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2008 Turkey Outlook: Costs and Prices on a Collision Course?

2008 Turkey Outlook: Costs and Prices on a Collision Course?. Dr. Thomas E. Elam President FarmEcon LLC February 9, 2008. Think of the cooler space you could save if you could breed this gene into a turkey!. 2004-2007 Four Good Years in a Row!.

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2008 Turkey Outlook: Costs and Prices on a Collision Course?

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  1. 2008 Turkey Outlook:Costs and Prices on a Collision Course? Dr. Thomas E. Elam President FarmEcon LLC February 9, 2008

  2. Think of the cooler space you could save if you could breed this gene into a turkey!

  3. 2004-2007 Four Good Years in a Row! Based on FarmEcon LLC model of 70% cut-up and 30% whole bird marketing mix. Does not include value-added products.

  4. Why the String of Profits? • Production growth in line with demand • U.S. demand increased • Export demand also growing, esp. 2005-2007 • Low feed costs until late 2006 • Excellent pricing in 2007, but… • Higher 2007 costs offset by higher prices • Net result – drop in 2007 margins despite average higher prices received

  5. Clouds on the Horizon? • Feed costs have moved to a new plateau • 2008-2009 recession looming • Record-high total beef/pork supplies • Turkey and broiler production increasing • Brazil has targeted turkey exports • Bottom line – in the face of larger supplies demand growth will not be as robust

  6. Annual Average Prices – Raw Data

  7. Annual Average Prices: Index shows real strength in dark meat

  8. Exports - Major Source of Strength

  9. Exports Show China Growth Source: U.S. Census Exports December 2007 estimated

  10. Average Export Value/lb. Source: U.S. Census Exports December 2007 estimated

  11. Value of the Export Market* *At port of exit Source: U.S. Census Exports December 2007 estimated

  12. Brazil Mounting a Challenge • Strategic export market targeting • Broilers • Pork (broiler companies heavily involved) • Beef • Turkeys (integral part of broiler companies) • Build a modern production system • Leverage inherent cost advantages • Labor • Land • Feed costs • Attack high cost competitors • Develop new export business in new areas

  13. Targeting of the Turkey Market • Not a traditional meat in Brazil • Development is by broiler companies • Promoted in domestic market first • Export promotion started about 2000 • Exports growing as % of production • Temporary setback from AI outbreak • 2007 exports up • 50% of 2007 production exported • Same model as used for all other meats

  14. Brazil Turkey Consumption and Exports Source: USDA/FAS PS&D Database

  15. Summary • Brazil is the #1 challenger in turkey exports • Major customer is the EU • Focus is on value-added products • Cost advantages appear to be long run • U.S. ethanol program is indirectly aiding their meat export program

  16. Export Demand Increase 2001-2007 Higher Volume at Higher Prices Source: U.S. Census Exports December 2007 estimated

  17. 2008 U.S. and Overall Outlook

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

  19. Estimated Value of the U.S. Market* Prices & Consumption Up *ex-processor, 30% whole birds, 70% cutout X Domestic Consumption

  20. 2007 Domestic Demand Increase

  21. Poult Placements, UB, Weekly Early 2008 Production +3.6%?? Placements through January 30, 2008

  22. U.S. Turkey Production 2000-2008 2% Increase?

  23. 2008 Turkey Forecast Details(Production, Use and Stocks in Million Pounds)

  24. 2008/09 – Higher Costs Will Hurt Margins Based on FarmEcon LLC model of 70% cut-up and 30% whole bird marketing mix. Does not include value-added products.

  25. 2008 Outlook Summary Demand growth will be more challenging Recession more likely every day Large supplies of competing meats, esp. pork Feed costs will be record-high U.S. turkey production growth 2-3%? Bird numbers will be up more than production? Feed costs argue for lighter average weights Exports look healthy, weak dollar helping Prices likely need to fall to use more turkey Margins will shrink, losses likely for some companies Could look like 2002-2003, or worse Declining demand was the main problem then Feed cost increases are the major issue today

  26. Feed Cost Outlook2008/2009

  27. It’s not ALL Ethanol • Ending global grain stocks trending down from 2001 • Economic growth adding to demand • Subsidized ethanol demand on top of robust food demand

  28. Feed Outlook – Ethanol Links • Ethanol production has reached a level where price rationing for feed use is happening • 3 major demand sources: • Feed • Exports • Food, 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? • How much additional corn can we produce?

  29. Ethanol Facts Every 20 gallons tank of E10 (10% ethanol) uses about enough corn to feed a 25 pound turkey or 7 five pound broilers. Universal use of E85 in the U.S. would consume almost the entire global grain supply Mandated 2008 U.S. ethanol production will use the same amount of grain as produced by Australia and Indonesia If all current and planned Iowa ethanol plants are operating they will use more than the entire Iowa corn supply

  30. Corn/Ethanol Plant Locations

  31. Corn Value to Ethanol Producers

  32. Reality check – 2-5-2008 • Use the DTN model ethanol plant, “Neeley Biofuels”, in South Dakota • U.S. average ethanol price = $2.27/gal • NY regular gasoline = $2.24/gal • Corn at DTN model plant = $4.50 • Model plant profit = -3.1¢/gal http://www.dtnethanolcenter.com/index.cfm

  33. At breakeven on 2-5-2008 $2.24 $2.27 $4.50

  34. 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.

  35. Ethanol Projections • Ethanol demand limited in short run by distribution and blending capacity • Long run limitation is feedstock (corn) supply • Demand is almost unlimited in the long run • E85 could use 500+ million acres of corn • Crude oil price and ethanol subsidy level will set long term corn prices • Use of cellulose also has many issues and limitations

  36. Mandated U.S. Ethanol ProductionAnd Corn Required

  37. 2008/2009 Ethanol Effects • Increased corn acreage has already doubled soybean meal prices • 2008 battle for acres • Corn acres need to increase • Soybean prices may prevent that • Further effects on global grain/oilseed prices • Food riots in China and Asia – already • China banned further use of grain for ethanol • EU and Canada withdrawing support for biofuels • Increasing use of DDGS in U.S. feeds • Long term advantage for Latin American corn and soybean producers

  38. Corn Outlook – 2008/2009 • Potential ethanol demand for corn • About 3.33 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

  39. Corn/Meal Price Outlook – 2008/2009 • Corn prices remain at $4.25-$5.00, meal at $325-375, through May-June • Weather drives prices after that • 2009 price outlook is “higher” • Biofuel production will increase • We are out of unused productive acres • There are limits to what biofuel producers can pay unless mandate becomes effective • Food prices will become a national issue

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

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

  42. Feed Cost Outlook – 2007/2008* • Current cash markets for ingredients imply a live feed cost of about 34-35¢ per pound and RTC cost of about 43-44¢. • December, 2008 futures imply about 1¢ higher for both. *Add $0.50/bu. for corn and $20/ton for soybean transportation and handling Based on 2.6:1 FCR, 65% corn, 22.5% SBM, 5% meat and bone meal, 5.5% grease diet

  43. Summary: • 2004-2005: improved profits = lower production • In 2006-2007 it all came together: • Excellent U.S. demand growth • Production issues that restrained 2006 supply • Higher turkey prices that offset higher feed costs • What will it take in 2008? • Continued demand growth in a worsening economy • Limited production growth • No HPAI in the U.S. • Despite best efforts on demand, higher feed costs will likely result in negative margins for the year for many producers

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