dr. lee schulz - managing the margin: economic outlook

Lee SchulzAssistant Professor &Extension Livestock EconomistDepartment of EconomicsIowa State [email protected](515) 294-3356

Managing the Margin:Economic OutlookIowa Events Center — Des Moines, Iowa

January 22, 2014

2014 Iowa Pork Congress

mailto:[email protected]

• What will input prices and production costs be?

• How many hogs will the market see and how big will they be?– Much anticipated USDA Hogs and Pigs Report(s)

What do inventories suggest? What do sows farrowing (and intentions) suggest? What do pigs saved per litter suggest? What do pig crops suggest?

– What will hog slaughter be?

– What will hog weights be?

• How will pork demand hold up?

Key Drivers of Pork Producer Profits in 2014

Input Prices

and Production Costs

U.S. Corn Supply and Use

Data Source: USDA/WAOB, January 10, 2014

World Corn Production


Jan 2014 WASDE Forecast


Data Source: Barchart.com, January 16, 2013

Ethanol: $1.99/gallonCorn: $4.23/bushelNatural Gas: 5.50/mmBtu

Ethanol Operating Margins

Data Source: ISU CARD, January 17, 2014

Corn Grind For Ethanol

DDGS is competitive with corn in hog diets

in this range

Source: USDA/AMS

DDGS, $/ton Corn, $/bu12/31/2013 $210.00 $4.2601/07/2014 $162.50 $4.1801/14/2014 $162.50 $4.18

Data Source: CME Group, January 17, 2014

Current Corn Futures Prices


Prob Mar-14 ≥ $4.240= 48%

May-14 ≥ $4.316= 55%

Jul-14 ≥ $4.384= 50%

Sep-14 ≥ $4.432= 46%

Dec-14 ≥ $4.490= 48%

U.S. Soybean Supply and Use



2013 = 43.3 bu/acre -1.4% vs Linear (Actual Yield) -2.7% vs 1979-2011 Trend -1.7% vs 1995-2011 Trend


World Corn Production

Jan 2014 WASDE Forecast


Data Source: Barchart.com, January 17, 2013

Current Soybean Futures Prices


Prob Mar-14 ≥ $13.16 = 50%May-14 ≥ $12.97 = 49% Jul-14 ≥ $12.82 = 47%Aug-14 ≥ $12.41 = 44%Sep-14 ≥ $11.71 = 47%Nov-14 ≥ $11.25 = 47%


Prob Mar-14 ≥ $435 = 48%May-14 ≥ $421 = 44% Jul-14 ≥ $412 = 45%Aug-14 ≥ $398 = 42%Sep-14 ≥ $379 = 43%Oct-14 ≥ $354 = 47%Dec-14 ≥ $352 = 45%


Data Source: USDA/NASS, Compiled & Analysis by Mike Duffy

Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre

Corn Prices vs Costs

Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre

Soybean Prices vs Costs

Data Source: USDA/NASS, Compiled & Analysis by Mike Duffy

Est 2012 Profits = -$12.06Est 2013 Profits = -$8.66

Forecasted 2014 Profits = +$20.62

1950-2006 2007-2012 2013Hogs 8% 5% 6%Cattle 22% 16% 17% Corn 7% 15% 15%Soybeans 6% 10% 10%

Data Source: USDA/ERS

Hog Supplies

Data Source: USDA/NASS

SOW SLAUGHTERFederally Inspected, Weekly

30

35

40

45

50

55

60

65

70Thou. Head

Avg.2007-11

2012

2013

2014

2013 Sow Slaughter 2013 Gilt Slaughter* -2.9% (vs. 2012) -1.8% (vs. 2012) -8.9% (vs. 2007-11) * University of Missouri

July-Dec 2013 Sow Slaughter -6.5% (vs. 2012) -9.9% (vs. 2007-11)

Livestock Marketing Information Center

Data Source: USDA-AMS & USDA-NASS

H-S-1501/17/14

PIG CROPQuarterly

18

20

22

24

26

28

30

32

1988 1991 1994 1997 2000 2003 2006 2009 2012

Mil. Head

H-N-5712/27/13

Projections→ Pig % Change Crop From Year AgoDec-Feb 2013/14 = Farrowing x Commensurate = 28,476 to 28,789 +1.3% to +2.5%

Mar-May 2014 = Intentions Pigs per Litter = 29,435 to 30,083 +1.4% to +3.6%

Growth % 2013/2012 Dec-Feb 1.1 Mar-May 2.2 Jun-Aug 2.0 Sep-Nov 0.1



? ? ? ?

0.0% to …

Data Source: USDA/AMS

Data Source: USDA/AMS & APHIS

Incorrect data from APHIS

H-S-0501/17/14



2013 Hog Slaughter-0.7% (vs. 2008-12)

Sep-Dec 2013 Hog Slaughter-1.2% (vs. 2008-12)

2014 Hog Slaughter-1.7% (vs. 2013)

-4.7% (vs. 2008-12)

Short of levels predicted by Sep 2013 Hogs and Pigs Report - USDA over-estimated Feb-Dec 2013/14 and Mar-May 2013 pig

crop (under-estimated breeding herd liquidation in 2012:Q3)

HOG SLAUGHTERFederally Inspected, Weekly

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500Thou. Head

Avg.2007-11

2012

2013

2014

PORK PRODUCTIONFederally Inspected, Weekly

325

350

375

400

425

450

475

500

525Mil. Pounds

Avg.2007-11

2012

2013

2014

M-S-1901/06/14

2013 Pork Production-0.3% (vs. 2012)

2.2% (vs. 2007-11)

2014 YTD Pork Production0.6% (vs. 2013)-0.8% (vs. 2012)

1.9% (vs. 2007-11)



PORK IN COLD STORAGEFrozen and Cured, End of the Month

450

500

550

600

650

700

750

JAN MAR MAY JUL SEP NOV

Mil. Pounds

Avg.2007-11

2012

2013

M-S-1012/23/13

Livestock Marketing Information CenterData Source: USDA/NASS

2013 YTD Pork in Cold Storage-0.8% (vs. 2012)

16.0% (vs. 2007-11)

Change Average Change Commercial Change ChangeYear Commercial from Carcass from Pork from Per Capita from

Quarter Slaughter Year Ago Weight Year Ago Production Year AgoConsumptio

n Year Ago(1,000 hd) (%) (lbs) (%) (mil lbs) (%) (retail wt) (%)

2012 I 28,105 2.3 209 0.2 5,858 2.4 11.1 -2.6 II 26,661 2.1 207 0.6 5,519 2.8 10.9 -1.2 III 27,965 2.1 201 0.3 5,631 2.7 11.2 1.8 IV 30,433 1.8 206 -0.8 6,244 0.9 12.7 3.6

Year 113,163 2.1 206 0.1 23,253 2.2 45.9 0.5 2013

I 27,874 -0.8 208 -0.5 5,777 -1.4 11.5 3.1 II 26,778 0.4 206 -0.5 5,519 -0.0 11.3 3.0 III 27,668 -1.1 203 1.0 5,624 -0.1 11.4 2.0 IV 29,803 -2.1 211 2.5 6,285 0.7 12.8 0.7

Year 112,122 -0.9 207 0.6 23,205 -0.2 46.9 2.1 2014

I 27,829 -0.2 211 1.6 5,872 1.6 11.7 1.7 II 26,579 -0.7 209 1.1 5,544 0.5 11.0 -2.1 III 27,990 1.2 205 0.8 5,735 2.0 11.3 -0.8 IV 30,496 2.3 211 0.2 6,447 2.6 12.8 -0.2

Year 112,894 0.7 209 0.9 23,598 1.7 46.8 -0.3 2015

I 28,466 2.3 213 1.0 6,065 3.3 11.9 2.4 II 27,214 2.4 211 1.0 5,735 3.4 11.2 1.8 III 28,765 2.8 207 1.1 5,956 3.9 11.6 2.1 IV 31,468 3.2 213 1.0 6,718 4.2 13.1 2.7

Year 115,913 2.7 211 1.0 24,474 3.7 47.8 2.3

Quarterly Hog & Pork Forecasts (LMIC:01/21/2014)

Pig and Hog

and Pork Prices

Data Source: ISU Livestock Crush Margins

The Crush Margin is the return remaining after accounting for the weaned pig, corn, and soybean meal that is used to cover the other more constant expenses. The Crush Margin is based on the following assumptions:

Carcass weight: 200 pounds Corn: 10 bu/hd Pig price: 50% of 5-month out LHF SBM: 150 lbs/hd

Wean to Finish Crush Margin

BARROW AND GILT PRICESIowa - So. Minnesota, Carcass Base Price, Weekly

50

60

70

80

90

100

110$ Per Cwt.

Avg.2008-12

2013

2014

H-P-0901/13/14

CMEFutures Feb-14 = $86.175

Apr-14 = $91.900May-14 = $99.600 Jun-14 = $101.575 Jul-14 = $100.200 Aug-14 = $97.775 Oct-14 = $84.625 Dec-14 = $79.850



Prob Feb-14 ≥ $86.175 = 40%

Apr-14 ≥ $91.900 = 54%

May-14 ≥ $99.600 = 51%

Jun-14 ≥ $101.575 = 45%Jul-14 ≥ $100.200

= 43%Aug-14 ≥ $97.775

= 51%Oct-14 ≥ $84.625

= 46%Dec-14 ≥ $79.850

= 51%


Pork Demand

Data Source: USDA/ERS, BLS

Pounds per Capita $ per Pound2013.Q1 +3.1% - 0.2%2013.Q2 +3.0% +4.0%2013.Q3 +2.0% +7.4%2013.Q4 +0.7% +9.2% 2013 +2.1% +5.1%

Data Source: USDA/ERS & USDL/BLS, Compiled & Analysis by Lee Schulz

Data Source: USDA/ERS & USDL/BLS, Compiled & Analysis by Lee Schulz

Year/Year increases in last 5 quarters (since Q4 of 2012): 2013 = +6.3%

Actual Quantity & Price Changes:2013: 46.9 lbs (per capita consumption) — $3.64 (nominal price) $1.56 (real price)

2013: Per Capita Consumption = +2.1% (Year/Year) Real Prices = +3.6%% IF Real Prices -2.6% = 0% Demand Change

International Trade

U S PORK EXPORTSCarcass Weight, Annual

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1990 1993 1996 1999 2002 2005 2008 2011 2014

Bil. Pounds

I-N-0501/09/14

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

Change from a Year Ago

Country Carcass Weight, 1,000 lbs PercentJapan -48,266 -3.8%Mexico 41,802 3.9%Canada -3,201 -0.6%China (Mainland) -128,114 -21.7%South Korea -127,294 -34.4%Russia -255,929 -93.7%Hong Kong 10,805 8.3%Australia -35,581 -19.4%China (Taiwan) 8,936 32.9%Philippines 11,767 12.8%Other Countries 109,119 26.5%TOTAL -415,957 -8.4%

U.S. Pork Exports, Jan-Nov 2013


USDA’s Pork Long-Term Trade Projections (as of Feb 2013)

Importers: thousand metric tons, carcass weight 2011 2012 … 2022 2012 to 2022 Total Growth

Japan 1,254 1,260 … 1,364 8% 104China 758 775 … 1,220 57% 445Hong Kong 432 440 … 528 20% 88South Korea 640 500 … 552 10% 52Russia 971 975 … 812 -17% -163Mexico 594 675 … 913 35% 238Central America/Caribbean 100 94 … 149 59% 55Canada 204 240 … 297 24% 57 United States 364 367 … 426 16% 59 Major Importers 5,317 5,326 … 6,260 18% 934

• Ability of the industry to send its products to the highest value market outlets and the comparative interest in countries worldwide to expand or adjust consumption patterns will progressively influence economic prospects


Data Source: Policy Analysis Computing & Information Facility In Commerce

Exporters: thousand metric tons, carcass weight 2011 2012 … 2022 2012 to 2022 Total Growth

Brazil 584 605 … 778 29% 173Canada 1,197 1,250 … 1,316 5% 66Mexico 86 90 … 139 54% 49European Union 1/ 2,204 2,280 … 2,591 14% 311China 244 215 … 213 -1% -2 United States 2,354 2,471 … 2,828 14% 357 Major Emporters 6,669 6,911 … 7,864 14% 9531/ Covers EU-27. Excludes intra-EU trade

USDA’s Pork Long-Term Trade Projections (as of Feb 2013)


• Longer-term U.S. pork export gains will be determined by costs of production in the U.S. relative to competitors’ costs

• Increasing demand for “higher quality” by consumers worldwide to justify higher costs of consumed protein

Data Source: Policy Analysis Computing & Information Facility In Commerce

Data Source: InterPig

Next 12-18 months

• Profit opportunities should be on the horizon if:– Domestic demand can hold– Export demand can hold– Modest rebound in crop demand and continued moderation in

input prices

• Who will enjoy what share of the profits (producers, packers, retailers) less certain– Operation-level impact vs market-level impact of PEDv– Strategic opportunities for pork

What does this all mean for the pork industry?

Next 10 years +

• Will the industry continue to gain more production capacity? If so, how fast?

• Don’t see large domestic demand changes

• Projected increased importance of export market– Export market fragile – be prepared for disruptions– The world is diverse with marked variation in preferences

(varied importance of price, cut preference, quality, phytosanitary issues, etc.)

• Changing landscape across production– Factors beyond “base fundamentals” rising in importance– Views and comparative advantages will determine the ability to profit and shape

the industry

• Next generation has a hungry and increasingly affluent world population to feed…Let’s keep up the great work!!!

What does this all mean for the pork industry?

Thank You!More information available at:

Iowa Farm Outlook & News www.econ.iastate.edu/ifo/

Ag Decision Maker www.extension.iastate.edu/agdm/

ISU Estimated Livestock Returnswww.econ.iastate.edu/estimated-returns/

ISU Livestock Crush Marginswww.econ.iastate.edu/margins/

http://www.econ.iastate.edu/ifo/

http://www.extension.iastate.edu/agdm/

http://www.extension.iastate.edu/agdm/

http://www.econ.iastate.edu/estimated-returns/

http://www.econ.iastate.edu/margins/

• Pork production direction is relatively certain

• Magnitude of impact is relatively uncertain

• Operation-level impact vs market-level impact

• Inelastic demand for pigs– Contract barns are a sunk cost

If no pigs go into the barns payments still made Buying pigs (even at high prices) to fill these barns makes sense for

some in the industry — Even at a loss

Economic Outlook PEDv

Data Source: AASV.org

Wean to Finish Pig Pricing Simulation

50% 5-month out LHF

Seller’s Buyer’s Returns ReturnsAverage $7.31 $3.03Std Dev $5.68 $16.97Minimum -$6.39 -$36.67Maximum $18.91 $35.23


60% 5-month out LHF

Seller’s Buyer’s Returns ReturnsAverage $15.12 -$4.78Std Dev $6.94 $16.11Minimum -$2.83 -$44.00Maximum $27.43 $27.56


70% 5-month out LHF

Seller’s Buyer’s Returns ReturnsAverage $21.58 -$11.24Std Dev $6.90 $16.51Minimum $1.71 -$51.33Maximum $29.95 $24.74


80% 5-month out LHF

Seller’s Buyer’s Returns ReturnsAverage $24.69 -$14.35Std Dev $5.42 $17.79Minimum $6.36 -$58.65Maximum $30.54 $24.74


Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14

0

20

40

60

80

100

120

140

160

180

USDA Estimated Pork Primal CutoutPrimal Composite Values, Monthly

Loin Butt Picnic Rib Ham Belly

$/cw

t

dr. lee schulz - managing the margin: economic outlook

Economy & Finance

acredata source

usedata source

mmbtudata source

aphisdata source

trenddata source

wasde forecastdata source

incorrect data

usdaams usdanass