Open Markets, Economic Growth and Shared Prosperity The Luckiest - - PowerPoint PPT Presentation

Al Ambrose Vice President, Risk Management Oilseed Processing CHS

Open Markets, Economic Growth and Shared Prosperity

22nd Annual Outlook Symposium Federal Reserve Bank of Chicago Chicago, IL December 5, 2008

“The Luckiest Generation”

A Remarkable Sequence of Events Leads Global Transformation

• Circa 1947 – UK PM Atlee (Fabian Socialist) nationalized

banks, coal, steel, roads, rails, aviation, electricity, telegraph. Created NHS (National Health Service) and welfare system.

• 1979 – 1990 Margaret Thatcher as U.K. Prime Minister

privatizes 2/ 3 U.K. state-run industries, deregulates, cuts taxes (basic rate of 33% to 25% , top wage rate of 98% cut to 40% )

• 1980 - 1988- Ronald Reagan as U.S. President cuts taxes

(top tax of 78% cut to 35% [was 91% in 1961], promotes deregulation, S.D.I .

• U.S./ U.K. economies lead global economic recovery (S&P

500 & U.K. FTSE triple ’82 -’87)

Remarkable Sequence… continued

• 1983/ 84 - Deng Xiaoping introduces “market socialism” ,

de-collectivizes state-run farms, promotes individual property rights through long-term land leases

• Nov ’89 Berlin Wall falls, Cold War ends, global shift from

“guns to butter”

• 1992/ 93 Uruguay Round (GATT) ends, global industrial trade

reform

• 1994 – “NAFTA”
• Widespread “sustainable prosperity”

A Formula for Prosperity

• Rule of Law (ordered liberty)
• Property rights (i.e. limited taxation)
• Capitalism (individual opportunity)
• Competition (creative destruction)
• Trade (comparative advantage)
• Sensible immigration policy
• Democracy? I n America, capitalism

predated democracy by hundreds of years

Standard & Poor 500 – Monthly – 78 Years

1,553 (Mar’00)

107 (Jul’82)

14-fold expansion over 18 years

All price charts as of C.O.B. November 28, 2008

Dow Jones I ndustrial I ndex - Quarterly - 108 years

Keynesian economic theory dominated public policy: 1945 -1980 (onerous taxation, central planning, government regulation and programs, socialism, collectivism…) 386 (1929) 570 (1974) Laski, Marx, Keynes, Atlee, Nehru, Galbraith, P.Samuelson, Krugman

“The State is wiser than the individual…”

Dow Jones I ndustrial I ndex - Quarterly - 108 years

Monetarist (“Chicago School”) approach replaced Keynesian policies circa 1981… (tax-reform, privatization, deregulation, free enterprise, capitalism, individualism…) Adam Smith, Von Misses, Hayek, Friedman, Reagan, Thatcher, Greenspan, Laffer, Kemp, Bernanke

“Individuals and markets allocate resources better than governments…”

Dow Jones I ndustrial I ndex - Quarterly - 108 years

11,750 (Mar’00)

15-fold expansion over 18 years… *Dow 132,000 by 2026?

770 (Aug’82)

(*Note: This is a rhetorical question, not a forecast!)

Post-9/11 high 14,198 (10/11/07) Post-9/11 low 7,198 (10/10/02)*

Leadership, I deas, Policy Choices Matter…

• 1957 –1981
• 300 months
• 40 in recession
• 13% of period
• 1982 –2007
• 300 months
• 8 in recession
• 2.7% of period

Source: Recessions by Geoffrey H Moore The Concise Encyclopedia of Economics Library of Economics and Liberty

LEADERSHIP

U.S. Household Net Worth (trillion dollars)

• 1950 1.0
• 1960 1.8
• 1970 3.4
• 1980 9.4
• 1990 20.2
• 2000 42.0
• 2007 (Q3) 58.7
• 2008 (Q2) 56.0

Source: U.S. Federal Reserve Statistical Release Flow of Funds Accounts – Sept 18, 2008

Expanded 6-fold in 27 years! Up 33% since 2000

56 trillion seconds is 1.78 million years…

All this growth despite…

• U.S./ global equity market collapse’00-02
• 9/ 11/ 01
• Enron, WorldCom, Tyco, etc.
• Three-year global economic slump
• Afghanistan and I raq wars
• SARS, BSE, Avian flu
• Global war on terror
• 17 Fed funds rate hikes (6/ 04 – 6/ 06)
• Katrina/ Rita
• Real-estate “bubble”
• $100+ crude oil
• Sub-Prime loan debacle

U.S. 30-year Bond I ndex – Quarterly – 31 years Greenspan’s conundrum… Productivity growth, massive wealth creation, Asian savings rate, equity-risk aversion, “housing bubble”, “Boomer” safe haven, 21.5% prime rate (12/80) 4% prime rate (6/03)

Liquidity

4%

U.S. Life Expectancy at Birth (years)

1900 48.3 46.3 47.3 1935* 63.9 59.9 61.7 1970 74.7 67.1 70.8 2000 79.7 74.3 77.0 2006 80.7 75.4 78.1 2006 v 1900 +67% +63% +65% 2006 v 1935 +26% +26% +26% *Social Security Act signed

Source: National Center for Health Statistics June 2008

Female Male Both Sexes

The Farm Sector

US Net Farm I ncome

(Billions of Dollars)

38.7 47.9 44.5 49.2 37.2 54.9 48.6 48 40.2 59.7 85.8 79.3 58.5 86.8 95.7 51.5 46.2 45.6

20 40 60 80 100 120 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 P 2 8 F

’91-’00 $46.1B Avg.

Source: USDA – Oct 2008

Uruguay, NAFTA, CAFTA-DR not helpful to US farmers?

$81.1B Avg. ’01-’08 $69.7B Avg.

$100B+?

US Average Farm vs. Non-Farm Household I ncome (Percentage)

80 100 120 140 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7

Source: USDA – Oct 2008

97% 135%

?

US Farm Sector Debt to Equity Ratio

(Percentage)

8 10 12 14 16 18 20 22 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007P 2008F

Source: USDA – Oct 2008

19% 9.9%

Average Farm Equity

(Thousands of Dollars)

600 800 1000 1200 1400 1600 1800 2000 2200 2400 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007P 2008F

Source: USDA – Oct 2008

$705 $2,147

Food Supply

Soy Consumption and Global Prosperity

• As the very poor advance economically, they

move from grains to vegetable oils to meat.

• Per capita vegetable oil consumption in the

poorest countries is used by I MF as measure

• f changing living standards.
• Very poor people do not purchase meat.
• I n many developing countries, massive job

creation and rapidly advancing incomes spur improved dietary intake.

• The result? An unprecedented expansion of

vegetable oil and protein consumption.

World Soybean Production 1995-2008

(Million Metric Tons)

11 Yr Avg. +10 MMT

Source: USDA – Nov 2008

Total production up 112 MMT(90%) in 11 years China usage grew 28 MMT (25%) (18) (24)(19?)

Soybean harvest followed by planting of double crop corn (31 combines & 12 planters)

Soybean Harvest - Mato Grosso, Brazil Yesterday: A Threat… Today: A Necessity…

Malaysian, I ndonesian, Other World Palm Oil Production (Million Metric Tons)

Source: USDA FAS – Nov 2008

5 10 15 20 25 30 35 40 45 50 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

OTHER WORLD INDONESIA MALAYSIA

5 43.2 Eight-fold in 28 years! Average: Up 2.4 MMT past 10 years (11 million soybean acres)

World Vegetable Oil Production (9)

(Million Metric Tons)

80/81 08/09 Percent Change Palm 4.9 43.2 + 782% Soybean 9.8 37.8 + 286% Rape 3.9 19.4 + 398% Sun Seed 4.6 11.7 + 154% Groundnut 2.3 4.9 + 113% Cotton 2.9 5.0 + 72% Palm Kernel 0.5 5.1 + 920% Olive 1.9 3.0 + 58% Coconut 2.8 3.6 + 29% Total 33.6 133.7 + 298%

World production quadruples in 28 years!

Source: USDA FAS – Nov 2008

23.2 69% 112 84%

(World Population + 50.5% same period) (5.9X)

World Production vs. Year-end Stocks-to-Use Ratios (Combined Palm oil, Rape oil, Soy oil, Sun oil)

4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 20 30 40 50 60 70 80 90 100 110 120

Production (MMT) Stocks-to-use (%)

Source: USDA FAS – Nov 2008

*This prior to recent bio-fuels phenomenon…

*

30+ year low

Strong Economic Growth, Especially In Developing Countries, Stimulates Demand For Both Food And Fuel 200 400 600 800 1000 1988 1992 1996 2000 2004 2008 2012 2016 2020 Foreign households w/real PPP incomes greater than $20,000 a year (in millions of households)

Source: Global Insight’s Global Consumer Markets data as analyzed by OGA/FAS/USDA

Developing countries Developed countries (ex US)

350 1.4B 560 2.2B 950 3.8B

Soybean Oil Futures - Quarterly - 40 years .7126 .5100 .2529

Soybean Futures - Quarterly - 40 years $16.63 $12.90 $6.70

100 200 300 400 500 600 700 800 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

YEAR BEGINNING ON JUNE 01 M I L L I O N T O N N E S

5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

P E R C E N T

Ending Stocks Total Consumption STU %

Source: USDA & Citi

World Corn Ending Stocks, Consumption and Stocks to Use %

(Million Metric Tons)

46% 14% 36 year low 800 MMT*

Nov 2008

*

Corn Futures - Quarterly - 40 years $5.545 $7.65 $2.74

Major producing country corn yields: Huge untapped potential

2 4 6 8 10 12 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Y ie ld (m t/h a )

EU Argentina China Brazil U.S.

Prepared by OGA/FAS/USDA July 2008

U.S. corn yields

3 6 9 12 15

MT/ha

10-year Trend Projection 40-year Baseline Projection

2008 – 2016 data from USDA Agricultural Baseline Projections; 10-year trend analysis from FAS

Herbicide, I nsecticide, Fertilizer Use in U.S Corn Production

Herbicide and insecticide use

1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 H e r b i c i d e p o u n d s o f a c ti v e i n g r e d i e n ts p e r a c r e 0.05 0.1 0.15 0.2 0.25 0.3 I n s e c ti c i d e p o u n d s o f a c ti v e i n g r e d i e n t p e r a c r e Insecticide Herbicide

Source: USDA/NASS, Agricultural Chemical Usage Report

Prepared by OGA/FAS/USDA July 2008

Fertilizer use

3.75 3.95 4.15 4.35 4.55 4.75 4.95 5.15 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 F e r t i l i z e r p o u n d s p e r b u s h e l

Source: USDA/ERS

100 200 300 400 500 600 700 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

YEAR BEGINNING ON JUNE 01

M I L L I O N T O N N E S

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70%

P E R C E N T

Ending Stocks Total Consumption STU %

Source: USDA & Citi

World Wheat Ending Stocks, Consumption and Stocks to Use %

(Million Metric Tons)

38% 22% Rebounding from 40+ year low 655 MMT*

Nov 2008

*

50 100 150 200 250 300 350 400 450

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

M I L L I O N T O N N E S

5 10 15 20 25 30 35 40 45

P E R C E N T

STOCKS USAGE STK/USE

World Rice Ending Stocks, Consumption and Stocks to Use %

(Million Metric Tons)

37% 19% 429 MMT*

Source: USDA & Citi

Stable at 30 year low

Nov 2008

*

20 40 60 80 100 120 140 160 180 200 8 0 /8 1 8 2 /8 3 8 4 /8 5 8 6 /8 7 8 8 /8 9 9 0 /9 1 9 2 /9 3 9 4 /9 5 9 6 /9 7 9 8 /9 9 0 0 /0 1 0 2 /0 3 0 4 /0 5 0 6 /0 7 0 8 /0 9

M I L L I O N T O N N E S

5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0 27.5 30.0 P E R C E N T

STOCKS USAGE STK/USE

World Barley Ending Stocks, Consumption and Stocks to Use %

(Million Metric Tons)

23% 19% Big recovery from 24 year low 144 MMT

Source: USDA & Citi Nov 2008

13%

China

10 20 30 40 50 60 70 80 90 1978 1985 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Percent Urban Rural

China – Rural versus Urban Population

(1978) 82% R -790m 18% U - 172m Total 963m (2002) +24 61% R - 782m 39% U - 502m Total 1.28B “To get rich is glorious!” Deng Xiaopeng (1984)* (2011) +9 50% R - 690m Total 1.38B

*

Chinese Soybean Oil Consumption

(Million Metric Tons)

2 4 6 8 10 12

1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Source: USDA – Nov 2008

48-fold expansion

• ver 25 years...

1992

Chinese Soybean Meal Consumption (Million Metric Tons) 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Source: USDA – Nov 2008

1992

3000% increase 1990 to 2008 16% population growth same period Protein consumption grew 188x population past 18 years

Chinese Soybean Meal Consumption (Million Metric Tons) 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Source: USDA – Nov 2008

1992

“Supply-side economics” Says law: “supply creates its own demand”

Standard & Poor 500 – Monthly – 38 Years

Trade-generated prosperity is not a zero-sum game!

1992

Chinese Soybean I mports (MMT)

4 8 12 16 20 24 28 32 36 40 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 07/08proj. 08/09proj

Source: USDA – Nov 2008

Rose 235-fold over 13 years… *(10 year average gain 3.4 MMT)

.16 3.9* 37.8

Chinese Vegetable Oil I mports (Million Metric Tons)

1 2 3 4 5 6 7 8 9 10 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 07/08proj. 08/09proj. SBO RSO Palmoil Total

Source: USDA – Nov 2008

Record palm oil imports 9 years running…

Soy oil imports avg. 2.2 MMT past 7 years…

Vegetable Oil Disappearance

(KG P/ C)

2 4 6 8 10 12 14 16 18 20 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 '01/02 '02/'03 '03/'04 '04/'05 '05/'06 '06/'07

China Cuba FSU-12 I ndia North Korea Mexico

Source: FAS – Feb 2007

3.1 15.3 5.3 11.1 16.9 *10.4 2 N.K. *T.S.R.E.E.A. - 2000

*Trade Sanctions Reform Export Enhancement Act of 2000

10 14.9 U.S. 38, Canada 26.3, EU-25 27.8, Japan 17.2

Socialistic Democracy? Capitalistic Autocracy?

Obesity in China Doubled in 1 1 Years W ith Rising Prosperity By Cristina Alesci July 8 ( Bloom berg) --

Still Not Convinced?

Capitalism versus Socialism

“A government big enough to give you everything you want, is strong enough to take everything you have.” Thomas Jefferson “The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.” Winston Churchill

The Unmistakable Trend… Twelve Selected Equity Markets 1996-2008 An Interdependent World

U.S. Standard & Poor’s 500 - Monthly

Mar’00 Mar’03 Oct’07

• S. & P., Dow Jones , Canada, Mexico

Prosperity is not a zero-sum game!

Nikkei, F.T.S.E., DAX, CAC

“B.R.I .C.” – Brazil, Russia, I ndia, China

The Farm Sector

As of 11/29/08: 733 Down 94%

Baltic Dry Index

As of C.O.B. 28-Nov-08

Symbol Post 9/ 11 Low 2007 High G ain Current Current % gain

S & P 500 769 1,576 105% 896 17% Dow Jones Industrials 7,198 14,198 97% 8,829 23% DJ Canada 1,843 5,019 172% 3,052 66% DJ Mexico 3,719 22,355 501% 13,730 269% NIKKEI 225 7,650 18,350 140% 8,515 11% FTSE 100 London 3,278 6,754 106% 4,288 31% DAX 30 Frankfurt 2,189 8,152 272% 4,669 113% CAC 40 Paris 2,401 6,168 157% 3,263 36% SNG - Singapore 895 3,126 249% 1,334 49% DJ Taiwan 871 2,448 181% 1,074 23% DJ South Korea 829 4,374 428% 2,279 175% DJK Hong Kong 1,378 5,992 335% 2,335 69%

Average 2,752 8,209

229%

4,522

73%

BRAZIL BOVESPA 8,420 74,500 785% 37,500 345% RUSSIA MICEX 131 1,970 1404% 611 366% INDIA SENSEX 2,595 21,207 717% 9,093 250% CHINA SHANGHAI 110 588 435% 196 78%

Average 2,814 24,566

835%

11,850

260%

16 Selected Equity Markets

World & Selected Countries (2007 Data) GDP, GDP and Rank, Population

2005-07 Country Rank $Trillion % 3yr G DP G rowth Avg. Million Rank % World 54.3 3.6 6,602 US 1 13.8 25.4% 2.7 301 3 4.6% Japan 2 4.4 8.1% 2.2 127 10 2.0% G ermany 3 3.3 6.1% 2.4* 82 14 1.3% China 4 3.3 6.1% 10.8 1,322 1 20.0% United Kingdom 5 2.7 5.0% 2.4* 61 22 0.9% F rance 6 2.6 4.8% 2.4* 64 21 0.9% Italy 7 2.1 3.9% 2.4* 58 23 0.9% Spain 8 1.4 2.6% 2.8 33 36 0.5% Canada 9 1.3 2.4% 2.4 40 29 0.6% Brazil 10 1.3 2.4% 3.8 190 5 2.9% Top 10 36.2 66.7% Russia 11 1.30 2.4% 6.9 141 8 2.1% India 12 1.2 2.2% 9.2 1,130 2 17.1% South Korea 13 0.97 1.8% 4.7 49 24 0.7% Mexico 14 0.89 1.6% 3.6 109 11 1.7%

* Euro Zone Average Source: World Bank. July 1, 2007

G ross Domestic Product World Population

Global Electoral Democracies

Total Partly Pct. Not countries Free Free F/P.F. Free

• 1975 158 40 53 59% 65
• 1981 164 54 46 61% 64
• 1985 167 56 56 67% 55
• 1995 191 76 62 72% 53
• 2005 193 90 58 77% 45

Source: Freedom House 2007

In 2002, the GDP of Free countries stood at $26.8 trillion, while the GDP of Not Free countries was $1.7 trillion.

+125% +9% +31% -31%

Not free because prosperous; rather, prosperous because free.

The Next Great Opportunity?

Global Agricultural Trade Reform Global industrial tariffs average: 4% (20% ) Global agricultural tariffs average: 40%

Support Global Agricultural Trade Reform!

The Outlook…

• The pervasive spread of economic freedom, free enterprise,

and optimism trumps terrorism

• The forward march of global prosperity hangs in the balance
• Food-demand growth rates still advancing?
• Free-market principles, progressive policies, and the

indomitable human spirit still required if the advance of the human condition to continue

• Caveats… rising protectionism, isolationism, and overt

nationalism pose greater threats to broadening prosperity than terrorism

• Excessive taxation, litigation, and regulation inhibit growth

“…Once you begin a great movement, there's no telling where it will end. We meant to change a nation, and instead, we changed a world.”

President Ronald Reagan Farewell Address to the Nation Oval Office - January 11, 1989

World Night Picture

Count Your Blessings!

Energy, Activity, Warmth, Prosperity, Hope… Truth…

Open Markets, Economic Growth and Shared Prosperity

22nd Annual Outlook Symposium Federal Reserve Bank of Chicago Chicago, IL December 5, 2008

“The Luckiest Generation”

Thank you!