Tuesday, March 25, 2014

Please Note our report was delayed a day due to bereavement (mother-inlaw). In addition, we WILL NOT publish a Hog Runner next week (March 31) due to business travel). THE COMMENTARY Breaking News (Meat & Poultry.com) - Russia will allow imports of pork from the United States from Smithfield Foods Inc., which is a subsidiary of WH Group formerly known as Shuanghui International Holdings. Russia’s decision to allow US pork imports from Smithfield Foods comes amid rising tensions over Russia’s move to annex Crimea from Ukraine. Russia banned US frozen meat after receiving no response to its request for information about measures the US is taking to prevent exporting chilled and frozen meat products with ractopamine residues. Russia previously planned to resume imports of US pork starting March 10. Russia will allow imports of pork from two Smithfield Foods facilities in Tar Heel, NC, and four coldstorage locations: Cloverleaf Cold Storage in Sioux City, Iowa, Benson, NC, and Sumter, SC; and Carolina Cold Storage in Tar Heel, NC. Other US companies are barred from shipping pork to Russia. As far as Runners are concerned, this is expected to be a boost for those Casing Companies with contracts to take the Runners from the respective Smithfield contracts, as this will allow them a much needed outlet for wider sizes of finished goods. As a result, there is already speculation that the packer with plants approved will be looking for more money on new sales of Runners in April, as opposed to current trading levels of $0.80. In regards to retail business, members of the trade report that demand continues to improve. We are told that inventories of narrow finished product are in excellent shape and this is allowing sellers to press for additional price improvements. Meanwhile, inventories of medium sized material is rapidly improving and we have heard of producers pressing for incremental price improvements, while demand for wider casings remains lackluster; however, the near-term outlook with Russia open to specific plants is likely to result in some price appreciation for producers able to export to Russia.

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The Latest PEDv numbers for the week ending March 15 are now available with the latest numbers reflecting that PEDv cases increased by 296 bringing the total number to 4,757, according to the USDA's National Animal Health Laboratory Network (NAHLN). Worth noting, one case can represent an individual animal or an entire herd. In addition, pundits estimate the loss of more than 5 million piglets since the virus was discovered in May 2013, with 1.3 million piglets succumbing to the disease in January alone.

THE LOOK AHEAD As to what we expect for this week, without a doubt, the partial reopening of Russia is a positive to the market. However, considering it as a partial reopening, this leaves us with guarded optimism as we are of the opinion that any potential increase in Runner prices likely limited. Meanwhile, winter is behind us and as temperatures warm, demand for finished material is on the rise. In our opinion, with retail prices for both beef and pork at all-time record levels, this is likely to drive consumers to more sausage items. If correct, this should assist casing companies in obtaining higher prices as we move forward. In the meantime, those in the artificial natural casing side of the business are unlikely to see any relief in prices. In fact, we continue to pontificate that we will likely see prices of collagen rise, due to unseasonably below average cattle slaughters. This has pushed prices of cattle hides and drop splits to alltime record highs, while demand for these products is not exhibiting any signs of easing in the near-term.

THE SLAUGHTER The nation’s hog slaughter last week totaled 2.042 million head, up 0.9% from the week before; however, down 6.3% compared to the same week last year. Year to date hog slaughter is trailing the 2013 level by 945,000 head or 3.7%. In the meantime, record high hog slaughter weights continue to allow year to date pork production levels to be above 2013, despite fewer hogs going to slaughter thus far in 2014. February federally inspected dressed hog weights reached 213 pounds for the third consecutive month, running 6 pounds and 2.9% above a year ago. www.themaxfieldreport.com 2

Meanwhile, the average barrow and gilt live weight in Iowa-Minnesota last week was 283.0 pounds, up 0.9 pounds from a week earlier and up 6.0 pounds from a year ago.

03/22/2014 Today’s Slaughter Slaughter Last Week Slaughter Last Year YTD Slaughter 2014 YTD Slaughter 2013

Week-to-Date U.S. Estimated Slaughter Totals Bovine Swine 575,000 2,042,000 564,000 2,024,000 604,000 2,179,000 6,531,000 24,525,000 7,047,000 25,470,000 (www.ams.sda.go/LSMarketNews)

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Ovine 42,000 39.000 46,000 443,000 455,000

Cattle feeding margins had a strong week last week, finishing the week up $12.96 per head to $246.70, according to the Sterling Profit Tracker. One month ago, feeders were earning $209.54 per head but at this time last year, they were losing nearly $72 per head. Fed steers topped $151 last week, up nearly $2 per hundredweight while feeder steers hit $170.72 per hundredweight compared to $169 the previous week. Feed costs increased $3 per head to $317.81 and total costs climbed $16.90 per head to $1,821.09. For the second week in a row, beef packer margins were in positive territory, finishing the week ending March 15 at $77.30 per head compared to $9.21 the previous week, negative $83.66 one month ago and negative $18.79 at this time last year. Another positive note for the cattle industry are cow-calf margins, which stand at $333.50 per cow for 2014, compared to $243.33 in 2013 and just $153.60 in 2011. The beef cutout value was also pushed higher last week, hitting $239.86, compared to $232.88 the previous week. Farrow-to-finish margins hit the highest level, $84.70 per head, last week since John Nalivka began tracking the data. The previous week, margins were $66.31 per head and a year ago, they stood at $7.06 per head. Lean hogs also improved, finishing the week ending March 14 at $114.22, compared to $106.03 the previous week. Pork packer margins increased $5.72 per head to $5.96. At this time last month, pork packers were earning $8.23 per head and $4.21per head at this time last year. The pork cutout value climbed more than $10 to $119.83, compared to $109 the previous week. The Sterling Beef Profit Tracker for the week ending March 15: 

Average feeder margins: $246.79 per head.

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Average beef packer margins: $77.30 per head.

The Sterling Pork Profit Tracker for the week ending March 14: 

Average farrow-to-finish margins: $84.70 per head.

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Average pork packer margins: $5.96 per head.

The Sterling Beef and Pork Profit Trackers are produced by Sterling Marketing Inc. and John Nalivka, president, Vale, Ore., and are published weekly by Drovers/CattleNetwork, and PorkNetwork. www.themaxfieldreport.com 4

THE WEEK IN REVIEW – PORK The retail pork price declined 3 cents per pound in February to $3.73; however, this is still 24 cents above the February 2013 price. The choice beef retail price was 40 cents per pound above the year ago level, while the retail chicken price was unchanged. Now that wholesale chicken prices have moved sharply higher in the last couple of weeks, it will be interesting to see if producers try to grow chicken supplies to account for reduced US red meat and the likelihood we will see less pork production moving forward. Despite modest gains in pork, the sum of commercial beef and pork production in February was at its lowest level since February 2007. The absence of strong chicken production growth has been one factor allowing the sharp increase in hog and pork prices in recent weeks. The pork cutout value on Friday morning was $131.04/cwt FOB the plants, gaining $8.39 from a week ago. All primal cuts were higher, with ribs advancing four percent, butts up six percent, and loins, hams, picnics and bellies strengthening by 7-8%. Meanwhile, the national average negotiated carcass price for direct delivered hogs was $122.60/cwt, up $12.13 (11%) from last Friday. Hogs in the eastern Corn Belt were at $119.35/cwt, with the western Corn Belt and Iowa-Minnesota hogs at $127.73/cwt. Peoria had a top live price of $82/cwt, $8 higher than last week. The top for interior Missouri live hogs was $86/cwt, with Zumbrota coming in at $87/cwt. The average hog carcass price was 93.6% of the cutout value. Hog futures gained ground again this week. The April lean hog contract jumped $6.08 during the week to close at $125.37/cwt today. May hog futures ended the week at $125.95/cwt, up $2.15 from the week before. The June contract gained $2.32 for the week to close at $130.17. July closed at $126.35 for the week with August settling at 126.65/cwt.

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THE NEWS United States Cattle on Feed Down 1 Percent Cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 10.8 million head on March 1, 2014. The inventory was 1 percent below March 1, 2013. Placements in feedlots during February totaled 1.65 million, 15 percent above 2013. Net placements were 1.58 million head. During February, placements of cattle and calves weighing less than 600 pounds were 390,000, 600-699 pounds were 330,000, 700-799 pounds were 415,000 and 800 pounds and greater were 515,000. Marketings of fed cattle during February totaled 1.55 million, 3 percent below 2013 and are the lowest ever on record. Marketings for February are the lowest for the month since the data series began in 1996. Other disappearance totaled 71,000 during February, 18 percent above 2013.

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Commercial Red Meat Production Down Slightly From Last Year Commercial red meat production for the United States totaled 3.65 billion pounds in February, down 1 percent from the 3.67 billion pounds produced in February 2013. 

Beef production, at 1.79 billion pounds, was 5 percent below the previous year. Cattle slaughter totaled 2.24 million head, down 5 percent from February 2013. The average live weight was up 10 pounds from the previous year, at 1,330 pounds.

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Veal production totaled 8.2 million pounds, 9 percent below February a year ago. Calf slaughter totaled 52,200 head, down 12 percent from February 2013. The average live weight was up 9 pounds from last year, at 267 pounds.

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Pork production totaled 1.84 billion pounds, up 4 percent from the previous year. Hog slaughter totaled 8.67 million head, up 1 percent from February 2013. The average live weight was up 6 pounds from the previous year, at 283 pounds.

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Lamb and mutton production, at 11.6 million pounds, was up 1 percent from February 2013. Sheep slaughter totaled 168,200 head, 4 percent above last year. The average live weight was 138 pounds, down 4 pounds from February a year ago.

January to February 2014 commercial red meat production was 7.9 billion pounds, down 1 percent from 2013. Accumulated beef production was down 5 percent from last year, veal was down 10 percent, pork was up 2 percent from last year, and lamb and mutton production was up slightly. February 2013 contained 20 weekdays (including 1 holiday) and 4 Saturdays. February 2014 contained 20 weekdays (including 1 holiday) and 4 Saturdays. (Meat & Poultry.com) - Smithfield Foods Inc. reported net income of $86.6 million for the eight months ended Dec. 30, 2013. This compares to $130.0 million during the comparable time frame in 2012. Costs associated with its takeover by Hong Kong-based WH Group, formerly known as Shuanghui International Holdings Ltd. www.themaxfieldreport.com 7

The company reported that weak performance in the company's pork and international segments dragged on earnings. Smithfield Foods filed a "Transition Report" on its Form 10-K for the period from April 29, 2013 to Dec. 29, 2013 with the Securities and Exchange Commission. Pork Segment operating profit fell $177.5 million on a jump in domestic live hog prices that were only partially offset by higher packaged meat prices and higher fresh meat market prices, the company reported. Operating profit for the company's International Segment dropped $97.2 million on higher hog raising costs and lower average selling prices. Smithfield's Hog Production Segment recorded an increase in operating profit of $97.2 million. The company attributed the gain to higher domestic live hog prices. The impact of the spread of Porcine Epidemic Diarrhea virus clouded the company's outlook. Ken Maxfield, President and Editor in Chief of The Maxfield Report brings 10 plus years’ experience reporting on Hog Runner and Casings to our report. It is Ken’s experience and breadth of knowledge and holistic approach to his reports why peers consider him one of the leading authorities reporting on Hog Runners and Casings. If you have questions, suggestions, or comments, or interested in receiving any of the reports offered by The Maxfield Report, please call 712-943-3210 or e-mail

[email protected].

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