NPB Pork Management Conference - 2013

1. NPB Pork Management Conference - 2013 Livestock and Meat Outlook

2. Key issues for 2013-2014 profitability . . . • Input prices and production costs • Demand • Domestic economic conditions • World economy, competition and demand • Exports and a resolution to challenges • Competitor protein supplies – and prices • Output levels for 2013 – and ‘14 • Prices and margins

3. Backdrop: Massive losses for hogs, cattle

4. Cow-calf profits – with 2013 expected good . . . Assumes “normal” weather, corn, hay

5. Output trends all kinked in ‘08-’09 . . . . . . and flattened in ‘12 – what about ‘13 & ‘14?

6. The critical issue for U.S. agriculture is still: Severe drought area is down to 25% High Plaines 45%, South 34%, MW 0.0%,

7. Scary context: April 2012 -- some problems . . . But LITTLE HINT of what was to come!

8. Grain, feed, cost assumptions “Normal” weather from here on out Corn yields in the mid- to upper-140 range SB yields in the mid-40s Current futures are fairly priced for corn, a bit high for SBM – weather premium in SB F-F hog costs near $80/cwt carcass Fed cattle BE’s >$130 thru year end, $120s in 2014 as feeders increase Chicken BE’s near $90 RTC weight

9. The macro-economy – key issues • Short term • Housing market is improving – low interest rates, job growth • Wealth effect has been positive – at least until this week • U-rate is falling but will likely stay above 7% • Long term • Deficit & spending – must be reigned in • How will economy react when the Fed actually slows on Quant Easing?

10. January 2013 – World economy is better . . . . . . But EU is still a wreck – and now Japan

11. Exchange rates Real moved big in ‘11-’12, stable recently Peso has improved but is still weaker than in ’11, ditto for the won Rapidly falling yen – due to gov’t policy

12. The U.S. economy muddles along . . . . . . Q1 GDP +2.4% - Still slowed by uncertainty

13. Dec Real per capita PDI was false security . . . . . . Jan was -0.4%, April was only +0.3%

14. PC cons did not go below 200# last year . . . . . . What about ‘13 or ’14?

15. Demand Primer • Demand is – The quantities of a product that consumers are willing and able to buy at alternative prices. • A set of price-quantity pairs • Downward sloping in P-Q space • Consumer is the primary demand – all others are derived based on transformation costs • Factors: Tastes/preferences, prices of substitutes (+) and complements (-), consumer incomes (ie. budget constraint)

16. Retail prices are at or near record highs . . . . . . Would not be if demand was, in fact, lower

17. Individual species indexes still mixed . . . . . . Chicken, beef and pork: Up for past 12 mos.

18. RPCE figures show monthly changes

19. Further proof: Record high ’12 expenditures . . . And another record expected in 2013

20. Exports have been a BIG challenge in ‘13 . . . . . . Pork is -14.5%, beef is -3%, chicken up

21. Russia & China Why is it happening? • Not really about ractopamine • China: Low hog prices, protection • Russia: • Push-back on human rights language • Protecting its domestic industry – self-sufficiency goals, vested interests in govt. • “Normal” fun and games with Russkies • Exports to Russia accounted for 1.2% of ’12 pork production, China accounted for 3.4% -- 10-15% price impact?

22. CATTLE AND BEEF

23. Some context: August 2011 – severe in SW

24. Further context: Summer 2012 . . . On 8/21: 77% drought, 44% severe or worse

25. ‘11 drought drove beef cow slaughter

26. ‘11 drought also drove HIGHER placements

27. Very high portion of pastures were poor . . . . . . In October ‘12 - last crop condition report

28. Ranges/pastures have improved sharply . . . . . . Still at the same level as last year

29. Regional -- Only the west is bad

30. Dec 1 Hay Stocks – Pct change, ‘12 vs. ‘11

31. Beef: Long-term trends PLUS droughts . . . . . . Smallest January 1 U.S. beef cow herd since ’46 . . . Smallest calf crop since 1949 is forecast for ‘13

32. FC supplies grew by 0.7% vs. Jan ‘12. . . . . . But are still near record low at 25.56 mil.

33. Placements had been lower yr/yr 8 of 9 mos. . . . Until +6% & +15% in March and April

34. May 1 COF is still 3.4% below last year . . . . . . Lower near-term supplies, closer in fall

35. May placements expected to be down again

36. Record-high weights helped prod levels . . . . . . But we are now back to yr-ago weights

37. No turn-around in sight for availability. . . . . . Per-cap: -3% in ‘13 and -5.5%+ in ’14 @ 52.6

38. Just as in ‘12, the sector is poised to grow . . . . . . But will Mother Nature allow it to do so?

39. Choice cutout FINALLY broke $200 . . . . . . Still there but falling from $210 peak

40. Driven by middle meats as end meats lag

41. Beef summary . .. Cattle are still big but will run close to ‘12 Lower cattle numbers thru Q3 and thus lower beef supplies Producers are keeping heifers but have some already moved to lots? Grass!!!! Longer term: Tighter per cap supplies thru 2014 (‘15?) and higher prices Will beef cease to be a habit for anyone below the middle class?

42. CHICKEN

43. Poultry: Reductions in ‘07 and ’11 but . . . . . . Flock has been up 1-2% yr/yr since Jan.

44. Sets have grown, yr/yr but placements . . . . . . Are even with last year – so far Sets were virtually even with ‘11 levels the entire second half of 2012 – now +1% Chick placements YTD are unchanged from 2012

45. Slaughter is up slightly but prod is up 2+% Broiler slaughter is up 0.9%YTD vs. 2012 – and more to come! Broiler production is now +2.2% YTD vs. 2012 – and more to come!

46. Weights were a big driver for ‘12 output . . . . . . A mixed bag so far in ‘13 – but still high

47. STRONG chicken prices driven by breasts!

48. Demand summary • Demand indexes are slightly higher than in ‘12 so far – with chicken leading • Still concerned about consumer incomes in ‘13 – wages, taxes? • New pork export records are in BIG doubt • Russia and China – over 20% of volume • Weaker yen will hurt Japanese buying power • MCOOL retaliation – may not hit until ‘14 • Higher beef and chicken (??) prices will be positive for pork demand

49. HOGS AND PORK

50. 2012 exports were 4% higher than ‘11 record