From information, knowledge Paragon Economics, Inc. Steve R. Meyer, Ph.D. Paragon Economics, Inc. NPB Pork Management Conference Livestock and Meat Outlook

From information, knowledge Paragon Economics, Inc. Key issues for 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 6/20/20132

From information, knowledge Paragon Economics, Inc. Backdrop: Massive losses for hogs, cattle 6/20/2013 3

From information, knowledge Paragon Economics, Inc. Cow-calf profits – with 2013 expected good... Assumes “normal” weather, corn, hay 6/20/2013 4

From information, knowledge Paragon Economics, Inc. Output trends all kinked in ‘08-’ and flattened in ‘12 – what about ‘13 & ‘14? 6/20/2013 5

From information, knowledge Paragon Economics, Inc. The critical issue for U.S. agriculture is still:  Severe drought area is down to 25%  High Plaines 45%, South 34%, MW 0.0%, 6/20/2013 6

From information, knowledge Paragon Economics, Inc. Scary context: April some problems... But LITTLE HINT of what was to come! 6/20/2013 7

From information, knowledge Paragon Economics, Inc. 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 6/20/2013 8

From information, knowledge Paragon Economics, Inc. 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? 6/20/20139

From information, knowledge Paragon Economics, Inc. January 2013 – World economy is better But EU is still a wreck – and now Japan 6/20/201310

From information, knowledge Paragon Economics, Inc. 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 6/20/201311

From information, knowledge Paragon Economics, Inc. The U.S. economy muddles along Q1 GDP +2.4% - Still slowed by uncertainty 6/20/201312

From information, knowledge Paragon Economics, Inc. Dec Real per capita PDI was false security Jan was -0.4%, April was only +0.3% 6/20/201313

From information, knowledge Paragon Economics, Inc. PC cons did not go below 200# last year What about ‘13 or ’14? 6/20/201314

From information, knowledge Paragon Economics, Inc. 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) 6/20/201315

From information, knowledge Paragon Economics, Inc. Retail prices are at or near record highs Would not be if demand was, in fact, lower 6/20/201316

From information, knowledge Paragon Economics, Inc. Individual species indexes still mixed Chicken, beef and pork: Up for past 12 mos. 6/20/201317

From information, knowledge Paragon Economics, Inc. RPCE figures show monthly changes 6/20/201318

From information, knowledge Paragon Economics, Inc. Further proof: Record high ’12 expenditures... And another record expected in /20/201319

From information, knowledge Paragon Economics, Inc. Exports have been a BIG challenge in ‘ Pork is -14.5%, beef is -3%, chicken up 6/20/201320

From information, knowledge Paragon Economics, Inc. 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% % price impact? 6/20/201321

From information, knowledge Paragon Economics, Inc. CATTLE AND BEEF 6/20/201322

From information, knowledge Paragon Economics, Inc. Some context: August 2011 – severe in SW 6/20/201323

From information, knowledge Paragon Economics, Inc. Further context: Summer On 8/21: 77% drought, 44% severe or worse 6/20/201324

From information, knowledge Paragon Economics, Inc. ‘11 drought drove beef cow slaughter 6/20/201325

From information, knowledge Paragon Economics, Inc. ‘11 drought also drove HIGHER placements 6/20/201326

From information, knowledge Paragon Economics, Inc. Very high portion of pastures were poor In October ‘12 - last crop condition report 6/20/201327

From information, knowledge Paragon Economics, Inc. Ranges/pastures have improved sharply Still at the same level as last year 6/20/201328

From information, knowledge Paragon Economics, Inc. Regional -- Only the west is bad 6/20/201329

From information, knowledge Paragon Economics, Inc. Dec 1 Hay Stocks – Pct change, ‘12 vs. ‘11 6/20/201330

From information, knowledge Paragon Economics, Inc. 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 6/20/201331

From information, knowledge Paragon Economics, Inc. FC supplies grew by 0.7% vs. Jan ‘ But are still near record low at mil. 6/20/201332

From information, knowledge Paragon Economics, Inc. Placements had been lower yr/yr 8 of 9 mos.... Until +6% & +15% in March and April 6/20/201333

From information, knowledge Paragon Economics, Inc. May 1 COF is still 3.4% below last year Lower near-term supplies, closer in fall 6/20/201334

From information, knowledge Paragon Economics, Inc. May placements expected to be down again 6/20/201335

From information, knowledge Paragon Economics, Inc. Record-high weights helped prod levels But we are now back to yr-ago weights 6/20/201336

From information, knowledge Paragon Economics, Inc. No turn-around in sight for availability Per-cap: -3% in ‘13 and -5.5%+ in /20/201337

From information, knowledge Paragon Economics, Inc. Just as in ‘12, the sector is poised to grow But will Mother Nature allow it to do so? 6/20/201338

From information, knowledge Paragon Economics, Inc. Choice cutout FINALLY broke $ Still there but falling from $210 peak 6/20/201339

From information, knowledge Paragon Economics, Inc. Driven by middle meats as end meats lag 6/20/201340

From information, knowledge Paragon Economics, Inc. 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? 6/20/201341

From information, knowledge Paragon Economics, Inc. CHICKEN 6/20/201342

From information, knowledge Paragon Economics, Inc. Poultry: Reductions in ‘07 and ’11 but Flock has been up 1-2% yr/yr since Jan. 6/20/201343

From information, knowledge Paragon Economics, Inc. Sets have grown, yr/yr but placements... Sets were virtually even with ‘11 levels the entire second half of 2012 – now +1%... Are even with last year – so far Chick placements YTD are unchanged from /20/201344

From information, knowledge Paragon Economics, Inc. Slaughter is up slightly but prod is up 2+% Broiler production is now +2.2% YTD vs – and more to come! Broiler slaughter is up 0.9%YTD vs – and more to come! 6/20/201345

From information, knowledge Paragon Economics, Inc. Weights were a big driver for ‘12 output A mixed bag so far in ‘13 – but still high 6/20/201346

From information, knowledge Paragon Economics, Inc. STRONG chicken prices driven by breasts! 6/20/201347

From information, knowledge Paragon Economics, Inc. 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 6/20/201348

From information, knowledge Paragon Economics, Inc. HOGS AND PORK 6/20/201349

From information, knowledge Paragon Economics, Inc exports were 4% higher than ‘11 record 6/20/201350

From information, knowledge Paragon Economics, Inc. Exports have been THE issue in Down 16% thru April, Feb-Apr down 14.4% 6/20/201351

From information, knowledge Paragon Economics, Inc. April exports – Japan down but steady..... Mexico came back, China on LT trend 6/20/201352

From information, knowledge Paragon Economics, Inc. U.S. sow herd is near smallest on record And yet Q4 production was record large! 6/20/201353

From information, knowledge Paragon Economics, Inc. Steady and dramatic productivity growth... 6/20/201354

From information, knowledge Paragon Economics, Inc. Weights have helped long-term production..... But feed costs have slowed them! 6/20/201355

From information, knowledge Paragon Economics, Inc. Imports from Canada are -9% YTD Risk issue for ‘14: MCOOL retaliation 6/20/201356

From information, knowledge Paragon Economics, Inc. ‘12 production costs were record-high......’13 will likely be higher -- new crop help? 6/20/201357

From information, knowledge Paragon Economics, Inc. 6/20 CME Group futures prices still imply Large losses for 2013 – but profits in ‘14 6/20/201358

From information, knowledge Paragon Economics, Inc. Sow slaughter: Higher due to prices But lower than “normal” ALL YEAR 6/20/201359

From information, knowledge Paragon Economics, Inc. March H&P Report: The herd is GROWING 6/20/201360

From information, knowledge Paragon Economics, Inc. ‘13 slaughter will be slightly larger than ’ But pattern will be different – summer??? 6/20/201361

From information, knowledge Paragon Economics, Inc. March H&P Report slaughter forecasts 6/20/201362

From information, knowledge Paragon Economics, Inc. What will be the impact of PEDv? As of 6/10:  218 positive samples  199 premises, up 44 from 6/3 – 47 sow farms, 130 growing pigs sites, 20 unknown  Positive in 19 states  102 in Iowa, 19 in Minnesota and 38 in Oklahoma – up 20 from 6/3  Earliest confirmed case is still mid-April  Number of animals impacted is unknown  Death losses, 7-10 days of slow/no growth 6/20/201363

From information, knowledge Paragon Economics, Inc. Disappointing Q1 has given way to..... An exceptional rally – that is likely OVER 6/20/201364

From information, knowledge Paragon Economics, Inc. Support from MANY part of the pig! Next? 6/20/201365

From information, knowledge Paragon Economics, Inc. Hog rally has gone to my “pre-March” highs Unlikely to see much more this summer 6/20/201366

From information, knowledge Paragon Economics, Inc. Packers have chased hogs since April... 6/20/ But margins are likely to widen soon

From information, knowledge Paragon Economics, Inc. Price forecasts – April reductions Now look too big -- book Q3 and Q4? 6/20/201368

From information, knowledge Paragon Economics, Inc. Slaughter trends vs. packing capacity 6/20/201369

From information, knowledge Paragon Economics, Inc. But the real capacity trend if FLAT! 6/20/ Potential trouble if we return to growth!

From information, knowledge Paragon Economics, Inc. Summary  Beef industry is still being impacted by ‘11 drought – and output will be effected through 2014 and into 2015 – high prices  Chicken slowed in ‘11 but has begun to grow again – and could grow QUICKLY  Pork industry: Huge equity hit but has “maintained” pending good ‘13 crops and a return to “normal” costs  Cornbelt rains have been good – need some warm, dry days now 6/20/201371

From information, knowledge Paragon Economics, Inc. Questions or Comments? 6/20/201372