Creating a Perfect Storm

2015 National Angus Convention Angus
University Lance Zimmerman
11/4/15
Cycle of Market Emotions
Wow! I feel great about
this investment.
Temporary setback. I m a long-term investor.
Euphoria
Point of Maximum
Financial
Opportunity
Anxiety
Thrill
Denial
Excitement
Optimism
Fear
Maybe the
markets aren t for
me.
Optimism
Relief
2016 Market Outlook
and Strategies Discussion
American Angus National Convention
Despiration
Point of Maximum
Financial Risk
November 4, 2015
Hope
Panic
Depression
Adapted from Westcore Funds/Denver Investment Advisers LLC, 1998
State of the Industry
•  The livestock industry just came out of the
"perfect storm."
•  It is up to producers and processors to
navigate the changing winds.
•  At the end of every rainbow, there is a pot
of gold. We just have to find it.
Creating a
Perfect Storm
Rain Where It Was Needed
~12% U.S. Beef Cowherd
~5% U.S. Corn Production
~80% U.S. Beef Cowherd
~85% U.S. Corn Production
Overland Park, Kan.
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2015 National Angus Convention Angus
University Lance Zimmerman
11/4/15
2014 tightest supply
Pork Prod.: +7% in F2015
Broiler Prod.:+5% lbs in F2015
Beef Prod.:-2.5% in F2015
Broiler
Pork
Beef
Supply Pressure Pushes
Margin Upstream
Retail
•  Tighter supplies stimulate prices
•  Incentive is to increase beef bids
(when demand is steady to higher)
Packer
Feeder
Cow-Calf
•  Overcapacity pressures higher bids
•  Incentive is to gain market share
Managing Expectations
After the Storm
•  Overcapacity pressures higher bids
•  Incentive is to increase efficiency
•  Profits increase through higher calf prices
•  Incentive exists to increase herd size
Overland Park, Kan.
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2015 National Angus Convention Angus
University Lance Zimmerman
Producers are answering
the economic call to expand
Overland Park, Kan.
11/4/15
2016 Price Forecasts
550-lb. Calves = $210/cwt.
750-lb. Feeder = $180/cwt.
Fed Cattle = $135/cwt.
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2015 National Angus Convention Angus
University Lance Zimmerman
11/4/15
The industry is on track for
the largest year-over-year %
increase in heifer numbers
since 1959 and 1951.
2011-2015 Avg.
Feedyard P/L = -$10/hd.
Steer/Heifer Sltr. = 454,000/wk.
Segment losses of $4.5 mil./wk.
Cow-calf producers who
expanded the most from
2014-2015 have the most
equity at risk on the break.
Overland Park, Kan.
4
2015 National Angus Convention Angus
University Lance Zimmerman
11/4/15
Demand
How much do you want?
What will you pay?
The Rainbow at the
End of the Storm
U.S. Retail Protein Prices
% Change
vs. YA
-0.4%
All-Fresh Beef
$6.08
+2.9%
Ground Beef
$4.13
+0.7%
Composite Pork
$3.92
-7.0%
Choice Beef
$1.95
-1.1%
Fresh Whole Chicken
$1.42
-8.3%
Boneless Breast
$3.38
-3.0%
Whole Frozen Turkey
$1.54
-2.9%
Whole Milk ($/gal.)
$3.39
-9.1%
Grade A Eggs ($/doz.)
$2.97
+50.6%
Composite Broiler
September 2015 vs. September 2014
5%
Wholesale Prices
Retail Prices
10%
% CHANGE vs. YEAR AGO
September
2015
$6.23
USDA Protein Prices vs. Year Ago
2.9%
0%
-1.1%
-5%
-6.8%
-7.0%
-10%
-15%
-20%
-20.0%
-25%
-30%
-24.9%
All-Fresh Retail Pork
Retail
Composite Wholesale Wholesale
Retail Beef
Price
Composite Boxed Beef Pork Price Composite
Price
Broiler Price
Cutout
Broiler Price
Source: USDA
PROTEIN
Source: USDA and BLS
Strongest 4-wk. period
since April.
Demand for 90% lean beef trim
could be double 1998 levels by
year end. How many other beef
items could make that claim?
Job-related news is mixed,
but consumer attitudes
remain strong.
Overland Park, Kan.
5
2015 National Angus Convention Angus
University Lance Zimmerman
11/4/15
2002-2015
Fed
Cattle
Prices +230%
No
Roll
Production
-45%
Prime
NR Spread +
415%
PrimetoProduction
+18%
The Millennial Consumer
Millennials are likely eating
the best beef of their lifetime.
As more millennials enter their prime buying years (ages 25-54),
their aggregate buying power is expected to increase 70% by 2020.
Baby boomers will see buying power shrink by 16% in that time.
•  36% of millennials research
• 
their retail purchase before
shopping
81% of meat and poultry
buyers make a list
•  90% do not list a preferred
meat brand
•  63% are open to making a
meat-related buying decision
in the store
Source: National Chicken Council Annual Marketing Seminar,
IRI Worldwide, July 2015
YTD Imports: +32%
Australia: = +53%
New Zealand = +17%
Canada = +6%
Mexico = +35%
Top 5 Countries
China = 1.36 bil.
India = 1.27 bil.
United States = 319 mil.
Indonesia = 253 mil.
Brazil = 202 mil.
R.O.W. = 3.85 bil.
YTD Exports: -12%
Japan: = -12%
South Korea = +10%
Mexico = -23%
Canada = -13%
Hong Kong = -30%
Source: US Department of Commerce, plus other published estimates
Overland Park, Kan.
6
2015 National Angus Convention Angus
University Lance Zimmerman
11/4/15
Can U.S. Protein Exports Grow?
The Best Opportunities May Remain Overseas
Mexico
Japan
Exports as % of Production
Beef = 11%
Pork = 22%
Chicken/Broiler = 20%
Canada
South Korea
Greater China*
Per Capita
Equivelent
30 lbs.
15 lbs.
36 lbs.
16 lbs.
1.4 lbs.
Export Volume
3.8 bil. lbs.
1.9 bil. lbs.
1.3 bil. lbs.
0.9 bil. lbs.
2.0 bil lbs.
Source: USDA and Census
*w/ H.K., Taiwan, Vietnam
What is a Profitable
Beef Cowherd Expansion?
Demand correction is
likely from recent highs.
2020 Beef Cowherd
Cow-Calf P&L
29 million
+$500 per cow
30 million
+$450
31 million
+$390
32 million
+$300
33 million
+$240
Assumptions:
•  Steady retail beef demand
•  Offsetting beef imports and exports
•  A $570/head cow cost in 2015 with 3-4% annual increases to 2020.
What if retail beef demand grows?
Summary
•  Market expectation: Prices carved out trading ranges
in 2014-15. Leverage left as supplies increased.
•  Expansion: The bulk of the competing protein supply
increase is here – pending better international demand.
Beef supplies will still increase into 2018. The
magnitude depends on margins.
•  Demand: Domestic improvement hinges on a
consumer who is better off than last year. Trade needs
to be a focus for all proteins.
•  Profitability: Low-cost operators find the most success
in the long run. Risk management is critical. There is
not a one-size-fits-all approach to profitability.
Overland Park, Kan.
+1% per year
33 million
+$340
+2% per year
33 million
+$440
You cause the grass to grow for the livestock
and plants for man to cultivate,
that he may bring forth food from the earth.
Psalm 104:14
Thank you!
Lance Zimmerman, Analyst
[email protected]
800-825-7525
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