1. From information, knowledge Paragon Economics, Inc. Steve R. Meyer, Ph.D. Paragon Economics, Inc. NPB Swine Educators – Sept. 2013 Meat Sector Economics Update and Outlook

2. From information, knowledge Paragon Economics, Inc. Government shutdown – What is running?  “Essential services” – SS, Medicaid, law enforcement, air traffic control, firefighters  Packing plants and processors – meat inspection is “essential”  Import inspection – generates import data but no one will be at AMS to use it!  Fee-based USDA programs – beef grading, checkoff oversight 6/20/20132

3. From information, knowledge Paragon Economics, Inc. What isn’t running?  USDA websites – none of them so even historic data are not available  AMS Market News -Price reporting for hogs and pork (and cattle, beef, chicken, etc.) -Slaughter and production data -Weekly live animals imports, meat exports  NASS – Hogs & Pigs report beat the bell! -This week: Broiler Hatchery -Next week: Crop Production, WASDE 6/20/20133

4. From information, knowledge Paragon Economics, Inc. What about hog and pork markets?  About 50% of hogs are priced off negoti- ated hogs or the cutout value  Hogs will still be traded but prices will be negotiated in a vacuum – no information  CRITICAL DAY: October 15 when October futures expires – CME LH Index???  Talk of voluntary reporting to an independent third party – devil is in the details and timing. 6/20/20134

5. From information, knowledge Paragon Economics, Inc. Key factors affecting meats and poultry...  Drought has been a game changer whose impacts will be felt for another 2 years  Grains/feed costs – has 2013 weather changed the game again?  Demand – performing well in spite of some lingering macro concerns  Pork and chicken supplies are growing  Beef supplies will not grow for 2 years – but incentives are in place 6/20/20135

6. From information, knowledge Paragon Economics, Inc. 2011 drought is still critical – esp. for beef!!! 6/20/20136

7. From information, knowledge Paragon Economics, Inc. ’12 drought: Much larger (77%, 44 %> severe)... And MUCH larger impact on feed supplies 6/20/20137

8. From information, knowledge Paragon Economics, Inc. And weather has remained critical in ‘13...... as WCB has gotten progressively dryer Severe drought: Up to 28% vs. 36% in ‘12 High Plains 38%, South 44%, West 53% Note dry conditions in IA, MO, NE, IL, MN

9. From information, knowledge Paragon Economics, Inc. Slow planting but better conditions, yr/yr... 6/20/2013 9 Harvest vs. 5yr: SB 3 vs 9, corn 7 vs 15

10. From information, knowledge Paragon Economics, Inc. Looks like we dodged the early frost bullet!

11. From information, knowledge Paragon Economics, Inc. World corn situation is MUCH better for ‘14  Record high world production (+11%) and consumption (+6%)  Highest year-end stocks since 2001-02  BUT S/U RATIO IS 5 TH LOWEST SINCE ‘75

12. From information, knowledge Paragon Economics, Inc. Big increases for all corn uses – exc ethanol 6/20/2013 12... But still less feed availability than pre-’09

13. From information, knowledge Paragon Economics, Inc. Ethanol’s challenge is NOT margins... 6/20/2013 13... The problem is SHARPLY LOWER gas usage

14. From information, knowledge Paragon Economics, Inc. World soybean situation is different...  World output +6.2% in ‘13-’14  Consumption +4.4%  Ending stocks +20%, S/U tied for 3 rd high... Record high output, consumption, stocks

15. From information, knowledge Paragon Economics, Inc. But SB prices are still near $13...... Primarily due to China’s appetite & means

16. From information, knowledge Paragon Economics, Inc. KEY RESULT: Lower – but still HIGH -- costs 6/20/2013 16

17. From information, knowledge Paragon Economics, Inc. The macro-economy – Improving  Good things: -GDP growth, improving housing market, low interest rates, job growth (++167k in Aug) -Wealth effect has been positive -- mainly -U (7.3%) is falling but U-6 is still at 13.7%  Question marks: -Personal disposable income is still FLAT, yr/yr 6/20/201317

18. From information, knowledge Paragon Economics, Inc. Dec Real per capita PDI was false security...... Average for 2013 YTD has been -0.1% 6/20/201318

19. From information, knowledge Paragon Economics, Inc. The macro-economy – Improving  Good things: -GDP growth, improving housing market, low interest rates, job growth (++167k in Aug) -Wealth effect has been positive -- mainly -U (7.3%) is falling but U-6 is still at 13.7%  Question marks: -Personal disposable income is still FLAT, yr/yr -Deficit & spending – must be reigned in -How will economy react when the Fed actually slows on Quantitative Easing? 6/20/201319

20. From information, knowledge Paragon Economics, Inc. PC cons stayed above 200 pounds in ‘12...... And is falling due to supplies/costs! 6/20/201320

21. From information, knowledge Paragon Economics, Inc. Retail prices are at or near record highs...... Would not be if demand was, in fact, soft 6/20/201321

22. From information, knowledge Paragon Economics, Inc. Meat/Poultry demand has been good in’13 6/20/201322

23. From information, knowledge Paragon Economics, Inc. Beef & chicken demand are up, turkey lower 6/20/201323

24. From information, knowledge Paragon Economics, Inc. Pork demand has been good so far in ‘13 6/20/201324... July was +4.7% yr/yr, YTD RPCE is +2.8%

25. From information, knowledge Paragon Economics, Inc. Large stocks but -1.4% vs. July, +0.6% yr/yr... 6/20/201325... Aug pork was -0.7% vs. July, -7.8% yr/yr

26. From information, knowledge Paragon Economics, Inc. CHICKEN 6/20/201326

27. From information, knowledge Paragon Economics, Inc. Poultry: Reductions in ‘07 and ’11 but...... ~+2% Jan-June and then +4.5% July & Aug 6/20/201327

28. From information, knowledge Paragon Economics, Inc. Broiler egg sets are +5% yr/yr last 2 wks. 6/20/201328

29. From information, knowledge Paragon Economics, Inc. Chicken prices – esp breasts – have fallen 6/20/201329

30. From information, knowledge Paragon Economics, Inc. BEEF 6/20/201330

31. From information, knowledge Paragon Economics, Inc. Better pasture conditions have allowed...... Cow slghtr to fall 10-15% since mid-July Data Source: USDA-NASS

32. From information, knowledge Paragon Economics, Inc. Beef cow herd is smallest since the ’40’s... 6/20/201332... But we may stabilize the herd this year

33. 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? 6/20/201333

34. From information, knowledge Paragon Economics, Inc. Beef: Long-term trends PLUS droughts...... ‘13 will be smallest calf crop since 1949 6/20/201334

35. From information, knowledge Paragon Economics, Inc. Lower numbers are finally reducing supply! 6/20/201335

36. From information, knowledge Paragon Economics, Inc. Production maintained by higher weights...... But can that continue – Zilmax situation? 6/20/201336

37. From information, knowledge Paragon Economics, Inc. FC supplies grew by 0.7% vs. Jan ‘12...... But are still near record low at 25.56 mil. 6/20/201337

38. From information, knowledge Paragon Economics, Inc. Data Source: USDA-AMS & APHIS FC imports from Mexico are down 46% YTD... And 46% is 450,000 head

39. From information, knowledge Paragon Economics, Inc. No turn-around in sight for availability...... Per-cap: -3% in ‘13 and -5.5%+ in ’14 @ 52.6 6/20/201339

40. From information, knowledge Paragon Economics, Inc. Sept 1 COF – Lower than expected-- bullish 6/20/201340

41. From information, knowledge Paragon Economics, Inc. Can beef be competitive at $180 - $200/cwt.?... As competitors lower their prices? 6/20/201341

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

43. From information, knowledge Paragon Economics, Inc. Pork exports: THE 2013 issue but improving... July: 1 st positive (+2%) month since Oct 6/20/201343

44. From information, knowledge Paragon Economics, Inc. July exports – growth in all but China, Korea.... YTD: Canada +3%, Mexico +2%, Others +18% 6/20/201344

45. From information, knowledge Paragon Economics, Inc. Imports from Canada are -10% YTD...... Risk issue for ‘14: MCOOL retaliation 6/20/201345

46. From information, knowledge Paragon Economics, Inc. September Hogs and Pigs – Surprise!!!! 6/20/201346

47. From information, knowledge Paragon Economics, Inc. Record-high litter size and return to 2%+... 6/20/201347

48. From information, knowledge Paragon Economics, Inc. But what about PEDv???... 6/20/201348... Missed losses or robust prod’ivity growth?

49. From information, knowledge Paragon Economics, Inc. The June H&P was dead on until Labor Day..... Sept slghtr. was -7.4% yr/yr, -3-5% vs frcst. 6/20/201349

50. From information, knowledge Paragon Economics, Inc. One reason for low slaughter: Low margins.. 6/20/201350... Nothing new: Lower vs. 5-yr avg for 2 yrs

51. From information, knowledge Paragon Economics, Inc. Sept H&P: Growth in Q4, sizable growth in ‘14 6/20/201351

52. From information, knowledge Paragon Economics, Inc. ‘14 prod costs continue to fall – now <$78...... Or roughly $32/head lower than in ‘13 6/20/201352

53. From information, knowledge Paragon Economics, Inc. Key issue for pork is slaughter weights... 6/20/201353... Currentness? Prod increase this fall?

54. From information, knowledge Paragon Economics, Inc. Pork cutout value has held VERY well...... How long can the counter-seasonal last? 6/20/201354

55. From information, knowledge Paragon Economics, Inc. Hog rally went to my “pre-March” highs...... Then seasonal, then the rally of last 2 wks 6/20/201355

56. From information, knowledge Paragon Economics, Inc. ‘14 forecast profits are now best since ‘05...... For those who have avoided PEDv 6/20/201356

57. From information, knowledge Paragon Economics, Inc. Slaughter forecasts – from Sept H&P Report 6/20/201357

58. From information, knowledge Paragon Economics, Inc. Price forecasts – Lower that ‘13 in ‘14... 6/20/201358... 2014 futures are offering opportunity now

59. From information, knowledge Paragon Economics, Inc. BIG challenge for future growth -- capacity! 6/20/201359... And disincentives for current players

60. From information, knowledge Paragon Economics, Inc. Closing thoughts...  Feed costs are lower – will drive expansion, especially for pork and chicken  Demand is good in spite of lackluster macro conditions – positive prefs for meat?  Beef supplies will continue tight – high prices and opportunities for competitors  MUCH STILL DEPENDS ON WEATHER -Beef still needs pasture/range recovery -Still hand-to-mouth for grains each year 6/20/201360

61. From information, knowledge Paragon Economics, Inc. Questions or Comments? 6/20/201361