Agricultural Outlook: Rebalancing U.S. Agriculture Michael J. Swanson Ph.D. Agricultural Economist January 2018 2018 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
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 $0 1917 1927 1937 1947 1957 1967 1977 1987 1997 2007 2017 4 2
Ranch and farm markets are linked 250 200 150 USDA Ag Revenues and Net Farm Income in Billions Crop Receipts Livestock Receipts 194 190 163 175 100 50 62 63 0 2000 2004 2008 2012 2016 5 You can t market your way out of this problem. 6 3
$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 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 7 $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 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 8 4
Capital is always looking for profits 14 12 10 8 6 4 2 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
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% 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 11 Many moving pieces relatively stable performance Global GDP in Trillions of USD $100 $80 $60 $40 $20 $0 Source: USDA, Wells Fargo 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 12 6
Why did the slinky bounce? 13 Why the market always cycles and never settles Supply Price Demand 14 7
Acreage goes to the most profitable 7.0 6.5 Natural Log of Acreage (millions of Hectares) y = 0.001x + 6.5285 R² = 0.0791 6.0 5.5 Grains Oilseed y = 0.018x + 4.7074 R² = 0.9924 5.0 Source: FAO, Wells Fargo 4.5 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 15 Global population growth is 1.1 percent and falling 1.5 1.0 0.5 Grains Oilseed Natural Log (yield MT/HA) y = 0.019x + 0.3883 R² = 0.98 0.0-0.5 y = 0.022x - 1.5544 R² = 0.99-1.0-1.5 Source: FAO, Wells Fargo 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 16 8
Dietary change is a slow process 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Natural log (Production millions of MTs) Grains Oilseed y = 0.019x + 6.9168 R² = 0.96 y = 0.039x + 3.153 R² = 0.99 Source: FAO, Wells Fargo 3.0 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 17 The emphasis on oilseeds has hit the U.S. as well. 18 9
Without ethanol this would have been even bigger U.S. Acreage Distribution Millions of acres harvested 80 60 40 20 Wheat Corn Soybeans 0 Source: USDA, Wells Fargo 2000 2004 2008 2012 2016 19 We are back to being long corn. 20 10
Yield gains 1.6%+ v. population growth of 0.7% U.S. Corn, Soybean and Wheat: Kilograms per capita 1600 1200 Ethanol's usage of corn per capita 800 Source: USDA, Wells Fargo 400 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 21 All proteins are good substitutes (at the right price) 22 11
It is possible to kill protein prices U.S. Meat Production natural log of 000s of metric tons 10.75 10.70 10.65 10.60 Production Domestic consumption 3.0% 10.55 10.50 10.45 10.40 10.35 10.30 Source: USDA, Wells Fargo (0.2%) 1.5% 3.1% 1.2% (0.6%) 2000 2004 2008 2012 2016 23 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 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 24 12
Better volumes are supporting better returns Percent: Profits before Taxes / Total Assets 3116 Animal slaughter and further processing 25 20 15 75th Percentile Median 25th Percentile 10 5 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 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
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
It is not about us so don t take it personal 130 120 110 100 90 80 70 U.S. Agricultural Exports to the Rest of the World 2010 = 100 60 Source: USDA, Wells Fargo 50 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 29 Not all dollars are equal 130 Different Commodities equal Different Dollars 120 110 100 90 80 70 Source: USDA, Wells Fargo U.S. agricultural exports to the World Soybeans Pork & Pork Products 1990 1994 1998 2002 2006 2010 2014 30 15
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-20 31 Money flows at the speed of greed Long-term Interest Rates: OECD Data 5.5 4.5 3.5 2.5 1.5 0.5 Germany Japan U.S. -0.5 Jan-2007 Jan-2009 Jan-2011 Jan-2013 Jan-2015 Jan-2017 32 16
Chinese Yuan to US Dollar exchange rate Yuan to Dollar 8.5 8.0 7.5 7.0 6.5 6.0 5.5 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-17 33 China is a great buyer (for now) $25 $20 $15 $10 $5 $0 -$5 -$10 -$15 -$20 -$25 Billions 3 (6) 10 4 6 Source: USDA, Wells Fargo Net Trade Balance Ag, Food, Forestry and Fishing 1 7 5 9 14 16 ROW China/HK 22 23 22 (1) (4) 16 18 (18) 15 (22) (23) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan - Nov 2017 34 17
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 33000 31000 Production Utilization 29000 27000 25000 23000 21000 19000 Source: EIA, Wells Fargo 17000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 36 18
Net exports have used 8% of production 4500 Ethanol Trade Per Month 4000 3500 Export 000s of barrels Import 000s of barrels 3000 2500 2000 1500 1000 500 0 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-17 38 19
Miles driven strongly connected to GDP 290 280 270 260 250 240 230 220 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 39 Fuel efficiency continues to offset miles driven 23 Miles per gallon 22 21 20 Source: Wells Fargo 19 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 40 20
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