Livestock Outlook: ∆Demand - ∆Supply ≈ ∆Price

1. Livestock Outlook:∆Demand - ∆Supply ≈ ∆Price Dr. Thomas E. Elam President FarmEcon LLC March 7, 2009

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

3. 2009 OUTLOOK Summary: Declining production sets the stage for higher prices, feed costs likely to be less volatile, but export and U.S. demand remain a huge question mark.

4. Lower meat supplies chasing lower demand, costs still high and volatile • Global contraction in GDP and income • 2008 meat export bright spot; fading in 2009 • Demand weakening • Declines concentrated in HRI and exports • Retail demand weakness in high end foods • Farm level prices not covering higher costs • Supply continues to fall until price > cost

5. Why is macroeconomics important? Source: FarmEcon LLC; Data from World Bank WDI and FAOStat

6. Consumers cutting back on food Source: Daily Livestock Report 3/4/09

7. Meat exports exploded in 2008, outlook cloudy

8. Broiler Feed Cost Variability Added $0.50/bu. for corn and $20/ton for soybean transportation and handling Based on 1.9:1 FCR, 55% corn, 35% SBM, 10% Other

9. Estimates of 2009 production

10. Hog Supply/Demand/Price • Production slow to adjust • Are our budgets realistic? • Contracting having a major effect? • Export demand will decline due to global recession and exchange rates • Domestic demand declining based on hog prices versus per capita consumption

11. Farrow/finish net returns/head(Iowa State model, costs as of date of feeding start)

12. 2009 Outlook • Stated profitability improving as high cost grain moves through the budget • Retail pork prices still reflecting higher hog prices • Current b/e is about $56 (live) moving to about $50 by May • Production decline unlikely to restore pre-2007 profitability levels this year

13. Cattle adjustment underway • On-feed number -6% • Cow liquidation has started • U.S./Canadian beef cows -3% • Dairy cow numbers declining • Adding to short run beef supply • Modest 2009 beef production drop • 2010 beef production down 2-3% • Continued pressure on feeder prices • Long term production capacity declining

14. Iowa State yearling budget Profit/loss per head (why does anyone feed cattle?)

15. OK City Feeder Steer/Panhandle Steer Ratio

16. Pricing ranges for 2009

17. Feed Cost Outlook2009/2010

18. Ethanol Factoids 18% of completed ethanol capacity closed due to bankruptcy or poor margins The cost of a commercial scale cellulosic ethanol plant is $10-20/gallon capacity Burning corn to replace natural gas and using that gas to power vehicles would generate more net energy than ethanol made from corn

19. Ethanol Plants by Status, Capacity in Million Gallons per Year Total Capacity = 13,983,000,000 gpy = 5 billion bu. corn http://www.ethanolproducer.com/

20. Mandated Corn-based Ethanol Production And Corn Required

22. Gasoline and Corn Price Link

23. Corn priced by energy value? RFS Demand? NOTE 2:1 Ratio

24. What is corn worth if ethanol price = gasoline price?

25. Ethanol production growth flattens at 2009 RFS

26. Why the 2:1 corn/gasoline ratio? • Corn’s energy value dominates corn demand as energy gets expensive • Corn is the variable ethanol cost in the short run • 1 bu. corn = 2.7 gal. ethanol + 17 lb. DDGS • 2.7 gal. ethanol = 1.8 gal. gasoline energy* • So, almost 2:1 just with gasoline value • DDGS price also plays a role • Corn up $1/bu. = DDGS value up 20.4 cents/bu.** *Based on same BTU content, ethanol has 66% energy of gasoline **Regression of monthly corn and DDGS prices from 1/2006 to 12/2008

27. Why the 2:1 Ratio? Assume gasoline up by $1.00/gal. • Corn energy value up by $1.80/bushel • DDGS price increases, adding to corn value • Adds another $0.37/bu. • ($1.80 corn price increase x $0.204 value/bu.) • Total corn value increase = $2.17 • Not statistically different from $2.00

28. Soyoil and Biodiesel Price Link

30. Corn Stocks/Price Curve Shifts Up Source: Daily Livestock Report

31. From Last Year - Corn Outlook – 2008/2009 Potential ethanol demand for corn About 3.6 billion bushels in CY 2008 Going to be 4+ billion in CY 2009 2008 corn acres likely to decrease Historic collision of ethanol and food is coming, and sooner rather than later Mandated use creates price insensitivity 2008/09 corn price could go to $6-8/bushel How much acreage goes to beans + weather? 2008 crop failure could take corn to over $10

32. Corn Overview – 2009/2010 Potential ethanol demand for corn About 3.6 billion bushels in CY 2009 Going to be 4.0-4.2 billion in CY 2010 2009 corn acres about same as 2008 Mandated use creates higher and more volatile corn price 2009/10 corn price could go back to $6-8 Where oil prices go, so goes corn and all other carbohydrates

33. Protein Meal Overview – 2009/2010 2009 soybean acres likely to increase Soybean/corn price of 2.3-2.5:1 or better normally causes a shift to soybeans If credit an issue 2009 cash costs are key Corn cash cost about $400/acre* Soybean cash cost about $225/acre* Current returns over cash costs plus risk factors slightly favor beans over corn *Iowa State projections, 12/2008, http://www.extension.iastate.edu/agdm/crops/html/a1-20.html

34. Corn/Meal Price Outlook – 2008/2009 Corn prices remain at $3.25-$4.25, meal at $250-325, through May-June Weather and acres drive prices after that 2009-2010 price outlook – some relief Biofuel production will grow due to RFS Ethanol use mandate = ethanol price mandate Volatile energy prices are critical to outlook More volatility in feed ingredients likely, but not as severe as 2008

35. Note increases in both average price and volatility!

36. Corn Outlook – 2007/2008* * September 1 Crop Year

38. Soybean Outlook – 2007/2008* * September 1 Crop Year

39. Questions? Comments?