Global Outlook for Agriculture Trend versus Cycle Michael Swanson Ph.D. Wells Fargo October 2017
Everything is connected we just don t see how. Connection corollary: Nothing natural moves in a straight line 2
Yield growth exceeds population growth Expect flat agricultural prices 3
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
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 5
How much money will they have to spend 7 World less Africa 6 Africa Global Population in Billions 6.27 7.25 5 4 3 2 1 1.25 2.48 0 Source: UN data, Wells Fargo analysis 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 6
Will they buy US farmers top dollar? Global Population in Billions 2.48 2 USA Africa 1.25 1 0.33 0.39 0 Source: UN data, Wells Fargo analysis 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 7
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 $0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 8
Why the market always cycles and never settles Supply Price Demand 9
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 4.5 Source: FAO, Wells Fargo 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 10
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 11
Dietary change is a slow process 8.0 7.5 Natural log (Production millions of MTs) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 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 12
The U.S. has a dominant role in global agriculture for a reason 13
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 1,000 800 600 400 200 - 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 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 14
Yield gains of 1.6%+ are double population 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 15
There is not enough demand growth to lift prices. 16
Miles driven is offset by fuel efficiency 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 17
We are now dependent on ethanol exports as well 5.8 Ethanol Usage and Production in Billions of Bushels 5.3 4.8 4.3 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
Ethanol demand growth will go negative in 2018 5% 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
Diesel growth is supports biodiesel, but it s a slow climb. 20
Truck traffic miles show flat distributions 140000 120000 100000 80000 60000 40000 20000 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
Cheap corn drives more meat and poultry. 22
It is possible to kill protein prices 10.70 U.S. Meat Production LN of thousands of MTs beef, pork and poultry 10.65 10.60 10.55 10.50 y = 0.0101x + 10.45 R² = 0.90 10.45 10.40 Source: USDA, Wells Fargo 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 23
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 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 24
Better volumes are supporting better returns 20 15 75th Percentile Median 25th Percentile Animal Slaughter Return on Assets Profit B4 Taxes / Total Assets 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 25
Global demand growth is slow but reliable. 26
Different growth rates imply pricing decisions Global Protein Production: Natural Log of 000s of Metric Tons 11.5 11.0 10.5 y = 0.029x + 10.39 y = 0.011x + 10.53 10.0 9.5 y = 0.055x + 9.03 LN beef LN Pork LN Broiler 9.0 Source: USDA, Wells Fargo 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 27
Protein has increase twice as fast as population 13.5 Natural Log of Global Population and Protein Production 13.0 y = 0.015x + 12.8 12.5 12.0 y = 0.029x + 11.23 11.5 LN Total Protein Production LN Population 11.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 28
Is there an right amount of protein? Per Capita: Fish and Meat 160 Kg/per capita 140 120 100 80 60 China USA Canada 40 20 Source: FAO, Wells Fargo 0 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 29
Are we reaching stable per capita rates? 160 140 120 Per Capita Protein Consumption: KGs 100 80 60 40 Africa Asia Europe Northern America 20 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 30
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
Don t confuse agriculture and food 32
Ag commodities are inputs to the food sector 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Ag Revenues Food and Beverage Spending Food and Beverage Spending in Billions of Dollars 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 33
People crave convenience, variety 900 Food and Beverage Spending in Billions of Dollars 800 700 At home Away from home 600 500 400 300 200 100 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 34
Where do you want to compete for the value-added 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Ratio: Food/Beverage Crops/Livestock 1.5 1950 1960 1970 1980 1990 2000 2010 35
Value to Consumers Willingness to pay Basic product Shelf-life Variety Packaging Availability Marketing 36
Craft beer offered the consumer something new 200 180 160 140 120 100 80 60 40 20 0 4/1/98 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
Every market has a feedback loop 11 9 7 5 3 1-1 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
Economic growth equals opportunity 25% Food and Beverage Spending as a Pct of GDP 20% 15% 10% 5% 0% 1947 1957 1967 1977 1987 1997 2007 39
What about the outlook for the US dollar and interest rates? 40
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
It is not about us so don t take it personal 130 120 110 100 90 80 70 60 U.S. Agricultural Exports to the Rest of the World 2010 = 100 Source: USDA, Wells Fargo 50 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 42
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 43
Markets try to anticipate. They fail badly. History + futures Fed Funds 6 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 44
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
Money flows at the speed of greed 5.5 Long-term Interest Rates: OECD Data 4.5 3.5 Germany Japan U.S. 2.5 1.5 0.5-0.5 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 46
Can we count on China? Yes, to take of China. 47
Chinese Yuan to US Dollar exchange rate 8.5 8.0 7.5 7.0 1. 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? 6.5 6.0 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
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 9 Net Trade Balance Ag, Forestry and Fishing 5 7 14 16 ROW China/HK 1 22 23 22 (1) (4) 16 18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan - Aug 2017 (18) (22) 8 (16) 49
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