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 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. 2 Rabobank International
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 5 Rabobank International
6 What Happened to Prices Dollars/Bushel $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 Source: USD, Rabobank 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 Corn Price per Unit 1978 1980 1982 1984 1986 1988 1990 1992 1994 Average Corn Price 1996 1998 2000 2002 2004 2006 2008 2011=$6.2/bu 2010
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The basics have remained the same But corn is now $6.50, not $2.50 • Global population (in millions) • Agricultural land (1,000 ha) For many decades productivity gains 10,000 5,000 1.50 outpaced demand growth. But things have changed. 9,000 4,900 Now due to GDP 8,000 growth in the 4,800 1.25 developing world, demand is 7,000 accelerating. 4,700 6,000 Unfortunately, productivity from yield improvement 5,000 4,600 1.00 is decelerating. 4,000 The world has 4,500 changed from one of structural surplus 3,000 to structural 4,400 0.75 deficits. 2,000 4,300 1,000 - 4,200 0.50 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 1960 1970 1980 1990 2000 2007 Total population Rural population Agricultural land area Agricultural land area per capita Urban population Source: FAO Stat, Rabobank Source: FAO Stat
China Industrialization Herd Size of Hog Farms in China 100% 5% 7% 10% 12% 15% 90% 21% 80% Structural trend towards scaled 36% 70% farming will accelerate in Specialized farm 48% 51% 60% (+3000 heads/farm) coming years 55% 50% Commercial farm (50~3000 heads/farm) 40% 74% Backyard farm 30% 57% (1~49 heads/farm) 42% 20% 37% 30% 10% 0% 2001 2005 2007 2009 2013F Herd Size of Poultry Farms in China 100% “BEIJING (Dow Jones)--China's 7% 9% 12% 6% 90% 8% 11% grain demand will likely 15% 25% 15% increase by 4 million metric 80% 18% 39% tons a year over the next Large commercial farm(>500K) 70% 70% five years, while the local 60% 64% Commercial farm (50K-500K 38% birds) supply of agricultural 50% Large size farm (10-50K birds) products will face huge 40% Mid size farm (2-10K birds) pressure, Vice Agricultural 23% 30% Backyard farm (<2K birds) Minister Chen Xiaohua said 18% 20% Thursday.” January 28, 2011 10% 14% 7% 0% 2000 2005 2010(E) 2015(F) 10 Source: MOA, Rabobank estimates
Supply For Global Wheat Trade Is Shifting % of World Total 35% 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canada United States Black Seas 11
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Tightening In Global Stocks World STU ratio: All Grains 35% 30% 25% 20.6% 20% 15% 16.5% 10% 5% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World STU World-China STU World STU ratio: Corn 35% 30% 25% 20% 14% 15% 10% 10% 5% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World STU World-China STU Source: Rabobank Source: USDA/FAS, Rabobank 13
Higher and more volatile price outlook (Farm Received Corn Price) $/Bu $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Average 5th Percentile 25th Percentile 75th Percentile 95th Percentile 14 Rabobank International
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 15 Rabobank International
Margins Showing Sign of Compaction No Government Payments 80% 80% % of Value Returned to Labor and Profits % of Value Returned to Labor and Profits Seed, Chem, Fert % of Crop Value Seed, Chem, Fert % of Crop Value Land % of Crop Value Land % of Crop Value 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% 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 Source: Iowa State University, University if Illinois, Rabobank 16
Room For Land Costs to Grow $/acre $700.00 Mortgage PMT Rent Return to Land & Profits $600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $0.00 ($100.00) 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012(f) Source: Chicago Federal Reserve Board, Rabobank 17 Rabobank International
Volatility Persists As Margins Tighten $/Acre 400 300 200 100 0 -100 -200 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 18 Rabobank International
Increased Probability of Losses Probability of Margins Less Than $0.00/bu and Greater Than • $60/bu 100% 90% 0.37 0.37 80% 0.42 0.46 0.47 0.52 0.57 70% 0.69 60% 0.24 50% 0.31 0.25 0.16 0.20 40% 0.19 0.17 30% 0.18 20% 0.39 0.37 0.34 0.34 0.32 0.28 0.26 10% 0.13 0% 2012 2013 2014 2015 2016 2017 2018 2019 19 Rabobank International
Confidence: The feeling just before you completely understand the situation • 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 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 21 Rabobank International
“The financial link in the global food chain”™ 22 Rabobank International
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