Regional Banking Group - 1 October 2008 A Invisible Sun Michael Swanson Ph.D. Wells Fargo Economics.

transcript

Regional Banking Group - 1

October 2008October 2008

A Invisible Sun

Michael Swanson Ph.D.Wells Fargo Economics

Regional Banking Group - 2Regional Bank 2

Everything is connected.

We just can’t see it.

What you want to know

Are we in a recession? Mostly yes and a little no (typical economist) What’s a recession

What is holding the economy back Fear of the unknown De-leveraging

What is pulling the economy ahead Productivity (technological and global) Trade growth

GDP = 11,720 = 8,341 + 1,694 + 2,088 - 350 *

GDP = 9,556 = C + I + G - (X-M)

GDP = 9,556 = 71% + 14% + 18% - 3%

GDP Breakout by Sector

Source: BEA 3rd Qtr – advance release (billions 2000 dollars)

* Net exports bottomed out at ($638) or 5.7% in the 4th quarter of 2005

It’s hard to put the economy into recession

Long-term GDP growth is 3% Output grows with inputs and productivity

Larger labor pool 0.5% More capital invested 1.1% Productivity gains 1.4%

A recession temporarily reduces demand not supply capacity

What’s changed?

GDP and Employment

Sep-58 Sep-63 Sep-68 Sep-73 Sep-78 Sep-83 Sep-88 Sep-93 Sep-98 Sep-03 Sep-08

Source: Wells Fargo Economics

LN of Employment in Millions

LN of Real GDP in Trillions

(right)

Employment

(left)

Cyclical still but differentSurfing a Different Wave

1967-I 1971-I 1975-I 1979-I 1983-I 1987-I 1991-I 1995-I 1999-I 2003-I 2007-I Source: Wells Fargo Economics

GDP - expected

Deleveraging: Is painful

Increased economic volatility Price volatility Demand volatility

Asset valuations Cost of money Predictability of cash flow

What does it mean to you?

π = P•Q – (W•X) - FC

Increased volatility

Natural and regulatory

volatility

Timingissues

What does money really cost?

That depends of course.

What the Fed controls

Fed Funds Futures12-01-08

0.42 0.42 0.39 0.44 0.48 0.53 0.55 0.64 0.721.00 1.02

0.78 0.86 0.94

12/31/2008 2/27/2009 4/30/2009 6/30/2009 8/31/2009 10/30/2009 12/31/2009Source: CBOT, WF Economics

Yield range

last 52 weeks

I mplied yield

It depends on who you are

3 Month Interest Rates

Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08

Source: FRED, Wells Fargo

Financial

commercial paper

non- financial

commercial paper

eff ective ff

Wild spreadsSpread to Effective Fed Funds

Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08

Source: Wells Fargo, FRED

Financial

commercial paper

non- financial

commercial paper

This will have an impact (sooner or later)

Spread in Basis PointsWeekly Prime - 3 month CDs

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08Source: FRED

Basis points

How about long-term base rate and spreads.

The Treasury Curve: Collapsed

10 Year Treasury Yields

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Source: FRED, Wells Fargo

Spreads are elevated

Corporate Bond Spreadsbase 10 Year Treasury

Nov-06 May-07 Nov-07 May-08 Nov-08Source: Wells Fargo, FRED

Basis points

Currency volatility

General and specific

A two edged sword

US Trade Weighted Dollar

1-70 1-78 1-83 1-88 1-93 1-98 1-03 1-08Source: Federal Reserve, Wells Fargo Economics

Wheat, beef, milk and wineAustralian and New Zealand Dollar

12/29/2006 5/18/2007 10/5/2007 2/22/2008 7/11/2008 11/28/2008

to USD

New Zealand

Australian

Soybeans, sugar/ethanol

Brazil Real1.5

1/13/2006 8/11/2006 3/9/2007 10/5/2007 5/2/2008 11/28/2008Source: Bloomberg, Wells Fargo Ag Economics

Per USDinverted

All models are wrong.Some are useful.

Accelerating global demand

Economic growth

Technology

Productivity

Feedback Energy

Climbing up Maslow’s hierarchyGlobal GDP

$5,000

$10,000

$15,000

$20,000

$25,000

1987 1992 1997 2002 2007

Source: USDA ERS, Wells Fargo Economics

Billions of USD

All Other

Will you bet against it?

Global GDP

1987 1992 1997 2002 2007

Source: USDA ERS, Wells Fargo Economics

Year over Year

All Other

(Un?)intended Consequence

Agriculture

LandValues

Energy

Inputcost

Outputvalue

Expected Profit

Cost offood

Global economic growth

Convergence: Temporary or permanent?

Nearby Crude Oil v Corn

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Source: NYMEX, Wells Fargo Economics

$s per barrel

Driven by energy10 Years + 1

Nearby Corn Futures

Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

cents per bushel

Year Min Max Spread99 1.79 2.32 0.53 00 1.75 2.41 0.66 01 1.87 2.32 0.45 02 1.95 2.73 0.78 03 2.06 2.55 0.49 04 1.99 3.31 1.31 05 1.91 2.58 0.67 06 1.90 3.55 1.66 07 3.18 4.30 1.12 08 3.39 7.55 4.16

09 prj 3.44 4.23 0.79

CBOT Nearby Corn

Competing with corn

10 Years + 1Nearby Soybean Futures

Source: CBOT, Wells Fargo Ag Economics

Per Bushel

52 week

moving

09 prj 8.70 9.13 0.43

CBOT Nearby Soybean

The invisible hand?

Soybeans to CornLong-term Price Ratios

1958 1968 1978 1988 1998 2008Source: Wells Fargo Ag Economics

Soybean to Corn

futures ratio

The complicating factor

Urea and DAPPrices ($/ton) FOB Gulf of Mexico

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08Source: Wells Fargo

(left)

(rigft)

The ratios are locked in

10 Years + 1Chicago Nearby Wheat

Source: CBOT, WF Ag Economics

09 prj 5.48 6.15 0.67

CBOT Nearby Wheat

A global commodity

Wheat to CornLong-term Price Ratios

1958 1968 1978 1988 1998 2008Source: Wells Fargo Ag Economics

Wheat to Corn

futures

What’s the cost? In bushels

Corn on Cash Rent 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average In PctYield per acre (bu.) 158 152 149 132 160 153 161 179 167 154 143Value per bu. $ 1.78 $ 1.74 $ 1.75 $ 1.76 $ 2.17 $ 2.21 $ 2.05 $ 2.03 $ 2.87 $ 3.64 Yield per acre with govt payment 162 155 152 139 161 155 171 199 169 158 Direct Expenses Seed 19 19 20 21 17 19 21 24 18 16 17 12%Fertilizer 25 25 25 28 21 22 27 31 25 22 23 16%Crop chemicals 16 15 15 15 12 12 13 12 8 6 12 8%Crop insurance 4 4 5 5 4 4 6 5 4 6 4 3%Drying fuel 4 3 3 5 6 3 10 7 4 2 4 3%Fuel & oil 5 5 6 6 5 5 7 9 7 6 6 4%Repairs 12 12 12 12 9 9 11 11 8 8 10 7%Land rent 49 50 50 51 42 42 47 49 36 30 42 29%Operating interest 6 5 6 5 4 3 3 4 4 4 4 3%Total direct expenses per acre 143 143 146 153 123 123 149 157 118 102 125 87%Overhead Expenses Hired labor 3 3 3 3 3 3 3 4 2 2 3 2%Machinery leases 2 3 3 3 2 2 2 2 2 1 2 1%Farm insurance 2 2 2 2 2 2 2 2 2 1 2 1%Utilities 1 1 1 2 1 1 1 2 1 1 1 1%Interest 4 4 4 4 3 2 3 3 2 2 3 2%Mach & bldg depreciation 13 13 11 12 10 10 11 12 8 7 11 8%Miscellaneous 2 2 3 3 2 2 2 2 2 2 2 1%Total overhead expenses per acre 29 29 28 30 24 23 25 28 20 18 24 17%

Total dir & ovhd expenses per acre 172 173 173 182 147 146 174 186 138 120 149 104%Net return per acre (11) (17) (21) (44) 15 10 (3) 13 30 38 0 0%

Soybeans? In bushels

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average As %Yield per acre (bu.) 44.8 41.3 41.5 38.6 44.1 33.4 34.0 46.8 45.5 43.5 39.8Value per bu. $ 5.13 $ 4.97 $ 5.11 $ 5.12 $ 5.26 $ 6.62 $ 5.54 $ 5.66 $ 6.03 $ 9.28 Yield with government payments 46.6 43.7 43.2 40.5 44.9 35.8 39.9 47.5 46.3 44.1 Direct Expenses Seed 3.4 3.6 3.6 4.1 4.2 3.6 4.6 5.3 5.1 3.6 3.5 9%Fertilizer 1.1 0.8 0.9 0.8 0.8 0.7 0.9 0.9 0.9 0.6 0.7 2%Crop chemicals 5.3 4.4 4.0 3.6 3.3 3.0 3.0 3.4 3.0 2.0 3.9 10%Crop insurance 2.1 1.9 1.9 1.8 1.7 1.5 2.3 2.0 2.0 1.6 1.7 4%Fuel & oil 1.3 1.4 1.7 1.7 1.4 1.3 1.9 2.5 2.6 1.8 1.6 4%Repairs 3.2 3.2 3.1 3.2 3.0 2.4 3.0 3.1 3.0 2.1 2.8 7%Custom hire 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.6 0.5 0.3 0.5 1%Land rent 16.1 16.5 15.5 16.1 15.6 12.5 15.4 15.8 15.1 10.4 14.2 36%Operating interest 1.6 1.5 1.4 1.4 1.1 0.7 0.8 1.1 1.4 0.9 1.2 3%Total direct expenses per acre 35.2 34.5 33.1 33.6 32.0 26.7 32.9 35.3 33.9 23.7 30.6 77%Overhead Expenses Hired labor 0.9 0.9 0.8 0.9 0.8 0.7 0.8 0.9 0.9 0.6 0.8 2%Machinery leases 0.7 0.8 0.8 0.7 0.6 0.5 0.5 0.5 0.5 0.3 0.5 1%Farm insurance 0.5 0.5 0.5 0.6 0.6 0.5 0.7 0.7 0.6 0.4 0.5 1%Utilities 0.4 0.4 0.4 0.4 0.4 0.3 0.4 0.4 0.4 0.3 0.4 1%Interest 1.2 1.1 1.1 1.0 0.8 0.6 0.7 0.8 0.8 0.6 0.8 2%Mach & bldg depreciation 3.3 3.4 2.7 3.0 3.0 2.4 2.9 3.1 2.9 2.0 3.0 8%Total overhead expenses per acre 7.8 7.9 7.3 7.7 7.3 6.0 7.1 7.6 7.3 5.0 6.9 17%

Total dir & ovhd expenses per acre 42.9 42.4 40.4 41.3 39.4 32.7 40.0 42.8 41.2 28.7 37.5 94%Net return per acre 3.6 1.4 2.8 (0.7) 5.6 3.2 (0.1) 4.7 5.2 15.4 4.3 11%

Compare and contrastBushels In Pct Bushels In Pct

Yield per acre (bu.) 143.3 39.8 Direct Expenses

Seed 17.0 12% 3.5 9%Fertilizer 22.8 16% 0.7 2%Crop chemicals 12.1 8% 3.9 10%Crop insurance 3.8 3% 1.7 4%Drying fuel 4.3 3%Fuel & oil 5.5 4% 1.6 4%Repairs 10.0 7% 2.8 7%Custom hire 2.0 1% 0.5 1%Land rent 41.5 29% 14.2 36%Machinery leases 0.5 0% 0.1 0%Hauling and trucking 0.1 0%Operating interest 4.2 3% 1.2 3%Total direct expenses per acre 124.8 87% 30.6 77%Return over direct exp per acre 24.7 17% 11.2 28%

Overhead Expenses Hired labor 2.9 2% 0.8 2%Machinery leases 1.8 1% 0.5 1%Farm insurance 1.6 1% 0.5 1%Utilities 1.2 1% 0.4 1%Interest 2.9 2% 0.8 2%Mach & bldg depreciation 10.9 8% 3.0 8%Miscellaneous 2.0 1% 0.6 1%Total overhead expenses per acre 24.2 17% 6.9 17%Total dir & ovhd expenses per acre 149.1 104% 37.5 94%Net return per acre 0.4 0% 4.3 11%

Input-Output ratio 104% 94%

Corn Cash Rent Soybean Cash Rent

Take-aways

Volatility rising Prices (inputs, outputs) Possible weather volatility

Financial leverage adjustments Understand your competitive structure

Differentiation: Practices or technology Implementation

Regional Banking Group - 1 October 2008 A Invisible Sun Michael Swanson Ph.D. Wells Fargo Economics.

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