolrfa.org/industry/statistics/


CY Ethanol Rated Capacity/Production

-

2,000

4,000

6,000

8,000

10,000

12,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

CY

cap

acity

-pro

duct

ion,

mgy

CY Capacity CY Productionhttp://www.ethanolrfa.org/industry/statistics/


Ethanol Corn Use Capacity

-

1,000

2,000

3,000

4,000

5,000

6,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Mill

ion

Bus

hels

Cap

acity

Rated bushels of corn Practical bushels of corn


2008/2009 Ethanol EffectsIncreased corn acreage has already doubled soybean meal prices2008 battle for acres

Corn acres need to increaseSoybean prices may prevent that

Further effects on global grain/oilseed prices

Food riots in China and Asia – alreadyChina banned further use of grain for ethanolEU and Canada withdrawing support for biofuels

Increasing use of DDGS in U.S. feeds


Corn Outlook – 2008/2009

Potential ethanol demand for cornAbout 3.33 billion bushels in CY 2008Going to be 4+ billion in CY 2009

2008 corn acres likely to decreaseHistoric collision of ethanol and food is coming, and sooner rather than laterMandated use creates price insensitivity2008/09 corn price could go to $6-8/bushel

How much acreage goes to beans + weather?2008 crop failure could take corn to over $10


Corn/Meal Price Outlook – 2008/2009

Corn prices remain at $4.25-$5.00, meal at $325-375, through May-JuneWeather drives prices after that2009 price outlook is “higher”

Biofuel production will increaseWe are out of unused productive acresThere are limits to what biofuel producers can pay unless mandate becomes effectiveFood prices will become a national issue


Corn Outlook – 2007/2008*

2006/2007Forecast

2007/2008Forecast

2008/2009

Planted Acres, Million 78.3 93.6 90.5 Harvested Acres, Million 70.6 86.1 82.0 Yield, Bu./Acre 149.1 151.1 154.0 Beginning Stocks, Mill. Bu. 1,967 1,304 1,438 Production, Mill. Bu. 10,535 13,074 12,628 Feed Use, Mill. Bu. 5,598 5,950 5,600 Exports, Mill. Bu. 2,125 2,450 2,200 Food, Seed, Industrial, Mill. Bu. 3,488 4,555 5,460 Fuel Ethanol, Mill. Bu. 2,117 3,200 4,100 Total Use, Mill. Bu. 11,210 12,955 13,260 Ending Stocks, Mill, Bu. 1,304 1,438 806 Average Farm Price, $/Bu. $3.04 $3.90 $4.25-4.75

* September 1 Crop Year


The approaching ethanol debacle

December, 2008 rated ethanol capacity = 13.405 bgyRunning capacity = ~15 bgyAt 2.75 gal/bu = 5.5 bbyWhat does that do to the balance sheet?


Corn Outlook – 2007/2008*

2006/2007Forecast

2007/2008Forecast

2008/2009

Planted Acres, Million 78.3 93.6 90.5 Harvested Acres, Million 70.6 86.1 82.0 Yield, Bu./Acre 149.1 151.1 154.0 Beginning Stocks, Mill. Bu. 1,967 1,304 1,438 Production, Mill. Bu. 10,535 13,074 12,628 Feed Use, Mill. Bu. 5,598 5,950 5,100 Exports, Mill. Bu. 2,125 2,450 1,800 Food, Seed, Industrial, Mill. Bu. 3,488 4,555 6,600 Fuel Ethanol, Mill. Bu. 2,117 3,200 5,500 Total Use, Mill. Bu. 11,210 12,955 13,500 Ending Stocks, Mill, Bu. 1,304 1,438 566 Average Farm Price, $/Bu. $3.04 $3.90 $6-7?



Consequences of 15 bgy ethanol

Corn balance sheet rules out 15 bgyBlending capacity not there today either105% of potential E10 sales

Lower price of ethanol relative to gasolineReduces corn price ethanol plants can afford

Similar to 1998/1999 hog debacleAnd on the 10th anniversary!


What will happen this fall, if?Gasoline stays near current level or lowerEthanol prices decline relative to gasolineThen:

Ethanol producers cannot afford $5+ cornFood producers outbid fuel producers for cornAbout 3.75 bgy (25%) surplus capacity

• Ethanol plants cannot run at capacity• Some will not run at all

Major shakeout likelyThose without long term contracts at risk


ETHANOL PLANT IN PRATT MIGHT NOT REOPEN

PHYLLIS JACOBS GRIEKSPOOR, The Wichita Eagle

Industry experts say that they doubt the Gateway Ethanol plant in Pratt, which closed this week, will reopen in the short term and that it might need repairs or renovations. "It's going to be extremely difficult for them to come back up without some major renovation," said David Vander Griend, president of ICM, one of the country's leading ethanol plant builders.

Neither Gateway plant manager Jarrett Hollis or Orion Ethanol co-owner Josh Barker, one of the plant's major investors, returned phone calls Friday.


Soybean Outlook – 2007/2008*2006/2007

Forecast 2007/2008

Forecast 2008/2009

Planted Acres, Million 75.5 63.7 68.5 Harvested Acres, Million 74.6 62.8 67.6 Yield, Bu./Acre 42.7 41.2 41.8 Beginning Stocks, Mill. Bu. 449 574 175 Production, Mill. Bu. 3,188 2,585 2,826 Crush Use, Mill. Bu. 1,806 1,830 1,750 Exports, Mill. Bu. 1,118 995 950 Seed 78 86 90 Residual 70 79 80 Total Use, Mill. Bu. 3,074 2,990 2,870 Ending Stocks, Mill, Bu. 574 175 131 Soymeal Average Price, $/Ton $205 $320 $375-425Soybean Average Price, $/Bu. $6.43 $10.50 $11.00-13.00



2007/2008 Biofuels Policy Cost Impact*Category Cost/Head Cost Basis

Broilers $0.38 (Per Head Sold)Turkeys $2.39 (Per Head Sold)Layers $5.01 (Per Layer Per Year)Market Hogs $26.93 (Per Head Sold)Fed Cattle $79.38 (Per Head Sold)Dairy Cows in Milk $255.95 (Per Cow Per Year)Other Food and Industrial Uses $37.45 (Per Person Per Year)

*Increases relative to no biofuels tax credits or RFS model solution, crop year basis


One small positive – by-products?

Item 2004 Jan. 2008 % ChangeMeat and Bone Meal/Ton $191.68 $347.75 81%Meat Meal/Ton $190.63 $335.39 76%Sunflower Meal/Ton $107.42 $215.17 100%Feather Meal/Ton $246.86 $400.87 62%Yellow Grease/Ton $335.70 $528.40 57%Rice Millfeed/Ton $27.05 $50.00 85%Distillers grains, 50% $45.00 $83.00 84%


Summary:No let up in cost pressuresSoybeans in a major crunch unless more acres2009/2010 debacle for ethanol producersNearing the top limits on biofuel effects, unless

Gasoline prices go higherCongress ups the ante on supportsNatural gas prices fall significantly

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Livestock Outlook: Imbalances in the Market

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