Packer Margins Collapse

Packer Margins Collapse Market Highlights The beef packing industry came out of 2016 with record-high profitability and started the Fed cattle trade in the South occurred New Year with estimated profits of more than $100 per head. That changed dramatically in at $122 to $123 this week; $3 to $4 higher compared to the week prior. Kansas saw just a few weeks. Most processors will be operating at or near a breakeven by the end of this trade at mostly $122, while Texas saw trade week. Losses will be common next week after paying higher prices for fed cattle against a from $122 to $123. In the North, cattle relatively stagnant wholesale beef market. traded at mostly $121 to $122.50 for the Since late December, average fed cattle prices rallied approximately $5/cwt or near $69 week, $2 to $3 higher compared to the previous week. Dressed trade occurred at per head. Over this same time, the early January composite cutout experienced some non- $194 to $196, which resulted in a $4 to $6 seasonal weakness – dropping more than $9/cwt or $81 per head. The combination of higher higher market compared to last week. A cattle prices and lower cutout values has taken $150 per head of margin away from packers. fully active trade was experienced across This margin compression is not shocking considering packer margins exceeded expectations all regions. Boxed beef moved higher this throughout the fourth quarter 2016. So, what has changed? week, with Choice product out-performing Select. Higher fed cattle prices kept asking Tighter cattle numbers have pro- prices firm and buyers saw some value pelled cattle prices higher. The weaker in the product after last week’s break. wholesale beef market is due to price December retail prices were released declines across many chuck and round this week; the USDA all-fresh retail price in December was $5.445/lb. down $0.13 from cuts to start 2017. Typically, demand November. Feeder cattle were steady to for roast, stew meat and ground beef $4 higher this week compared to the week is stronger coming out of the holidays. prior. Calves were steady to $5 higher Seasonally, those items also receive for the week. Market cows were mostly price support from tighter supplies steady. Inclement weather did restrict sales volumes across some regions. Sale coming out of the holiday-shortened receipts are expected to remain large slaughter weeks. However, chuck during the next several weeks. The corn and round items rallied in December market moved 10 cents higher this week. much more than a normal seasonal year This is the fourth week in a row that corn has moved higher. Corn has moved 20 would suggest. Those items came into to 25 cents higher over that period and is the year at seasonally higher levels. expected to continue to be firm this spring. Another difference between early 2017 and other years is how the holidays fell. With Christmas and Currentness New Year’s Day on weekends, it allowed packers to slaughter more cattle compared to other years, and profitability encouraged them to do so. It is possible the larger-than-normal holiday slaughter tipped 2017 EDUCATIONAL Very current the supply situation enough into the buyers’ favor that packers needed to lower prices to keep inventories manageable. SEMINAR DATES As the calendar transitions from January to February, fed steer June 21-22, 2017 Current and heifer slaughter seasonally declines, and CattleFax expects that Risk Management Seminar trend to hold in 2017. Beef demand in February is typically the Neutral worst of any month in the calendar year. Throughout second half July 19-20, 2017 2016, year-over-year increases in Saturday slaughter numbers were Corporate College Seminar Caution normal as processors responded to record profitability. In order for September 20-21, 2017 fed slaughter to decline seasonally, the packer will first need to receive Risk Management Seminar the economic signal to slow production. It is possible that the signal Uncurrent has arrived over the last few weeks. November 28, 2017 Bottom Line: Expect weekly steer and heifer slaughter levels to 2018 Outlook & Strategies Steer carcass Meeting weights are decline from the non-holiday November to December average of up 5 pounds at 905 and 488,000 per week to around 460,000 later into the first quarter, as 3 pounds above last year. packers respond to the margin collapse since late 2016. Alan Smith Stretching the Market Fed-Cattle Fed cattle prices have advanced nearly 25 percent from the Next Week: Fed supplies will remain very Outlook fall lows. Since 1980, the fed market has only had a larger than manageable. Look for the beef complex to firm. The 25 percent rally from the second half lows of the previous year, market is expected to trade at $121 to $122. into the first half highs six times. In all of those six years, the February-March: Fed cattle supplies will continue per-capita net beef supplies were declining. In 2017, the per- to be very manageable. Beef demand and usage will capita net beef supplies are increasing. This would suggest that be seasonally slow early, before increasing moving the market is presently probing the upper-end of the range for closer to spring. Look for the market to find a range the year. That said, the tightest fed cattle supplies of 2017 will and trade between $116 and $124. be noted over the next 45 days, and will be price supportive. April-May: Increasing fed cattle supplies will be At the same time, beef usage is at a seasonal slow spot until the noted moving through this timeframe, and continued weather warms moving into the spring. The 3 cardinal rules currentness will be critical to keeping the front-end 1) fed cattle making money, 2) discount live cattle futures, supply manageable. Seasonally, beef usage will and 3) buying a lower breakeven than the current fed market, increase moving into the spring. Look for a softer trend all suggests that the cattle feeding industry will continue to be as the market transitions into the large fed supplies. willing sellers and remain current. Longer-term, increasing Kevin Good supplies of beef as well as competitive proteins will keep a lid on values moving through 2017 and beyond. Contract and Formula Cattle 20-Jan-2017 Scheduled Shipped Scheduled Scheduled in in in in January January February March

Projected Fed-Cattle Marketings (000 Head) 20-Jan-2017 Kansas 255,000 192,500 210,000 225,000 Adj. Wkly Texas 230,000 150,000 220,000 220,000 Placed Pre Mo Begin Mo Carry- Net Avg % of Colorado 90,000 72,000 75,000 80,000 Against Carryover Inv Shipments Over % Weeks Shipments Yr Ago Nebraska 220,000 150,000 205,000 215,000 JAN 781 440 1222 804 36 4.2 134 103 Totals 795,000 564,500 710,000 740,000 FEB 727 442 1169 718 42 4.0 126 105 MAR 710 509 1220 800 38 4.6 122 103 Basis Bids February March Arpril Steers even to -$1 +$2 to even +$2 to even APR 692 480 1172 732 41 4.0 128 104 Heifers even to -$1 +$2 to even +$2 to even MAY 766 499 1265 837 37 4.4 133 96 JUN 836 491 1328 892 36 4.4 142 104 CattleFax Shipments Buyers See Value Beef Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Prices for the Choice boxed beef Complex Monthly Totals (000 hd) 2016 539 2015 488 523 567 507 599 602 572 524 555 460 567 cutout closed the week $2.50 higher, 2017 389 2016 504 546 515 582 599 590 656 606 528 562 514 while over the same period Selects Weekly Averages (000 hd) advanced by $.94. Higher fed cattle 2016 128 2015 122 119 129 127 136 137 136 125 126 115 129 prices kept asking prices firm at the 2017 139 2016 120 119 123 138 136 148 143 144 126 134 122 seller level as packers attempted to 17%16 109 16%15 98 100 95 109 100 108 105 115 100 117 95 retain margin. 17%5Yr 103 16%5Yr 90 91 96 99 92 99 99 104 100 108 88 After prices moved higher during December than CattleFax Placements most observers thought, prices fell back quicker and to a Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec lower level than most expected as well. The new, lower Monthly Totals (000 hd) priced beef has afforded buyers some opportunities to 2016 487 2015 490 578 561 548 470 518 555 580 661 473 496 purchase their needs again at lower levels than what 2017 345 2016 582 645 495 641 538 467 652 601 595 577 532 most had earlier thought possible. This had led to Weekly Averages (000 hd) 2016 116 2015 122 131 128 137 117 118 132 138 150 118 113 renewed buyer interest on cuts such as ribs and some 2017 123 2016 138 140 118 153 122 117 142 143 142 137 127 loin items, stabilizing the cutout. Longer term it is 17%16 106 16%15 113 107 92 112 104 99 108 104 95 116 112 expected to lead to price gains as we begin February. 17%5Yr 97 16%5Yr 107 99 98 101 100 87 99 96 95 102 100 Next Week: A lower slaughter this week and another week of higher fed cattle prices should result in a steady to firmer cutout. Look for Choice boxes to trade from $190 to $195, Selects between $186 and $190. Duane Lenz

Fed Cattle Prices 20-Jan-2017

Live Hot-Wgt Live Hot-Wgt Trade Contract Steers Prices Heifers Prices Volume Formula PANH 122-123 N.T 122-123 N.T 57,000 86% KS 122 N.T 122 N.T 80,500 73% NE 121-122.50 194-196 121-122.50 194-196 85,000 90% CO* 122 194 122 194 37,000 73% CB 120-124 192-196 120-122 192-195 27,500 0% PNW* N.T N.T N.T N.T 0 0% SW N.T N.T N.T N.T 0 0% CattleFax Placements CattleFax Price ranges reflect the last best test for average choice to high quality cattle. *Includes all reported Canadian Imports Page 2 WHEN THE MARGIN FOR ERROR IS SMALL, PRECISION MATTERS.

Stopping the spread of disease starts with directly targeting its causes. Bovilis® Coronavirus is specially formulated to help reduce enteric disease caused by Bovine Coronavirus, and delivers spot-on protection as part of a comprehensive vaccination protocol. Proven to aid in the reduction of enteric disease caused by Bovine Coronavirus

Safe for use in colostrum-fed calves

Approved for intranasal application in one or both nostrils

Safe for use in calves as young as 1 day of age

merck-animal-health-usa.com • 800-521-5767 Copyright ©2016 Intervet, Inc., doing business as Merck Animal Health, a subsidiary of Merck & Co., Inc. All rights reserved. 8/16 55299-2 Take care of BRD with Once PMH® IN, the first and only Approved for healthy cattle 1 week of age or older intranasal vaccine that delivers dual bacterial pneumonia Dual protection against Mannheimia haemolytica and Pasteurella protection for healthy cattle of all ages, including calves multocida, the leading causes of early-onset BRD Adjuvant-free, intranasal application that’s easy to use and easy as young as 1 week of age. on cattle Choose Once PMH IN And never choose again Talk to your veterinarian or animal health supplier about Once PMH IN. Always read, understand and follow product label and use as directed.

2 Giralda Farms • Madison, NJ 07940 • merck-animal-health-usa.com • 800-521-5767 Copyright © 2015 Intervet Inc., doing business as Merck Animal Health, a subsidiary of Merck & Co., Inc. All rights reserved. 51131 1/15 BV-Once IN-51131-B May Feeder Cattle Basis Strength Feeder Cattle Outlook Strong basis levels have persisted for months in the Last week the cattle markets, with cash prices remaining at substantial CattleFax U.S. premiums over the futures markets at both the live cattle 850-pound steer and the feeder cattle levels. Stronger than average May price averaged feeder cattle basis is expected to continue into expiration. $127.60/cwt, and

the daily closing Feeder Cattle and Calves: Representative Direct Sales price for the 2017 Area # Hd. Wt. Breed Type Price Del. May feeder cattle CENTRAL STEERS KS 200 760 Choice Eng X 132.50 MAR futures contract KS 1250 800 CH Eng X - DEL 127.50 FEB averaged $126.83. TX 400 820 Choice Eng X 121.60 APR TX 1150 800 Choice Eng X 123.35 MAY Basis is cash di- CO 800 772 CH Eng X - DEL 132.78 IMM vided by futures, CO 300 858 CH Eng X - DEL 135.99 IMM $127.60/$126.83 CO 250 850 CH Eng X - DEL 126.00 MAR IA 100 617 CH Eng X - DEL 130.50 IMM in this case, which MT 500 775 Choice Eng X 128.16 IMM equaled 100.6 per- NM 1100 825 Choice Eng X 128.67 IMM NE 350 600 Choice Eng X 152.91 IMM cent for the week ending January 13. The basis weakened as futures rallied CENTRAL HEIFERS nearly $4/cwt and cash prices declined by over $1/cwt for the week. Basis TX 1300 700 Choice Eng X 120.00 APR at 100.6 percent marked the weakest level realized since June 2016. Histori- TX 450 725 CH Eng X - DEL 118.65 MAR CO 350 807 CH Eng X - DEL 133.00 IMM cally, when May feeder cattle basis has set up as strong as it has this year, it CO 1200 775 CH Eng X - DEL 125.90 MAY remained stronger than normal, ranging mostly from 101 percent (1% cash NE 350 807 Choice Eng X 132.40 IMM premium) down to 98 percent (2% cash discount) through March and then NE 150 725 Choice Eng X 129.74 FEB SOUTH STEERS weakened to 96-97 percent in late May. There is no historical precedence to GA 100 625 Choice Eng X 129.50 IMM support a cash price premium of more than 1 percent over the May futures GA 250 675 Choice Eng X 130.50 IMM into expiration. GA 100 725 Choice Eng X 126.10 IMM GA 250 775 Choice Eng X 124.50 IMM The cash fed cattle market reached the targeted level in the low-$120’s this GA 700 825 Choice Eng X 123.50 IMM week. With October 2017 live cattle futures trading at a significant discount GA 400 875 Choice Eng X 123.25 IMM to the cash fed cattle market, basis remains very strong, so additional upside SOUTH HEIFERS GA 250 625 Choice Eng X 124.00 IMM for futures will likely require additional cash market gains. When the cash GA 100 675 Choice Eng X 120.50 IMM market stops going up, October live cattle futures and thus May feeder cattle GA 150 725 Choice Eng X 122.50 IMM futures are expected to halt their rally as well. Upside potential to the low- Live Cattle Imports, Year-to-Date Totals $130’s/cwt level exists for May futures, with support expected to hold in the $122-$124/cwt range as long as the cash fed cattle market remains above 07-Jan-17 17-YTD 16-YTD Canada the $116-$117/cwt level. Feeders 228 228 0 Bottom Line: May feeder cattle basis has weakened out as cash prices Slaughter 6,757 6,757 86 have increased $2 to $3/cwt since mid-November, yet May 2017 feeder cattle 14-Jan-17 17-YTD 16-YTD futures have rallied $8 to $9/cwt. Basis is expected to average stronger than Mexico 11,175 13,439 13,104 normal into expiration. Chad Spearman

Feeder Cattle Prices 20-Jan-2017 West & Northwest Central Southeast WA/OR CO MT/WY CA NV/UT AZ/NM /ID TX KS/MO ND/SD NE OK IA AL AR FL GA LA/MS KY/TN wts STEER wts STEER wts STEER 9-10 124-129 122-128 118-124 116-123 117-123 114-123 9-10 123-129 122-133 126-131 129-134 124-130 123-128 9-10 116-122 117-123 114-120 116-122 116-122 120-126 8-9 131-136 123-135 124-130 122-129 123-130 120-129 8-9 125-133 127-135 128-133 131-136 126-134 131-136 8-9 118-126 123-131 116-124 118-126 118-126 124-132 7-8 133-139 127-138 126-133 124-132 125-133 122-132 7-8 127-135 129-137 134-140 138-144 129-137 130-136 7-8 120-128 127-135 118-126 120-128 121-129 125-133 6-7 139-148 137-147 132-143 129-142 130-142 127-141 6-7 132-142 134-147 143-152 144-153 136-146 141-150 6-7 124-134 134-144 122-132 124-134 125-135 124-134 5-6 160-171 152-168 143-155 140-154 141-165 138-153 5-6 143-155 148-162 159-170 161-172 150-162 152-163 5-6 133-145 146-158 129-141 131-143 133-145 128-140 4-5 175-187 168-186 159-172 156-171 157-181 154-170 4-5 158-172 158-177 170-182 170-182 166-180 166-178 4-5 136-150 154-168 137-151 138-152 136-150 132-146 HEIFER HEIFER HEIFER 8-9 126-131 117-130 116-123 114-122 115-126 112-122 8-9 115-123 117-126 120-125 123-128 118-126 120-125 8-9 112-118 113-119 110-116 112-118 112-118 112-118 7-8 126-132 120-131 118-126 116-125 117-127 114-125 7-8 121-129 119-133 124-130 124-130 122-130 122-128 7-8 115-123 118-126 113-121 115-123 115-123 110-118 6-7 129-138 121-137 120-131 118-130 118-133 116-130 6-7 122-132 122-138 127-136 128-137 125-135 125-134 6-7 114-124 119-129 112-122 114-124 114-124 110-120 5-6 134-145 133-145 127-139 125-138 125-140 123-138 5-6 123-135 124-141 135-146 140-151 126-138 130-141 5-6 115-127 123-135 112-124 114-124 115-127 116-128 4-5 155-167 145-166 135-149 132-148 133-162 130-147 4-5 140-154 133-151 145-157 146-158 148-162 144-156 4-5 121-135 129-143 117-131 114-126 121-135 116-130 COWS COWS COWS util 53-63 50-62 60-67 58-65 50-65 59-67 util 55-61 54-66 52-62 54-64 57-61 53-63 util 49-57 54-61 51-59 52-60 47-57 51-57 cn/cut 46-56 42-58 52-59 50-57 42-57 51-60 cn/cut 55-60 47-64 48-58 48-58 57-60 46-56 cn/cut 48-53 53-58 48-57 49-56 39-49 45-52 bulls 72-82 69-81 70-80 66-77 68-81 66-78 bulls 78-83 78-86 72-82 75-85 77-82 70-80 bulls 74-78 79-86 72-79 73-80 72-82 68-74

West — Feeder cattle prices were mostly $1 Central — Feeder cattle traded $1 to $4 Southeast — Feeder cattle prices were to $2 higher. Calf prices were mostly $2 to higher for the week. Calves ranged from steady to $1 higher for the week. Calves $3 higher. Slaughter cow prices were $1 to steady to instances of $5 higher. Weather were steady. Market cows were mostly $2 higher.— Chad Spearman hampered movement. Market cows were steady. — Troy Applehans near steady. — Troy Applehans

Page 3 CattleFax 9110 East Nichols Avenue, Ste. 301 Englewood, Colorado 80112 1-800-825-7525

While CattleFax believes that the data/information provided is accurate and complete, no warranty is made with respect thereto. CattleFax shall not be liable for decisions or actions taken by the use based on the data/information.

Summary of Activity This Week Last Week Year Ago Retail Beef Continues Fall 20-Jan-17 13-Jan-17 22-Jan-16 The December USDA all-fresh beef retail price declined 13 CattleFax Data cents from the previous month – reaching $5.44/lb. The price for Placements 140,234 123,818 141,302 Shipments 122,586 153,515 132,339 beef at grocery stores is now 43 cents lower than last year and Avg In-Weights 706 707 731 more than 70 cents lower than the July 2015 highs. Revisions to USDA Sltr Wgts 1,381 1,383 1,384 the October, November and December prices are still possible, USDA Str Carc Wgt* 905 900 902 Days on Feed 149 154 154 but remain on track to average $5.74/lb. in 2016. Carryover Pct 37 39 41 Retail prices in 2015 averaged $6.04/lb. The price decline of Weekly Supply 389,900 405,800 477,600 6.6 percent in 2016 compares to a per-capita retail beef supply that Percent Grade Choice & Higher 78.94 77.56 76.16 Prime Grade Pct 6.01 6.07 6.09 increased 3.2 percent, to 55.7 pounds per person. In summary, Choice Grade Pct 72.93 71.49 70.07 retail beef prices declined more in the past year than the supply Select Grade Pct 16.71 17.92 18.55 increase would have suggested. As a result, retail beef demand Live Prices ($/cwt) Slaughter Steers 121.85 118.82 133.10 declined 3 percent. Steer Calf (450#) 166.05 164.44 206.28 Early signs point to additional declines in retail beef prices Steer Calf (550#) 153.28 150.03 184.91 in 2017, as beef prices adjust closer to pork and poultry values. Yearling Steer (650#) 139.15 137.62 165.39 Yearling Steer (750#) 131.72 131.01 152.87 U.S. grocery stores are advertising beef at the highest rate to Yearling Steer (850#) 128.80 127.60 144.53 start a year since 2011, and the advertised price is the cheapest Utility and Commercial Cows 57.68 58.19 71.21 Canner and Cutter Cows 53.11 53.21 66.79 since 2014. Consumers are responding to those specials, and Lean Hogs 64.92 62.22 56.50 retailers wanting additional market share will continue to adjust Omaha Corn ($/bu) 3.45 3.34 3.58 retail prices lower through 2017. 12-City Broiler 85.13 87.99 87.64 The seasonal suggests retail prices will decline through early Dollar Index 101.28 101.36 99.06 Meat Prices ($/cwt) winter before holding firm in the spring and then breaking more Certified Angus Beef Cutout (UB) 197.12 197.28 230.13 in second half 2017. CattleFax expects the USDA all-fresh retail Choice Cutout 191.60 189.10 227.67 Select Cutout 187.49 186.55 223.08 beef price to average $5.35 this year, which implies an additional Choice/Select Price Spread 4.11 2.55 4.59 annual demand decline near 7 percent. However, retail price Cow Cutout 160.60 161.15 165.13 declines and demand losses should be smaller into 2020. Hide and Offal 12.00 12.00 10.59 Pork Cutout 78.90 79.37 74.03 Lance Zimmerman Slaughter (000 hd) and Meat Production (Mil lbs) Cattle 569.0 609.0 575.0 Hogs 2,324.0 2,395.0 2,305.0 Total Red Meat Production 969.7 1,016.5 972.8 Beef Production 473.9 507.6 474.0 Pork Production 491.9 504.9 494.9 Poultry Production N/A 857.0 771.0 CME AVG 6 STATE FED KS-TX-OK FDR PRICE STR PRICE** FED STR** Thu 01/19 N/A 120.90 121.14 Wed 01/18 132.25 119.08 119.18 Tue 01/17 132.37 118.95 119.06 Mon 01/16 132.56 118.95 119.06 Fri 01/13 131.99 118.95 119.06 * USDA steer carcass weights are actual from two weeks ago. ** 5-Day weighted average fed steer price (CO,IA,KS,NE,TX,OK), (KS,TX,OK) F.I. Slaughter Mix (000 head) ------Week Ending ------Year To Date ------07-Jan-2017 09-Jan-2016 2017 2016 Pct Chg Total Sltr 543 553 543 553 DN 1.8 Pct No Pct No Steers 53.2 289 53.3 295 289 295 DN 2.0 Heifers 26.3 143 24.1 133 143 133 UP 7.5 Cows 19.2 104 21.2 117 104 117 DN 11.1 Bulls 1.3 7 1.3 7 7 7 DN 0.0 Page 4