August 7, 2012 Sponsored by: Presenter: Dr. Glynn Tonsor, Kansas State University

August 7, 2012Sponsored by:

Presenter: Dr. Glynn Tonsor, Kansas State University

WEBINAR OVERVIEW

• Broad Economic Outlook Overview for Industry – Pasture Conditions and Implications – July Cattle Inventory Report Highlights

• Heightened Uncertainty: Drivers and Implications for Decision-making of Industry Leaders

Economic Outlook Overview: Cow-Calf

• Strong calf price pullback – National vs. regional drought has magnified cattle market impact compared

to 2011 – Pasture rather than corn uncertainty critical at this point…

• Eventually: return as beneficiary of tight supplies and probable expanded heifer retention…

• Returns over cash costs – 2012 estimates have fell $100/cow in last 2 months – Will 2015 now be “the peak return year” ???

• Likely a widening between top 1/3 and bottom 1/3 of producers …

As of: 8/6/12August FC:

8/3/12: $1396/3/12: $158

But “true” expected price may be $5 less

currently …

ESTIMATED AVERAGE COW CALF RETURNSReturns Over Cash Cost (Includes Pasture Rent), Annual

-100

-50

0

50

100

150

200

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

$ Per Cow

C-P-6608/02/12

Livestock Marketing Information CenterData Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

ESTIMATED AVERAGE COW CALF RETURNSReturns Over Cash Cost (Includes Pasture Rent), Annual

-100

-50

0

50

100

150

200

250

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

$ Per Cow

C-P-6603/21/12Livestock Marketing Information Center

Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

US RANGE AND PASTURE CONDITIONPercent Poor and Very Poor, Weekly

15

20

25

30

35

40

45

50

55

60

May Jul Sep

Percent

Avg.2006-0102011

2012

G-NP-3007/30/12

Livestock Marketing Information CenterData Source: USDA-NASS, Compiled & Analysis by LMIC

Beef Cows in stateswith 40% Poor to Very Poor

Last year Cows % of Total07/17/11 12139 39.46%07/24/11 10498 34.12%07/31/11 12363 40.18%

This Year 07/15/12 21940 73.62%07/22/12 22809 76.54%

07/29/12 22809 76.54%

CORNBELT REGIONRANGE AND PASTURE CONDITION

Percent Poor and Very Poor, Weekly

0

10

20

30

40

50

60

70

80

May Jul Sep

Percent

Avg.2006-0102011

2012

G-NP-3407/30/12


IL, IN, IA, MI, MN, MO, OH, & WI

14.5% of Cows (2012)

GREAT PLAINS REGIONRANGE AND PASTURE CONDITION


10

20

30

40

50

60

70

80

May Jul Sep

Percent

Avg.2006-0102011

2012

G-NP-3207/30/12


CO, KS, MT, NE, ND, SD, & WY

29.2% of Cows (2012)

WESTERN REGIONRANGE AND PASTURE CONDITION


15

20

25

30

35

40

45

50

55

May Jul Sep

Percent

Avg.2006-0102011

2012

G-NP-3107/30/12


AZ, CA, ID, NV, NM, OR, UT, & WA

10.2% of Cows (2012)

SOUTHERN PLAINS REGIONRANGE AND PASTURE CONDITION


10

20

30

40

50

60

70

80

90

100

May Jul Sep

Percent

Avg.2006-0102011

2012

G-NP-3307/30/12


OK & TX20.4% of Cows (2012)

SOUTHEAST REGIONRANGE AND PASTURE CONDITION


5

10

15

20

25

30

35

40

45

May Jul Sep

Percent

Avg.2006-0102011

2012

G-NP-3607/30/12


AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA, & WV24.5% of Cows (2012)

BEEF COW SLAUGHTERFederally Inspected, Weekly

45

50

55

60

65

70

75

80

85

90

95Thou. Head

Avg.2006-10

2011

2012

C-S-3408/03/12

Livestock Marketing Information CenterData Source: USDA-AMS & USDA-NASS

SLAUGHTER COW PRICESSouthern Plains, 85-90% Lean, Weekly

40

50

60

70

80

90

JAN APR JUL OCT

$ Per Cwt.

Avg.2006-10

2011

2012

C-P-3507/30/12

Livestock Marketing Information CenterData Source: USDA-AMS

MED. & LRG. #1 STEER CALF PRICES400-500 Pounds, Southern Plains, Weekly

115

135

155

175

195

215

235

JAN APR JUL OCT

$ Per Cwt.

Avg.2006-10

2011

2012

C-P-49A07/30/12

Livestock Marketing Information CenterData Source: USDA-AMS, Compiled & Analysis by LMIC

July 1 Cattle Inventory Report

• Report was eliminated and then reinstated for 2012; future is unknown …

• Downsizing of herd continues (yr-on-yr changes)

– Beef cows: -3% (900,000 hd)– Beef heifer replacements: 0% (was +1.4% in Jan.) – 2012 calf crop estimate: -2.3% (800,000 hd) – Feeder supplies outside feedlots: -3.2% (1.18 mil. Hd)

Economic Outlook Overview : Stockers

• Margins have improved by fall in calf prices – During drought, weak basis has improved projected

margins…

• Of course, not everyone has the necessary forage to successfully background calves this fall/winter– Increased VOG = increased rewards for management … – Pockets of “excess silage” resources = opportunity…

“Buy-Sell” spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf)

• 8/6/12’ Salina, KS Situation:• BeefBasis.com forecasted price of 750 lb steer

December 4, 2012 is $145.45/cwt

• What is break-even purchase price of a 550 lb steer purchased on September 4, 2012? • forecasted price is $150.55/cwt

Expected Return: +$16.76/head [2.0 *($158.93-$150.55)]

Feeding COG $80 = +$23.42/head Expected ReturnFeeding COG $100 = +$10.10/head Expected Return

“Buy-Sell” spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf)

Purchase $139.45 $141.45 $143.45 $145.45 $147.45 $149.45 $151.45Weight1

450 163.01 166.18 169.36 172.53 175.71 178.88 182.06500 156.41 159.28 162.15 165.02 167.90 170.77 173.64550 151.06 153.68 156.31 158.93 161.55 164.17 166.79600 146.64 149.06 151.47 153.89 156.30 158.72 161.13650 142.94 145.18 147.42 149.66 151.90 154.14 156.38700 139.81 141.90 143.99 146.08 148.17 150.26 152.35750 N/A N/A N/A N/A N/A N/A N/A

1Enter the minimum purchase weight you are willing to consider.

2Based on a feeding cost of gain of $90/cwt.

Selling Price

Breakeven Purchase Price2

And “true” expected purchase price may be

$5 less currently …

COG of $115 = $0/hd Exp. Returns (550 lbs to 750 lbs)Positive Exp. Returns with only 100 lb gains (550 lbs to 650 lbs)

Economic Outlook Overview : Feedlots

• Excess capacity concerns remain… – Drought improves this initially, makes it worse over

coming years…

• Forecasted losses persist – Current closeouts are at severe losses… – Elevated cost of gain

Markets are up +/- $2 over past 2 weeks …

CHOICE STEER PRICE vs BREAKEVENCattle Feeding, S. Plains, Monthly

75

85

95

105

115

125

135

145

2004 2005 2006 2007 2008 2009 2010 2011 2012

$ Per Cwt

SteerPrice

Breakeven

ProjectedBreakeven


C-P-2108/01/12

Latest Data: July 2012

AVERAGE RETURNS TO CATTLE FEEDERSFeeding 725 Lb. Steers, S. Plains, Monthly

-325-275-225-175-125-75-252575

125175225275

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$ Per Head


C-P-2208/01/12

QUARTERLY FORECASTS (LMIC: 8/2/12)% Chg. Average % Chg. Comm'l % Chg.

Year Comm'l from Dressed from Beef fromQuarter Slaughter Year Ago Weight Year Ago Production Year Ago

2011I 8,314 1.8 771 0.7 6,410 2.6II 8,640 -0.5 759 0.7 6,559 0.2III 8,738 -0.2 771 -0.3 6,736 -0.5IV 8,395 -3.0 773 -0.8 6,490 -3.7Year 34,087 -0.5 768 0.1 26,195 -0.42012I 8,027 -3.5 783 1.5 6,283 -2.0II 8,311 -3.8 779 2.6 6,475 -1.3III 8,341 -4.5 787 2.1 6,565 -2.5IV 8,237 -1.9 785 1.6 6,468 -0.3Year 32,916 -3.4 784 2.0 25,790 -1.52013I 7,711 -3.9 784 0.2 6,046 -3.8II 7,965 -4.2 779 -0.0 6,203 -4.2III 8,170 -2.1 792 0.7 6,474 -1.4IV 7,778 -5.6 794 1.1 6,172 -4.6Year 31,624 -3.9 787 0.5 24,895 -3.5

QUARTERLY FORECASTS (LMIC: 8/2/12)Live Sltr. % Chg. Feeder Steer Price

Year Steer Price from Southern PlainsQuarter 5-Mkt Avg Year Ago 7-800# 5-600#

2011I 110.12 23.1 129.06 150.07 II 112.79 17.1 132.03 148.61 III 114.05 19.5 135.93 141.69 IV 121.99 21.7 143.15 153.11 Year 114.74 20.3 135.04 148.37 2012I 125.29 13.8 154.25 182.41 II 120.91 7.2 152.65 178.65 III 117-119 3.5 138-141 141-144IV 121-124 0.4 137-140 140-145Year 121-122 5.9 144-148 159-1642013I 124-128 0.6 137-141 147-152II 126-130 5.9 141-147 154-160III 124-129 7.2 145-152 158-165IV 126-132 5.3 146-153 158-166Year 126-129 4.9 143-147 155-160

Uncertainty Factors• Weather (multi-year drought impacts on pasture) • Policy (GIPSA “fair markets”, Env., MCOOL, Farm Bill, Tax Code) • Timeline on excess capacity resolution …• Social Pressures (AW, Sustainability,) - demand getting complicated• Global markets present growth, need for change, & new risks…

– Working together to “grow the pie” is critical; yet divisions persist…

• Overall increase in variability in profitability drivers: – Signals opportunity to some = expansion and/or reinvestment – Triggers discomfort to many = exit or simply maintain status quo

• within industry variations in views and comparative advantages will determine the ability to profit and shape future of industry…

• BEEF Magazine Poll (N=99 as of 8/17/11’) – how would a 12’ survey look?– “If you had to liquidate cattle this year because of flooding or drought, what

do you plan to do with the proceeds?• 47% Restock with cows when conditions improve• 9% Restock but change production models (e.g., buy stockers rather

than cows)• 27% Keep the cash; leave the business• 6% Reinvest the cash in another non-livestock ag enterprise• 10% Don’t know

• If cow-calf herd used to expand when Exp. Profit=$100/cow, what trigger is needed today???

• If variability in feedlot returns is increasing (and avg. returns are not), when/where/how will excess capacity begin to be resolved?

27

Uncertainty Implications

Sponsored by:

Questions typed by participants during the webinar presentation

which were not directly responded to are addressed in the remaining

subsequent slides.

Question: “With tight supplies and high prices what do you see as the longer term impact on demand when supplies increase?”

• Response: – Economists typically say quantity demanded (rather than demand) declines as

own-product prices increase. Changes in prices of other products (pork/poultry), consumer views on product quality, etc. drive changes in demand. Related distinctions and implications for understanding beef demand are outlined at: http://www.agmanager.info/livestock/marketing/graphs/Meat%20Demand/Index/IndexOverview_09-14-10.pdf .

– Given ongoing increases in cost of production for the beef industry, if demand is neutral or improving over time, consumers will see notably larger retail prices than they have previously.

• Bottom line: If tight supplies change the nature of beef products influencing its appeal to consumers that may alter beef demand which makes this a complex question. If alternatively the main change is higher production costs and similar quality of beef product offerings persist, I do not see demand declining but rather see a smaller set of households (or less per representative household) ultimately being the consumer of a product with higher retail prices than in the past. That is, the quantity demanded would be lower at elevated retail prices.

Question: “Will we see packer capacity close?”

• Response: – Many analysts think there is both excess bunk space at the feedlot

level and hooks at the packing level given current and expected cattle supplies. Given this, pressure on packing capacity can be expected to continue. Moreover, the economics of needing to run plants near their capacity (e.g. partially using facilities is very undesirable) reinforces this pressure.

• Bottom line: Yes I think there is notable pressure on the packing sector given current and expected volumes available to them for throughput in their business. Identifying when this will lead to a specific plant closure much less what plant is most likely to close is beyond my ability to comment on here.

Question: “You mentioned that forecasted losses in feedlots persist, could you please give us some idea of what would that part of the industry be one year from today? How many less players are you expecting?”

• Response: – I am in the middle of a project attempting to better estimate the amount of

excess capacity in the feedlot sector. Please watch for an associated fact sheet to be posted online ( http://www.agmanager.info/) in the near future.

– The preliminary assessment suggests that since 2000, total industry capacity has either declined or increased, perhaps by 4% depending on what assumptions are used regarding <1,000 hd yards. An increase is possible as the number of larger feedyards has grown while the number of smaller yards has declined. Over the same period, the cattle supplies to feedlots have declined by 6%-11% depending on the approach used.

• Bottom line: The specific amount of excess capacity has yet to be finally determined but the issue firmly appears worse than it was in 2000. The number of players (e.g. lots) that will exit as the capacity-to-cattle supply relationship improves is likely to be large given the ongoing decline in operations under 1,000 hd.

Question: “To sum up, do you expect modest liquidation since cow-calf producers are still turning a profit and the drought has just pushed off expansion or will we see liquidation pick up this fall/winter?” • Response:

– Most analysis suggests representative cow-calf producers have covered variable costs but not total costs in most years. See: http://www.agmanager.info/livestock/budgets/production/beef/Cow-calf_EnterpriseAnalysis(Jun2011).pdf. Please note the charts on slides 5 & 6 are returns over cash costs rather than total costs.

– Given the state of pasture conditions throughout the country the prospect of additional herd liquidation in the coming few months remains high.

• Bottom line: I maintain a view that the total beef cow herd in the U.S. will likely expand in coming years. This view is mainly driven by global beef demand bullishness and an assumption that the current weather patterns are not “the new normal.” It is important however to note the herd could expand while operations exit. More narrowly, I’d expect the number of cow-calf operations to continue the pattern of decline while the total herd (and hence # of cows/operation) increases.

Question: “Given controversy over RFS mandate and your comments about demand, any sense which consumers prefer more - food or fuel?”

• Bottom line: This is not something I have narrowly studied and was not immediately aware of a study examining how U.S. consumers or residents would prefer U.S. grains be utilized.

A quick Google search led to these resources:– http://www.extension.org/pages/27136/biodiesel-and-the-food-vs-fuel-debate

– http://ictsd.org/downloads/2011/12/the-impact-of-us-biofuel-policies-on-agricultural-price-levels-and-volatility.pdf

– http://ajae.oxfordjournals.org/content/early/2012/05/11/ajae.aas039.short?rss=1

Question: “What is the outlook for beef consumption in the US?”

• Response: – Longer term, the economics of supply and demand come to play of course but

in the near term when production volumes are known or set by existing inventories, it is important to recognize consumption reflects production adjusted for imports, exports, and cold storage inventories. The price of retail products then reflects the value it presents to consumers and the known quantity available. Since production is the main driver in this calculation, as beef production declines, one expects consumption to decline.

• Bottom line: I think per capita beef consumption in the U.S. will largely continue to be at levels below what most in the industry are used to for three main reasons. First, note the point above about production declines leading to consumption declines. Secondly, the longer-term process of higher production costs resulting in smaller industries (absent demand enhancement) reinforces this trend. Finally, if global per capita incomes grow at rates above those in the U.S., foreign consumers would be expect to “bid away” additional pounds from U.S. consumers.

Question: “In your opinions, given capital and pasture, when is the correct time to expand?”

• Response: – I always pause and rarely even indirectly give market timing type advice.

Ultimately I share a sincere view that if I had the answer to this I’d be out making market bets reflecting this view in an effort to “corner the market.” My absence of this activity is consistent with years of research.

– Please also see this related presentation by Dr. Dhuyvetter: http://www.agmanager.info/Faculty/dhuyvetter/presentations/2011/KCD_K-StateBeefConf(Aug2011).pdf

• Bottom line: There is enough variation in production cost situations across producers that no one answer exists regardless of views on upcoming cattle and feedstuff markets. I would encourage any producer interested in this issue to utilize the decision aid at this website (http://www.agmanager.info/Tools/default.asp#LIVESTOCK; see “KSU-Beef Replacements” file) to identify the net present value implied by different replacement decisions. An understanding of these NPV values along with appreciation of an operation’s own cost structure and tolerance for what it means to be in “the modern cattle business” will lead each operator to answer this question on their own.

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August 7, 2012 Sponsored by: Presenter: Dr. Glynn Tonsor, Kansas State University