The Financial Shape of the Agricultural Industry Mid Americia - - PowerPoint PPT Presentation

Presentation by: Terry Barr, Senior Director of Industry Research Knowledge Exchange Division, CoBank, ACB E-mail: tbarr@cobank.com

“The Financial Shape

• f the

Agricultural Industry ”

• Mid Americia CropLife Assoc.
• 2014 Annual Meeting

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Data source: World bank

25 50 75 100 125 150 175 Indexes (2010=100)

Energy Agriculture (all commodities)

60 6 2 64 66 6 8 7 0 72 74 7 6 78 80 82 8 4 86 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 04 06 08 1 0 12 1 4 16 18

Old Normal

Rising Global Middle class Economic Turmoil 2009‐13 Policy Realignment 2014‐18

Mother nature, global growth, liquidity and geo‐politics will drive market!

Commodity Markets Seeking Equilibrium Amid Economic Transition; Energy & Ag Delinking?

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Data source: World bank

25 50 75 100 125 150 175 Indexes (2010=100)

Fertilizer Agriculture (all commodities)

60 6 2 64 66 6 8 7 0 72 74 7 6 78 80 82 8 4 86 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 04 06 08 1 0 12 1 4 16 18

Rising Global Middle class Economic Turmoil 2009‐13 Policy Realignment 2014‐18

Mother nature, global growth, liquidity and geo‐politics will drive market!

As Commodity Markets Seek Equilibrium There Will Be Adjustments in All Related Industries

4 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

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 2 8 2 9 2 1 2 1 1 2 1 2 2 1 3 2 1 4

50 60 70 80 90 100 110 120 130 Index (2011=100)

P ric e s re c e iv e d : c ro p s P ric e s p a id *

*P ric e s p a id c o m m o d itie s & s e rv ic e s , in te re s t, ta x e s a n d w a g e ra te s

P ric e s re c e iv e d : liv e s to c k

Larger Crop Supplies and Limited Production in Animal Protein and Dairy Shape U.S. Prices

Cost pressures

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Global Economy and Agriculture Faced Major Turmoil Over The Past Decade … What’s Ahead?

2004‐2008: “Rising Middle Class”

Rapid global growth fueled by rising middle class in China and emerging markets. Stimulative fiscal & monetary policies Sharply declining U.S. $ Rising financial leverage & “irrational exuberance” Rising commodity prices, demand & trade Rapid growth in biofuels Declining grain stocks Rising U.S. meat exports

2009‐2013: “Economic Turmoil”

Financial crisis/recession. Global fiscal deficits and debt reach critical levels. Massive liquidity / near‐ zero interest rates Continuing emerging market growth/demand U.S. consumer tempering spending & deleveraging. Biofuels growth slowing Reduced crops force low grain stocks‐to‐use, boosted prices / volatility and insulated crop sector. Stressed livestock/dairy.

2014‐2018: “Policy Realignment”

Fiscal austerity, stalled reform agendas and destabilizing geo‐politics . Tightening monetary policy & rising interest rates on the horizon. Subdued growth in China . Consumer led U.S.

• growth. Significant

business liquidity could boost investment, M&A! Grain/oilseed stocks

• rebuilding. Biofuels flat.

Animal protein and dairy realigning globally. New farm bill implementation.

The Dominos Are Beginning to Fall!

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

This Strategy Will Not Work! The Dominos Are Beginning to Fall!

The Global Economy Has Major Structural Issues To Confront Over Next Few Years!

Xi Jinping New President of China Angela Merkel German Chancellor Mario Draghi ECB President Christine Legarde Managing Director IMF

Mother Nature & Black Swans

Prime Minister Shinzo Abe

Europe: Debt/deficits/austerity; ECB promises whatever it takes but questions remain! Out of recession but Eurozone structure in doubt! U.K. is bright spot. Russian actions in Ukraine will be lingering issue! Japan: devaluation; central bank QE actions; debt and consumption tax; more stimulus and third arrow of reform??

John Boehner Majority Leader Harry Reid Senate Leader U.S. President Janet Yellen FED President

China: new reform agenda ; slower exports limit growth; seeking transition to consumer sector as driver; vulnerable shadow banking.

India Brazil Russia

Emerging markets

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Emerging markets weakening as trade and capital flows slow. Currency volatility rising in Turkey, Argentina; (Argentine default)! Contagion risk! Fracking /horizontal drilling bring new energy paradigm to global market but infrastructure and Middle East turmoil are factors!. U.S.: Building growth momentum? Debt/deficit and policy actions shifted to after congressional elections; Federal Reserve tapering ends in October with timing of rate increases linked to job growth and inflation!

Policy Realignment 2014‐18 ??? Rising Middle Class 2004‐08 Avg.=4.5% Economic Turmoil 2009‐13 Avg.=2.9% Confidential and Proprietary 9

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4 1 6 1 8

• 2

2 4 6

Percent change in annual world growth (purchasing-power parity rates)

Advanced countries Rest of world China India

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

The Global Economy Reflects Guarded Optimism If Advanced Economies Build Momentum

At the Same Time Central Bank Policies are Beginning to Transition to New Phases

U.S. Federal Reserve Bank Bank of Japan European Central Bank Bank of England

Strong growth in the U.K. is likely to trigger interest rate increases by the Bank of England! May adopt reactive role of U.S. Federal Reserve! U.S. Federal Reserve quantitative easing will end in October but rate increases are still on hold. Strategies for reducing excess reserves will

• evolve. Federal Reserve in reactive

rather than preemptive role relative to inflation! Bank of Japan has few

• ptions but will wait for

reform agenda and fiscal stimulus. European Central Bank may have to step up if Euro region slips back into recession! But it must

• vercome EU tribunal and

German objections!

Central Banks Need to Unwind $6 Trillion From Balance Sheets and Promote Growth

Chart source: Cumberland Advisors

U.S. Federal Reserve Bank of England European Central Bank

(long term refinancing operations)

Bank of Japan U.S. nominal money velocity

Monthly Central Bank Assets (dollar equivalents on left scale) U.S. Nominal Money Velocity (right scale) June 2006 to June 14, 2014

Billion dollars Nominal GDP/M2

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

* C u rre n c ie s w e ig h te d b y re la tiv e m a rk e t im p o rta n c e to to ta l U .S . tra d e .

70 80 90 100 110 120 130 140 150

Indexes of major currencies/US$ (March 1973=100) 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 7 4 7 6 7 8 1 0 1 2 1 4

From 2002 to 2011 ………..... ‐39 % From August 2011 bottom to August 2014 ..… +13 %

Weak U.S. Dollar in 2002 to 2011 Boosted Commodities; Steady Gains Since 2012

Dollar declined by

• ver 25% after

floating in 1973!

Volker slide

• Geo‐political risks: Middle East (Iraq, Israel/Gaza, Syria).
• Slowing growth in China and shadow banking exposure.
• Ukraine / Russia will be lingering issue.
• Vulnerability of Eurozone banking system (stress tests)

and progress on fiscal and banking union.

• Emerging market contagion: slower capital flows and

rising current account deficits lead to currency volatility, reduced growth & expanded political uncertainty.

• Central bank policy transition and coordination.
• U.S. ability to sustain growth momentum is strategic.

Will Any of These Risks Break Containment?

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Can U.S. Sustain Growth Momentum?

John Boehner Majority Leader Harry Reid Senate Leader U.S. President

Fiscal Policy on Hold With Federal Reserve Transitioning Monetary Policy

Janet Yellen FED President?

• 8
• 6
• 4
• 2

2 4 6 8 Percent change in quarterly Gross Domestic Product (Chained 2005$)*

* S e a s o n a lly a d ju s te d a t a n n u a l ra te

2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 2 2 0 1 0 2 0 1 1 2 0 1 3 2 0 1 4

60‐70% of U.S. economic growth comes from consumer spending:

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

U.S. Economic Growth Rebounded in the Second Quarter But Consumer Spending Remain Modest

2.1% 2.2% 2.3% 1.6% Annual average= 2.5% ‐2.8% ‐0.3%

• 2.1%

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

50 60 70 80 90 100 110 120 130 140

Percent (debt-to-income)

400 480 560 640 720 800 880 960 1040 1120

Percent (net worth-to-income)

D e b t-to -In c o m e

N e t W o rth -to -in c o m e

Consumption (which accounts for 60‐70 percent of U.S. growth) will track income growth. Consumer seems more comfortable with debt levels, incomes are rising and home prices are up 9% from year earlier. Total assets at record levels! But job growth remains an issue?

Consumers Have Reduced Debt and Net Worth Has Recovered But Consumer Is Cautious

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Unemployment Rate Coming Down But Conflicting Data Make FED Actions Uncertain

2 4 6 8 10 12 14 16 18

Percent rate of unemployment

unemployment rate Unemployed, part time & marginal

7 0 7 2 7 4 7 6 7 8 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0

R e c e s s io n s

1 2 1 4

Fed Target moving *Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.

Business Investment is the Key to Growth and Job Acceleration in the U.S. Economy… 2015?

1999 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 Billion dollars in profits; investment at annual rates

Business fixed investment Corporate profits (after tax) Residential investment

2001 2003 2005 2007 2009 2011 2013

Housing in slow recovery

2015

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

19

U.S. Economic Policy Inaction Creates Headwinds for Break‐out Growth in 2014!

Risk management and investment strategies cannot deal with policy vacuum. Companies can measure and adjust to risk based on actual policy decisions! Financial sector Financial sector regulatory reform implementation Energy sector New energy paradigm; Fracking & horizontal drilling technology change fossil and renewable roles!! Immigration Piecemeal progress likely in 2014. Health care sector Affordability Care Act, unintended consequences? Regulatory oversight Increasing regulation; Clean air & water, Food safety Deficit reduction Changing tax policy and entitlement programs likely on hold until at least 2015!

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Trade Agreements TPA ???; Trans-Pacific (TPP); Trans-Atlantic (TTIP)

It's deja vu all over again!

Legislative Action Likely Postponed Until After Elections; Lame Duck, 2015 or Impasse?

Today: 234 Republicans, 201 Democrats (Democrats need a gain of 17 seats to reach 218 seats and gain majority).

The House of Representatives

Only 66 seats in the House are competitive

• r potentially competitive in 2014.

222 Districts are solid or likely Republican seats! (Cook political report)

No likely change in majority; leadership changes within parties

Today: 55 Democrats*, 45 Republicans (Republicans need a net gain of 6 seats to reach 51 seats and gain majority). Democrats must defend 21 seats while Republicans must defend 15 seats.

* two Independents caucusing with Democrats

The Senate Majority will be very small for whichever party prevails!

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Energy Sector Realignments Could Be Major Impetus for Economic Growth and Jobs

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Oil and Natural Gas Prices Have Diverged and Are Now Subject to Unique Forces

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 Dollars per barrel 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Dollars per million Btu

W est Te xas In te rm ed iate (left s cale) H en ry H u b (rig h t scale) Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Regulatory Agenda Will Accelerate Under Administrative Authorities in 2014‐16!!! Limited Legislative Progress Until After November Elections!!!!!!!!

Fiscal and Monetary Policy in Transition

White House Congress U.S. Federal Reserve U.S. Treasury Department

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4 1 6 1 8 2 2 2 2 4

• 1600
• 1400
• 1200
• 1000
• 800
• 600
• 400
• 200

200

Deficit in billion dollars

• 16
• 14
• 12
• 10
• 8
• 6
• 4
• 2

2

• 6 %
• 5 .3 %
• 2 .4 %

R e a g a n C lin to n G . B u s h G .W . B u s h

S o u rc e : C o n g re s s io n a l B u d g e t O ffic e (A u g u s t 2 0 1 4 ), B E A a n d T re a s u ry D e p a rtm e n t

D e fic it a s p e r c e n t

• f G D P

P e rc e n t o f G D P

O b a m a

• 1 1 %

? ? ? ? ?

11,500 people per day will qualify for Medicare over the next 16 years!

Short Term Deficit Relief Means Long Term Revenue and Spending Changes Are Post‐2014

First budget

• f next

President

2 4 6 8 10 12 14 16 18 20 22 Trillions of dollars 12 24 36 48 60 72 84 96 108 120

Percent of GDP Eisenhower Kennedy Johnson Nixon / Ford Carter Reagan H.W. Bush Clinton G.W. Bush Obama Truman Roosevelt

D e bt h eld b y p u b lic as % of G D P

4 0 45 5 0 5 5 60 6 5 7 0 75 8 0 8 5 90 9 5 00 05 10 15 20 F iscal year D eb t h eld b y p u b lic in d o llars

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

American Taxpayer Relief Act of 2012 Reduces Deficit With Sequestration; But Debt Rises

Debt Ceiling debate prior to March 15, 2015 expiration of suspension !

U.S. Federal Reserve U.S. Treasury Department

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Fiscal and Monetary Policy in Transition

27 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

1 2 3 4 5 6 7 8 9 Percent

1 0 -y e a r T re a s u rie s

F e d e ra l F u n d s R a te

9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 02 0 4 0 3 0 5 0 6 0 7 0 9 0 8 1 2 10 11 13 14 15

Federal Reserve Will Continue To Promote Growth and Employment in 2014‐15

 Extend near‐zero rate guidance to mid‐2015 or later.  Continuing tapering and ending quantitative easing by October!  Modified 6.5% target unemployment?; inflation below 2%!

Federal Reserve actions:

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Agriculture Markets Are Approaching Significant Transitions in This Global Environment

PEDs virus limits pork production response Lowest cattle inventory since 1950’s Breeding flock reductions in 2011-12 limit poultry response Global production shortfalls open export markets for U.S. dairy 2011-12 created smaller and more disciplined egg industry Record large world stocks

• f cotton.

Record large world stocks

• f soybeans.

Large increase in world stocks

• f coarse grains.

Increases in competitive grains limit wheat demand.

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

2014 Crop Supplies Moving Higher and Forcing Transitions for Agriculture Markets

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

250 500 750 1000 1250 1500 Million metric tons of wheat and coarse grains

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Increased Global Competition and Infrastructure are Significant Challenges for Midwest Agriculture

Since 2007 U.S. grain production has been near or below the 2007/08 level but may be 5.5% above in 2014/15! Harvested area down 9 million acres. Since 2007 non‐U.S. grain production has been volatile but above the 2007/08 level every year and is 21% above in 2014/15! Harvested area up 25 million acres! U.S. grain output Non‐U.S. grain output

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

25 50 75 100 125 150 175 Million metric tons or bales

C oarse grains W heat S oybeans C otton

23% to China 66% to China

Exports Continue to be Major Driver of Markets But Pace of Growth is Question

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

32 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

100 200 300 400 500 Million metric tons of wheat & coarse grains 8 16 24 32 40 Stocks-to-use percentage World stocks Stock/use

A Recovery in Global Grain Stocks Will Require Two Years of Large Harvests

33

Rising Coarse Grain Supplies and Reduced Wheat Feeding Will Pressure Wheat Market

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

34 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) 7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Billion bushels

E n d in g s to c k s

To ta l u s e P ro d u c tio n

Despite Lower U.S. Wheat Harvest Carryover is Likely to Increase as Demand Weakens

35

Large U.S. Corn Crop Shifts Focus to Demand Side Concerns

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

2 4 6 8 10 12 14 16 Billion bushels

Production Total Use Free stks Gov't stks

Corn Stocks Rebounding With Large Harvest, Stagnating Ethanol, Feed and Exports

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

37 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Billion bushels of corn

Feed and residual E xports Food, seed & industrial E th anol

D D G 's

Corn Demand Stabilizing in 2014/15 as Buyers Anticipate Large Harvest

Year‐over year change : 2013 2014 Corn price … ‐ 35 % ‐ 20% Feed use ….. +20 % + 1% Exports ……. +163 % ‐ 10 % Ethanol ……. + 10 % ‐1 %

This is future growth driver. How will this shape grain flows and infrastructure?

38 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Large U.S. and South American Crops Will Likely Overwhelm Strong China Demand

7 5 7 7 7 9 8 1 8 3 8 5 8 7 8 9 9 1 9 3 9 5 9 7 9 9 1 3 5 7 9 1 1 1 3

1 1 2 2 3 3 4 4 5 Billion bushels

Production Total Use Stocks

Record Soybean Production and Rising Global Supplies Will Push U.S. Stocks Sharply Higher

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

40 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

10 20 30 40 50 60 70 80 90 Million metric tons of soybeans 5 10 15 20 25 30 35 40 45 Stocks-to-use percentage Ending stocks Stocks-to-use

World Soybean Stocks Could Increase Sharply If Global Harvests Materialize

41 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Larger Foreign Cotton Supplies Impacting Market Prospects

42 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4

20 40 60 80 100 Million 480-pound bales of cotton 20 40 60 80 100 Stocks-to-use percent Stocks Stocks-to-use

Larger World Cotton Crop and Slower Growth in Demand Will Boost Stocks

$0.00 $2.00 $4.00 $6.00 $8.00 $10.00

Dollars per bushel (monthly prices received by farmers, USDA)

W h e a t p ric e

8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0

L o a n ra te

1 2 1 4

?

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00

Dollars per bushel (monthly prices received by farmers, USDA)

C o rn p ric e

8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0

L o a n ra te

1 2 1 4

?

20 30 40 50 60 70 80 90 100 Cents per pound (monthly prices received by farmers, USDA) Upland cotton price

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Loan rate

12 14

?

$0 $2 $4 $6 $8 $10 $12 $14 $16 $18

Dollars per bushel (monthly prices received by farmers, USDA)

Soybean price

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Loan rate 12 14

?

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Various Commodity Markets Are in Different Stages of Transition

Export Markets

Export Reliance:

Emerging markets Disease (FMD) U.S. $ rebound Rising competition Trade disputes

Feed Costs:

Low stocks Rising price volatility Yield/weather issues Ethanol

Low Cattle Inventory, Strong Demand and Lower Feed Costs Spur Meat and Dairy Sectors

45

Pork and Broiler Sectors Riding Wave of Reduced Beef Supplies and Lower Feed Costs

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4 1 6

5 10 15 20 25 30 35 40

Billion pounds

B eef P ork B roilers

• 4.5 % -1 to 0 %
• 1.8 % +2 to +4%

C hange in 2014 2015 + 1.5 % +2 to +4 % B eef P ork B roilers

2011 2012 2013 2014 2015 0.7% 0.2% -1% 0.2% +1 to 3%

Percent change in total meat output

PEDS virus

Smallest cattle inventory since 1952!

46 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Beef Pork Broilers

1 2 3 4 5 6 7 8

Billion pounds (2001-2015)

01 03 05 07 09 13 11 15 01 03 05 07 09 13 11 15 01 03 05 07 09 13 11 15

Export share of 2013 U.S. production

 Broilers ….. 19%  Beef ………. 10%  Pork ……… 22%  All meat .......17%  Dairy (skim) ..16%

Beef Exports Limited by Supplies; Pork Steady With Broiler Exports Rsing

47 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

100 200 300 400 500 600

Thousand metric tons (2001-2014) N onfat dry m ilk Cheese Butter Dry w hole m ilk

01 03 05 07 09 11 13 01 03 05 07 09 11 13 01 03 05 07 09 11 13 01 03 05 07 09 11 13

U.S. Nonfat Dry Milk and Cheese Exports Have Risen Rapidly As World Markets Grow

Cattle Hogs Broilers Turkeys Milk Eggs

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ dollars per cwt. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ dollars per cwt. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ cents per pound ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Strong Protein Margins Will Extend Into 2015; Larger Dairy Output Eases Prices

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

* Record highs

2012 122.86 60.88 86.6 105.6 18.53 117.4 2013 125.89* 64.05 99.7* 99.8 20.05 124.7 2015 149 – 162* 72 ‐ 78 100 – 108 102 ‐ 111 19.75 – 20.75 124 ‐ 134

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ cents per dozen ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ USDA August Supply and Demand

2014 150 – 153* 79 ‐ 81* 103 – 106* 105 – 108* 23.65* 136 – 139*

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Agriculture Markets Are Approaching Significant Transitions in This Global Environment

50 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

25 50 75 100 125 150 Billion dollars

Net cash income Direct payments Decade averages

D irect governm ent paym ents*

* em ergency paym ents are striped area of governm ent paym ents) 2010-14 $122.5 2000-09 $71.0 1990-99 $56.5 1980-89 $42.7

Farm Income Declines Limited by Inventory Sales; Animal Protein/Dairy Remains Strong

Over the last five years net cash farm income has averaged 73 percent higher than previous decade!

51 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

1000 2000 3000 4000

Per acre value in dollars

100 200 300 400

Net returns per acre in dollars

C ro p lan d v alu e p er acre W eig h ted n et retu rn s p er acre

Sharp Drop in Net Returns Have Domino Effects

• n Land Values, Rental Rates and Input Prices

Net per acre returns for wheat, corn, soybeans and cotton weighted by planted acreage.

Balance Sheet of Agriculture is Better Prepared for Volatility and Transition

6 8 7 7 2 7 4 7 6 7 8 8 8 2 8 4 8 6 8 8 9 9 2 9 4 9 6 9 8 2 4 6 8 1 1 2 1 4 500 1000 1500 2000 2500 3000 Billion dollars 100 200 300 400 500 600 Billion dollars

C h a n g e 1 9 6 8 -1 9 7 8

A s s e ts ... + 1 7 9 % D e b t ....... + 1 5 5 %

C h a n g e 1 9 7 8 -1 9 8 8

A s s e ts .. + 1 .4 % D e b t ...... + 7 .5 %

C h a n g e 1 9 8 8 -1 9 9 8

A s s e ts ... + 3 7 % D e b t ....... + 2 4 % F a rm a s s e ts (le ft s c a le ) F a rm d e b t (rig h t s c a le )

C h a n g e 1 9 9 8 -2 0 0 8

A s s e ts ... + 9 8 % D e b t ....... + 5 9 % Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Change 2008-2014 Assets …. +36% Debt ……....+20%

The Transition Will Impact the Entire Food, Fiber and Agriculture Supply Chain

Global and domestic supply chains will realign to the new emerging market dynamics. Larger supplies, lower margins, increasing export reliance, regulatory and infrastructure issues and significant financial liquidity will speed the consolidation and integration of supply chains.

 The market transitions will bring new opportunities as

supply chains shift increasingly to feed and export channels, new niche markets and storage options. Understanding these evolving domestic and global supply chains and the associated risk and volatility will be crucial.

 Competitive pressures in the global market will

intensify in response to strong prices and efforts by international buyers to diversify supply chains. Infrastructure issues such as locks & dams, the widening of Panama canal and freight capacity (rail, truck and ocean) will impact competitiveness.

The Transition in Markets and Supply Chains Creates Strategic Management Challenges

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

 The regulatory and market demands for more scrutiny

• f the food chains will expand and impact domestic

and global supply chains. Food safety, animal welfare, traceability, sustainability, environmental regulations and terror prevention will increase on a global basis.

 The pace of consolidation, both horizontally and

vertically, will accelerate throughout the global supply chains as margins tighten, economies of scale dominate and market participants utilize their accumulated liquidity to enhance their position in domestic and global markets.

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

The Transition in Markets and Supply Chains Creates Strategic Management Challenges

 Investments in equipment, land ownership and lease

commitments will need to be reassessed.

 Major farm program and tax code changes are coming.

New farm programs and tax rules on depreciation, 1031 like‐exchanges, accounting options, estate taxes, etc. may alter optimal business structures and strategies.

 Precision agriculture technologies and data mining to

control costs, boost production and enhance sustainability will be integral ingredients in transition strategies for input providers and producers. Increased regulatory scrutiny of data handlers & brokers coming.

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

The Transition in Markets and Supply Chains Creates Strategic Management Challenges

 Risk management strategies will need reevaluation with

particular focus on margin & marketing strategies, cost controls, regulatory compliance and counter party risk.

 A strong balance sheet with significant working capital

and strong risk management policies will be required to implement transition strategies. Debt capital will become significantly more expensive and subject to tightening credit standards over next five years.

 Strategic capital management will be crucial in

positioning in evolving domestic & global supply chains.

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

The Transition in Markets and Supply Chains Creates Strategic Management Challenges

Presentation by: Terry Barr, Senior Director of Industry Research Knowledge Exchange Division, CoBank, ACB E-mail: tbarr@cobank.com

“The Financial Shape

• f the

Agricultural Industry ”

• Mid Americia CropLife Assoc.
• 2014 Annual Meeting