August 7, 2012 Sponsored by:

1. August 7, 2012 Sponsored by: Presenter: Dr. Glynn Tonsor, Kansas State University

2. WEBINAR OVERVIEW • Broad Economic Outlook Overview for Industry • Pasture Conditions and Implications • July Cattle Inventory Report Highlights • Heightened Uncertainty: Drivers and Implications for Decision-making of Industry Leaders

3. Economic Outlook Overview: Cow-Calf • Strong calf price pullback • National vs. regional drought has magnified cattle market impact compared to 2011 • Pasture rather than corn uncertainty critical at this point… • Eventually: return as beneficiary of tight supplies and probable expanded heifer retention… • Returns over cash costs • 2012 estimates have fell $100/cow in last 2 months • Will 2015 now be “the peak return year” ??? • Likely a widening between top 1/3 and bottom 1/3 of producers …

4. As of: 8/6/12 August FC: 8/3/12: $139 6/3/12: $158 But “true” expected price may be $5 less currently …

5. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

6. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

7. Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

8. IL, IN, IA, MI, MN, MO, OH, & WI 14.5% of Cows (2012) Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

9. CO, KS, MT, NE, ND, SD, & WY 29.2% of Cows (2012) Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

10. AZ, CA, ID, NV, NM, OR, UT, & WA 10.2% of Cows (2012) Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

11. OK & TX 20.4% of Cows (2012) Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

12. AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA, & WV 24.5% of Cows (2012) Livestock Marketing Information Center Data Source: USDA-NASS, Compiled & Analysis by LMIC

13. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS

14. Livestock Marketing Information Center Data Source: USDA-AMS

15. Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

16. July 1 Cattle Inventory Report • Report was eliminated and then reinstated for 2012; future is unknown … • Downsizing of herd continues (yr-on-yr changes) • Beef cows: -3% (900,000 hd) • Beef heifer replacements: 0% (was +1.4% in Jan.) • 2012 calf crop estimate: -2.3% (800,000 hd) • Feeder supplies outside feedlots: -3.2% (1.18 mil. Hd)

17. Economic Outlook Overview : Stockers • Margins have improved by fall in calf prices • During drought, weak basis has improved projected margins… • Of course, not everyone has the necessary forage to successfully background calves this fall/winter • Increased VOG = increased rewards for management … • Pockets of “excess silage” resources = opportunity…

18. “Buy-Sell” spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) • 8/6/12’ Salina, KS Situation: • BeefBasis.com forecasted price of 750 lb steer December 4, 2012 is $145.45/cwt • What is break-even purchase price of a 550 lb steer purchased on September 4, 2012? • forecasted price is $150.55/cwt

19. “Buy-Sell” spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) Expected Return: +$16.76/head [2.0 *($158.93-$150.55)] Feeding COG $80 = +$23.42/head Expected Return Feeding COG $100 = +$10.10/head Expected Return And “true” expected purchase price may be $5 less currently … COG of $115 = $0/hd Exp. Returns (550 lbs to 750 lbs) Positive Exp. Returns with only 100 lb gains (550 lbs to 650 lbs)

20. Economic Outlook Overview : Feedlots • Excess capacity concerns remain… • Drought improves this initially, makes it worse over coming years… • Forecasted losses persist • Current closeouts are at severe losses… • Elevated cost of gain

21. Markets are up +/- $2 over past 2 weeks …

22. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

23. Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC

24. QUARTERLY FORECASTS (LMIC: 8/2/12)

25. QUARTERLY FORECASTS (LMIC: 8/2/12)

26. Uncertainty Factors • Weather (multi-year drought impacts on pasture) • Policy (GIPSA “fair markets”, Env., MCOOL, Farm Bill, Tax Code) • Timeline on excess capacity resolution … • Social Pressures (AW, Sustainability,) - demand getting complicated • Global markets present growth, need for change, & new risks… • Working together to “grow the pie” is critical; yet divisions persist… • Overall increase in variability in profitability drivers: • Signals opportunity to some = expansion and/or reinvestment • Triggers discomfort to many = exit or simply maintain status quo • within industry variations in views and comparative advantages will determine the ability to profit and shape future of industry…

27. Uncertainty Implications • BEEF Magazine Poll (N=99 as of 8/17/11’) – how would a 12’ survey look? • “If you had to liquidate cattle this year because of flooding or drought, what do you plan to do with the proceeds? • 47% Restock with cows when conditions improve • 9% Restock but change production models (e.g., buy stockers rather than cows) • 27% Keep the cash; leave the business • 6% Reinvest the cash in another non-livestock ag enterprise • 10% Don’t know • If cow-calf herd used to expand when Exp. Profit=$100/cow, what trigger is needed today??? • If variability in feedlot returns is increasing (and avg. returns are not), when/where/how will excess capacity begin to be resolved?

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29. Questions typed by participants during the webinar presentation which were not directly responded to are addressed in the remaining subsequent slides.

30. Question: “With tight supplies and high prices what do you see as the longer term impact on demand when supplies increase?” • Response: • Economists typically say quantity demanded (rather than demand) declines as own-product prices increase. Changes in prices of other products (pork/poultry), consumer views on product quality, etc. drive changes in demand. Related distinctions and implications for understanding beef demand are outlined at: http://www.agmanager.info/livestock/marketing/graphs/Meat%20Demand/Index/IndexOverview_09-14-10.pdf . • Given ongoing increases in cost of production for the beef industry, if demand is neutral or improving over time, consumers will see notably larger retail prices than they have previously. • Bottom line: If tight supplies change the nature of beef products influencing its appeal to consumers that may alter beef demand which makes this a complex question. If alternatively the main change is higher production costs and similar quality of beef product offerings persist, I do not see demand declining but rather see a smaller set of households (or less per representative household) ultimately being the consumer of a product with higher retail prices than in the past. That is, the quantity demanded would be lower at elevated retail prices.

31. Question: “Will we see packer capacity close?” • Response: • Many analysts think there is both excess bunk space at the feedlot level and hooks at the packing level given current and expected cattle supplies. Given this, pressure on packing capacity can be expected to continue. Moreover, the economics of needing to run plants near their capacity (e.g. partially using facilities is very undesirable) reinforces this pressure. • Bottom line: Yes I think there is notable pressure on the packing sector given current and expected volumes available to them for throughput in their business. Identifying when this will lead to a specific plant closure much less what plant is most likely to close is beyond my ability to comment on here.

32. Question: “You mentioned that forecasted losses in feedlots persist, could you please give us some idea of what would that part of the industry be one year from today? How many less players are you expecting?” • Response: • I am in the middle of a project attempting to better estimate the amount of excess capacity in the feedlot sector. Please watch for an associated fact sheet to be posted online ( http://www.agmanager.info/) in the near future. • The preliminary assessment suggests that since 2000, total industry capacity has either declined or increased, perhaps by 4% depending on what assumptions are used regarding <1,000 hd yards. An increase is possible as the number of larger feedyards has grown while the number of smaller yards has declined. Over the same period, the cattle supplies to feedlots have declined by 6%-11% depending on the approach used. • Bottom line: The specific amount of excess capacity has yet to be finally determined but the issue firmly appears worse than it was in 2000. The number of players (e.g. lots) that will exit as the capacity-to-cattle supply relationship improves is likely to be large given the ongoing decline in operations under 1,000 hd.

33. Question: “To sum up, do you expect modest liquidation since cow-calf producers are still turning a profit and the drought has just pushed off expansion or will we see liquidation pick up this fall/winter?” • Response: • Most analysis suggests representative cow-calf producers have covered variable costs but not total costs in most years. See: http://www.agmanager.info/livestock/budgets/production/beef/Cow-calf_EnterpriseAnalysis(Jun2011).pdf. Please note the charts on slides 5 & 6 are returns over cash costs rather than total costs. • Given the state of pasture conditions throughout the country the prospect of additional herd liquidation in the coming few months remains high. • Bottom line: I maintain a view that the total beef cow herd in the U.S. will likely expand in coming years. This view is mainly driven by global beef demand bullishness and an assumption that the current weather patterns are not “the new normal.” It is important however to note the herd could expand while operations exit. More narrowly, I’d expect the number of cow-calf operations to continue the pattern of decline while the total herd (and hence # of cows/operation) increases.

34. Question: “Given controversy over RFS mandate and your comments about demand, any sense which consumers prefer more - food or fuel?” • Bottom line: This is not something I have narrowly studied and was not immediately aware of a study examining how U.S. consumers or residents would prefer U.S. grains be utilized. A quick Google search led to these resources: • http://www.extension.org/pages/27136/biodiesel-and-the-food-vs-fuel-debate • http://ictsd.org/downloads/2011/12/the-impact-of-us-biofuel-policies-on-agricultural-price-levels-and-volatility.pdf • http://ajae.oxfordjournals.org/content/early/2012/05/11/ajae.aas039.short?rss=1

35. Question: “What is the outlook for beef consumption in the US?” • Response: • Longer term, the economics of supply and demand come to play of course but in the near term when production volumes are known or set by existing inventories, it is important to recognize consumption reflects production adjusted for imports, exports, and cold storage inventories. The price of retail products then reflects the value it presents to consumers and the known quantity available. Since production is the main driver in this calculation, as beef production declines, one expects consumption to decline. • Bottom line: I think per capita beef consumption in the U.S. will largely continue to be at levels below what most in the industry are used to for three main reasons. First, note the point above about production declines leading to consumption declines. Secondly, the longer-term process of higher production costs resulting in smaller industries (absent demand enhancement) reinforces this trend. Finally, if global per capita incomes grow at rates above those in the U.S., foreign consumers would be expect to “bid away” additional pounds from U.S. consumers.

36. Question: “In your opinions, given capital and pasture, when is the correct time to expand?” • Response: • I always pause and rarely even indirectly give market timing type advice. Ultimately I share a sincere view that if I had the answer to this I’d be out making market bets reflecting this view in an effort to “corner the market.” My absence of this activity is consistent with years of research. • Please also see this related presentation by Dr. Dhuyvetter: http://www.agmanager.info/Faculty/dhuyvetter/presentations/2011/KCD_K-StateBeefConf(Aug2011).pdf • Bottom line: There is enough variation in production cost situations across producers that no one answer exists regardless of views on upcoming cattle and feedstuff markets. I would encourage any producer interested in this issue to utilize the decision aid at this website (http://www.agmanager.info/Tools/default.asp#LIVESTOCK; see “KSU-Beef Replacements” file) to identify the net present value implied by different replacement decisions. An understanding of these NPV values along with appreciation of an operation’s own cost structure and tolerance for what it means to be in “the modern cattle business” will lead each operator to answer this question on their own.

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