DTN Progressive Farmer Ag Summit 2012

DTN-The Progressive Farmer Ag Summit 2012

December 11, 2012

Presentation by Terry N. Barr, Senior Director, Knowledge Exchange Division, CoBank 1

DTN‐Progressive Farmer Ag Summit

2012

“Hazards from Budget Crisis Here

and Abroad”

Presentation by: Terry Barr, Senior Director of Industry ResearchKnowledge Exchange Division, CoBank, ACBE-mail: [email protected]


December 11, 2012


-10 -8 -6 -4 -2 0Fiscal structural deficit as % of GDP

201120122013

201120122013

201120122013

201120122013

201120122013

0 35 70 105 140 175

Greece

Spain

Japan

Greece

U.S.

Maastricht Treaty = 3% Maastricht Treaty = 60%

U. K.

Japan

U.S.

U. K.

Debt and Fiscal Issues Will Challenge Major Advanced Economies Beyond Europe

Data source: International Monetary Fund, WEOGross government debt as percent of GDP

Greece

Spain


December 11, 2012


This is not just about a “fiscal cliff” in 2013:1. It is about beginning a multiyear transition with major fiscal

and monetary corrections in the U.S., Europe and Asia.2. It is about strategic choices regarding the role and size of

government.3. It is about fiscal drag, legislative and regulatory clarity for the

business sectors and financial market realignment.4. It is about currency realignments that will reflect the pace of

adjustments in the regions and impact trade flows.5. It is about a growing role for Asia in the global economy and the

realignment of their export dependent growth strategies.6. It is about agriculture’s domestic and global market potential

and the impacts of changes in farm and energy policy, regulation and tax code (estate taxes, 1031 like exchanges).

“Hazards from Budget Crisis Here and Abroad”

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)


December 11, 2012


Confidential and Proprietary 4

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

-2

0

2

4

6

Percent change in annual world growth (purchasing-power parity rates)

Advanced countries Rest of world China India


A Global Rebound That Will Boost Trade Will Require Recovery in U.S./Europe


December 11, 2012


The Largest Chinese Trading Partners Drive China’s Economic Growth Potential

Region

European UnionUnited StatesHong KongASEANJapanSouth KoreaIndiaRussiaTaiwan

Exports

356.0324.5268.0170.1148.382.950.538.935.1

Imports

211.2122.215.5

192.8194.6162.723.440.3

124.9

Balance

+144.8+202.3+252.5‐22.7‐46.3‐79.8+27.1‐1.4‐89.8

Trade


December 11, 2012



U.S. Agriculture Export Destinations Have Increasing Asian Flavor

1.China2. Canada3. Mexico4. Japan5. EU‐276. South Korea7. Hong Kong8. Taiwan9. Indonesia10. Philippines11. Turkey12. Egypt13. Viet Nam14. Russia15. ThailandTotal all exports

23.420.018.913.88.96.23.43.12.52.31.91.81.51.51.3

135.8

Top 15 Markets 2012

1.Japan2. Canada3. EU‐274. Mexico5. South Korea6. Taiwan7. China8. Hong Kong9. Egypt10. Philippines11. Turkey12. Indonesia13. Russia14. Dominican Rep.15. Saudi ArabiaTotal all exports

9.37.56.56.32.52.01.51.21.10.90.70.70.70.50.5

50.8

Top 15 Markets 2000

Asian markets account for 45% of U.S. exports and occupy 9 of the top 15 market destinations. China has become the #1 market with Thailand and Viet Nam growing rapidly!

Bil. US$ Bil. US$


December 11, 2012



Grains, Meats & Dairy Exports Focused on Markets That Rely on U.S. / European Growth


December 11, 2012


New energy paradigm will reshape geopolitical realities and facilitate structural

economic transformations.


Sovereign Debts and Fiscal Cliffs Will Dominate Global Economy for Many Years!

Sovereign debt will drive financial and structural transitions in Euro zone!

Fiscal cliff and national debt decisions will shape U.S. policies

and economy for years!

China has new leadership and an economy strongly linked to U.S. & Euro trade.


December 11, 2012



A New Energy Paradigm and Geopolitics Will Mean Major Market and Policy Shifts


December 11, 2012


Jens WeidmannPresident Bundesbank

Angela MerkelGerman Chancellor

Mario DraghiECB President

Xi JinpingNew President of ChinaBlack Swans

Strategic Decisions Lead by These Political Leaders Will Shape Global Growth Path

M. AhmadinejadIranian President

Bashar al‐ AssadSyrian President

Benjamin NetanyahuIsrael Prime Minister

Ben BernankeFED President

John BoehnerMajority Leader

Harry ReidSenate Leader

U.S. President ?


December 11, 2012



Euro Region Struggling to Transition


Jens WeidmannPresident Bundesbank

Limit the German burden!

Angela MerkelGerman Chancellor

A state vote in January and Federal elections in September

Mario DraghiECB President

ECB will do whatever it takes


December 11, 2012


Euro Zone Country Debt Levels Still Rising; Will Austerity Hold? France?

-10 -8 -6 -4 -2 0

Data source: International Monetary Fund, WEOFiscal structural deficit as % of GDP

Italy

Greece

Spain

201120122013

201120122013

201120122013

201120122013

201120122013

0 35 70 105 140 175Gross government debt as percent of GDP

Italy

Spain

Maastricht Treaty = 3% Maastricht Treaty = 60%

Greece

France France

Germany Germany


December 11, 2012



Euro Region Struggling to Transition

Monetary Union Fiscal Union Banking Union

No shortcut


No quick solutionRecent actions have calmed waters…… but reality is a 3 to 5 year volatile transition!


December 11, 2012


Building fiscal union: ECB defines Outright Monetary Transactions (OMT)

Purchases short term sovereign debt (1‐3year maturities) with no fund limit on ECB. Countries must approach EFSF/ESM for assistance and agree to structural reforms to improve fiscal positions and enhance labor competitiveness. Forfeiting sovereignty.

Building banking union: ECB would have authority over Europe’s 6000 banks

• Single depository insurer.• Standard practices in winding down bankrupt banks.• Authority for EFSF/ESM to recapitalize banks directly.

Euro Region Struggling


EFSF (European Financial Stability Facility) ESM (European Stability Mechanism)


December 11, 2012


The Competitiveness of Weak Sovereigns is Structural Problem That Must be Fixed


December 11, 2012


1.72

2.92.4

0.5

-2.8

0.70.3

-1.3

0.3

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-4

-3

-2

-1

0

1

2

3

4Percent growth rate per year


Weak Euro Zone Growth Rates Unlikely to Improve Dramatically Over Next Three Years


December 11, 2012



China Is Undergoing a Once‐in‐a‐Decade Leadership Transition


Xi JinpingNew President of China


December 11, 2012



9.8

11.3

12.7

14.2

9.6 9.2

10.4

9.2

8

9.5

93-02 2005 2006 2007 2008 2009 2010 2011 2012 20130

2.5

5

7.5

10

12.5

15Percent growth rate per year

7 .5 - 9 .5


Growth in China Has Slowed as the Once‐in‐a‐Decade Leadership Transition Begins


December 11, 2012


Modest Inflation Gives China’s New Leadership More Stimulus Options

-2

0

2

4

6

8

10Percent change from year earlier

Ch in a

A d van ced e conom ie s

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2

China will now focus on internal growth as export markets weaken!

1.7% inflationIn October; food prices up 1.8%



December 11, 2012



5.0

5.5

6.0

6.5

7.0

7.5

8.0Central bank policy rate

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3

Subdued Inflation and Weak Export Sector May Signal More Financial Stimulus

6.00%



December 11, 2012



U.S. Recovery Remains SubduedBut Policy Uncertainties Pose Challenge!

UnitedStates


Ben BernankeFED President

John BoehnerMajority Leader

Harry ReidSenate Leader

U.S. President ?


December 11, 2012


22

Current Focus on Fiscal Cliff Detracts From Broader Challenges Ahead


$528 billion = 3.3% of U.S. economy in 2013(currently projected growth is 3.7%)

Expiration of: certain income tax cuts, reduced rates for estate and gift tax provisions, and the indexing of the AMT for inflation.

Expiration of the payroll tax holiday.

Defense cuts mandated by sequester

Non‐defense spending cuts mandated by sequester

Expiration of emergency unemployment insurance benefits.

Doc fix

Expiring tax extenders

Cost of the expiring tax provisions and spending cuts for fiscal 2013.(billion dollars)

Sources; Congressional Budget Office, Bipartisan Policy Center and Eurasia Group


December 11, 2012


Fiscal Cliff Impacts on Consumers Will Vary By Type of Revenue Generator

Payroll tax cutUpper Income tax rate expirationAffordable Care Act Personal taxesEmergency Unemployment benefits

Total

$126

$56

$24

$12

$218

Estimated Impact

60%

30%

30%

60%

51%

Marginal Propensity to consume

Estimatedspending Impact

$126

$56

$24

$12

$218

% change in retail

sales from 2012

‐1.5%

‐0.3%

‐0.2%

‐0.2%

‐2.3%

(bil. $)(bil. $)

Source: Bureau of Economic Analysis, Census and Goldman Sachs


December 11, 2012


-8

-6

-4

-2

0

2

4

6

8Percent change in quarterly Gross Domestic Product (Chained 2005$)*

* S e a s o n a lly a d ju s te d a t a n n u a l ra te2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 22 0 1 0 2 0 1 1 2 0 1 3

60‐70% of U.S. economic growth comes from consumer spending:

Debt, unemployment, home values and political uncertainty will limit 2012 and 2013

growth!Assumes no fiscal cliff!


Too Much Uncertainty to Build Base for Rapid Recovery in U.S. Economy


December 11, 2012



Congress Must Eventually Choose A Path Between No Action and Kick‐the‐ Can

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

Deficit in billion dollars

R e a g a n C lin to nG . B u s h

G .W . B u s h

S o u rc e : C o n g re s s io n a l B u d g e t O ff ic e (A u g u s t , 2 0 1 2 ) , B E A a n d T re a s u ry D e p a r tm e n t a n d fo re c a s t

O b a m a

No action

Extend tax cuts; no sequestration

$7.8 trillion in deficit reduction

Debt‐to‐GDP*

58.5%

89.7%

* National debt held by the public as percent of GDP


December 11, 2012


Taking No Action Would Put Budget on Path to Limit National Debt Increases

40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20

0

2

4

6

8

10

12

14

16

18

20

22Trillions of dollars

0

12

24

36

48

60

72

84

96

108

120

132

Percent of GDP

National debt Percent of GDP

Eise

nhow

er

Ken

nedy

John

son

Nix

on /

Ford

Car

ter

Rea

gan

H.W

. Bus

h

Clin

ton

G.W

. Bus

h

Oba

ma

Trum

an

Roo

seve

lt

No debt ceiling vote required!

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)* National debt held by the public as percent of GDP


December 11, 2012


By Extending Tax Cuts and Eliminating Spending Cuts The National Debt Doubles

40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20

0

2

4

6

8

10

12

14

16

18

20

22Trillions of dollars

0

12

24

36

48

60

72

84

96

108

120

132

Percent of GDP

National debt Percent of GDP

Eise

nhow

er

Ken

nedy

John

son

Nix

on /

Ford

Car

ter

Rea

gan

H.W

. Bus

h

Clin

ton

G.W

. Bus

h

Oba

ma

Trum

an

Roo

seve

lt

Debt ceiling would need to be increased regularly!

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)* National debt held by the public as percent of GDP


December 11, 2012


Debt Ceiling Debate Will Be Part of Fiscal Cliff Patch and Final Deficit Reduction Debate

Debt ceiling applies to debt held by the public and intergovernmental debt (e.g. social security trust fund invested in treasuries).


December 11, 2012


The Budget Debate Will Likely Continue For Several Years!

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22

10

15

20

25

30Revenue and outlays as percent of GDP

Outlays

Revenues

Oba

ma

G.W

. Bus

h

Nix

on /

Ford

Car

ter

Rea

gan

H.W

. Bus

h

Clin

ton

What combination

of tax increases & spending cuts will close this gap? Any path will

create fiscal drag!



December 11, 2012


30

U.S. Economic Policy Transitions Will Create Headwinds for Recovery!

U.S. is proposing to undertake major policy reform:

Virtually every sector of the economy will be impacted and risk management and investment strategies cannot deal with uncertainties. Companies can measure and adjust to risk based on a set of rules. Can’t assess uncertainty!

Financial sector Financial sector regulatory reform implementation

Energy sector New energy paradigm; Fracking technology changes landscape! Comprehensive reassessment

Immigration Reform groundwork being laid for 2013

Health care sector Uninsured, medicare / medicaid reform?

Regulatory oversight Clean air & water, Food safety

Deficit reduction

Changing tax policy and entitlement programs (including farm and food programs).



December 11, 2012


Removing $2‐3 Trillion in Stimulus Over Next Decade Will Create Fiscal Drag

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

-4

-2

0

2

4

6

Percent change Gross Domestic Product (Chained 2005$)

Subdued growth expectations

reflect major policy uncertainty!



December 11, 2012


32

Monetary Policy Will Adjust to Fiscal Policy Wild Card and Economic Growth

White House U.S. Federal Reserve

CongressU.S. Treasury Department



December 11, 2012


33Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

0

1

2

3

4

5

6

7

8

9Percent

1 0 -y e a r T re a s u rie s

F e d e ra lF u n d s R a te

9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 40 3 0 5 0 6 0 7 0 90 8 1 21 0 1 1 1 3 1 4

Federal Reserve Will Continue To Promote Growth in 2012‐15: QE3 / Operation Twist

Extend near‐zero rate guidance through mid‐2015 QE3 of $40 bil. per month in mortgage‐backed

securities. Continue Operation Twist and reinvestment of principal payments from holdings through yearend. (total of $85 bil. per month through yearend)

Federal Reserve actions:


December 11, 2012


34

World’s Central Banks Have Injected $6 Trillion into the Global Economy …

Current actions may add another $1 trillion to central bank balance sheets!

Data and chart source: Cumberland Advisors, Oct. 12


December 11, 2012


35

Supply Concerns Will Drive Markets in Short Term But Demand Will be Longer Term Issue



December 11, 2012


36

World Grain Stocks Decline is Accelerating With Reduced Harvests


70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

0

100

200

300

400

500Million metric tons of wheat & coarse grains

0

8

16

24

32

40Stocks-to-use percentage

World stocks Stock/use


December 11, 2012



70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

0

10

20

30

40

50

60

70Million metric tons of soybeans

0

5

10

15

20

25

30

35Stocks-to-use percentage

Ending stocks Stocks-to-use

Global Soybean Stocks Rely on Record S. American Crop Now Being Planted


December 11, 2012



70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

0

10

20

30

40

50

60

70

Million metric tons of U.S. exports

Wheat Soybeans Coarse grains

Growth in U.S. Grain Exports Will Be Vital As Stocks Rebuild and Competitors Expand


December 11, 2012


Export Market Will Be Key to Positive Animal Protein and Dairy Returns

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 -3

0

3

6

9

12

15

18Billion pounds (red meat: carcass weight; poultry: ready-to-cook)

Imports Exports BalanceExport share of

2012 U.S. production Broilers ………... 20% Beef ………….…. 10% Pork …………..… 23%All meat …….....17%Dairy (skim solids)… 17%



December 11, 2012


40

Farm Bill and Final Deficit Reduction Packages Will Impact Agriculture Sector


Farm bill:Fiscal cliff down payment could include new farm bill or simply score savings, extend current farm bill and direct committees to achieve required savings. Movement from direct payments to insurance programs likely for 2014.

Magnitude and composition of required savings will change as full deficit reduction package evolves!

Tax code changes:Fiscal cliff down payment will include some tax code changes that could impact consumer demand for meat and dairy but full deficit reduction package will address estate taxes, 1031 like exchanges, capital gains, depreciation allowances, etc.


December 11, 2012



Farm Income Remains Strong But Protein and Dairy Remain Under Pressures

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 110

25

50

75

100

125

150Billion dollars

N e t F a rm C a s h In c o m e

D ire c t g o v e rn m e n t p a y m e n ts *

* e m e rg e n c y p a y m e n ts a re s tr ip e d a re a o f g o v e rn m e n t p a y m e n ts )

Income gains in 2012 will be sustained despite below normal harvest and weak global

economy! However, dramatic regional and commodity diversity in income and balance

sheets!


December 11, 2012


Farm Debt Leveraging Has Not Followed Land Prices Higher

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

0

500

1000

1500

2000

2500

Billion dollars

0

100

200

300

400

500

Billion dollars

C h a n g e 1 9 7 0 -1 9 8 0A s s e ts ... + 2 5 9 %D e b t ....... + 2 3 5 %

C h a n g e 1 9 8 0 -1 9 9 0A s s e ts ... -1 6 %D e b t ....... -1 9 %

C h a n g e 1 9 9 0 -2 0 0 0A s s e ts ... + 4 3 %D e b t ....... + 2 5 %

C h a n g e 2 0 0 0 -2 0 1 0A s s e ts ... + 8 2 %D e b t ....... + 5 3 %

F a rm a s s e ts(le ft s c a le )

F a rm d e b t(r ig h t s c a le )


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