FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President State of The Agricultural Economy Dr. Thomas E. Elam President FarmEcon LLC November 8,

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President First, the lawyer told me to say… The information contained herein is currently believed to be reliable and the views expressed within this document reflect judgments at this time and are subject to change without notice. FarmEcon LLC does not warrant that the information contained herein is fully accurate or complete, and it should not be relied upon as such. Any business decisions made based on this information and analysis are the sole responsibility of the decision maker.

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Declining real costs relative to average goods and services Efficiency increases Gains in real incomes Combined = Production expansion incentives Why has protein consumption and feed volume grown? 3

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President More Spending = More Meat, Globally and Locally On average +10% Spending = +9% more meat Sources: Consumer Spending: World Bank; United Nations. Meat Production: UN/FAO $1 trillion increase in spending = 9 mmt more meat produced R 2 =

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Prices Matter Too: Real Price Index 5

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Prices and Income Growth 6

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Macroeconomic Headlines Real U.S. GDP growth is slowing Why? Unprecedented government borrowing and market interference = uncertainty Labor market is not recovering U1 Unemployment rate down from recession low Because people are dropping out of the labor force Real U6 unemployment rate stuck at about 16% Almost no private sector job growth Therefore, no real improvement in earnings of people who buy consumer goods 7

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Total (U6) unemployment rate % U1 + marginally attached + discouraged potential workers Does not include those who have totally given up looking for work 8

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Labor force participation rate, % 9 Employed + unemployed divided by adult population

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Employed as % of the Population 10 Employed divided by total population

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Work = consumer income = spending = MEAT DEMAND Weak 2011/12 protein demand increase Turkey demand may be an exception 2010/12 protein price strength almost totally due to lower supply/higher exports If meat supplies increase or exports decline in the face of low income growth, prices will decline Why you need to care… 11

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Informa Model Turkey Margins 12

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Informa Model Broiler Margins 13

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Farrow-Finish Returns, IA State Budget 14

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Yearling Steer Returns, IA State Budget 15

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President We may have reached “peak meat” Certain for the next 2-3 years Likely for the next decade Feed cost volatility here to stay Low carryover stocks Feed costs now linked to energy prices The future looks like the recent past 16

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Per Capita Total Meat Consumption: 10% Reduction 17  Recession and slow recovery  Lower availability driving pricing up  Root causes:  Higher Costs  Lower Production  Export growth

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President CHICKEN/TURKEY/EGG OUTLOOK 2011/12 18

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Higher feed costs driving production down Weak U.S. demand growth Russia and China broiler trade issues It’s both supply and demand Production needs to adjust to a new reality Prices need to increase to cover higher costs What are the Underlying Issues? 19

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

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

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President UB Turkey Egg Sets and Placements 4 Week YoY %Change Moving Averages Feed Costs Spike 22

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President U.S. Broiler Chicken Egg Sets and Placements 3 Week YoY %Change Moving Averages Feed Costs Spike 23

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President U.S. Cumulative Potential Egg-Type Layer Placements Relative to Current Supply Flocks 7-18 Months Earlier Feed Costs Spike 24

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Poultry Feed Costs – New Records! 25

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Turkey supply in line with demand Excellent exports have helped Prices have responded to lower domestic supply Outlook is for positive margins through mid-2012 Chicken supply still too high Lack of export growth has hurt Cutbacks just starting to take hold Egg supply reductions will help by 2012 Supply Reductions are Helping 26

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Turkey Price Improvement Has Outpaced Supply Reduction 27

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Chicken Wholesale Price Scatter 28

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Turkey Feed Cost Outlook Includes transportation basis for corn, soybean meal, MBM and grease. Based on 2.6:1 FCR, 65% corn, 22.5% SBM, 5% meat and bone meal, 5.5% grease diet 29

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Broiler Feed Cost Outlook Includes transportation basis for corn, and soybean meal Based on 1.9:1 FCR, 55% corn, 35% SBM, 10% Other 30

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2012 Turkey Forecast Summary (Production, Use and Stocks in Million Pounds) Average: 42.7¢

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2012 Broiler Forecast Summary (Production, Use and Stocks in Million Pounds) 32

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President UEP/HSUS proposal will have long term cost impact 2011 margins have been tight Layer numbers forecast to decline, and remain 1-2% under year-earlier through 2012 Exports likely to grow modestly in 2012 Table eggs and egg product prices likely to set new records in 2012 Will be needed to offset feed costs 2012 Egg Industry Forecast 33

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2012 Poultry Outlook Summary Demand vs. production cost a major challenge Economy expanding, but not a typical recovery rate Red meat domestic supplies shrinking in 2011 and 2012 Chicken supplies are declining due to incredible losses How much chicken reduction needed for profitability? 2012 prices and profitability factors: Feed costs Continued economic recovery – no double-dip Poultry production levels Extreme feed cost risk level will (hopefully) temper 2012 production plans 34

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Price outlook driven by exports and production Exports will remain strong Competitor countries declining exports Global beef demand growing U.S. production will decline in Southwest drought and herd reductions Higher feed costs Beef cattle outlook 35

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Major Beef Exporter Volumes: Only U.S./India Growing 36 Source: USDA/FAS Production, Supply, Demand database

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2012 Cattle Forecast 37 Record high prices, lowest production since 2005, lowest per capita consumption in records that go back to 1970!

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President PORK OUTLOOK 2011/12 38

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President “Steady as she goes” theme for 2012 Recent USDA numbers show no swings coming in sow numbers or pig crop Export demand seen growing in 2012 Prices likely to set new records, but not by much Remember though, VOLATILITY! Pork Summary 39

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2012 Pork Forecast 40 Record high prices, higher production, record exports and second lowest per capita consumption in records that go back to 1970! Prior low was 42.9 pounds in 1975.

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2012 Feed Cost Outlook 41

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Something Changed! 42

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Correlations: Monthly Average Prices, Omaha #2 Yellow Corn; Petroleum Blender Gasoline and Ethanol 43

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Regression for Season Average Corn Price, Feedgrain Crops of R 2 = 89% Forecast 2010 crop price was $5.47/bushel, above the USDA $5.18 average Forecast 2011 crop price is $6.46/bushel, vs. the USDA $6.20-$7.20 range Lower stocks, higher ethanol prices, and ethanol production all important drivers Ethanol production growth in excess to 4 billion gallons, ethanol prices over $2/gallon, and low stocks are all combining to drive corn prices up. The next year looks like more of the same at this point. 44

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Feedgrains Balance * September 1 Crop Year 45

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President * September 1 Crop Year Soybean Outlook Detail to 2011/2012* 46

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn/SBM/DDGS Feeding 47 Lower feed availability & higher protein exports are squeezing consumption

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President About $5.8 billion of revenue goes away Including DDGS, total ethanol plant sales are about $43 billion Most of credit stays with blender But that much money has a corn price effect Maximum effect is about $1/bushel Real effect will be less If Ethanol Tax Credit Goes Away? 48

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Sets price insensitive floor for corn demand Inflates corn, DDGS and ethanol prices Absent RFS and tax credit, ethanol priced near BTU-parity to gasoline: 67% of gasoline Wholesale gasoline at $3.00 = $2.00 ethanol $2.00 ethanol = $4.75 corn and $150 DDGS RFS is the Real Policy Issue 49

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Summary: Any scenario has large up and downside risk Realistic potential exists for: $9+ corn $6 corn $450 soymeal $300 soymeal Prices will be volatile and will depend Macroeconomics Crop size (U.S. and global) Energy prices Potential biofuel policy changes 50

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Higher feed costs = feed efficiency wins share Broilers 2:1 (or better) Aquaculture (as low as 1:1) Turkeys 2.6:1 Hogs 3:1 (including sows, at best) Fed cattle 6:1 Grass fed cattle 0:1 Cow and sow herds likely to shrink for 4-5 years Total protein production can increase if the mix changes enough! That is, less beef and pork and more poultry Likely winners and losers 51

FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President U.S. Meat Protein Shares Reflect Long Term Market Competition Sources: USDA/ERS 52