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

“The Financial Shape of the Agricultural Industry ”  Mid Americia CropLife Assoc.  2014 Annual Meeting Presentation by: Terry Barr, Senior Director of Industry Research Knowledge Exchange Division, CoBank, ACB E-mail: tbarr@cobank.com

Commodity Markets Seeking Equilibrium Amid Economic Transition; Energy & Ag Delinking? Rising Economic Policy Indexes (2010=100) Global Turmoil Realignment Middle class 2009 ‐ 13 2014 ‐ 18 175 Energy Agriculture (all commodities) 150 Mother nature, global growth, 125 liquidity and geo ‐ politics will drive market! 100 75 50 Old Normal 25 0 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 Data source: World bank Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

As Commodity Markets Seek Equilibrium There Will Be Adjustments in All Related Industries Rising Economic Policy Indexes (2010=100) Global Turmoil Realignment Middle class 2009 ‐ 13 2014 ‐ 18 175 Fertilizer Agriculture (all commodities) 150 Mother nature, global growth, 125 liquidity and geo ‐ politics will drive market! 100 75 50 25 0 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 Data source: World bank Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Larger Crop Supplies and Limited Production in Animal Protein and Dairy Shape U.S. Prices Index (2011=100) 130 P ric e s re c e iv e d : liv e s to c k 120 P ric e s p a id * 110 Cost pressures 100 90 80 70 60 P ric e s re c e iv e d : c ro p s 50 1 1 3 5 6 7 8 9 0 2 3 5 6 7 8 9 0 2 3 4 4 4 0 1 9 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 9 0 1 0 0 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 *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 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) 4

Global Economy and Agriculture Faced Major Turmoil Over The Past Decade … What’s Ahead? 2004 ‐ 2008: 2009 ‐ 2013: 2014 ‐ 2018: “Rising Middle Class” “Economic Turmoil” “Policy Realignment” Rapid global growth Financial crisis/recession. Fiscal austerity, stalled fueled by rising middle reform agendas and Global fiscal deficits and class in China and destabilizing geo ‐ politics . debt reach critical levels. emerging markets. Tightening monetary Massive liquidity / near ‐ Stimulative fiscal & policy & rising interest zero interest rates monetary policies rates on the horizon. Continuing emerging Sharply declining U.S. $ Subdued growth in China . market growth/demand Rising financial leverage U.S. consumer tempering Consumer led U.S. & “irrational exuberance” spending & deleveraging. growth. Significant business liquidity could Rising commodity prices, Biofuels growth slowing boost investment, M&A! demand & trade Reduced crops force low Grain/oilseed stocks Rapid growth in biofuels grain stocks ‐ to ‐ use, rebuilding. Biofuels flat. boosted prices / volatility Declining grain stocks Animal protein and dairy and insulated crop sector. realigning globally. New Rising U.S. meat exports Stressed livestock/dairy. farm bill implementation. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

The Dominos Are Beginning to Fall! Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

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

The Global Economy Has Major Structural Issues To Confront Over Next Few Years! Japan: Europe: Debt/deficits/austerity; devaluation; ECB promises whatever it takes but central bank QE questions remain! Out of recession actions; debt and but Eurozone structure in doubt! consumption tax; Angela Merkel Prime Minister Shinzo Abe German Chancellor U.K. is bright spot. Russian actions Xi Jinping more stimulus and U.S.: Building growth New President of China in Ukraine will be lingering issue! third arrow of momentum? Debt/deficit and China: new reform reform?? policy actions shifted to after agenda ; slower congressional elections; exports limit growth; Mario Draghi Christine Legarde Federal Reserve tapering ends seeking transition to ECB President Managing Director IMF in October with timing of rate consumer sector as Mother Nature & increases linked to job growth driver; vulnerable Emerging markets Black Swans U.S. President and inflation! shadow banking. weakening as trade and India Fracking /horizontal drilling capital flows slow. bring new energy paradigm to Currency volatility rising global market but in Turkey, Argentina; Brazil infrastructure and Middle East (Argentine default)! Janet Yellen Russia John Boehner Harry Reid turmoil are factors!. Contagion risk! FED President Emerging markets Majority Leader Senate Leader Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

The Global Economy Reflects Guarded Optimism If Advanced Economies Build Momentum Percent change in annual world growth (purchasing-power parity rates) Rising Middle Economic Policy Class Turmoil Realignment 6 2004 ‐ 08 2009 ‐ 13 2014 ‐ 18 Avg.=4.5% Avg.=2.9% ??? 4 2 0 -2 Advanced countries Rest of world China India 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 Confidential and Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) 9 Proprietary

At the Same Time Central Bank Policies are Beginning to Transition to New Phases U.S. Federal Reserve quantitative Strong growth in the U.K. is easing will end in October but rate likely to trigger interest rate increases are still on hold. Strategies increases by the Bank of for reducing excess reserves will England! May adopt reactive evolve. Federal Reserve in reactive role of U.S. Federal Reserve! rather than preemptive role relative to inflation! Bank of England Bank of Japan European Central U.S. Federal Bank Reserve Bank of Japan has few Bank options but will wait for reform agenda and European Central Bank fiscal stimulus. may have to step up if Euro region slips back into recession! But it must overcome EU tribunal and German objections!

Central Banks Need to Unwind $6 Trillion From Balance Sheets and Promote Growth 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 U.S. nominal money velocity Bank of Japan Bank of England European Central Bank (long term refinancing operations) U.S. Federal Reserve Chart source: Cumberland Advisors

Weak U.S. Dollar in 2002 to 2011 Boosted Commodities; Steady Gains Since 2012 Indexes of major currencies/US$ (March 1973=100) 150 From 2002 to 2011 ………..... ‐ 39 % Dollar declined by 140 From August 2011 bottom over 25% after floating in 1973! to August 2014 ..… +13 % 130 120 Volker slide 110 100 90 80 70 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 1 2 1 4 * 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 . Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Will Any of These Risks Break Containment?  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. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Can U.S. Sustain Growth Momentum? U.S. President Harry Reid John Boehner Janet Yellen Senate Leader Majority Leader FED President? Fiscal Policy on Hold With Federal Reserve Transitioning Monetary Policy

U.S. Economic Growth Rebounded in the Second Quarter But Consumer Spending Remain Modest Percent change in quarterly Gross Domestic Product (Chained 2005$)* 8 ‐ 0.3% ‐ 2.8% 2.5% 1.6% 2.3% 2.2% 2.1% Annual average= 6 4 2 0 -2 -4 -2.1% -6 60 ‐ 70% of U.S. economic growth comes -8 from consumer spending: 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 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 * S e a s o n a lly a d ju s te d a t a n n u a l ra te Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)