October 2017
Global Outlook for AgricultureTrend versus Cycle
Michael Swanson Ph.D.Wells Fargo
Everything is connected
we just don’t see how.
2
Connection corollary: Nothing natural moves in a straight line
Yield growth exceeds population growth
Expect flat agricultural prices
3
Global trends are stable
Population growth is 1.1% annuallyTrend continues to slowWide spread between regionsEconomic growth slows population growth
Global GDP growth 3%Trend remains stableWith sporadic volatilityIt’s has survived many “crises”Careful with “it’s different this time”
4
Demand = People * Income
5
1.1%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Global Population Growth Rates
Source: UN data, Wells Fargo analysis
How much money will they have to spend
6
6.27
7.25
1.25
2.48
0
1
2
3
4
5
6
7
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Global Population in Billions
World less Africa
Africa
Source: UN data, Wells Fargo analysis
Will they buy US farmers top dollar?
7
0.33 0.39
1.25
2.48
0
1
2
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Global Population in Billions
USA
Africa
Source: UN data, Wells Fargo analysis
Many moving pieces – relatively stable performance
8
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Global GDP in Trillions of USD
Source: USDA, Wells Fargo
9
Supply Price Demand
Why the market always cycles and never settles
Acreage goes to the most profitable
10
y = 0.001x + 6.5285R² = 0.0791
y = 0.018x + 4.7074R² = 0.9924
4.5
5.0
5.5
6.0
6.5
7.0
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Natural Log of Acreage (millions of Hectares)
Grains
Oilseed
Source: FAO, Wells Fargo
Global population growth is 1.1 percent and falling
11
y = 0.019x + 0.3883R² = 0.98
y = 0.022x - 1.5544R² = 0.99
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Natural Log (yield MT/HA)
Grains
Oilseed
Source: FAO, Wells Fargo
Dietary change is a slow process
12
y = 0.019x + 6.9168R² = 0.96
y = 0.039x + 3.153R² = 0.99
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Natural log (Production millions of MTs)
Grains
Oilseed
Source: FAO, Wells Fargo
The U.S. has a dominantrole in global agriculture
for a reason
13
Critical mass plus a surplus per person
14
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000
Total Production (Grain+Oilseed) v. Per Capita
North America
Oceania
FSU-12South America
EU-28
East Asia
South Asia
Southeast Asia
Sub-Saharan Africa
Middle East
Other Europe
North Africa
Kilograms /
Per capita
Production
000s of MT
Average per capita
consumption in
kilograms
Yield gains of 1.6%+ are double population of 0.7%
15
400
800
1200
1600
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
U.S. Corn, Soybean and Wheat:Kilograms per capita
Source: USDA, Wells Fargo
Ethanol's usage of corn
per capita
There is not enough demandgrowth to lift prices.
16
Miles driven is offset by fuel efficiency
17 200
210
220
230
240
250
260
270
280
290
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Billions of miles Driven
Source: Federal Highway Admin
We are now dependent on ethanol exports as well
18
3.8
4.3
4.8
5.3
5.8
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Ethanol Usage and Production in Billions of Bushels
Annualized corn inAnnualized corn out
Ethanol demand growth will go negative in 2018
19
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Growth Rate Domestic Ethanol Usage v. Gasoline52 week moving average YOY Pct Chg
Domestic ethanol usageDomestic gasoline usage
Diesel growth is supports biodiesel, but it’s a slow climb.
20
Truck traffic miles show flat distributions
21
0
20000
40000
60000
80000
100000
120000
140000
Mar-00 Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12 Jul-13 Nov-14 Mar-16 Jul-17
Distallate Fuel Oil DistributionsMonthly average 000s of barrels
Source: EIA, Wells Fargo
Cheap corn drives more meat and poultry.
22
It is possible to kill protein prices
23
y = 0.0101x + 10.45R² = 0.90
10.40
10.45
10.50
10.55
10.60
10.65
10.70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
U.S. Meat ProductionLN of thousands of MTs beef, pork and poultry
Source: USDA, Wells Fargo
This will require better exports
24
7,000
9,000
11,000
13,000
15,000
17,000
19,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
U.S. Annual Meat Productionin 000s of Metric Tons
Meat, Beef and Veal
Meat, Swine
Poultry, Meat, Broiler
Source: USDA, Wells Fargo
Better volumes are supporting better returns
25
0
5
10
15
20
4/1/103/31/11
4/1/113/31/12
4/1/123/31/13
4/1/133/31/14
4/1/143/31/15
4/1/153/31/16
Animal Slaughter Return on AssetsProfit B4 Taxes / Total Assets
75th Percentile
Median
25th Percentile
Global demand growth is slow but reliable.
26
Different growth rates imply pricing decisions
27
y = 0.011x + 10.53y = 0.029x + 10.39
y = 0.055x + 9.03
9.0
9.5
10.0
10.5
11.0
11.5
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Global Protein Production: Natural Log of 000s of Metric Tons
LN beefLN PorkLN Broiler
Source: USDA, Wells Fargo
Protein has increase twice as fast as population
28
y = 0.029x + 11.23
y = 0.015x + 12.8
11.0
11.5
12.0
12.5
13.0
13.5
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Natural Log of Global Population and Protein Production
LN Total Protein Production
LN Population
Is there an “right” amount of protein?
Source: FAO, Wells Fargo0
20
40
60
80
100
120
140
160
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Per Capita: Fish and Meat
ChinaUSACanada
29
Kg/per capita
Are we reaching “stable” per capita rates?
30
0
20
40
60
80
100
120
140
160
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Per Capita Protein Consumption: KGs
AfricaAsiaEuropeNorthern America
Why be bullish about Ag?Demand will grow
PopulationIncome and food preferencesBioenergy is the “real deal”
You can differentiate yourselfTechnological changeRegulatory barriersAsset disciplineManaging supply chain difficulties
31
Don’t confuse agriculture and food
32
Ag commodities are inputs to the food sector
33
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Food and BeverageSpending in Billions of Dollars
Ag Revenues
Food and Beverage Spending
People crave convenience, variety …
34
0
100
200
300
400
500
600
700
800
900
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Food and BeverageSpending in Billions of Dollars
At home
Away from home
Where do you want to compete for the value-added
35
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1950 1960 1970 1980 1990 2000 2010
Ratio: Food/Beverage Crops/Livestock
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Value to Consumers
Shelf-life
VarietyPackaging
Marketing
Availability
Basic product
Willingness to pay
Craft beer offered the consumer something new
37
0
20
40
60
80
100
120
140
160
180
200
4/1/983/31/99
4/1/003/31/01
4/1/023/31/03
4/1/043/31/05
4/1/063/31/07
4/1/083/31/09
4/1/103/31/11
4/1/123/31/13
4/1/143/31/15
RMA Breweries# of Statements Analyzed
Every market has a feedback loop
38
-3
-1
1
3
5
7
9
11
4/1/983/31/99
4/1/003/31/01
4/1/023/31/03
4/1/043/31/05
4/1/063/31/07
4/1/083/31/09
4/1/103/31/11
4/1/123/31/13
4/1/143/31/15
Industry Average Breweries: Percent Profit Before Taxes
Economic growth equals opportunity
39
0%
5%
10%
15%
20%
25%
1947 1957 1967 1977 1987 1997 2007
Food and Beverage Spending as a Pct of GDP
What about the outlook for the US dollar and interest rates?
40
Relative opportunity drives change▪ Stronger dollar
▪ Better “risk adjusted” returns▪ Faster growth + inflation = opportunities▪ Regulatory predictability
▪ Weaker dollar▪ Others grow faster than expected today▪ Perceived risk declines in the BRICs▪ Regulatory burden grows
41
It is not about us so don’t take it personal
42
50
60
70
80
90
100
110
120
130
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
U.S. Agricultural Exports to the Rest of the World2010 = 100
Source: USDA, Wells Fargo
Not all “dollars” are equal
43
70
80
90
100
110
120
130
1990 1994 1998 2002 2006 2010 2014
Different Commodities equal Different Dollars
U.S. agricultural exports to the World
Soybeans
Pork & Pork ProductsSource: USDA, Wells Fargo
Markets try to anticipate. They fail badly.
44
0
2
4
6
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
Source: FRED, Wells Fargo Ag Industries
History + futuresFed Funds
Historical
Futures
Low inflation still adds up over time.
45
$850,000
$870,000
$890,000
$910,000
$930,000
$950,000
$970,000
$990,000
$1,010,000
$1,030,000
$1,050,000
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
What Does the Federal Reserve Mean Exactly by "Low Inflation"
1 Million Dollars compounded at Fed Funds
Inflation Adjusted Fed Funds Returns
Source: Wells Fargo
Money flows at the speed of greed
46
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017
Long-term Interest Rates: OECD Data
Germany
Japan
U.S.
Can we count on China?
Yes, to take of China.
47
Chinese Yuan to US Dollar exchange rate
48
1. Is it the truth?2. Is it fair to all concerned?3. Will it build goodwill and better friendships?4. Will it be beneficial to all concerned?
5.5
6.0
6.5
7.0
7.5
8.0
8.5
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Federal Reserve, Wells Fargo
China is a great buyer (for now)
49
36 9
14 1622 23 22
16 18
8
(6)
10 4
5 7
1
(1)(4)
(18)(22)
(16)
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan - Aug2017
Billions
Net Trade BalanceAg, Forestry and Fishing
ROWChina/HK
Source: USDA, Wells Fargo
An “adaptive” type of attitude
▪ Don’t try predicting your future▪ You’ll be wrong anyways▪ You’ll be wasting flexibility
▪ The economy always grows▪ Trend▪ Cycle
▪ The “problem” is internal not external
50