For Farm Incomes: The Case For Volatility With An Upward Bias - - PowerPoint PPT Presentation

▶
for farm incomes
SMART_READER_LITE
LIVE PREVIEW

For Farm Incomes: The Case For Volatility With An Upward Bias - - PowerPoint PPT Presentation

Sep 21, 2022 405 likes •629 views

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

slide-1
SLIDE 1

The Case For Volatility With An Upward Bias

What Lies Beyond The Horizon For Farm Incomes:

Sterling Liddell Rabo AgriFinance 314 317 8038 Sterling.Liddell@RaboAg.com July 16, 2012 KC FED Agricultural Symposium

slide-2
SLIDE 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.

Rabobank International 2

slide-3
SLIDE 3
slide-4
SLIDE 4
slide-5
SLIDE 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

Rabobank International 5

slide-6
SLIDE 6

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 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 Corn Price per Unit Average Corn Price

What Happened to Prices

6

Source: USD, Rabobank

2011=$6.2/bu

slide-7
SLIDE 7

7

slide-8
SLIDE 8

But corn is now $6.50, not $2.50

The basics have remained the same

  • Agricultural land (1,000 ha)
  • Global population (in millions)
  • 1,000

2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Total population Rural population Urban population 0.50 0.75 1.00 1.25 1.50 4,200 4,300 4,400 4,500 4,600 4,700 4,800 4,900 5,000 1960 1970 1980 1990 2000 2007 Agricultural land area Agricultural land area per capita Source: FAO Stat Source: FAO Stat, Rabobank

For many decades productivity gains

  • utpaced demand
  • growth. But things

have changed. Now due to GDP growth in the developing world, demand is accelerating. Unfortunately, productivity from yield improvement is decelerating. The world has changed from one

  • f structural surplus

to structural deficits.

slide-9
SLIDE 9

China Industrialization

10

74% 57% 42% 37% 30% 21% 36% 48% 51% 55% 5% 7% 10% 12% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2001 2005 2007 2009 2013F

Herd Size of Hog Farms in China

Specialized farm (+3000 heads/farm) Commercial farm (50~3000 heads/farm) Backyard farm (1~49 heads/farm)

70% 64% 14% 7% 15% 18% 23% 18% 8% 11% 39% 38% 7% 6% 15% 25% 9% 12% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2005 2010(E) 2015(F) 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)

Structural trend towards scaled farming will accelerate in coming years

Herd Size of Poultry Farms in China

Source: MOA, Rabobank estimates

“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

slide-10
SLIDE 10

Supply For Global Wheat Trade Is Shifting

11

0% 5% 10% 15% 20% 25% 30% 35% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 % of World Total Canada United States Black Seas

slide-11
SLIDE 11

12

slide-12
SLIDE 12

13

Tightening In Global Stocks

Source: Rabobank

World STU ratio: All Grains World STU ratio: Corn

0% 5% 10% 15% 20% 25% 30% 35% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World STU World-China STU

20.6% 16.5%

0% 5% 10% 15% 20% 25% 30% 35% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World STU World-China STU

10% 14%

Source: USDA/FAS, Rabobank

slide-13
SLIDE 13

Higher and more volatile price

  • utlook (Farm Received Corn Price)

Rabobank International 14

$3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $/Bu Average 5th Percentile 25th Percentile 75th Percentile 95th Percentile

slide-14
SLIDE 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

Rabobank International 15

slide-15
SLIDE 15
  • 60%
  • 40%
  • 20%

0% 20% 40% 60% 80% 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 % of Value Returned to Labor and Profits Seed, Chem, Fert % of Crop Value Land % of Crop Value

Margins Showing Sign of Compaction

16

  • 60%
  • 40%
  • 20%

0% 20% 40% 60% 80% % of Value Returned to Labor and Profits Seed, Chem, Fert % of Crop Value Land % of Crop Value

No Government Payments

Source: Iowa State University, University if Illinois, Rabobank

slide-16
SLIDE 16

Room For Land Costs to Grow

Rabobank International 17

($100.00) $0.00 $100.00 $200.00 $300.00 $400.00 $500.00 $600.00 $700.00 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012(f) $/acre Mortgage PMT Rent Return to Land & Profits

Source: Chicago Federal Reserve Board, Rabobank

slide-17
SLIDE 17

Volatility Persists As Margins Tighten

Rabobank International 18

  • 200
  • 100

100 200 300 400 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $/Acre

slide-18
SLIDE 18

Increased Probability of Losses

  • Probability of Margins Less Than $0.00/bu and Greater Than

$60/bu

Rabobank International 19

0.26 0.13 0.28 0.37 0.39 0.32 0.34 0.34 0.17 0.18 0.19 0.16 0.24 0.31 0.25 0.20 0.57 0.69 0.52 0.47 0.37 0.37 0.42 0.46 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012 2013 2014 2015 2016 2017 2018 2019

slide-19
SLIDE 19

Confidence:

  • The feeling just before you completely understand the situation

20

  • 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

slide-20
SLIDE 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

Rabobank International 21

slide-21
SLIDE 21

“The financial link in the global food chain”™

22 Rabobank International