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OUTPUT-TO-FEED RATIOS, MONTHLY Month, Continued to Demonstrate the Cost-Price Squeeze Fac- Ratio - Hogs & Ratio - Broilers & Ing Livestock and Poultry Growers

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OUTPUT-TO-FEED RATIOS, MONTHLY Month, Continued to Demonstrate the Cost-Price Squeeze Fac- Ratio - Hogs & Ratio - Broilers & Ing Livestock and Poultry Growers Vol. 10, No. 85/ May 5, 2011 If you are re-distributing Daily Livestock Report, please make sure that the recipients actually want it! We have received several e-mails in recent weeks from parties that are receiving DLR via fax. We do not send it via fax to anyone, so these are instances where one or more of our loyal readers are sharing a good thing (at least that is OUR opinion!) that, for some obviously peculiar reason, is not completely appreciated by the recipient. Not everyone is as smart as we are, right? Per our distribution policy, any subscriber is wel- come to share DLR with others but, given these calls, we would ask that you make sure all of the recipients want to receive the newsletter. A better solution, of course, is to ask your recipients to go to www.dailylivestockreport.com and subscribe. Their contact information is perfectly safe. We share our subscriber list with no one. We are flattered that readers believe the letter is worth sharing and appreciate your enthusiasm. Please just make sure that enthusiasm is shared by the people to whom are sending DLR. USDA’s monthly output-to-feed price ratios, published as part of the Agricultural Prices report near the end of each OUTPUT-TO-FEED RATIOS, MONTHLY month, continued to demonstrate the cost-price squeeze fac- Ratio - Hogs & Ratio - Broilers & ing livestock and poultry growers. The data for 1990 to present Cattle Turkeys appear in the chart at right. 60 12 The most dramatic shift in these numbers is clearly the Hog-Corn Fed Cattle-Corn near-record low level of the broiler:feed ratio which stood at 3.1 in 50 10 Broiler-Feed April, just 0.1 higher than its all-time low set in February. This ratio Turkey-Feed underscores the profits situation facing the broiler industry at the 40 8 present time. With costs at record highs, the companies appear to have engaged in a big game of, pardon the pun, “chicken” in which 30 6 they are just going to see who can last the longest before being forced to reduce output. It may take bankruptcies to get that done 20 4 but the seems to be the game that is being played. We believe losses of the magnitude that were announced last week by Pilgrim’s Pride are not uncommon in the broiler sector 10 2 at present. The second largest U.S. broiler producer lost $121 mil- lion in the quarter that ended March 27. That is over twice the 0 0 amount lost in the same quarter last year ($45.5 million) when 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Agricultural Prices, USDA, NASS USDA’s broiler:feed ratio averaged 4.6 instead of 3.2. Further, those losses were incurred in spite of a 15% increase in sales (to $1.89 billion) versus one year ago. So why have these lower output-to-feed ratios persisted? The biggest reason is the unexpected increase in grain prices in the second half of 2010. Recall that last year’s crop was planted extraordinarily early following a relative moderation of feed costs with Omaha corn prices having stayed between $3 and $4/bushel for most of a two-year period. Things looked good until crop conditions began to de- teriorate in July and prices exploded to near-record highs. In addition, the improvement in profitability in the first half of 2010 had some producers — especially in the broiler and pork sectors — thinking expansion once again. And broiler companies were doing more than thinking about it as they, by May 2010, had increased the broiler breeding flock by nearly 7% from its low October 2009 low. Finally, there is a bit of a math trick involved here. Though the output-to-feed ratios are low, we must remember that the denominators of these ratios are MUCH larger than they once were. That means that a lower output-to-feed ratio may still involve a margin measured in dollars (ie. the NUMBER of dollars) that is not nearly as bad as the ratio might suggest. There is no way that the present broiler:feed ratio of 3.1, hog:corn ratio of 10.5 or fed cattle:corn ration of 19.4 is good for its respective participants. But at these cost levels it will not take the his- toric ratios 6:1, 20:1 and 40:1 to make operations profitable. We have to learn some new guidelines. The first major indication of a move back to expansion in the pork industry came last week when Cargill announced that is was buying the shuttered Smithfield Foods operations near Dalhart, TX. Those units were built by Premium Standard Farms be- fore it was acquired by Smithfield and their closure was part of the downsizing that Smithfield initiated in 2009. We understand that the units have a capacity of 20,000 sows at present but several observers tell us that the buildings could likely house about 30,000 sows if present finishing buildings are converted to breeding-gestation facilities and present nurseries are converted to farrowing barns. Cargill says they plan to ship the pigs to the Midwest for feeding, so the nursery and finishing facilities should be available for conversion. The company expects the first pigs to come north in 2012. According to Successful Farming magazine’s 2010 Pork Powerhouse rankings, Cargill will have roughly 139,000 to 149,000 sows after re-populating the site. The growth would Cargill the #4 or #5 largest U.S. sow own- er. Assuming a reasonably normal output level for such modern facilities, 30,000 sows will producer 750,000 to 850,000 pigs per year. The Daily Livestock Report is published by Steve Meyer and Len Steiner. Please forward to others that may benefit from this information. To subscribe/ unsubscribe visit www.dailylivestockreport.com. Disclaimer: The Daily Livestock Report is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any commodities or securities whatsoever. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures trading is not suitable for all investors, and involves the risk of loss. Past results are no indication of future performance. Futures are a leveraged investment, and because only a percentage of a con- tract’s value is require to trade, it is possible to lose more than the amount of money initially deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their life- style. And only a portion of those funds should be devoted to any one trade because a trader cannot expect to profit on every trade. CME Group is the trademark of CME Group, Inc. The Globe logo, Globex® and CME® are trademarks of Chicago Mercantile Exchange, Inc. CBOT® is the trademark of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange. Inc. COMEX is a trademark of Commodity Exchange, Inc. Copyright © 2011 CME Group. All rights reserved. .
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