Bill Lapp

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BillLapp
Advanced Economic Solutions
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INPUT PRICES
How to Survive Todays WildCommodity Ride
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Key Concepts To Consider

• Financial Gridlock vs. Economic Crisis
• Greater Importance of Developing EconomiesIn
  Leading Economic Recovery
• China Is Key Question
• Energy at 40 or Lower is Not Sustainable
• The New Plateau In Commodity Prices

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LIBOR Remains Near 1.25Narrowing vs. 3-Month
Tbills (0.30)
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(No Transcript)
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World GDP Declines In 2009 AfterStrong Decade of
Growth
1980-1999 Average GDP OECD
2.8 Emerging 3.4 WORLD 3.0
2000-2009 Average GDP OECD
1.9 Emerging 6.1 WORLD 3.7
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World Energy Supply/Demand
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Crude Oil Prices
- As world economic growth recovers, crude oil
under 50 is not sustainable
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Crude Oil (Black) vs. Corn (Red)-- Over time, a
relatively close correlation --
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Wholesale Food Costs (PPI-Food) vs. Consumer Food
Prices (CPI-Food)

• Key Points
• Over time the CPI-Food exceeds the PPI-Food by
  roughly 1
• During most of the past two years, the PPI has
  exceeded the CPI
• Retailers respond to higher food costs only
  after an extendedperiod of cost pressures

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US Consumer Food Inflation(2009 Forecast)
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2008 Consumer Food Inflation Detail
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2009 Food Inflation Prospects

• Grain vegoil based items have less pressure
• Smaller supplies mean higher meat dairy costs
• Non-food cost pressures will recede
• Wildcard Fruit Vegetable prices
• Overall consumer food inflation expectedto be
  near 5
• Easing prices pressures in grains offset
  byhigher rates of gain in protein and dairy
  prices

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Corn Futures

• Corn Prices 3.50/ BU Vs. 5.40 YA and
  long-term average 2.40
• Corn is the primary feed ingredient for the
  livestock and dairy industry
• Weather, a sharp acreage decline and value of US
  dollar are key price risks
• Upside price risk is significant for corn in the
  coming year

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Chicago Wheat Futures

• - Wheat Prices 5.15 / BU Vs. 11.00 YA and
  long-term average 3.50
• World and US crops declining weather and value
  of US are primary risk
• Prices have moderate upside risk from current
  levels

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Soyoil Futures

• - Soyoil Prices .36 / LB Vs. .64 YA and
  long-term average .24
• Weather, energy prices and biofuel policy are
  key price risks
• Prices likely faces less upside risk than other
  inputs

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Broiler Supply Flock Dramatically Lower
Announced cut-backs suggest we could be below YA
by this fall, and that 2009 production will be
below 2008
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US Hog Inventory Begins To ShrinkAs of 12/08
(vs. YA) Market Hogs -2 // Breeding Inv -2
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Cattle Feedlot Inventories 6 Below YA
- Feedlot supplies expected to shrink sharply in
coming months
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Beef 50s 90s Price History 50s .69 vs. .53
YA 90s 1.41 vs. 1.45 YA
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Cheese 1.26 vs. 2.06 YA

• Extending coverage through most of 2009 still
  recommended

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Laundry List of Key Commodity Market
Issues/Implications

• Shorter-Term

• Longer-Term

• 2009 Acreage Planted
• Weather Events
• US EPA Implementation of Bio-Fuels Mandates
• Protein / Dairy Sectors Each Have Negative
  Margins
• Value of US Dollar

• Move Toward Protectionism?
• Timing of Economic Recovery in China, World
• Regulatory Impediments (COOL, EPA, GHG, Mergers)
• Value of US Dollar

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Hope Springs Eternal.

• In spite of reports to the contrary, US and world
  economies will recover
• China and developing countries will take a lead
  role
• Rhetoric of spiraling downward is just plain
  wrong
• Expect worst of recession will soon be behind us
• Flat to positive US GDP during LH2009
• Unemployment begins to improve FH2010
• Cyclical economic adjustments (eg, lower housing
  starts) are a positive for the future economic
  growth
• Windfall from lower energy prices lower housing
  prices
• Fiscal stimulus takes time, but will be a fiscal
  stimulus