Important Economic and Ag Trends and Value-added Beef Production

ForAnnual 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

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 5-10 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

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

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

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

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

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.

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)

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.

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.

Global Warming Vs. Global Cooling

(Other Half of the Story)

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.

The substantial price increase for corn is Demand Driven. The hub of agriculture is corn

The train has “left the station” regarding ethanol production.

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)

2002-03 2009-10

Represents 1 billion bushels or 11% of the total annual corn crop

Represents 4.0 billion bushels or 30% of the total annual corn crop

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.

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.

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.

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”.

Most smaller farmer feeders in the corn belt will be able to compete.

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.

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

1. China

2. Mexico

3. South Korea

4. Saudi Arabia

5. Brazil

6. World (all countries)

7. South Africa

8. United States

9. Egypt

10. Japan

11. European Union

12. Australia

13. India

Total % Increase for the 1995-2005 Time Period

49.7

28.6

25.0

17.8

16.5

16.3

14.9

10.4

9.9

9.1

6.4

2.4

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)

Beef Pork Chicken

41%

16% 12%

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.

Growing economy and increasing consumer incomes.

Improved beef product quality and consistency.

People are living longer.

Increased Hispanic (Mexican) population. They like beef.

The beef check off program.

Increasing beef export sales.

Why has Consumer Demand for Beef Increased over the Past 8 Years

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.

Since 1990, total U.S. feed pen space capacity has increased by at least 25%.

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

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.

Being a true low cost producer and taking advantage of major economies of scale for the feedyards operating as “hotels”.

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.

These feedyards using and taking advantage of wet or dry distillers grain and feeding primarily yearling cattle.

Guiding Principles (Continued)

These feedyards buying and contracting more yearling feeder cattle from smaller “back grounding” and “grow” feedyards.

These feedyards entering into various fed cattle supply, marketing and pricing grid agreements with one or more of the major beef packing companies.

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)

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.

These feedyards being committed to various branded beef “partnerships” or “alliances” that are win-win arrangements for all parties that result in increased value-added beef production and improved production efficiencies.

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

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 value-added 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

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. Grain fed vs. Grass fed. 13. Food safety. 14. U.S. vs. Foreign origin. 15. Preparation time and convenience. 16. Package design and specifications. 17. Nutrition information. 18. New product development. 19. Cooked vs. non-cooked. 20. Price.

Conclusions

1. In order to better increase beef cattle production efficiencies and to increase value-added 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.