1. From information, knowledge Paragon Economics, Inc. Steve R. Meyer, Ph.D. Paragon Economics, Inc. 2008 Iowa Pork Congress Managing Input Costs: Are There Any Good Options?

2. From information, knowledge Paragon Economics, Inc. Meyer’s strategy for success -- Spring 2007: n Buy low n Convert efficiently n Sell high n Real rocket science, huh? n THE CHALLENGE: Just what constitutes “Low” and what constitutes “High” in 2008 and beyond?

3. From information, knowledge Paragon Economics, Inc. Only one “high” higher than now!... “harvest” lows in Aug ’06 and July ’07!

4. From information, knowledge Paragon Economics, Inc. Wheat reminded us that it is important, too!

5. From information, knowledge Paragon Economics, Inc. Higher SBM has exacerbated the problem...

6. From information, knowledge Paragon Economics, Inc. Average costs up 27%, July ’06 to Dec ‘07

7. From information, knowledge Paragon Economics, Inc. And where are they headed?... there is no end in sight at present!

8. From information, knowledge Paragon Economics, Inc. What can you do? n Not much for costs at present n Use existing inventories for as long as they will last n Use DDGS as much as feasible -Price isn’t a real bargain, though, vs. corn

9. From information, knowledge Paragon Economics, Inc. Historic price relationship

10. From information, knowledge Paragon Economics, Inc. But the substitution is not 1-to-1

11. From information, knowledge Paragon Economics, Inc. Simple method is a price ratio...... with DDGS=92% of corn the critical value

12. From information, knowledge Paragon Economics, Inc. What can you do? n Not much for costs at present n Use existing inventories for as long as they will last n Use DDGS as much as feasible -Price isn’t a real bargain, though, vs. corn -Reason: It is better cattle feed! n Other alternatives are priced vs. corn (and wheat and barley!) so they are high as well

13. From information, knowledge Paragon Economics, Inc. This couldn’t get worse – or could it? n ABSOLUTELY YES!

14. From information, knowledge Paragon Economics, Inc. And what about usage?... “It’ll never fly Wilbur!”

15. From information, knowledge Paragon Economics, Inc. Could use Calls to prevent a bigger disaster n Still considerable time value in the deferred n Could write Puts to pay for the Calls -How big will your window be? -You MUST manage the long position if the market drops and you are exercised on

16. From information, knowledge Paragon Economics, Inc. Crude Oil Futures Prices, 2007-2012

17. From information, knowledge Paragon Economics, Inc. Ethanol: Profitable again but for how long?

18. From information, knowledge Paragon Economics, Inc. USDA July frcst.: S/U Ratio of 13.1%......and average farm price of $2.80-$3.40

19. From information, knowledge Paragon Economics, Inc. January: 11.1% and $3.70 - $4.30!

20. From information, knowledge Paragon Economics, Inc. Keys to prices this year n South American soybeans -Rains delayed planting in some areas -Conditions have been good since then, though -Brownfield’s Peter Shinn last Friday: Brazilian contacts think Brazil’s crop could be record large, near 60 million tonnes n Just who is following whom here?

21. From information, knowledge Paragon Economics, Inc. Tight world supplies of grains and oilseeds

22. From information, knowledge Paragon Economics, Inc. U.S. year-end SB stocks are VERY LOW!

23. From information, knowledge Paragon Economics, Inc. Keys to price this year n South American soybeans n U.S. corn acres -Current futures strength is a ongoing effort to buy acres -Even 87 mil. doesn’t appear to be enough! n U.S. corn yields

24. From information, knowledge Paragon Economics, Inc. Which trend do you use?

25. From information, knowledge Paragon Economics, Inc. Keys to price this year n South American soybeans n U.S. corn acres -Current futures strength is a ongoing effort to buy acres -Even 87 mil. doesn’t appear to be enough! n U.S. corn yields -Which trend? – I choose the ’80-’07 -Weather?

26. From information, knowledge Paragon Economics, Inc. Okay here for now – but look at the Southeast

27. From information, knowledge Paragon Economics, Inc. And our last widespread dought? 1988 1988 Yield: 25% below ’80-’07 trend

28. From information, knowledge Paragon Economics, Inc. $70/cwt may be “low” for costs... Where will hog prices go?

29. From information, knowledge Paragon Economics, Inc. The Profit Challenge – You actually do this! n Profit = P H · q H - Σ P xi · x i – FC n You determine: Amounts of the x i ’s (inputs) you use to produce your output (q H ) n Market determines P H and P xi based on everyone’s collective decisions n P H = f( P p-us, C packers ) n P p-us = g(Q p-us, Q p-exp, P B, P C, Inc, T&P) n Q p-us = h(P C, P SBM, P Inputs, Technology) + i·Q p-Canada

30. From information, knowledge Paragon Economics, Inc. Questions & Discussion? National Hog Farmers’ North American Preview www.nationalhogfarmer.com CME’s Daily Livestock Report www.dailylivestockreport.com www.dailylivestockreport.com