Agribusiness Chartbook
SECTOR REVIEW
July 2008 Update
In just the last week, near term corn futures have retreated $0.68/bushel to
$6.78/bushel and protein stocks have shown signs of recovery. Ag secretary
Ed Schafer said last week that the flood damage in Iowa was not as bad as
previously thought. While last Friday’s USDA revisions to corn inventories
provide a little more breathing room, endings stocks are still very low and there
continues to be little room for error. A hot, dry summer or an early frost could
easily drive corn up to $8 or more per bushel. We have not yet seen enough
demand destruction – even in ethanol – for prices to pull back measurably.
Food vs Fuel… Chalk One Up for Food. Last week, the UK announced that it
would slow its biofuel expansion plans, pushing its 5% target of transportation
fuels by 2010 out to 2013-14. As for the fate of the U.S. biofuel industry, the
EPA is expected to decide on July 24 whether or not to waive the RFS, per
Texas governor Rick Perry’s request. But corn ethanol production has already
begun to stagnate given the economics, with numerous capacity expansion
plans delayed or scrapped altogether. Energy security continues to be a priority
for the U.S., but we believe the chances of delayed ethanol targets or additional
Brazilian sugar ethanol imports have gone up.
CRP. The Bush administration is still reluctantly moving toward a no-penalty
early opt-out of Conservation Reserve Program (CRP) land, but the timing of
such a decision was clouded last week as the National Wildlife Federation
succeeded in getting a federal judge to halt the USDA’s May announcement to
allow CRP acreage to be used for grazing and haying after nesting season. A
hearing on this matter is scheduled for Thursday. We expect the USDA to wait
for the outcome of the hearing before moving forward. Releasing acreage at
this time of year would give participating farmers time to plant winter wheat on
CRP land.

ADM. Four-week average spot ethanol wet milling margins averaged $0.48/gallon,
compared to $0.70/gallon in both the previous four-week period and last year. Ethanol
spot prices are beginning to rise again, while corn futures have eased moderately over the
past week. Spot corn is now at $6.78/bushel while ethanol is holding steady at
$2.86/gallon. As a result, we estimate spot wet milling ethanol margins have improved to
$0.91 cents per gallon, while dry milling margins are still weak at -$0.24 per gallon.
In the last four weeks, ethanol pricing averaged $2.76 per gallon in the last 4 weeks
compared to $2.07 last year, with the spread between ethanol and wholesale gasoline
averaging -$0.77. It’s going to take time for refiners to work through the ethanol glut. Spot
corn prices averaged $6.88 in the last four weeks (compared to $5.58 the prior period and
$3.34 last year).
Bunge. Four-week average cash soybean crush margins have improved to $1.68,
compared to $1.27 last year, supported by higher byproduct values. Soybean oil prices
have averaged $0.63 per pound, nearly double the $0.34 level last year, while soybean
meal prices are averaging $343/ton compare to $230/ton last year. Spot soybean prices
are currently $15.81.
Pilgrims Pride and Tyson. Our broiler margin index was dismal over the past four weeks,
averaging $0.06 per pound compared to $0.45 per pound last year. Although the fourweek
average whole bird price has strengthened to $0.87 per pound (compared to $0.81
last year), skinless boneless breast prices averaged $1.53 per pound, suggesting the rise
to $2+ per pound breast meat prices will take longer than we originally thought. Current
grain futures suggest that chicken producers need a 25% increase in pricing over the next
18 months to get back to normalized profit margins. We would need to see last week’s 4%
reduction in eggs set to continue at that pace in order to get chicken prices to rise
sufficiently. TSN could help alleviate some of the industry pressure by cutting back on its
own production, but we don’t believe that’s a likely scenario given that TSN is currently
benefiting from strong beef and pork packing margins.
Tyson. Beef packing margins have been exceptional this summer, averaging $69.60/head
so far in July. Strong consumer demand this grilling season has led to wholesale cut out
values rising longer than seasonally typical, while cash cattle prices remained relatively
steady until their rally of the last two weeks. This can, in part, be attributed to industry
players exercising restraint in kill levels – perhaps because last fall’s misery has not yet
been forgotten – but we have also seen significantly higher marketings as ranchers and
dairy farmers send more cows to slaughter.
Smithfield Foods. Cash hog production margins worsened in June to -$8.46 per head and
have fallen further the first two weeks of July to -$17/head as we continue to see high
grain costs and sow liquidation. At current futures levels, our hog production model
suggests returns won’t turn positive again until June 2009. Cash hog prices are still
around $0.50/lb, good for pork packing margins at Tyson and Hormel. Packing margins
averaged -$6.64 per head in June and have improved to $11.67 per head so far in July.

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