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!
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!
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
What is this data?
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
2008 OUTLOOKBottom line: A deteriorating balance of higher costs, increasing production, and a more difficult demand growth scenario.
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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%
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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?
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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?
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Paragon Economics, 1-24-08
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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)
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Feeders outside feedyards
29,000
29,500
30,000
30,500
31,000
31,500
2001 2002 2003 2004 2005 2006 2007 2008
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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%?
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Beef export value/price scatter
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Beef export volume recovery
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Pork export value/price scatter
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Balanced pork export volume growth
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Feed Cost Outlook2008/2009
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Corn/Ethanol Plant Locations - RFA
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
Corn/Ethanol Plant Locations - DTN
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/documents/IFO100107_000.pdf
Boom Starts
Boom Stops
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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.
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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/
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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/
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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?
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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?
* September 1 Crop Year
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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!
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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.
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
* September 1 Crop Year
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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%
FarmEcon LLCA source of information on global farming and food systemsThomas E. Elam, PhDPresident
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