1. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Livestock Outlook: Imbalances in the Market Dr. Thomas E. Elam President FarmEcon LLC March 1, 2008

2. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President First, we need to make sure we are all on the same level of reading comprehension!

3. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President First, we need to make sure we are all on the same level of reading comprehension!

4. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President What is this data?

5. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2008 OUTLOOK Bottom line: A deteriorating balance of higher costs, increasing production, and a more difficult demand growth scenario.

6. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Like 1972-76? Unprecedented increase in grain demand Food price inflation becomes an issue Huge imbalances in the ag economy Farm income/land prices explode But, this time around: Different cause – biofuels subsidies No reserve acres

7. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Food price inflation rate Beef & pork price increases yet to come

8. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Imbalances Feed costs are headed higher, personal income growth slowing But total meat production increasing Corn acres likely to drop But ethanol capacity up 40-50% by year end Dollar not likely to strengthen Grain export demand likely to increase

9. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President USDA total meat production fcst. +1.8% +2.4%

10. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn available for feed use

11. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Light at the end of the tunnel? Yes! Hint: It’s not the sun (or the moon) Profitability for hogs and cattle bad, and getting worse 2008-09 macro outlook not good Only apparent solution = less meat How much less and how soon?

12. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Hogs Production seems headed 3-5% higher Costs will continue to increase Already losing $35+/head With current outlook, losses increase Only question, when does liquidation really get underway?

13. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Paragon Economics, 1-24-08

14. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Comm. Pork vs. CME Lean

15. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Comm. Pork vs. CME Lean Target for profitability

16. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Farrow/finish net returns/head (Iowa State model, 7/08 FarmEcon fcst.)

17. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President What needs to happen Pork production needs to drop to about 20 to 20.5 billion pounds (-10%) Forecasts for 2008 up 3-4%: USDA = 23.065 Informa = 22.852 Plain and Grimes = ~22.9 No signs of major liquidation (yet)

18. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Cattle outlook not any better Record-large on-feed (12,097,000) Feedlot losses mounting, more pressure on feeder prices Liquidation takes years to show up Feeder cattle prices taking a hit now Cow budgets showing losses Slow liquidation (-.5% Jan. 1, 2008 cows) Feeder cattle supply same as 2007 Beef output will not drop until 2009-11

19. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Iowa State yearling budget Profit/loss per head

20. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President OK City Feeder to Panhandle Steer Ratio

21. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Feeders outside feedyards

22. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Beef supply/demand outlook 2008 production up about 1% Exports could absorb most of the increase Estimated production splits by quarter Q1 +2 to +3% Q2 -1 to -2% Q3 +.5 to -.5% Q4 +2% to +3% 1/1/2009 beef cow number -1% to -2%?

23. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Bright spot – beef and pork exports Beef export demand recovery Volume and price both increasing Average export value/lb. above 2003 Pork export demand growth Volume almost double 2002 Value/lb. up 10% since 2002

24. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Beef export value/price scatter

25. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Beef export volume recovery

26. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Pork export value/price scatter

27. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Balanced pork export volume growth

28. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Feed Cost Outlook 2008/2009

29. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President It’s not ALL Ethanol Ending global grain stocks trending down from 2001 Economic growth adding to demand Subsidized ethanol demand on top of robust food demand

30. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Feed Outlook – Ethanol Links Ethanol production has reached a level where price rationing for feed use is happening 3 major demand sources: Feed Exports Food, Seed and Industrial Ethanol is the only growing piece Ethanol demand growth is not market-driven Who will cut back to make room for ethanol? Additional corn makes little price difference

31. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Biofuels S/D with tax credit/RFS Price Quantity Demanded and Supplied Supply Demand, no tax credit RFS Demand, w/tax credit Amount of Tax Credit A B

32. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Feedstock S/D with tax credit/RFS Price Quantity Demanded and Supplied Supply Demand, Biofuel Value & tax credit w/RFS RFS Tax credit A B

33. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol Facts 20 gallon tank of E10 = 25 pound turkey or 7 five pound broilers. Universal E85 in the U.S. = global grain supply Mandated 2008 U.S. ethanol = Australia + Indonesia grain crops Current and planned Iowa ethanol plants = Iowa importing corn

34. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn/Ethanol Plant Locations - RFA

35. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn/Ethanol Plant Locations - DTN

36. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol cost/revenue drivers Inputs as % of revenue Corn 60-65% Natural gas 14-15% Chemicals 4% All other costs 11% Leaves about 8% for ROI and debt service Revenue 80-87% ethanol 12-19% DDGS <1% CO 2

37. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Value to Ethanol Producers

38. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/documents/IFO100107_000.pdf Boom Starts Boom Stops

39. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Reality check – 2-20-2008 DTN model ethanol plant, “Neeley Biofuels”, South Dakota U.S. average ethanol price = $2.32/gal NY regular gasoline = $2.58/gal Corn at DTN model plant = $4.80 Model plant profit = 18.7¢/gal http://www.dtnethanolcenter.com/index.cfm

40. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 18 cent plant profit, 2-20-2008 $2.58$2.32 $4.80

41. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Summary: We cannot produce enough corn to depress the price significantly below the level set by the value of corn to ethanol producers. If corn prices drop, ethanol producers will expand until the corn price increases enough to make further expansion unprofitable.

42. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol Projections Ethanol demand limited in short run by distribution and blending capacity Long run limitation is feedstock (corn) supply Demand is almost unlimited in the long run E85 could use 500+ million acres of corn Crude oil price and ethanol subsidy level will set long term corn prices Use of cellulose also has many issues and limitations

43. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Mandated U.S. Ethanol Production And Corn Required

44. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol Refinery Rated Capacity http://www.ethanolrfa.org/industry/statistics/

45. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President CY Ethanol Rated Capacity/Production http://www.ethanolrfa.org/industry/statistics/

46. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Ethanol Corn Use Capacity

47. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2008/2009 Ethanol Effects Increased corn acreage has already doubled soybean meal prices 2008 battle for acres Corn acres need to increase Soybean prices may prevent that Further effects on global grain/oilseed prices Food riots in China and Asia – already China banned further use of grain for ethanol EU and Canada withdrawing support for biofuels Increasing use of DDGS in U.S. feeds

48. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Outlook – 2008/2009 Potential ethanol demand for corn About 3.33 billion bushels in CY 2008 Going to be 4+ billion in CY 2009 2008 corn acres likely to decrease Historic collision of ethanol and food is coming, and sooner rather than later Mandated use creates price insensitivity 2008/09 corn price could go to $6-8/bushel How much acreage goes to beans + weather? 2008 crop failure could take corn to over $10

49. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn/Meal Price Outlook – 2008/2009 Corn prices remain at $4.25-$5.00, meal at $325-375, through May-June Weather drives prices after that 2009 price outlook is “higher” Biofuel production will increase We are out of unused productive acres There are limits to what biofuel producers can pay unless mandate becomes effective Food prices will become a national issue

50. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Outlook – 2007/2008* * September 1 Crop Year

51. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President The approaching ethanol debacle December, 2008 rated ethanol capacity = 13.405 bgy Running capacity = ~15 bgy At 2.75 gal/bu = 5.5 bby What does that do to the balance sheet?

52. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Corn Outlook – 2007/2008* * September 1 Crop Year

53. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Consequences of 15 bgy ethanol Corn balance sheet rules out 15 bgy Blending capacity not there today either 105% of potential E10 sales Lower price of ethanol relative to gasoline Reduces corn price ethanol plants can afford Similar to 1998/1999 hog debacle And on the 10 th anniversary!

54. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President What will happen this fall, if? Gasoline stays near current level or lower Ethanol prices decline relative to gasoline Then: Ethanol producers cannot afford $5+ corn Food producers outbid fuel producers for corn About 3.75 bgy (25%) surplus capacity Ethanol plants cannot run at capacity Some will not run at all Major shakeout likely Those without long term contracts at risk

55. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President ETHANOL PLANT IN PRATT MIGHT NOT REOPEN PHYLLIS JACOBS GRIEKSPOOR, The Wichita Eagle Industry experts say that they doubt the Gateway Ethanol plant in Pratt, which closed this week, will reopen in the short term and that it might need repairs or renovations. "It's going to be extremely difficult for them to come back up without some major renovation," said David Vander Griend, president of ICM, one of the country's leading ethanol plant builders. Neither Gateway plant manager Jarrett Hollis or Orion Ethanol co-owner Josh Barker, one of the plant's major investors, returned phone calls Friday.

56. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Soybean Outlook – 2007/2008* * September 1 Crop Year

57. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President 2007/2008 Biofuels Policy Cost Impact* *Increases relative to no biofuels tax credits or RFS model solution, crop year basis

58. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President One small positive – by-products?

59. FarmEcon LLC A source of information on global farming and food systems Thomas E. Elam, PhD President Summary: No let up in cost pressures Soybeans in a major crunch unless more acres 2009/2010 debacle for ethanol producers Nearing the top limits on biofuel effects, unless Gasoline prices go higher Congress ups the ante on supports Natural gas prices fall significantly