Agricultural Outlook: Rebalancing U.S. Agriculture

Transcription

1 Agricultural Outlook: Rebalancing U.S. Agriculture Michael J. Swanson Ph.D. Agricultural Economist January Wells Fargo Bank, N.A. All rights reserved. For public use. The U.S. Ag Sector renormalizes! Biofuels growth approaches zero! Current profitability is extremely poor! Without a RFS change little growth! The U.S. long grains and oilseeds! Back to pre-rfs levels per capita! Productivity outpacing domestic demand growth! Livestock and protein remain next best! Global market wants more protein! Cheap feed makes the U.S competitive! 1

2 Yield growth exceeds population growth Expect flat agricultural prices 3 $7 Why do commodity prices move like this? Annual Corn Prices $6 $5 $4 $3 $2 $1 Source: USDA, Wells Fargo $

3 Ranch and farm markets are linked USDA Ag Revenues and Net Farm Income in Billions Crop Receipts Livestock Receipts You can t market your way out of this problem. 6 3

4 $7 Sales gap between low and high cost producers MN Cash Rent Corn Production Sales revenue per bushel $6 $5 Low cost 40% High cost 40% $4 $3 $2 $1 $0 Source: FINBIN, Wells Fargo $7 $6 $5 $4 $3 $2 Cost gap between low and high cost producers Low cost 40% High cost 40% MN Cash Rent Corn Production Total cost per bushel $1 $0 Source: FINBIN, Wells Fargo

5 Capital is always looking for profits Profits before Taxes / Total Assets 111 Crop Production 112 Livestock Production 115 Agricultural Support 311 Food Mfg 0 4/1/10 3/31/11 4/1/11 3/31/12 4/1/12 3/31/13 4/1/13 3/31/14 4/1/14 3/31/15 4/1/15 3/31/16 4/1/16 3/31/17 9 Global trends are stable Population growth is 1.1% annually Trend continues to slow Wide spread between regions Economic growth slows population growth Global GDP growth 3% Trend remains stable With sporadic volatility It s has survived many crises Careful with it s different this time 10 5

6 Demand = People * Income 2.5% Global Population Growth Rates 2.0% 1.5% 1.0% 1.1% 0.5% Source: UN data, Wells Fargo analysis 0.0% Many moving pieces relatively stable performance Global GDP in Trillions of USD $100 $80 $60 $40 $20 $0 Source: USDA, Wells Fargo

7 Why did the slinky bounce? 13 Why the market always cycles and never settles Supply Price Demand 14 7

8 Acreage goes to the most profitable Natural Log of Acreage (millions of Hectares) y = 0.001x R² = Grains Oilseed y = 0.018x R² = Source: FAO, Wells Fargo Global population growth is 1.1 percent and falling Grains Oilseed Natural Log (yield MT/HA) y = 0.019x R² = y = 0.022x R² = Source: FAO, Wells Fargo

9 Dietary change is a slow process Natural log (Production millions of MTs) Grains Oilseed y = 0.019x R² = 0.96 y = 0.039x R² = 0.99 Source: FAO, Wells Fargo The emphasis on oilseeds has hit the U.S. as well. 18 9

10 Without ethanol this would have been even bigger U.S. Acreage Distribution Millions of acres harvested Wheat Corn Soybeans 0 Source: USDA, Wells Fargo We are back to being long corn

11 Yield gains 1.6%+ v. population growth of 0.7% U.S. Corn, Soybean and Wheat: Kilograms per capita Ethanol's usage of corn per capita 800 Source: USDA, Wells Fargo All proteins are good substitutes (at the right price) 22 11

12 It is possible to kill protein prices U.S. Meat Production natural log of 000s of metric tons Production Domestic consumption 3.0% Source: USDA, Wells Fargo (0.2%) 1.5% 3.1% 1.2% (0.6%) This will require better exports 19,000 17,000 15,000 Pork Beef Broiler U.S. Meat Production 000s of Metric Tons 13,000 11,000 9,000 7,000 Source: USDA, Wells Fargo

13 Better volumes are supporting better returns Percent: Profits before Taxes / Total Assets 3116 Animal slaughter and further processing th Percentile Median 25th Percentile /1/10 3/31/11 4/1/11 3/31/12 4/1/12 3/31/13 4/1/13 3/31/14 4/1/14 3/31/15 4/1/15 3/31/16 Source: RMA 4/1/16 3/31/17 25 Three macro drivers to watch Interest rates/exchange rates Key relationships Relative growth China growth Reasonable expectations How much volatility should we expect? Biofuels policy Energy pricing Governmental policy 26 13

14 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 27 The US economy is the fastest turtle on the track Facts remain in the witness protection program 28 14

15 It is not about us so don t take it personal U.S. Agricultural Exports to the Rest of the World 2010 = Source: USDA, Wells Fargo Not all dollars are equal 130 Different Commodities equal Different Dollars Source: USDA, Wells Fargo U.S. agricultural exports to the World Soybeans Pork & Pork Products

16 Markets try to anticipate. They fail badly. 6 History + futures Fed Funds 4 2 Futures 0 Source: FRED, Wells Fargo Ag Industries Historical Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan Money flows at the speed of greed Long-term Interest Rates: OECD Data Germany Japan U.S Jan-2007 Jan-2009 Jan-2011 Jan-2013 Jan-2015 Jan

17 Chinese Yuan to US Dollar exchange rate Yuan to Dollar Source: Federal Reserve, Wells Fargo 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 China is a great buyer (for now) $25 $20 $15 $10 $5 $0 -$5 -$10 -$15 -$20 -$25 Billions 3 (6) Source: USDA, Wells Fargo Net Trade Balance Ag, Food, Forestry and Fishing ROW China/HK (1) (4) (18) 15 (22) (23) Jan - Nov

18 Ethanol demand growth will approach zero in 2018 Longer term it faces very difficult demand issues 35 Ethanol and biodiesel face domestic demand challenges Ethanol Supply and Demand 000s of barrels Production Utilization Source: EIA, Wells Fargo Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan

19 Net exports have used 8% of production 4500 Ethanol Trade Per Month Export 000s of barrels Import 000s of barrels Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: EIA, Wells Fargo 37 1 st time ethanol was actually cheaper per BTU $4.75 $4.25 $3.75 $3.25 $2.75 $2.25 Per Gallon Wholesale Prices $1.75 $1.25 Source: USDA, Wells Fargo Ethanol's cost as gasoline Gasoline $0.75 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan

20 Miles driven strongly connected to GDP Billions of miles Driven 210 Source: Federal Highway Admin 200 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan Fuel efficiency continues to offset miles driven 23 Miles per gallon Source: Wells Fargo 19 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan

21 The U.S. Ag Sector renormalizes Biofuels growth approaches zero Current profitability is extremely poor Without a RFS change little growth The U.S. long grains and oilseeds Back to pre-rfs levels per capita Productivity outpacing domestic demand growth Livestock and protein remain next best Global market wants more protein Cheap feed makes the U.S competitive 41 21