Global Outlook for Agriculture Trend versus Cycle

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1 Global Outlook for Agriculture Trend versus Cycle Michael Swanson Ph.D. Wells Fargo October 2017

2 Everything is connected we just don t see how. Connection corollary: Nothing natural moves in a straight line 2

3 Yield growth exceeds population growth Expect flat agricultural prices 3

4 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 4

5 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%

6 How much money will they have to spend 7 World less Africa 6 Africa Global Population in Billions Source: UN data, Wells Fargo analysis

7 Will they buy US farmers top dollar? Global Population in Billions USA Africa Source: UN data, Wells Fargo analysis

8 Many moving pieces relatively stable performance Global GDP in Trillions of USD $90 $80 $70 $60 $50 $40 $30 $20 $10 Source: USDA, Wells Fargo $

9 Why the market always cycles and never settles Supply Price Demand 9

10 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

11 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

12 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

13 The U.S. has a dominant role in global agriculture for a reason 13

14 Critical mass plus a surplus per person 2,000 1,800 Kilograms / Per capita Total Production (Grain+Oilseed) v. Per Capita North America 1,600 1,400 Oceania 1,200 1, Other Europe Middle East North Africa FSU-12 Southeast Asia Sub-Saharan Africa South America EU-28 South Asia Average per capita consumption in kilograms East Asia Production 000s of MT 0 100, , , , , , ,000 14

15 Yield gains of 1.6%+ are double population of 0.7% U.S. Corn, Soybean and Wheat: Kilograms per capita Ethanol's usage of corn per capita 800 Source: USDA, Wells Fargo

16 There is not enough demand growth to lift prices. 16

17 Miles driven is offset by fuel efficiency 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-17 17

18 We are now dependent on ethanol exports as well 5.8 Ethanol Usage and Production in Billions of Bushels Annualized corn in Annualized corn out 3.8 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 18

19 Ethanol demand growth will go negative in % 4% 3% 2% 1% 0% -1% -2% -3% -4% Growth Rate Domestic Ethanol Usage v. Gasoline 52 week moving average YOY Pct Chg Domestic ethanol usage Domestic gasoline usage -5% Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 19

20 Diesel growth is supports biodiesel, but it s a slow climb. 20

21 Truck traffic miles show flat distributions Distallate Fuel Oil Distributions Monthly average 000s of barrels 0 Source: EIA, Wells Fargo 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 21

22 Cheap corn drives more meat and poultry. 22

23 It is possible to kill protein prices U.S. Meat Production LN of thousands of MTs beef, pork and poultry y = x R² = Source: USDA, Wells Fargo

24 This will require better exports 19,000 17,000 Meat, Beef and Veal Meat, Swine Poultry, Meat, Broiler U.S. Annual Meat Production in 000s of Metric Tons 15,000 13,000 11,000 9,000 7,000 Source: USDA, Wells Fargo

25 Better volumes are supporting better returns th Percentile Median 25th Percentile Animal Slaughter Return on Assets Profit B4 Taxes / Total Assets /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 25

26 Global demand growth is slow but reliable. 26

27 Different growth rates imply pricing decisions Global Protein Production: Natural Log of 000s of Metric Tons y = 0.029x y = 0.011x y = 0.055x LN beef LN Pork LN Broiler 9.0 Source: USDA, Wells Fargo

28 Protein has increase twice as fast as population 13.5 Natural Log of Global Population and Protein Production 13.0 y = 0.015x y = 0.029x LN Total Protein Production LN Population

29 Is there an right amount of protein? Per Capita: Fish and Meat 160 Kg/per capita China USA Canada Source: FAO, Wells Fargo

30 Are we reaching stable per capita rates? Per Capita Protein Consumption: KGs Africa Asia Europe Northern America

31 Why be bullish about Ag? Demand will grow Population Income and food preferences Bioenergy is the real deal You can differentiate yourself Technological change Regulatory barriers Asset discipline Managing supply chain difficulties 31

32 Don t confuse agriculture and food 32

33 Ag commodities are inputs to the food sector Ag Revenues Food and Beverage Spending Food and Beverage Spending in Billions of Dollars

34 People crave convenience, variety 900 Food and Beverage Spending in Billions of Dollars At home Away from home

35 Where do you want to compete for the value-added Ratio: Food/Beverage Crops/Livestock

36 Value to Consumers Willingness to pay Basic product Shelf-life Variety Packaging Availability Marketing 36

37 Craft beer offered the consumer something new /1/98 3/31/99 4/1/00 3/31/01 4/1/02 3/31/03 4/1/04 3/31/05 RMA Breweries # of Statements Analyzed 4/1/06 3/31/07 4/1/08 3/31/09 4/1/10 3/31/11 4/1/12 3/31/13 4/1/14 3/31/15 37

38 Every market has a feedback loop Industry Average Breweries: Percent Profit Before Taxes -3 4/1/98 3/31/99 4/1/00 3/31/01 4/1/02 3/31/03 4/1/04 3/31/05 4/1/06 3/31/07 4/1/08 3/31/09 4/1/10 3/31/11 4/1/12 3/31/13 4/1/14 3/31/15 38

39 Economic growth equals opportunity 25% Food and Beverage Spending as a Pct of GDP 20% 15% 10% 5% 0%

40 What about the outlook for the US dollar and interest rates? 40

41 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

42 It is not about us so don t take it personal U.S. Agricultural Exports to the Rest of the World 2010 = 100 Source: USDA, Wells Fargo

43 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

44 Markets try to anticipate. They fail badly. History + futures Fed Funds 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-20 44

45 Low inflation still adds up over time. $1,050,000 $1,030,000 $1,010,000 $990,000 $970,000 $950,000 $930,000 $910,000 $890,000 $870,000 Source: Wells Fargo What Does the Federal Reserve Mean Exactly by "Low Inflation" 1 Million Dollars compounded at Fed Funds Inflation Adjusted Fed Funds Returns $850,000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 45

46 Money flows at the speed of greed 5.5 Long-term Interest Rates: OECD Data Germany Japan U.S Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan

47 Can we count on China? Yes, to take of China. 47

48 Chinese Yuan to US Dollar exchange rate 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? Source: Federal Reserve, Wells Fargo 5.5 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 48

49 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 9 Net Trade Balance Ag, Forestry and Fishing ROW China/HK (1) (4) Jan - Aug 2017 (18) (22) 8 (16) 49

50 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

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