Transcript 2008 Outlook .(English)

Important Economic and Ag Trends
and Value-added Beef Production
For
Annual Meeting of the American
Society of Agricultural Consultants
Crowne Plaza Hotel
St. Louis, Missouri
Prepared and Presented by
Bill Helming
Agribusiness Consultant and Economist
Bill Helming Consulting Services
10640 South Glenview Lane
Olathe, Kansas 66061
(913)768-6540
November 12, 2007
Important U.S. Economic Trends

Much slower economic growth in late 2007 and within
2008. A recession is likely in 2008. Plan accordingly.

Reduced consumer spending resulting primarily from
a serious housing market liquidity, credit, cash and
declining market value squeeze that is real. It will get
worse before it gets better.

Interest rates will decline further through 2007-2008.
Interest rates and the rate of inflation will likely trend
much higher in 2009-2014. Fix rates between mid
and late 2008 as a borrower.
Important U.S. Economic Trends

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Energy costs will remain high. Crude oil prices will
likely remain in the $70 to $100 per barrel range over
the next several years. Any actual or perceived supply
interruptions will cause crude oil prices to go even
higher.
The U.S. dollar will remain weak. It will likely decline
further over the next two years.
The need for a fundamental change in our U.S.
Income Tax Code will increase greatly over the next 510 years.
If Congress and the White House go democratic in
November 2008, plan on taxes, interest rates and the
rate of inflation going up significantly. This will be
negative for the U.S. economy.
Important Ag and Food Industry Trends
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The Golden Age of Agriculture has finally arrived. The
future for American agriculture for the next 10 years is
very positive.
Cheap grain is gone for at least the next 10 years.
Farm and grassland values will continue to go up.
Substantially higher grain prices are primarily
demand driven. Major increases in corn and soybean
supplies (used for bio fuel production) and increased
global consumer demand for grain, meat and milk in
key places like China, India and elsewhere are key
factors driving the increased demand.
Important Ag and Food Industry Trends
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As global consumer incomes increase,
demand and consumption of meat, eggs,
cheese and milk go up. All economists agree
on this point.
The trend for U.S. and global food prices will
be up significantly for the next several years.
Consumer expenditures for food (as a percent
of total disposable income) will increase
significantly as well.
Important Ag and Food Industry Trends
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The same will be true for energy and health care
costs. The combination of (1) increased energy costs,
(2) increased Ag commodity prices and food costs
and (3) increased health care costs set the stage for
significant consumer price escalation (inflation) and
higher interest rates in the 2009-2014 time period.
Increased yields and productivity will accelerate at
the farm level. No one should under estimated the
capacity of the American farmer to over produce.
Farmers will plant more acres in response to the
higher prices. There will be very intense competition
for acres between corn, soybeans, wheat and other
crops. However, there are limits on how many total
acres that can be planted to grain crop production
and for livestock grazing in the years ahead.
Big Concerns Moving Forward
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Too many people focus on “I” or “Me”
instead of “We” in the U.S.
Increased level of fraud, decline in ethics
and honesty, and the trend towards moral
decline and a reduced belief in God.
Over 50% of Americans now believe in
government dependency, socialism, bigger
government, higher taxes and servitude.
Big Concerns Moving Forward
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The large portion of U.S. citizens who do not
understand the serious threat of terrorism to their
lives, freedoms, our economy and to America’s
future.
The continued trend towards a very large number of
illegal immigrants entering the U.S. each year (in
addition to the ones already living here).
Most members of Congress are not serious about
reducing government spending, balancing the
budget, reducing the national debt and truly fixing
Social Security and Medicare (or the future funding of
same).
Global Warming Vs. Global Cooling
(Other Half of the Story)

Over many centuries, the earth has
experienced significant and gradually
increasing and decreasing temperatures.

There is substantial historical scientific data
and many respected scientists that support
the theory that global climate and weather
changes are cyclical in nature and that these
changes are primarily the result of gradual
reductions and increases in the amount of
energy and heat coming from the sun.
Global Warming Vs. Global Cooling
(Other Half of the Story)

Greenland is a good example. From about 950 to
1400 AD, the southern part of Greenland was lush,
green and had a warm climate for several centuries.
Starting about 1500 AD, the people of Greenland
began to disappear due to a famine in what was
called the Little Ice Age. Climate conditions became
so cold that the people in Greenland could no longer
live there. Today there are about 56,000 people who
live in Greenland.

The temperature in Greenland is now gradually
increasing. Farmers are now growing vegetables in
the southern part of Greenland.
Global Warming Vs. Global Cooling
(Other Half of the Story)

Historical climate changes on earth and
specifically those that have been taking place
over the past 30 years and today are mostly
the result of natural cyclical climate forces
rather than a result of manmade forces.
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Many respected scientists today believe that
within 10 to 20 years from now, much of the
talk will be on global cooling, not on global
warming. From a historical perspective, the
odds are 90% that they will be right.
Global Warming Vs. Global Cooling
(Other Half of the Story)
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I strongly believe, based on the
historical scientific data and on the
climate changes over many centuries,
that average annual temperatures of the
earth will continue to gradually go up
and go down over time as a result of the
cyclical increases and decreases in the
energy and heat coming from the sun.
Global Warming Vs. Global Cooling
(Other Half of the Story)

Those who believe global warming today is
primarily manmade equates to global socialism.
The odds are very high that these people are wrong
and that they are encouraging policies and changes
that will be harmful to our economy and to the global
economy for many years into the future.

I strongly believe in energy conservation and in the
practice of being protective of our environment in a
responsible and balanced way.
Gaining Production Efficiencies
and
Value-added Beef Production
Major Grain and Beef
Industry trends over the
next 5–7 years
Corn Demand and Prices

With normal crop growing conditions, average annual cash prices
ranging between $3.00 and $4.00 per bushel will be the norm,
compared to the $2.00 per bushel average price over the past 10
years at the farm level.
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The substantial price increase for corn is Demand Driven. The hub
of agriculture is corn

The train has “left the station” regarding ethanol production.
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Distillers grains will become much more plentiful and will very likely
decline farther in price.

Corn used for Ethanol production will increase significantly over the
next several years (see bar chart on next slide).
Ethanol Use of Corn
(Billions of Bushels)
Represents 4.0
billion bushels or
30% of the total
annual corn crop
Represents 1 billion
bushels or 11% of
the total annual corn
crop
2002-03
2009-10
Beef Cattle Inventory Numbers and
Beef Supplies

The Cattle cycle has changed. The trend is for flat to
declining beef cattle inventory numbers.

Primary reasons are (1) dry weather, (2) sharply higher corn
prices, (3) average age of cow-calf operators and (4) the
significantly higher costs of producing a calf.

The demand for pasture and grass by ranchers and stocker
cattle operators will increase significantly as a result of putting
on more weight before steers and heifers are placed on feed.
This is because of significantly higher corn prices.
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Total annual beef suppliers will be relatively flat and tight.
Excess Feedlot and
Beef Packing Plant Capacity

Capacity utilization at the feedlot level will be in the 60% to
75% range at best.
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Capacity utilization at the beef packing level will be in the
65% to 80% range at best.

Competition for fed cattle supplies among beef packers will
increase significantly. Beef packers will have to pay more to
get the fed cattle they need.

Beef packers will have increased incentives to (1) “line up”
fed cattle supplies and (2) find ways to add value to the fed
beef they sell to retail food stores, the HR&I trade and to
their beef export customers.
The Excess Feedlot and Beef Packing Capacity
will Result in Accelerated Consolidation

Over the next 10 years, 1% of U.S. feedlots will account for at
least 75% to 80% of all fed cattle marketed.
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Depending on their location, many of the 5,000 to 25,000 head
feedyards will not be able to compete. Many of these feedlots
will become “dinosaurs”.
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Most smaller farmer feeders in the corn belt will be able to
compete.
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Over the next 10 years, the five largest U.S. beef packers will
account for at least 90% of all fed steer and heifer slaughter.
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Supply, pricing grid, value-added and branded beef
agreements, “partnerships” and “vertical alliances” will
accelerate between relatively large cattle feeding and beef
packing companies.
.
U.S. Consumer and Export
Demand for Beef will remain
Strong and Increase Further
Percentage Increase in Total Combined Meat Consumption for Beef,
Pork, Poultry and Lamb for the U.S. and for Other Countries*
(1995-2005)
Major
Countries
Total % Increase for the 19952005 Time Period
1. China
49.7
2. Mexico
28.6
3. South Korea
25.0
4. Saudi Arabia
17.8
5. Brazil
16.5
6. World (all countries)
16.3
7. South Africa
14.9
8. United States
10.4
9. Egypt
9.9
10. Japan
9.1
11. European Union
6.4
12. Australia
2.4
13. India
2.0
*Source: Food and Agriculture Organization of the United Nations, New York City, New York.
Over the Past 8 Years, U.S. Consumer
Dollar Expenditures for Beef, Pork and
Chicken have Increased
Eight Year Percentage Increase
(1999-2006)
41%
16%
Beef
Pork
12%
Chicken
Why Consumer Demand and Expenditures have
Increased so Much over the Past 8 Years

The demand curve has shifted to
the right.

Consumer demand for beef has
become significantly more inelastic.
Why has Consumer Demand for Beef
Increased over the Past 8 Years

Growing economy and increasing consumer
incomes.
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Improved beef product quality and consistency.
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People are living longer.
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Increased Hispanic (Mexican) population. They
like beef.
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The beef check off program.
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Increasing beef export sales.
Why There is Substantial Excess Feedyard
and Beef Packing Plant Capacity

The Beef Cattle Inventory is not increasing. Beef
cattle numbers may decline. Feedyards will be
feeding more yearling cattle and fewer calves.
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Since 1990, total U.S. feed pen space capacity
has increased by at least 25%.
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Since 1990, total U.S. Beef packing plant
capacity has increased by at least 25%.
Why There is Substantial Excess Feedyard
and Beef Packing Plant Capacity
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Many cattle feeding customers have
stopped feeding cattle. Therefore, the
feedyard owner(s) have to feed substantially
more cattle. This will be even more true in
the years ahead.

This trend increases the market risks
associated with cattle on feed ownership. It
also substantially increases the amount of
working capital and bank financing required
by the feedyard owner(s).
Guiding Principles for Successful Large-scale
Cattle Feeding Operations Moving Forward

Owning and operating feedyards that have 35,000
to 100,000 head capacities in the right locations.
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Being a true low cost producer and taking
advantage of major economies of scale for the
feedyards operating as “hotels”.
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The feedyards operating at 85% to 95% of capacity
where 80% to 100% of the cattle are owned by
those who own and operate these feedyards.
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These feedyards using and taking advantage of wet
or dry distillers grain and feeding primarily yearling
cattle.
Guiding Principles (Continued)
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These feedyards buying and contracting more yearling
feeder cattle from smaller “back grounding” and “grow”
feedyards.
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These feedyards entering into various fed cattle supply,
marketing and pricing grid agreements with one or more
of the major beef packing companies.
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These feedyards will require more good data and
information on their cattle relative to (1) source
verification, (2) genetic makeup, (3) animal health history,
(4) cattle feeding performance and (5) carcass quality
characteristics.

These feedyards and their beef packer “partners” being
committed to achieving improved production efficiency
and increased value-added beef production.
Guiding Principles (Continued)
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These feedyards doing more “partnering” with selected
cow-calf and stocker cattle producers to jointly add-value
and consistently produce what their customer (the beef
packer) wants each week.
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These feedyards being committed to various branded beef
“partnerships” or “alliances” that are win-win
arrangements for all parties that result in increased valueadded beef production and improved production
efficiencies.
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These feedyards being committed to moving away from a
commodity orientation system to a value-added and
branded beef system.
Commodity Value vs. Added-value for Beef
Producers, Cattle Feeders and Beef Packers
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Beef Commodity Values – Very little , if any, price
differentiation for fed cattle. The same price is paid
essentially for all fed cattle sold in a given week. The
emphasis is on producing more pounds, not on valueadded beef production.
Beef Added Values – Customers paying more money for
fed beef that is perceived by customers as being of higher
quality relative to such things as (1) tenderness, (2) taste
and eating satisfaction, (3) consistency, (4) the use or
non-use of growth hormones, (5) the use or non-use of
antibiotics, (6) U. S. vs. foreign origin, (7) grain fed vs.
grass fed beef, (8) carcass fat content, (9) breed and
genetic makeup, etc.
Commodity Beef Vs. Value–added Beef
Production and Merchandising
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Commodity Beef Production – This is the traditional
and historical supply push approach where price is a
major factor impacting consumer buying decisions.
Value-Added and Branded Beef Merchandising– This
is where price is somewhat less important to consumers.
This is the demand pull and brand loyalty approach
where customers and consumers perceive they are
buying safe, dependable and consistently high
quality beef products at a higher price.
Key Information Needed by Cattle Producers,
Cattle Feeders, Beef Packers and their
Customers Relative to Value-added and
Branded Beef Production and Merchandising
1. Tenderness and taste.
2. USDA quality and yield grades.
3. Consistency of quality and supply.
4. Age of beef and feed ration.
5. Genetic makeup.
6. Eye appeal and color.
7. Weight and portion size.
8. Fresh vs. Frozen.
9. Fat content.
10. Use or non-use of growth hormones.
Key Information (Continued)
11. Use or non-use of antibiotics.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Grain fed vs. Grass fed.
Food safety.
U.S. vs. Foreign origin.
Preparation time and convenience.
Package design and specifications.
Nutrition information.
New product development.
Cooked vs. non-cooked.
Price.
Conclusions
1. In order to better increase beef cattle
production efficiencies and to increase valueadded and branded beef production and
merchandising opportunities, larger scale
feedlot owners and operators must have more
beef cattle ID data for each animal from the
time they purchase the feeder cattle through at
least the beef packing and carcass quality level.
Conclusions
2. By having this data, many of the
increased production efficiencies and the
value-added beef production
opportunities are realistically achievable
for beef cattle producers, for cattle
feeders and for beef packers who take
the value-added approach as opposed to
the commodity approach.
Conclusions
3. Bottom line, the commodity approach does not
require a lot of cattle ID data. The value-added
and branded beef approach, however, does
require much more cattle ID data. For those beef
producers, cattle feeders and beef packers who
take the cattle ID road can expect to be well
rewarded financially for doing so. Value-added
beef production is where the beef industry is
going. This is where the real future is for the
beef industry moving forward.
Conclusions
4. In reality, cattle producers and cattle
feeders are historically very slow to
change. Therefore, I expect only a
relatively few of the more progressive and
visionary cow/calf operators and cattle
feeders (cattle feeding companies) to take
advantage of the significant opportunities
in the value-added beef production arena
today.