1. Feed: Sourcing, Pricing and Evaluating
Bart Borg
Murphy Brown LLC
Ames, Iowa

2. Outline Shuanghui International purchase of Smithfield Foods
Key decision points for:
Feed pricing
Feed sourcing
Feed quality and efficiency evaluation
Wrap up

3. Transaction Overview
On September 26, 2013, Smithfield became a wholly- owned subsidiary of Shuanghui International Holdings Limited, creating a leading, vertically integrated global pork enterprise
Smithfield will continue to operate as Smithfield Foods and under its existing brand names

4. Who is Shuanghui?
Shuanghui International Holdings Limited is a Hong Kong-based holding company, which owns a variety of businesses that include food and logistics
Shuanghui International and its subsidiaries are the majority shareholders of China’s largest meat processor, Henan Shuanghui Investment & Development Co.
Shuanghui began operating a single meat processing plant in Luohe City, part of Henan Province, China, in April of 1969
Shuanghui International counts among its shareholders CDH Investments, Goldman Sachs, New Horizon, Kerry Group, and Temasek, as well as Shuanghui employees and management

5. The Same Old Smithfield, But Better!
No changes expected in how Smithfield does business operationally in the U.S. and throughout the world
Shuanghui is committed to maintaining Smithfield operations, staff and management:
Headquarters will remain in Smithfield, VA
No closures at facilities and locations
Management teams and workforces will continue in place
Smithfield will continue to work with the same U.S. producers and suppliers

6. Who is Shuanghui?

7. Partnership that is all about Growth
China has 1.35 billion people, many of whom are moving rapidly into the middle class and desire more and better-quality protein in their and their family’s diets
Pork is by far the leading protein in the Chinese diet, representing over 60 percent of all protein consumed
Chinese consume more than 20 pounds more pork per capita per year than Americans
Over the last 15 years, Chinese per capita consumption has grown by 25 percent and US per capita consumption has shrunk by 10 percent
Pork is the number three protein in the US, but the number one protein in China
China is responsible for 50 percent of the world’s pork consumption and their demand is still growing, whereas pork demand in the US has been declining for almost 15 years

8. Improving the Agricultural Environment in US and China
Growing exports is a key strategic objective for this partnership
Exports currently account for 30 percent of Smithfield’s fresh pork revenue
Exports are also critical to the US industry on a whole
China is the fastest-growing and largest overseas market in terms of potential demand

9. Corn Harvest in Henan Province, China

11. Feed: Largest Variable Cost
Insert your presentation title here
29 October 2004
Feed: Largest Variable Cost
It is commonly understood that feed is the largest cost of production, but it is interesting to note using AgriStats data (45% US market share and 50 participating companies) shows that feed cost has increase from 60 to 70% of the total cost.
Source AgriStats, 2011
Rabo

13. Sensitivity Analysis – Hog Production

14. Feed Energy Content and Cost of Production
Average Daily Gain
Feed Conversion
Feed milling and transport capacity
Cost of Production

15. Routine Ingredient Price Monitoring
Important to bench mark alternative ingredients to a standard (i.e. corn)
Three scenarios:
Seasonal ingredient price flux relative to corn- midds
Little flux relative to corn – DDGS
Opportunities in particular regions and significant change over time - fat

17. Oil removal occurring across plants at a rapid rate

19. Feed Source Modeling Output

20. Feed Sourcing Considerations
Unbundle the cost of feed delivered to the farm
Feed milling costs
Pellets or mash; micron size of grain
Feed transportation costs
Feed ingredient costs
Highly influenced by grain micron size
Alternative ingredient opportunities
The combination of the three is our eventual cost of feed at each site

21. Feed Processing Opportunities

22. Grinding Reducing particle size of grain increases surface area
Improved digestion – improved feed conversion
Reduces diet costs to achieve the same dietary energy content

23. Particle for pellets – less 300 microns
Mash – microns

24. ME Content of Corn with Differing Micron Size
5% ME difference
-- U of IL/Renessen, 2008

25. Diet Cost per Ton at Various Corn Costs and Micron Sizes *
Cost/pig fed would differ by approximately $3.30/pig
Corn Cost, $/bu
Corn Micron Size
3.00
6.00
400
164.04
255.85
600
169.72
266.36
800
175.12
276.33
* Isocaloric diets using fat addition to standardize energy content and
fat prices held at 350% of corn

26. Milling Energy and Pellet Durability Across Various Corn Micron Size
1,000
800
600
400
Pellet durability, %
78.8
79.4
82.4
86.4
Milling energy, Kwh/ton
2.66
3.06
3.81
8.09
Milling cost, $/ton
.213
.244
.306
.647
Wondra et. al., 1992
Electricity at $.08/kwh

28. Evaluation of Pelleting
Production considerations;
Feed conversion impact or diet cost reduction
Potential for improved ADG
Mortality change with some genotypes??
Opportunity to use increased amounts of ingredients that may cause bulk density or flow challenges
Fine ground grain
Alternative ingredients – bakery by-product, wheat midds, etc.

29. Estimated net financial value is $12-13 per ton compared to mash

30. Effect of Diet Form on Finishing Feed Conversion
$2.60/ head opportunity
Controlled test at MB
Poorly pelleted feeds (30-50% pellets) have comparable f/g to meal feed
Working to improve pellet quality with a target 70% +
SEM = .05; Quadratic response P<.008
Murphy Brown LLC, 2003

31. --Stark, NC State, 2011

32. Feed Evaluation Nutrient content monitoring and validation
Are you getting what you’re expecting
Simple moisture, protein, fat and macro mineral analysis
Mycotoxin testing and monitoring
Set maximum allowable mycotoxin specification from the feed source and/or verify through periodic testing
Efficiency of use (i.e. feed conversion)

33. Projected Feed Cost Savings, $ per market pig
Corn price, $/bushel*:
Feed efficiency improvement:
$5.00
$6.00
$7.00 6%
$ 4.12 $
$ 5.66 8%
$ 5.50 $
$ 7.55
10%
$ 6.87 $
$ 9.44
*Assumes a constant price ratio of corn to SBM and fat

35. Feed Efficiency: Outcome metric not a lead indicator
Marginal metric for effective benchmarking
Requires extensive standardization adjustments
Mortality
Dietary nutrient levels (ME and AA density)
Physical form
Market weight
Paylean use
Place weight

36. Drivers of Feed Conversion Change
Dietary energy/nutrient content
Use of pellets or mash feed - Enzymes??
Grain micron size
Lean deposition rate
Sex - Improvest
Genetics - Paylean
Placement and sale weight
Health status- livability
When your plan for any of the above varies, the outcome based Feed/Gain expectation can vary tremendously.

37. Making Sense of Feed Conversion in a Production System

38. Example of Standardized Feed Efficiency
Plan
Actual
Difference better than plan
Adjusted plan 2.685
Difference worse than plan
Estimated cost variance $-0.36 per cwt
The key is being able to define as much of the variance of adjusted plan to actual as is possible.

39. Average Daily Lactation Feed Intake

40. Weaned Pig Weight

41. Lactation Feed Conversion

42. Summary
Feed sourcing decisions become much more clear when the delivered to the farm cost is unbundled into milling, delivery and ingredient costs.
Monitoring key ingredients relative to corn can help in identifying opportunity purchases.
Grain micron size if a key driver in overall diet digestibility and resulting costs.
Many variables effect the feed conversion metric. It is important to understand their individual impacts and adjust expectations accordingly.