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Page 1: Agricultural commodities: Trends, Spikes and Asia powerpoints/Mathews, Luke...Please view our website at . The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank")

Agricultural commodities: Trends, Spikes and AsiaLuke Mathews, Commonwealth Bank of Australia24th February 2014

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Important InformationThis advice has been prepared without considering your objectives, financial situation or needs, and before acting on the advice, you should consider its appropriateness to your circumstances.

Commonwealth Bank of Australia (“CBA”) as a provider of investment, borrowing and other financial services undertakes financial transactions with many corporate entities in Australia. This may include any corporate issuer referred to in this report.

For US and US investors: This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the “Bank”) and is distributed in the United States by the Bank’s New York Branch. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Investments and strategies are discussed in this report only in general terms and not with respect to any particular security or securities transaction, and any specific investments may entail significant risks, including exchange rate risk, interest rate risk, credit risk and prepayment risk among others. There may also be risks relating to lack of liquidity, volatility of returns, and lack of certain valuation and pricing information. International investing entails risks that may be presented by economic uncertainties of foreign countries as well as the risk of currency fluctuations. Investors interested in the strategies or concepts described in this report should consult their tax, legal or other advisors, as appropriate. This report is not intended to provide information on specific securities. The New York Branch provides its clients access to various products and services available through the Bank and its affiliates. In the United States, U.S. brokerage products and services are provided solely by or through Commonwealth Australia Securities LLC (“CAS”), a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

Please see further disclaimers at the back of this document. Please also view our website at www.research.commbank.com.au for a more detailed disclaimer.

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� Why is there a global focus on Australian agriculture?

� What are the broad drivers of the commodity boom?

� What about price spikes (and troughs)?

� What may the future look like?

� Will Australia become the food bowl of Asia?

Contents

Page 4: Agricultural commodities: Trends, Spikes and Asia powerpoints/Mathews, Luke...Please view our website at . The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank")

Why is there a global focus on Australian agriculture?

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Global food prices are rising…

� The 2000-2012 commodity boom follows two decades of flat prices.

� The price spikes are a temporary – they will not last.

S&P-GS agriculture commodity price index (USD terms )Since 2000 prices have risen by an average of 8%pa.

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And Australia is a reputable exporter of ag commodit ies.

� Australia has a well established, politically stable agriculture sector.

� Australia’s agriculture industry is export oriented, thus well connected to global trends.

Gross Value of Farm Production Value of Australian rural exports

Page 7: Agricultural commodities: Trends, Spikes and Asia powerpoints/Mathews, Luke...Please view our website at . The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank")

What are the broad drivers of the commodity boom?

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Structural # 1 – Broad based global commodity boom

� A broad-based commodity boom started to develop at the turn of the millennium.

� Agricultural commodities were pulled along for the ride.

� Most analysts suggest resource/energy commodity prices have peaked.

S&PGS Commodity Price Index (USD terms, nominal)

10.3% CAGR

7.8% CAGR

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Structural shift # 2 – The ethanol boom.

US corn used in ethanol production

� US corn based ethanol production exploded from 2000 to 2010, growing by ~700%.

� 12-14 million hectares of land in the US used to grow corn for ethanol production. Australia’s total wheat area is 12-14 million hectares.

Global corn consumption breaks away from its long run trend because of ethanol.

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Phase 1: 1980-2010

� Meat

� Feed grain

Phase 2: 2005-2020

� Dairy

� Meat substitution (red vs. white)

� Sugar

� Wine/beer

Structural shift # 3 – Westernisation of China

Changing per capita consumption patterns in large-p opulation regions drives global consumption growth.

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Structural shift # 3 – Meat consumption in China

� Meat consumption typically rises as per capita incomes rise.

� China’s growth phase in per capita meat consumption occurred at a lower relative income level than observed in Japan and South Korea. Chinese growth is plateauing.

Meat consumption growth (kg per person per year)Attention now turns to countries such as Egypt and Indonesia. Don’t bank on India.

Update with correct colours

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China impacted global trends for meat and feed.

Chinese meat consumption growth

� China contributed half of the growth in GLOBAL meat demand from the 1980’s.

� China’s rate of growth in meat consumption has started to slow. More slowing expected.

� But the structural change in the industry will endure. Red meat is picking up.

Chinese soybean imports

In 1995, China didn’t import any soybeans.

They now account for 66% of the world’s soybean imports.

.

Growth primarily in pig and poultry

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� So the trend higher in agricultural commodity prices is because of:

1. The broad-based commodity boom

2. The ethanol boom

3. And the China boom

� But what about the spikes in agricultural markets?

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Spikes are driven by short term adjustments to supp ly or demand.

� What is needed for a price spike?

– Crop / production failures

– Resilient physical demand

– Drawdown in supplies to critically tight levels

– Supportive “outside influences” (USD, crude, equities)

� Prices spike in order to ration demand and increase production.

� HIGH PRICES CURE HIGH PRICES

What drives a “spike”?

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What might the future look like?

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The future???

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� There will always be demand for agricultural commodities, however demand prospects are not necessarily even. And improving demand does not always mean improving profitability.

� The broad-based commodity boom and the ethanol booms are waning. Supply responses are coming to fruition.

� In our view, the best demand prospects are for those commodities which currently have low per capita consumption in high population, emerging economies.

What might the future look like?

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Example A: China meat substitution…

� Chinese meat demand growth through the past 40YRS has been fuelled by white meats (83% of demand growth, now account for 86% of total Chinese meat consumption)

� The opportunity now lies in increasing per capita consumption of red meats.

Chinese meat consumption by type over time (kg/pers on/year)

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Example B: Dairy & sugar

� China’s per capita dairy demand is low but rising. SMP 25% pa from 2010, Cheese 4%

� China responsible for 33% global fresh milk demand growth, 80% WMP growth.

� China’s sugar demand is low. History shows Asian sugar demand rises as incomes rise.

Cheese consumption vs incomes. Sugar consumption vs incomes.

Page 20: Agricultural commodities: Trends, Spikes and Asia powerpoints/Mathews, Luke...Please view our website at . The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank")

Will Australia become the food bowl of Asia?

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Australia will NOT become the food bowl of Asia…

� Australian agriculture is a mature industry. Quick output gains are difficult.

� CHINDIA (China + India) would currently eat Australia’s entire wheat crop in a month.

� China would eat Australia’s entire rice crop in 2 days.

� But Australia is benefiting from (1) higher global ag commodity prices and (2) a growing market for agricultural exports.

Fig 1: Australian production vs. Chinese consumptio n

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So what do we focus on?

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Assess individual commodities on their own merits…

Annual percentage change in selected agricultural c ommodity prices (USD terms)

Over the same period agriculture food commodity price index fell 11%.

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And continue to strive for productivity.

Farmers terms of trade

� Despite rising commodity prices, farmers terms of trade continue to trend lower.

� The only way to improve/maintain profitability in the face of falling terms of trade is to via productivity improvements.

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Questions?

Luke Mathews – Director Agricultural Research [email protected]

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This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the “Bank”) and isdistributed in the United States by the Bank’s New York Branch. The information contained herein is not intended to be an exhaustive discussion of the strategies or conceptsmentioned herein or tax or legal advice. Investments and strategies are discussed in this report only in general terms and not with respect to any particular security or securitiestransaction, and any specific investments may entail significant risks, including exchange rate risk, interest rate risk, credit risk and prepayment risk among others. There may also berisks relating to lack of liquidity, volatility of returns, and lack of certain valuation and pricing information. International investing entails risks that may be presented by economicuncertainties of foreign countries as well as the risk of currency fluctuations. Investors interested in the strategies or concepts described in this report should consult their tax, legal orother advisors, as appropriate. This report is not intended to provide information on specific securities. The New York Branch provides its clients access to various products andservices available through the Bank and its affiliates. In the United States, U.S. brokerage products and services are provided solely by or through Commonwealth Australia SecuritiesLLC (“CAS”), a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

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