FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Turkey and Protein Sector Outlook 2010

Dr. Thomas E. Elam President FarmEcon LLC February 11, 2010 1

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Disequilibrium:

A situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term byproduct of a change in variable factors or a result of long-term structural imbalances.

2

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Protein markets in adjustment

Two major disequilibrium drivers Higher feed costs still not fully reflected in protein prices 2008/2009 recession Both imply lower protein production Poultry has made adjustments Red meats & dairy slower to respond Those who adjusted have been rewarded Those who have not are still in pain 3

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Feed cost pressures continue

$450 $400 $350 $300 $250 $200 $150 $100 $50 $0 $9.00

$8.00

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

$0.00

1/22/2010 Soybean meal, Central Ill.

Corn, Central Ill.

4

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Why the higher feed costs?

Reduced global grain stocks Support from subsidized ethanol demand Historically high crude oil prices High ethanol prices Increases value of corn Corn pulls other feeds up Dollar devaluation 5

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Some key correlations

Period

1982-2005 2006 2007 2008 2008-Nov. 2009

Gas/Corn Ethanol/Corn

-0.053

0.272

-0.491

-0.342

-0.331

-0.039

0.936

0.890

0.686

0.797

Commodity Correlation w/Corn

U.S. Average Farm Price, Soybeans U.S. Average Farm Price, Sorghum U.S. Average Farm Price, Barley U.S. Average Farm Price, Oats U.S. Average Farm Price, Wheat DDGS, Lawrenceburg Illinois

Correlation

0.93

0.95

0.87

0.87

0.96

0.87

6

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Corn/gasoline price relationship

(Through 1/20/2010)

800 700 600 500 400 300 200 100 0 Corn price driven by energy value + ethanol tax credit Corn price driven by RFS, feed value, ethanol tax credit and record 2009 crop forecast 400 350 300 250 200 150 100 50 0 Corn, Central Illinois New York Harbor Conventional Gasoline 7

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Protein sector profitability has suffered – Product prices relative to feed costs

12 10 8 2 0 6 4 30 20 10 0 60 50 40 Broiler-feed Milk-feed Turkey-feed Hog-corn Steer and heifer-corn 8

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Estimated profit/loss per unit

Species

Fed Cattle

Units

$/Head, All Costs Market Hogs $/Head, All Costs Broilers Turkeys Dairy ¢ Per RTC Pound, All Costs ¢ Per RTC Pound, All Costs $/Head/Day over Feed Cost -$7

2006 2007 2008 2009 H1 2009 H2 2010

-$15.04 -$25.51 -$119.94 -$87.95 -$75.26 -$20.00

-$10.92

$3.14

-$21.53 -$21.15 -$31.28

-$5.00

2.25¢ 5.38¢ -$0.87

9.17¢ 5.50¢ $2.51

-5.17¢ -6.13¢ $0.87

2.92¢ -7.50¢ -$2.46

2.75¢ -2.50¢ -$1.23

3.00¢ 1.00¢ $0.00

Sources: Fed Cattle: Iowa State fed yearling budget Market Hogs: Iowa State farrow-finish budget Broilers: Informa Economics broiler margin model Turkeys: Informa Economics turkey margin model Dairy: Penn State milk margin model 2010 Forecast: FarmEcon LLC 9

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Estimated 2009 total profit/loss

Species

Turkeys Dairy

Units

Fed Cattle Million Head Market Hogs Million Head Broilers Billion RTC Pounds Billion RTC Pounds Million Cows

Production

26.6

110.5

35.5

5.7

9.2

Profit/Loss per Unit

-$81.61

-$26.21

$0.028

-$0.050

-$674.34

Total Total Profit/Loss, $ Million

-$2,171 -$2,897 $1,006 -$29 -$6,204

-$10,294

Profit/Loss for primary production only, does not include value added operations past RTC, carcass or raw milk 10

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Current breakevens and prices

Species

Fed Cattle

Units

$/CWT (Live) Market Hogs $/CWT (Carcass) Broilers Turkeys Milk Cents/Lb (RTC) Cents/Lb (RTC) $/CWT

Breakeven

$90 $71 69¢ 75¢ $17

Current Price

$82 $59 72¢ 73¢ $16 Turkey and broiler price is weighted average of whole birds and parts 11

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

What does this tell us?

2010 red meat production will decline Milk production likely to decline Broiler production likely to grow Turkey production about the same Wholesale prices for all likely to increase Red meat and dairy more than poultry Turkey more than broilers 12

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2010 Protein Production Outlook

Item, Units

Broiler Production, Million Lbs. Broiler Slaughter, Million Turkey Production, Million Lbs.

Turkey Slaughter, Million Pork Production, Million Lbs.

Market Hog Slaughter, Million Beef Production, Million Lbs.

Fed Cattle Slaughter, Thous.

2007

35,770 8,898 5,873 265 21,962 105.4

26,667 27,933

2008

36,510 8,922 6,164 271 23,367 112.5

26,815 27,488

2009

35,230 8,550 5,660 245 23,029 109.9

26,050 26,600

2010

35,900 8,600 5,650 240 22,500 106.5

25,300 26,400

2010/2009

2% 1% 0% -2% -2% -3% -3% -1% Sources: 2005-2009, USDA/FAS PS&D database; 2010, FarmEcon forecast) 13

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Per Capita Meat Disappearance

300 First 3 year decline since 1920s 250 200 150 100 50 0 Poultry Pork Beef 2002 2003 2004 2005 2006 2007 2008 2009 2010 14

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Factors in the per capita numbers

Production declines, lack of profitability Exports Strong 2005-2008 growth 2009 decline 2010 (forecast) to increase 2009 frozen stocks reduction – not to be repeated in 2010 1%/year population increase 15

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2010 TURKEY SECTOR OUTLOOK

16

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2009 Outlook

(Feb, 2009 NTF Presentation)

Summary: Declining production sets the stage for higher prices, feed costs likely to be less volatile, but export and U.S. demand remain a huge question mark.

17

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2010 Turkey Outlook Overview

 Surplus cold storage stocks worked down  Production cuts helped prices late in 2009  Q1: production 2-4% lower than 2009  Q2: production +1 to -2% compared to 2009  Q3/Q4: production likely to increase 1-3%  Exports expected to grow modestly  Lower total competing meat supply  More stable feed costs (?) 18

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Inventories = production/use balance

700,000 600,000 500,000 400,000 300,000 200,000 100,000 Record Inventory Reduction!

Record Whole Bird Use!

Other Turkey Whole Birds 19

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

FarmEcon Model: RTC Value Per Pound and Feed Costs

120¢ 100¢ 80¢ 60¢ 40¢ 20¢ 0¢ Weighted Product Price Feed Cost Weighted Product Price - Feed Costs Based on FarmEcon LLC model of 70% cut-up and 30% whole bird marketing mix. Prices are USDA/AMS. Does not include value-added products.

20

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Exports Lose the Gains of 2008

350,000 300,000 250,000 200,000 150,000 Jan. Nov.

100,000 50,000 0 2004 2005 Source: U.S. Census Exports, converted to RTC weight by USDA/FAS 2006 2007 2008 2009 All Other Cuba South Africa Panama Taiwan Dominican Republic Russia Hong Kong Canada China Mexico 22

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Export Value Drops With Volume

$600,000 $500,000 $400,000 $300,000 $200,000 $100,000 Jan. Nov.

All Other Cuba South Africa Panama Taiwan Dominican Republic Russia Hong Kong Canada China Mexico $0 2004 2005 2006 2007 2008 2009 Source: U.S. Census Exports, declared value 23

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

U.S. Market RTC Turkey Consumption

5,400 5,300 5,200 5,100 5,000 4,900 4,800 4,700

24

b l e r P o t i f a l t i a b e U n f p r o

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

RTC Turkey Consumption Per Capita

Note the similar patterns: 2000 to 2004 and 2006 to 2010

18.0

17.5

17.0

16.5

16.0

Turkeys are generally profitable at 17 pounds per capita or less - and not profitable at 17.5 pounds or more.

25

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2009 Recession Effect: Turkey p rices down despite reduced consumption

90¢ 85¢ 80¢ 2005 2010f 2007 2009 2008 75¢ 70¢ 65¢ 60¢ 55¢ 50¢ 16.6

2006 2004 2000 2003 2001 2002 16.8

17.0

17.2

17.4

17.6

17.8

U.S. Turkey Consumption, Pounds per Person 18.0

26

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Why under 17 pounds in 2010?

Production down slightly, entire reduction in Q1/Q2 Limited potential to reduce inventory again Limited downside on exports vs. 2009 Result is 16.9 pounds per capita, down 3% 27

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Weekly UB Poult Placements Point to Lower Jan-May 2010 Production

6,500,000 6,000,000 5,500,000 5,000,000 2007 2008 2009 2010 4,500,000 4,000,000 1 Ja n 1 Fe b 1 M ar 1 A pr 1 M ay 1 Ju n 1 Ju l 1 A ug 1 S ep 1 O ct 1 N ov 1 D ec Placements through week of Jan. 20, 2010 28

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2010 Turkey Forecast Detail

(Production, Use and Stocks in Million Pounds)

Beginning Stocks Production Total Supply Exports U.S. Consumption Per Capita (Lbs.) Total Use Ending Stocks USDA Hen Price, $/lb.

USDA Tom Price, $/lb.

USDA Breast Meat, $/lb USDA Thigh Meat, $/lb USDA MDT, $/lb Margin over Feed, ¢

2006

206 5,634 5,840 546 5,076 16.9

5,622 218 $0.770

$0.768

$2.147

$0.849

$0.212

56.1¢

2007

218 5,914 6,132 554 5,318 17.6

5,871 261

2008

261 6,206 6,467 676 5,294 17.7

5,970 396 $0.821 $0.878

$0.820 $0.876

$2.306 $1.717

$0.957 $1.019

$0.246 $0.263

55.5¢ 36.3¢

2009 2010 fcst

396 5,660 6,056 550 5,256 17.4

5,806 250 5,650 5,900 250 550 5,125 16.9

5,675 225 $0.810

$0.810

$1.460

$0.950

$0.334

37.6¢ $0.880

$0.880

$1.600

$1.050

$0.300

44.6¢

09/10 %Change

-37% 0% -3% 0% -2% -3% -2% -10% 9% 9% 10% 11% -10% 19%

29

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Feed Cost Outlook 2009/2010

30

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Mandated Corn-based Ethanol Production And Corn Required

6,000 5,000 4,000 3,000 2,000 1,000 19 97 19 99 20 01 20 03 2 00 5 20 Grain needed, Mill. Bu.

07 20 09 20 11 20 13 20 15 Ethanol Mandate, bg 16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

31

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Corn/gasoline price relationship

(Through 1/20/2010)

800 700 600 500 400 300 200 100 0 Corn price driven by energy value + ethanol tax credit Corn price driven by RFS, feed value, ethanol tax credit and record 2009 crop forecast 400 350 300 250 200 150 100 50 0 Corn, Central Illinois New York Harbor Conventional Gasoline 32

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Corn Stocks/Price Curve Shifts Up

$4.50

$4.00

Higher energy prices, RFS, and tax credits 2007/2008 2008/2009 2009/2010 USDA Forecast $3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

0.0% 5.0% 2006/2007 10.0% 15.0% 20.0% Ending Stock as % of Total Use/Exports 25.0% 33 30.0%

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Corn/Meal Price Outlook – 2009/20010

Corn prices remain at $3.30-$4.25, meal at $275-325, through May-June* Weather and acres drive prices after that Ethanol production will grow due to RFS 2010 RFS is 12 bg vs. 10.5 for 2009 Ethanol use mandate = ethanol price mandate Volatile energy prices are critical to outlook More volatility in feed ingredients likely 34 *Central Illinois cash prices

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Corn prices – average and variability

8,00 Note increases in both average price and volatility!

7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 1/1/05-8/31/06 Avg. $1.99, St. Dev. $0.17, Range $0.81

9/1/06-8/31/07 Avg. $3.32, St. Dev.

$0.48, Range $2.03

9/1/07-12/31/09 Avg. $4.13, St. Dev. $0.99, Range $4.39

35

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Turkey Feed Cost Outlook – 2010

Corn Price, Central Ill. ($/Bu.) + $0.60

Soybean Meal Price ($/ton , 47%) +$25 Meat and Bone Meal, Diluth/Ton +$20 Grease, Diluth/Ton +$20 Turkey feed costs (¢/lb, Live) Turkey feed costs (¢/lb, RTC) Lowest Turkey feed cost (¢/lb, RTC) Highest Turkey feed cost (¢/lb, RTC) Turkey feed cost (¢/lb, RTC) Range

2005

$2.50

$216 $197 $340 22.1¢ 28.0¢ 26.4¢ 29.8¢ 3.4¢

2006

$3.01

$202 $188 $306 23.1¢ 29.2¢ 27.1¢ 35.3¢ 8.2¢

2007

$4.11

$261 $256 $477 29.7¢ 37.6¢ 35.2¢ 42.6¢ 7.5¢

2008

$5.50

$362 $358 $590 38.0¢ 48.0¢ 36.1¢ 57.8¢

21.7¢

2009

$4.15

$376 $361 $457 33.0¢ 41.7¢ 38.7¢ 47.4¢

8.7¢

2010f

$4.10

$345 $345 $440 31.9¢ 40.4¢ na na na

Added $0.60/bu. for corn and $25/ton for soybean transportation and handling Based on 2.6:1 FCR, 70% corn, 18% SBM, 5% meat and bone meal, 6% grease diet

36

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

2010 Turkey Outlook Summary:

The 2009 “Double-Whammy” Lower production was required for higher prices to cover higher feed costs Also needed to reduce inventories Production down more than needed in long run 2010: Still adjusting to higher feed costs, and… Stocks issues have been addressed 2010 outlook for improved demand and prices Slightly lower feed costs Cost volatility lower, but an ongoing issue RTC production should be close to 2009 Consumption will drop to about 17 pounds 37

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President

Questions?

Comments?

38