What Lies Beyond The Horizon For Farm Incomes:

Transcription

1 What Lies Beyond The Horizon For Farm Incomes: The Case For Volatility With An Upward Bias Sterling Liddell Rabo AgriFinance July 16, 2012 KC FED Agricultural Symposium

2 Summary Restructuring of margin risk Structural shift in demand leading to expanded production in more volatile areas Tighter global stocks conditions leaving little room for supply disruptions Resulting in higher and more volatile prices Cost of production to reclaim historic proportion of crop value Competition between inputs and land values for proportion of crop value Cost of land claims residual profits Outlook returns margins to break even with high volatility Margin compaction with high volatility leaves margins vulnerable Warning signs if input costs exceed historic proportions or land costs exceed fundamental drivers Increasing cost of capital, energy markets/policy and macroeconomic conditions are keys to future. 2 Rabobank International

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5 Summary Restructuring of margin risk Structural shift in demand leading to expanded production in more volatile areas Tighter global stocks conditions leaving little room for supply disruptions Resulting in higher and more volatile prices 5 Rabobank International

6 Dollars/Bushel What Happened to Prices $ =$6.2/bu $5.00 $4.00 $3.00 $2.00 $1.00 Corn Price per Unit Average Corn Price $0.00 Source: USD, Rabobank 6

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8 The basics have remained the same But corn is now $6.50, not $2.50 For many decades productivity gains outpaced demand growth. But things have changed. 10,000 9,000 Global population (in millions) 5,000 4,900 Agricultural land (1,000 ha) 1.50 Now due to GDP growth in the developing world, demand is accelerating. Unfortunately, productivity from yield improvement is decelerating. 8,000 7,000 6,000 5,000 4,800 4,700 4, The world has changed from one of structural surplus to structural deficits. 4,000 3,000 2,000 4,500 4, ,000 4, , Total population Urban population Rural population Agricultural land area Agricultural land area per capita Source: FAO Stat Source: FAO Stat, Rabobank

9 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10 21% 74% China Industrialization Herd Size of Hog Farms in China 5% 7% 10% 12% 15% 36% 57% 48% 42% 51% 37% 55% 30% F BEIJING (Dow Jones)--China's grain demand will likely increase by 4 million metric tons a year over the next five years, while the local supply of agricultural products will face huge pressure, Vice Agricultural Minister Chen Xiaohua said Thursday. January 28, % 90% 80% 70% 60% 50% 40% 30% 20% 10% Specialized farm (+3000 heads/farm) Commercial farm (50~3000 heads/farm) Backyard farm (1~49 heads/farm) 7% 6% 8% 11% 15% 70% 18% 64% 9% 12% 15% 39% 23% 14% 25% 38% 18% 7% 0% (E) 2015(F) Source: MOA, Rabobank estimates Structural trend towards scaled farming will accelerate in coming years Herd Size of Poultry Farms in China Large commercial farm(>500k) Commercial farm (50K-500K birds) Large size farm (10-50K birds) Mid size farm (2-10K birds) Backyard farm (<2K birds)

10 Supply For Global Wheat Trade Is Shifting % of World Total 35% 30% 25% 20% 15% 10% 5% 0% Canada United States Black Seas 11

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12 Tightening In Global Stocks World STU ratio: All Grains 35% 30% 25% 20% 15% 10% 20.6% 16.5% 5% 0% World STU World-China STU World STU ratio: Corn 35% 30% 25% 20% 15% 10% 5% 14% 10% 0% Source: Rabobank Source: USDA/FAS, Rabobank World STU World-China STU

13 Higher and more volatile price outlook (Farm Received Corn Price) $/Bu $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $ Average 5th Percentile 25th Percentile 75th Percentile 95th Percentile 14 Rabobank International

14 Summary Restructuring of margin risk Structural shift in demand leading to expanded production in more volatile areas Tighter global stocks conditions leaving little room for supply disruptions Resulting in higher and more volatile prices Cost of production to reclaim historic proportion of crop value Competition between inputs and land values for proportion of crop value Cost of land to claim residual profits Outlook returns margins to break even with high volatility 15 Rabobank International

15 Margins Showing Sign of Compaction 80% 60% % of of Value Returned to to Labor and and Profits Seed, Chem, Fert %% of of Crop Value Land % of of Crop Value No Government Payments 40% 20% 0% -20% -40% -60% 16 Source: Iowa State University, University if Illinois, Rabobank

16 Room For Land Costs to Grow $/acre $ $ Mortgage PMT Rent Return to Land & Profits $ $ $ $ $ $0.00 ($100.00) Source: Chicago Federal Reserve Board, Rabobank (f) 17 Rabobank International

17 Volatility Persists As Margins Tighten $/Acre Rabobank International

18 Increased Probability of Losses Probability of Margins Less Than $0.00/bu and Greater Than $60/bu 100% 90% 80% 70% 60% % 40% 30% % 10% 0% Rabobank International

19 Confidence: The feeling just before you completely understand the situation Manage the balance sheet Secure liquidity Secure working capital Depends on how much growth is desired in the future 20%-40% Maintain good lending/credit standards Behavior consistent with margin minimization 20

20 Summary Key Risks Margin compaction with high volatility leaves margins vulnerable Warning signs if input costs exceed historic proportions or land costs exceed fundamental drivers Increasing cost of capital, energy markets/policy and macroeconomic conditions Interest rate increases Demand destruction as a result of drought 21 Rabobank International

21 The financial link in the global food chain 22 Rabobank International