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From information, knowledge Paragon Economics, Inc. Steve R. Meyer, Ph.D. Paragon Economics, Inc. PPIC/RAC – September 2010 Ethanol Update, Pork Industry.

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Presentation on theme: "From information, knowledge Paragon Economics, Inc. Steve R. Meyer, Ph.D. Paragon Economics, Inc. PPIC/RAC – September 2010 Ethanol Update, Pork Industry."— Presentation transcript:

1 From information, knowledge Paragon Economics, Inc. Steve R. Meyer, Ph.D. Paragon Economics, Inc. PPIC/RAC – September 2010 Ethanol Update, Pork Industry Economic Outlook, GIPSA Rule

2 From information, knowledge Paragon Economics, Inc. ETHANOL IS STILL A BIG DEAL FOR LIVESTOCK AND POULTRY PRODUCERS! AND FINALLY – MEAT AND POULTRY CONSUMERS!

3 From information, knowledge Paragon Economics, Inc. 210 plants, capacity of bil. gal. n Cellulosic: 16.9 mil. gal. – 1% of the total n 346 mil. gal. still under construction n Full output would use 5.05 bil. bu. of corn

4 From information, knowledge Paragon Economics, Inc. Ethanol plants are in the black – for now Nearby corn: $4.83/bu. Ethanol: $2.15/gal. Nat. Gas: $4.02/mmBtu

5 From information, knowledge Paragon Economics, Inc. Reason: Big recovery in ethanol price

6 From information, knowledge Paragon Economics, Inc. Why the rally? -- Seasonal? Octane?

7 From information, knowledge Paragon Economics, Inc. RFS is 12 bil. gal. this year, 12.6 in Slower growth (600 mil./yr.) thru 2015

8 From information, knowledge Paragon Economics, Inc. Ethanol now uses over 30% of corn supply

9 From information, knowledge Paragon Economics, Inc. Corn above ethanol+DDGS rising SLOWLY

10 From information, knowledge Paragon Economics, Inc. Important policy issues this fall/winter n Renewal of the BTC and Import Tariff -Both are questionable -Could lower BTC -Must keep it close to Tariff or Brazil, et. al. will almost surely challenge in WTO n 15% blend allowance -Or 12%? -May approve for 2007 and later models – but what about logistics? Liability?

11 From information, knowledge Paragon Economics, Inc. Sept WASDE: Lowest S/U ratio since ‘96

12 From information, knowledge Paragon Economics, Inc. Record-large crop and record-high price!

13 From information, knowledge Paragon Economics, Inc. Cash corn is now above the “new” range And harvest has barely begun!

14 From information, knowledge Paragon Economics, Inc. We have survived the tight stocks..... SBM futures now in UPPER half of new range

15 From information, knowledge Paragon Economics, Inc. Result: Highest feed index since early ‘09

16 From information, knowledge Paragon Economics, Inc. Average costs for ‘11 > $70/cwt carcass

17 From information, knowledge Paragon Economics, Inc. Consider BE costs of new price ranges n “New” range for corn $3.10 to $4.20 and “new” range for SBM is $250 to $350 n $3.10 corn and $250 SBM = $61.62/cwt n $3.65 corn and $300 SBM = $67.15/cwt n $4.20 corn and $350 SBM = $72.52/cwt n Since 11/1/2007: -SBM has been >$300/ton 106 of 148 weeks! -Corn has been >$3.65/bu. 80 of 148 weeks! n <$3.65 and <$300 look like good buys

18 From information, knowledge Paragon Economics, Inc. Competing Meats -- Briefly n Beef production is falling -Smallest calf crop since Smallest beef cow herd since Weights will not likely increase given $5 corn -I expect record-high (‘03??) cutout values in 2011 n Chicken output is growing again -SBM is providing a relative advantage -Composite is still near record-high ~ $85 -Breasts $180, Leg qtrs >$40, Wings >$120

19 From information, knowledge Paragon Economics, Inc. PORK AND HOG OUTLOOK

20 From information, knowledge Paragon Economics, Inc. Key Issues for rest of 2010 and 2011: n Feed costs – have reduced profit outlook by over 50% since June n Q4 hog numbers – Sept H&P report says there are few hogs “backed up” n Expansion -Some evidence that we added sows but the BH was lower in Sept than in June -Limiting factor: Risk – feed and rules n Demand -Domestic – soft past 12 mos. but improving -Exports – July was disappointing

21 From information, knowledge Paragon Economics, Inc. Financial positions are improving Futures suggest 50% loss recovery by July

22 From information, knowledge Paragon Economics, Inc. Actual slghtr has been -1.9% from June H&P... And -5.4% from ’09 since June 1 Since 7/17: -336k head vs. Jun H&P

23 From information, knowledge Paragon Economics, Inc. September Hogs and Pigs Report

24 From information, knowledge Paragon Economics, Inc. Supplies slowly getting back to yr/yr levels

25 From information, knowledge Paragon Economics, Inc. Weights are NOT GROWING yet implying..... We are going deep into supply – new corn?

26 From information, knowledge Paragon Economics, Inc. Production declines early in ‘10 & recent Yr/yr change is getting MORE negative

27 From information, knowledge Paragon Economics, Inc. Freezer stocks are very tight – esp. pork!

28 From information, knowledge Paragon Economics, Inc. BIG cutout rally – 2 NEW RECORD HIGHS... Will the normal seasonal prevail?

29 From information, knowledge Paragon Economics, Inc. Hog price rally was smaller But could keep prices above $70 this fall

30 From information, knowledge Paragon Economics, Inc. Exports +18.6% in May, +22% in June But -7.1% in July, still +5.1%YTD

31 From information, knowledge Paragon Economics, Inc. Japan fell sharply in July from record highs.....Mexico is still strong, Russia up 4X in May

32 From information, knowledge Paragon Economics, Inc. All demand indexes are lower for 12 mos July indexes were better & the trend is up! July monthly index vs. ‘09: Pork – +1.26% Chick – +3.92% Beef – +3.67%

33 From information, knowledge Paragon Economics, Inc. Reason: Retail prices are finally rising At or near record highs and more to come!

34 From information, knowledge Paragon Economics, Inc. Sow slaughter is lower – down 10-20% But slaughter surged last summer

35 From information, knowledge Paragon Economics, Inc. Slaughter of US sows is now trailing ’ YTD ’10 = 28.8% vs. 29.6% in ‘09

36 From information, knowledge Paragon Economics, Inc. YTD gilt slaughter: -0.2% vs. ’09, -0.3% vs. ‘08

37 From information, knowledge Paragon Economics, Inc. Futures: Profits of ~$12.03/hd for all of ’ ~ $7.08 for rest of ’10, but only $4.15 in ‘11

38 From information, knowledge Paragon Economics, Inc. Slaughter forecasts based on Sept H&P Growing supplies through 2011

39 From information, knowledge Paragon Economics, Inc. Price forecasts

40 From information, knowledge Paragon Economics, Inc. Short-term risks to consider: n Feed costs – Yields? Harvested acres? Exports? What about NEXT SPRING AND SUMMER? n Domestic demand – strengthening but what if we have a double-dip recession? n Appears that BH is not growing but how large will productivity growth be? n Any of a host of goofy occurrences – remember H1N1?

41 From information, knowledge Paragon Economics, Inc. PROPOSED GIPSA RULE

42 From information, knowledge Paragon Economics, Inc. Addresses 5 requirements of 2008 Farm Bill : n Criteria to be considered in deciding whether an undue or unreasonable preference or advantage has been given. n Conditions constituting reasonable notice of suspension of delivery of birds n Whether a requirement of additional capital investments are a violation of the Act n Whether a reasonable time period has been given to remedy a breach of contract n Arbitration opt-out and “fair” arbitration

43 From information, knowledge Paragon Economics, Inc. 1. Undue/Unreasonable Preference n Contract terms/prices based on number, volume, etc. must be offered to all individuals and groups that can meet terms n Premiums for quality, time and prod methods must not be discriminatory against prods or groups n Information regarding procurement methods must be disclosed to all when it is disclosed to one or more

44 From information, knowledge Paragon Economics, Inc. 3. Capital investments as unfair practice n Can grower decide against it? n Is it the result o f coercion or threats? n Does packer plan to reduce or stop operations within 12 months? n Are some required while others are not? n Age of recent upgrades or investments n Can investment be expected to be recouped in a reasonable time period? n Is reasonable time give to implement?

45 From information, knowledge Paragon Economics, Inc. Definition of “capital investment” n Investment of $25,000 or more for equip- ment, goods, prof services, labor, interest n Initial or additional n “Additional capital investment” defn. -The term does NOT include maintenance or repair costs -Provides no guidance on differentiating maintenance from repair from capital investment

46 From information, knowledge Paragon Economics, Inc. 4. Reasonable time to remedy a breach n Packer/contractor must provide: -Written notice upon initial discovery -Description and time of the act or omission -How the breach can be satisfactorily remedied -Reasonable deadline to remedy n Failure to provide notification within 90 days waives packer’s/contractor’s rights to terminate the contract due to the breach

47 From information, knowledge Paragon Economics, Inc. 5. Fair arbitration process, opt-out choice n Clearly disclose -all costs to be paid by grower/producer -steps of the process and limitations on rights and remedies n Requires -impartial neutrals as arbitrators -Grower/producers be given opportunity to engage in “reasonable discovery process” -A reasoned, written opinion provided to all n Chance to opt out of binding arbitration

48 From information, knowledge Paragon Economics, Inc. GIPSA went well beyond the Farm Bill n GIPSA has the authority to write rules to necessary to enforce the Act – Are these “necessary”? n Competitive injury – conduct that distorts competition in the market channel or marketplace. -What is the competitive “norm”? -Significance of any deviation? -Gains (such as economies of scale) to offset?

49 From information, knowledge Paragon Economics, Inc. Likelihood of competitive injury n Packer/contractor raising rivals’ costs n Foreclosing competition through -exclusive dealing -misusing market power to restrain competi- tion -Depressing prices paid below market value -Impairing a producer’s/grower’s ability to: »Compete with other producers/growers »Receive the reasonable expected full economic value from a market transaction

50 From information, knowledge Paragon Economics, Inc. Records and justification requirement n Requires written records that provide “justification” for any prices or contract terms that deviate from standard prices or terms -What is “standard”? -Apparently ANY deviation -No time period for records retention -No idea of what an acceptable “justification” may be

51 From information, knowledge Paragon Economics, Inc. Defines the scope of P&S Act n Applies to all swine prod, poultry growing and livestock prod and marketing contracts n Conduct can violate the P&S Act without a finding of harm or likely harm to competition. -BIG DEAL!! -Contradicts 8 Circuit Courts and Congress! -Legislation by regulation!!

52 From information, knowledge Paragon Economics, Inc. Defines unfair, discriminatory, deceptive n “Unjustified” breach – is there such a thing as a justified breach? n Retaliation for grower’s/producers’ lawful expression, association or actions n Refusing to provide data used to determine payments n Any act or attempt to get a grower to waive rights – jury trial, full damages, et.al. n Undocumented price differences not substantiated by revenue or cost justification

53 From information, knowledge Paragon Economics, Inc. Defines unfair, discriminatory... continued n Termination of a production contract for violating a law UNLESS the violation is reported “immediately” to authorities -Can’t work with them to resolve the problem and then terminate due to the violation n Fraud – duh n Any act that causes competitive injury or the likelihood of it – “any action that distorts competition”

54 From information, knowledge Paragon Economics, Inc. Limitations on livestock buying practices n Prohibits a packer from buying animals from another packer or affiliated company -Stated reason is to prevent “signalling” -Does not define “affiliated companies” -Producers who are owners of a plant? Triumph? US Premium Beef? -Packer-sold hogs are reported and published separately, cattle are not – Cattle issue? -Animals will move through dealers – signals? n Limits dealers who serve as packer buyers to working for only one packer -- culls??

55 From information, knowledge Paragon Economics, Inc. Submission of contracts n Each “unique” marketing contract must be submitted to GIPSA within 10 days -No definition of unique – ANY term? -GIPSA may post copies on its website »Contractors can identify confidential business information »Says “confidential business info” will be redacted – no guarantee it is same, though -Must notify GIPSA within 10 days when a “unique” contract is no longer in use -Significant record-keeping

56 From information, knowledge Paragon Economics, Inc. Other capital investment restrictions n Contracts must be long enough for grower to recoup 80% of capital investment if the investment is required n Can’t require an additional cap investment -If a grower has given at least 90 days’ notice of intent to sell -If they have previously approved current equipment and it is still in good working order n Cant reduce animals placed because a grower refuses to make equip changes if current equip is working

57 From information, knowledge Paragon Economics, Inc. Impacts n Homogenization – no premiums other than carcass (???), lower prices n Higher costs and risks of using contracts -Significant written documentation required -Opens possibility of challenge after challenge n BIG difficulties for some packers and owners of packing plants n Legislation by regulation – BAD precedent n Uncertainty and liability = costs!

58 From information, knowledge Paragon Economics, Inc. Impacts -- continued n Variations and individual needs will be ignored due to required justifications -Will limit the gains of good negotiators -“Treat all the same” regardless of needs n Likely to lead to further vertical integration -Production contracting too expensive – own your buildings -Marketing contracting too expensive – own your hog supply n Next action: Ban/limit vertical integration

59 From information, knowledge Paragon Economics, Inc. What is the impact at retail? n Higher costs at farm level will have to be covered -Eventually – lower supplies than would otherwise have occurred – higher prices -Which species will it favor? n Ditto for packers – risk=costs n Potentially less variety --Less differentia- tion due to fears of legal action

60 From information, knowledge Paragon Economics, Inc. And now the target shifts to RETAILERS n Competition “workshops” are separate from GIPSA rule (sort of) n December 8 session in DC is on Price Spreads or Marketing Margins – difference between retail and farm price n Labor unions and some activist groups are trying to “unite” the livestock/poultry sectors to rise up against the REAL culprits – Retailers!

61 From information, knowledge Paragon Economics, Inc. QUESTIONS & DISCUSSION?


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