What Lies Beyond The Horizon For Farm Incomes:

What Lies Beyond The Horizon For Farm Incomes: The Case For Volatility With An Upward Bias Sterling Liddell Rabo AgriFinance 314 317 8038 Sterling.Liddell@RaboAg.com July 16, 2012 KC FED Agricultural Symposium

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

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

1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Dollars/Bushel What Happened to Prices $6.00 2011=$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

7

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 4,600 1.25 1.00 The world has changed from one of structural surplus to structural deficits. 4,000 3,000 2,000 4,500 4,400 0.75 1,000 4,300-1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 4,200 1960 1970 1980 1990 2000 2007 0.50 Total population Urban population Rural population Agricultural land area Agricultural land area per capita Source: FAO Stat Source: FAO Stat, Rabobank

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% 2001 2005 2007 2009 2013F 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, 2011 100% 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% 2000 2005 2010(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)

Supply For Global Wheat Trade Is Shifting % of World Total 35% 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canada United States Black Seas 11

12

Tightening In Global Stocks World STU ratio: All Grains 35% 30% 25% 20% 15% 10% 20.6% 16.5% 5% 0% 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 World STU World-China STU World STU ratio: Corn 35% 30% 25% 20% 15% 10% 5% 14% 10% 0% 13 1996 1997 1998 Source: Rabobank Source: USDA/FAS, Rabobank 1999 2000 2001 2002 World STU 2003 2004 2005 World-China STU 2006 2007 2008 2009 2010 2011

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 $3.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Average 5th Percentile 25th Percentile 75th Percentile 95th Percentile 14 Rabobank International

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

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 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

Room For Land Costs to Grow $/acre $700.00 $600.00 Mortgage PMT Rent Return to Land & Profits $500.00 $400.00 $300.00 $200.00 $100.00 $0.00 ($100.00) 1982 1980 1978 1976 1974 1972 1970 Source: Chicago Federal Reserve Board, Rabobank 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012(f) 17 Rabobank International

Volatility Persists As Margins Tighten $/Acre 400 300 200 100 0-100 -200 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 18 Rabobank International

Increased Probability of Losses Probability of Margins Less Than $0.00/bu and Greater Than $60/bu 100% 90% 80% 70% 60% 0.57 0.69 0.52 0.47 0.37 0.37 0.42 0.46 50% 40% 30% 0.17 0.19 0.16 0.24 0.31 0.25 0.20 20% 10% 0% 0.18 0.37 0.39 0.26 0.28 0.32 0.34 0.34 0.13 2012 2013 2014 2015 2016 2017 2018 2019 19 Rabobank International

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

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

The financial link in the global food chain 22 Rabobank International