Q2 2020 Big Picture Market Outlook

Q2 BIG PICTURE
OUTLOOK
NAVIGATING MEAT PROTEINMARKETS
AMIDSTAGLOBALPANDEMIC
HOSTED BY: J.S. Ferraro
DATE: April 15, 2020
Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
WEBINAR
Photo by Clark Young on Unsplash

2 |
An integrated sustainable food
brand committed to creating the
best-tasting fresh protein
experience.
Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.
Providing market intelligence, risk
management and meat
distribution & logistics solutions
for the meat and livestock industry.
ABOUT JSF

CO-HOST | DR. ROB MURPHY
DR. ROB MURPHY, BS, MS, PhD Agri Economics
Executive Vice President, Research and Analysis
J.S. Ferraro
www.jsferraro.com
An agricultural economist and business leader with over 27 years in the industry, Dr. Rob Murphy has
a wealth of experience in the North American meat and livestock industries studying, analyzing and
predicting market movements. His expertise spans commodity analysis, econometric modelling,
forecasting, futures markets, hedging, and risk management.
Rob holds a Ph.D. in Agricultural and Applied Economics from Virginia Tech and has developed his
market expertise over the past three decades by serving as an economist with the Chicago Mercantile
Exchange, Sparks Companies and Informa Economics.
At Informa, Rob held two senior leadership roles (Senior VP of Livestock, Meat, Dairy and Poultry
group and Vice President) over 13 years. He focused on the development of risk management
programs and directed the division’s work in commodity analysis in the protein sector. He has spoken
internationally on many topics, including agri supply chain-development and international protein
demand.
Currently, Rob is the Executive Vice President, Research and Analysis at J.S. Ferraro & Co. leading
the team in commodity analysis, financial modelling, and the development of trading and risk
management strategies.
3 | Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.

CO-HOST | KEVIN GRIER
KEVIN GRIER
Market Analyst
Kevin Grier Market Analysis & Consulting
www.kevingrier.com
Kevin Grier is a noted Canadian Agriculture & Food Market Analyst providing economic and market
outlook for livestock, meat and grocery industries over the last 20+ years. His critical market insight
and analysis helps his clients - from government and producer groups to small to large businesses -
drive profitable bottom line decisions.
Kevin is a regular contributor and respected expert across media platforms throughout North America -
Global News, CTV, National Post, Globe & Mail, National Hog Farmer and Grocery Business. Kevin
speaks with clarity on a range of topics including market analysis, economic impacts, consumer trends
and commodity analysis. He provides regular commentaries on the market and is a national and
international keynote speaker known for his approachable yet pragmatic style.
His breadth of knowledge was developed over 18 years at the George Morris Centre, a leader in
economic research in the agriculture and food industry. Prior to that Kevin was a manager with the
Ontario Farm Products Marketing Commission, the supervisory body of the provincially regulated
marketing boards. Currently, Kevin is managing director of Kevin Grier Market Analysis and
Consulting, a company specializing in livestock, meat, poultry and grocery industry market insight and
analysis working across a breadth of organizations internationally.

1. MARKET OUTLOOK | CATTLE & BEEF
• US Markets - Supply, Demand & Pricing
• Canadian Market Insights
• Speaker Panel Discussion
2. MARKET OUTLOOK | HOGS & PORK
• US Market – Supply, Demand & Pricing
• Canadian Market Insights
• Speaker Panel Discussion
3. LIVE Q&A
DISCUSSION OUTLINE

• MARKETS OVERVIEW
• SUPPLY, DEMAND & PRICING
Q2 BIG PICTURE MARKET OUTLOOK
CATTLE & BEEF | US

Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.7 |
• Social distancing has become the new normal, restricting travel and economic interaction.
• Food supply chain appears safe, but there has been a huge shift away from foodservice and
toward retail sales as restaurants close or move to take-out only.
• All sports have been put on pause along with other large gatherings such as concerts, religious
services, schools and conferences.
• The global economy is now in recession. US unemployment has skyrocketed to unprecedented
levels, economic activity has slowed to a crawl.
• We must recognize the potential for packing plant closures. Workers may refuse to enter plants if
they fear the risk of contracting the virus is high.
GENERAL OBSERVATIONS: COVID-19 PANDEMIC

• The live cattle futures market
has become increasingly
pessimistic as the Covid
pandemic progressed
• Some of it has to do with
fears that plant closures will
back cattle up and force cash
prices lower.
• While those concerns are
valid, packers have worked
hard to avoid plant closures
and are slowing chain speeds
in order to space workers and
limit the potential for
spreading the disease.
JUNE 2020 LIVE CATTLE FUTURES

• Once stay-at-home orders
began to be issued,
consumers rushed to grocery
stores and cleaned out the
meat case
• Retailers rushed to replenish,
causing the Choice cutout to
spike close to $50 in two
weeks
• Cutouts are now retracing as
the retail pipeline is full once
again
• Middle meats have struggled
while end meats and grinds
have been stronger than
normal
CHOICE CUTOUT

• The sharp rise in the cutouts
sent packer margins to all
time record levels, even
exceeding those of the plant
fire back in August
• That incentivized packers to
increase fed kills to meet the
sudden demand surge
• Now packer margins are
retreating, but are expected
to remain well above normal
in the coming weeks
• Slowing chain speeds and
the reduced slaughter that
they create will support
larger-than-normal packer
margins.
PACKER MARGIN

• Fed cattle slaughter during
Q1 has been larger than
expected and well above last
year’s level
• The mild winter had cattle
finishing 30-60 days ahead of
schedule, supporting big kills
• Slowing chain speeds and
some plant closures should
push Apr slaughter 7-8%
below last year’s level
• This will provide some
support for the cutouts if it
continues, but threatens live
cattle prices
+1.3%
+4.4%
+9.1%
-7.6%
-4.1%
-4.0%
WEEKLY AVERAGE STEER & HEIFER SLAUGHTER

• Carcass weights remain very
heavy for this time of year.
• The blended (steer+heifer)
carcass weight was 23
pounds over last year
• This is concerning for cattle
feeders because it limits their
leverage in negotiations with
the packer
• Slowing chain speeds will
exacerbate this problem
• The de-trended and de-
seasonalized carcass
weights are near their highest
level in almost 5 years
BLENDED S&H CARCASS WT.

• The uncertainty surrounding Covid-19 and sharp drop in cattle
futures has caused cattle feeders to sharply reduce placements
in March
• JSF projects placements down 12% in March, but other
estimates call for as much as a 20% decline
• The sharp drop in placements should leave feedyard inventories
down about 4% as of April 1.
• Feedyard inventories could slip to around 5% under last year in
summer, but much will depend on the slaughter pace between
now and then.
History Forecast Histor
y
Forecast
FEEDYARD PLACEMENTS & INVENTORY

• Current breakevens on fed cattle
slaughtered today are around $123/hd, far
above the $105/cwt that cattle sold for last
week.
• Our margin model suggests cattle feeders
are losing about $200/head on cattle being
marketed in April
• Breakevens will stay high until at least
Memorial Day and after that they begin to
decline, reaching $106 by the end of July
• Breakevens will decline this summer due to
the lower prices producers had to pay for
feeder cattle this spring
AVERAGE CATTLER FEEDING BREAKEVEN

• A huge increase in beef
production during Q1, could
give way to a 10% YOY decline
in beef production in Q2
• Q3 beef production now
expected to be about 1.0%
below last year.
• Buyers should be prepared for
a big drop in beef production
during Q4, down 3.5% or more
• Slowing feedyard placements in
Q2 will drive the reduced
production in Q4
+7.9%
-10.0%
-1.1%
TOTAL BEEF PRODUCTION BY QUARTER, 2018-20

• Movement in the weekly
demand curve show the surge in
demand in the second half of
March
• Demand is moving lower now
that grocery stores have been
replenished
• Demand is still above the level
that we saw in February and
early March
• Normally, we would expect
strong seasonal demand
increases in April, but the Covid
pandemic has destroyed that
Supply Curve
Demand Curve
WEEKLY BOXED BEEF DEMAND

• Beef exports were strong in February, up 21% YOY
• March exports should be down from Feb levels and April and
May could be even worse
• JSF’s projection for 2020 beef exports is up 4%
• The risk is that slow global growth will push exports below last
year
BEEF EXPORTS

• JSF sees the Choice cutout moving
lower for the next 3-4 weeks, then
stabilizing around the $215 mark.
• Kill slowdowns due to labor issues
driven by Covid-19 could cause the
cutout to exceed our expectations this
summer, depending on how serious the
disruptions become.
• Light placements this spring set the
stage for supply tightness this fall,
elevating the cutout. Current projections
have the Choice cutout averaging about
$220 in Sep-Nov
• Pricing will be highly dependent upon
the depth and length of the recession.
CHOICE CUTOUT

• All of the live cattle contracts currently
trading look seriously under-priced
compared to the JSF fundamental forecast
• Much of this under-pricing is likely due to
uncertainty about the length of time that
consumers will be asked to stay at home
due to Covid-19
• Uncertainty about the length and depth of
the recession is also contributing to the
weakness in deferred futures
• Buyers should be prepared for near-term
price increases if more plants are forced to
close or slowdown dramatically.
• The low level of futures makes this an
excellent time to book fixed-price product
for fall delivery.
JSF LIVE CATTLE FUTURES

• INSIGHTS
CATTLE & BEEF | CAD

FOODSERVICE SALES BREAKDOWN
Special
8%
Drinking
4%
Full Serve
44%
Limited
Serve
44%
Foodservice Sales Breakdown 2015-19 Average

FOODSERVICE MONTHLY AVERAGE SALES
2015-2019

FOODSERVICE SALES Q2-Q4 2019-2020

FOODSERVICE AND RETAIL
• 60% at home
• $1 away $1 home
• Rabobank 10% away leads to 3% home
Confidential. © Copyright J.S. Ferraro. All Rights Reserved, 2020. Not for distribution.| Photo by Andrew Seaman on Unsplash24 |

CANADIAN SUPERMARKET SALES Q2-Q4
2019-2020

CDN QUARTERLY CATTLE SLAUGHTER
2018-2020
• Q1 +2%
• Q2 +5%

CANADIAN BEEF CUTOUT
MONTHLY 2020, 2019 AND 2014-2018 AVG

WEEKLY BEEF WHOLESALE PRICE
DIFFERENTIAL VS 2017-2019 AVERAGE

RETAIL BEEF MARGINS VS 2017-19 AVERAGE
WEEKLY FEB-APRIL

BEEF SUMMARY POINTS
• Availability?
• Costing is uncompetitive
• Margins are not competitive
• Merchandising option?

PANEL DISCUSSION

AUDIENCE QUESTIONS – FOODSERVICE TO RETAIL
What is the long term impact of COVID-19 on meat demand
and restaurant business?
We know the obvious that demand has shifted to retail from
food service but what is your sense of the overall
demand/growth for beef, pork and chicken in this new
environment?
“

AUDIENCE QUESTIONS - CBOT
Wondering if it would help if there was a contract for the cutout
traded on the CME. With the large disconnect between the live
cattle contract and the cash price, in both the U.S and Canada,
it doesn’t really seem like it is a relevant risk management tool
anymore. It seems like the feeder cattle contract and live cattle
contract correlate (some what), so would a cutout contract do
the same?
“

• MARKETS OVERVIEW
• SUPPLY, DEMAND & PRICING
HOGS & PORK | US

• Lean hog futures have moved rapidly
lower in recent weeks
• The futures rallied briefly in mid-March
while consumers were rushing to
grocery stores and stockpiling meat
• The June contract has had an
amazing spread, posting a $95 high
last spring during the “ASF” rally and is
currently trading below $50
• We view this sell-off as overdone, but
much will depend on how fast
foodservice can come back online.
JUNE 2020 LEAN HOG FUTURES

• Note the sharp rally in the cutout that
occurred in mid-to-late March as
grocery stores scrambled to refill
their meat cases
• Since then however, it has been
straight down as demand has fallen
considerably
• A lot of this decline has been driven
by the processing items, bellies and
hams, which have a heavy
foodservice presence
• JSF thinks we are now near a
bottom for the cutout and it should
begin to work higher into the spring
PORK CUTOUT

• USDA reported the US breeding herd up only 0.4% as of March 1
• That is the smallest breeding herd increase in four years.
• A smaller breeding herd will give way to smaller pig crops going
forward.
• The Dec/Feb pig crop however, was reported up 4.7%, which
implies ample supplies this summer when those hogs come to
slaughter
• Productivity was phenomenal once again, with pigs saved per litter
rising by 2.8%
• Low futures prices, if they persist, will encourage producers to
scale back production later this year
BREEDING HERD / PIG CROP

• One of the ways producers are already scaling back
production capacity is by retaining fewer gilts to add to the
breeding herd in Q1
• The number of gilts held as breeding replacements
declined 9.2% YOY in Q1
• Another method producers are using to scale back is by
increasing the number of sows they send to slaughter.
• Sow slaughter in the Dec/Feb quarter is projected to be
up 6.5%
+6.5%
-9.2%
GILTS ADDED / SOW SLAUGHTER

• One concerning development is
that in recent quarters slaughter
has far exceeded USDA’s pig
crop estimates
• This has forced USDA to go back
and revise prior pig crops sharply
upward
• As of the first week of March,
JSF estimates the industry killed
300,000 head more than what
the Sep/Nov pig crop indicated
• However, smaller kills in the
ensuing weeks holds the
potential to significantly reduce
the Q2 over-kill
HOG SLAUGHTER OVER/UNDER

• Pork exports remain a bright spot. February exports clocked in at
+45% YOY, with much of that increase due to China
• Weekly data on exports suggest that exports remained strong in
March, even as Covid raged
• JSF now sees total pork exports up 19% in 2020
+39.4%
+7.9%
+18.3%
+13.7%
EXPORTS

• Pork demand surged higher in mid-
March as grocery stores sought to
restock following a flood of panic
buying by consumers
• Since then however, demand has
plummeted, and we are now seeing
demand lower than it was back in
February
• This differs from beef, which has
not seen demand fall below
February levels
• JSF thinks the worst is behind us
for pork demand and it should
slowly recover in the weeks ahead
Demand Curve
Supply Curve
WEEKLY PORK DEMAND

• Pork bellies are a big part of the
demand and pricing problem
• It is not easy to shift bacon from
packaging designed for foodservice
into retail packaging, thus retail has
not taken up the slack caused by
foodservice shutdowns
• The belly primal last week
averaged $34.54—the lowest level
in our dataset going back to 2007
• As time passes, bacon slicers will
better shift from foodservice to retail
packaging and that should help lift
the belly primal out of its dismal
state
BELLY PRIMAL

• Forecasting pork prices in this
environment is extremely difficult
• Supply is uncertain because
packers are having to slow down
chain speeds to help with labor
constraints
• Demand is really uncertain because
we don’t know when consumers will
be allowed out of their homes again
• JSF is looking for some recovery in
the cutout as we head into summer,
but the tops in the cutout are likely
to be well below what we’ve
experienced in past summers
PORK CUTOUT

• Most of the lean hog futures contracts
currently trading look way under-priced
relative to the JSF fundamental forecast.
• June 2020 is the most under-priced,
probably because traders are building in a
high probability of additional plant
disruptions
• One thing is certain, the “ASF bullish
story” that dominated hog futures for the
past year has now faded and the “Covid
bear story” has taken over.
• If more plant disruptions occur, we are
likely to see a growing disconnect
between the price of pork and the price of
hogs, which the futures are based upon.
JSF LEAN HOG FUTURES MIS-PRICING

• INSIGHTS
HOGS & PORK | CAD

CDN QUARTERLY HOG SLAUGHTER
2018-2020
• Q1 +5%
• Q2 +5%
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Q1 '18 Q2 Q3 Q4 Q1 '19 Q2 Q3 Q4 Q1 '20 Q2
MillionHead

CANADIAN PORK CUTOUT
2020, 2019 AND 2014-2018 AVERAGE
130
150
170
190
210
230
250
J F M A M J J A S O N D
c$/CKG
2014-2018 Average 2019 2020

WEEKLY CANADIAN PORK WHOLESALE PRICE
DIFFERENTIAL VS 2017-2019 AVG
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
Feb 8 Feb 15 Feb 22 Feb 29 Mar 7 Mar 14 Mar 21 Mar 28 Apr 4 Apr 11
PriceDifferential
Pork-Beef Pork-Chicken

RETAIL FRESH PORK MARGINS VS 2017-2019
AVERAGE FEB-APRIL
0%
2%
4%
6%
8%
10%
12%
14%
Feb 8 Feb 15 Feb 22 Feb 29 Mar 7 Mar 14 Mar 21 Mar 28 Apr 4 Apr 11

PORK SUMMARY POINTS
• Availability?
• More competitive than beef
• Merchandising option for spring

PANEL DISCUSSION

AUDIENCE QUESTION – PORK & PROFITS
What level of pork exports would we need to stay
profitable throughout 2020?
“

AUDIENCE QUESTION – PLANT PRODUCTIVITY
How confident are we re: packing capacity in the
coming weeks?
With the processing plants productivity decrease,
how would the sector react, how would our livestock
be processed?
“

AUDIENCE QUESTION - ASF
How does ASF factor in to all of this as China
recovers from Covid19 vs. the slowing global growth
picture due to virus spread?“

Q & A SESSION
?
?
?

You can email our panelists directly
at:
• Rob.Murphy@jsferraro.com
• Kevin@KevinGrier.com
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to help us continue to shape great
discussions.
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CANADA
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Q2 2020 Big Picture Market Outlook

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