Global Trends and Swing Factors And their impact on the - - PowerPoint PPT Presentation

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Global Trends and Swing Factors And their impact on the agricultural complex

Introduction

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I'm speaking today and tomorrow in Iowa for the IA Farm Bureau and I followed Sterling Liddell who gave a long range outlook . Super presentation. He has all the flamboyant showmanship of an economist, but still strangely likable.

John Phipps

Agricultural Columnist

Food & Agribusiness Research and Advisory

A global team of analysts – supporting knowledge based banking

Christchurch Mexico City New York Sao Paulo Mumbai Melbourne Utrecht Shanghai Buenos Aires Fresno

Team of 80+ analysts Specialist teams

− Grains & oilseeds − Dairy − Animal protein − Retail − Beverages − Ag inputs − Sugar

London Chicago St Loius Sydney Singapore Hong Kong Beijing Santiago New Dehli

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Macro Conditions

Recipe for our Economic Perfect Storm: Lower Interest Rates

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Rabobank International Market Developments & Outlook U.S. wage costs have barely budged

• ver

the last decade, while costs for Brazil are up 70% and up

• ver 350% in

China. This changes the relative competitive landscape dramatically – especially when we think about whether China wil l import grain

• r meat.

Higher mean higher costs – but also more protein consumption. Brazil, China and US Real Wage Index Source: IBGE, BLS, Bloomberg, 2012

Labor: west improving relative cost competitiveness

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Rabobank International Market Developments & Outlook Sovereign Debt Interest Rates - US and Brazil Source: Bloomberg, 2012

Cost of capital: Big advantage vs. Brazil other developing economies

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Systemic Risk Random Risk

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00

1 9 5 1 9 5 2 1 9 5 4 1 9 5 6 1 9 5 8 1 9 6 1 9 6 2 1 9 6 4 1 9 6 1 9 6 8 1 9 7 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 1 9 1 9 2 1 9 4 1 9 6 1 9 8 2 2 2 2 4 2 6 2 8 2 1 D

• l

a r s / B u s h e l

C

• rn Price per Unit

Average C

• rn Price

What Happened to Prices

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Source: USD, Rabobank

Demand Shifts Lead To Volatility

Rabobank International

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Understanding The Drivers:

Ethanol Reversing Grain Flows

US corn used for ethanol has increased by roughly 100MMT since 2005, while world grain demand has risen by about 300MMT. Biodiesel is a factor as well. World demand for vegetable oil is growing by about 5 million tons per year. About 2 of that,

• r 40%, has

been going to feed biodiesel demand.

Ethanol daily bid prices leading the market

Ethanol The Marginal Buyer

Source: Rabobank

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Understanding The Drivers: Follow The Leader

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Rabobank International Market Developments & Outlook World GDP growth continues to

• utpace

animal protein production growth – so demand is

• utstripping

supply which leads to high meat prices. Animal protein production is adapting to structurally higher and more volatile grain prices. Given the lag factor caused by anima l life-cycles, this process will take time. The shorter life cycle for poultry, in addition to feed conversion advantages, provides a Especially that from developing markets Sources: World Bank for GDP data and forecast, USDA for meat production, Rabobank for meat production forecast

Meat Production < GDP = Higher Meat Prices

The Struggle For Supply Growth In China

KFC is adding almost one new store per day in China. MCD also growing rapidly. Suppliers are struggling to keep up. + hard to secure an assemblage

• f land

+ labor costs are rising rapidly, labor availability in decline + biosecurity a huge

KFC and McDonald’s Restaurants in China Source: Company data, Bloomberg, Reuters, 2011

If industrial hog production grows from 55% to 60%, and modified from 11% to 21%, deficit expected to be 23 MMT by 2015

• Assuming

10 bu. of corn per pig

China Hog Production Source: MOA, Rabobank, 2012

Industrialization Production Driving Demand

Soybean Imports

Despite a recovery

• f

60MMT

• f grain

producti

• n from

the FSU last year, the world grain still declined slightly. Structurally, demand is growing faster than supply.

World Grain Stocks to Use Ratio Source: USDA, 2012

Grain Not Keeping Up With Structural Demand Growth

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Certainly We Have Tried To Over Produce

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Understanding The Drivers: Changes In Supply Sources

Global Soybean Production

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Infrastructure Challenges

Investment in storage infrastructure has not matched the growth of corn and soybean production

19/03/13 19/03/13 19/03/13 19/03/13

1 9 / 0 3 / 1 3 1 9 / 0 3 / 1 3

19/03/13

1 9 / 0 3 / 1 3

19/03/13

1 9 / 0 3 / 1 3

19/03/13

1 9 / 0 3 / 1 3

19/03/13 19/03/13

1 9 / 0 3 / 1 3

19/03/13

1 9 / 0 3 / 1 3

19/03/13 19/03/13

1 9 / 0 3 / 1 3

CAGR: 6%

19/03/13

1 9 / 0 3 / 1 3 1 9 / 0 3 / 1 3

19/03/13

1 9 / 0 3 / 1 3

19/03/13

1 9 / 0 3 / 1 3 1 9 / 0 3 / 1 3

19/03/13 19/03/13

19/03/13 19/03/13

CAGR: 4% [Million Metric Tons]

Source: Rabobank. Data from CONAB:2012.

154 149 144 123 115 119 123 101 155

Supply For Global Wheat Trade Is Shifting

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Incremental Production Moving to More Volatile Environments

What Does All of This Make Agriculture in 2013??? The Dog That Has Finally Caught the Car!

Outlook:

Higher Prices Do Not Guarantee A Profit

Impacting US Farmers and Their Suppliers

Confidence:

The feeling just before you completely understand the situation

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• Macro economy remains highly

volatile

• New trends of changing labor

rates and historically low cost of capital for developed economies

• New demand sources continue to

grow

• Developing economies demand

more protein

• Food delivery systems force

changes

• Although reduced from past

years, inelastic demand from bio fuels remains a key

• Supply will attempt to keep up
• As crop production spreads

across the globe, weather will introduce additional volatility

Land Values

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Livestock Turn To Wheat

Surge in export interest in wheat matches US livestock move to wheat

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In 2013 Corn Continues To Expand

Wheat is expected to gain acreage in 2013/14 while cotton is expected to decline, with corn and soybeans stable YOY

Source: USDA, Rabobank

• 8
• 6
• 4
• 2

2 4 6 8 10 09/10 10/11 11/12 12/13 13/14(f) Corn Soybeans Cotton Wheat

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Western Corn Belt: Still Little Room For Error

Pivotal point in the future

Yield New Source of Uncertainty

50 70 90 110 130 150 170 190 10,000 15,000 20,000 25,000 30,000 35,000

1 9 8 1 9 8 9 1 9 1 9 1 1 9 2 1 9 3 1 9 4 1 9 5 1 9 6 1 9 7 1 9 8 1 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 2 1 2 1 2 1 2 2 1 3 ( f ) 2 1 4 ( f ) 2 1 5 ( f ) 2 1 6 ( f ) 2 1 7 ( f )

Y ield/ Ac re P

• pulation/ Ac

re Weighted P lant P

• pulation/Acre

Actual Y ield E xpected yied based

• n P

P A Y ield at 1988 10-year ave weight/plant Max C apacity L inear (Actual Y ield)

Conclusions

Current situation Milk production in export regions is low but increasing Supply side stocks have started to rise International market prices continue to gradually move upwards Steeper recovery so far prevented by softer demand growth/forward coverage US drought induced price premiums have now been eradicated Next 12 months Prices will slowly be squeezed up by falling supply as margins turn negative However, the pace and vigour of the move has now been tempered US wholesale prices to move up in tandem with the international market

This time government supports are less impactful

All Wheat Accumulated Exports BY Week

Corn Accumulated Exports By Week