Transcript The Economic Climate: A Global Transition That Will Challenge

“The Economic Climate:
A Global Transition That Will
Challenge Agriculture”
Presented by:
Terry Barr, Senior Director of Industry Research
E-mail: [email protected]
“Thriving in Uncertain Times”
12th Annual Farmer Cooperatives Convention
November 9-10, 2009
The Economic Climate
The economic climate is beyond anyone’s
control but it must be incorporated into the
controllable aspects of your business
Risk management (market, supply & counterparty)
Business strategy
Capital structure
Productivity
Product quality and service
Operations management
The Global Transition to
Sustainable Growth Paths
The U.S. and global economy are
transitioning to more sustainable
growth paths that will rebalance
global economic and political
interdependency.
This transition will be complicated
by the fact that the current downturn
had its origins in the financial
markets of the advanced economies.
Capital markets will not provide
safety valve for excess leverage.
As a result the recovery process will
be more protracted and will include
greater role of government in the
marketplace.
The Global Transition to
Sustainable Growth Paths
This transition will place a
broad spectrum of policies in
flux over the next few years and
will introduce a greater degree
of global “policy” uncertainty
and risk than has been present
in the past decade.
Policy Headwinds Are Building!
FOR EXAMPLE THE U.S. IS PROPOSING TO RESTRUCTURE:
Financial sector
Financial sector regulatory reform
Energy sector
Comprehensive energy policy/climate change
(cap and trade); transition from fossil fuels!
Immigration
Reform groundwork being laid for 2010
Health care sector
Uninsured, medicare / medicaid
Regulatory oversight
Clean air & water, Food safety
Deficit
reduction
Tax policy; entitlement programs (including farm
and food programs).
Virtually every sector of the economy will be impacted and risk management
and investment strategies will have to reflect the growing uncertainties
The Global Transition to
Sustainable Growth Paths
The food, fiber and agriculture
sector will not be exempt.
After several years of record
income the sector is now
transitioning to a sustainable
growth path.
This transition, fueled by a return
to a resource challenged world,
will not be linear and will be
volatile with each commodity
facing a unique set of challenges.
The Global Transition
No Decoupling and Unique
Global Recession
P ercent change in annual world growth (purchasing-power parity rates)
7
6
Recession
5
Recession
4
Recession
Recession
3
2
1
0
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
-1
Slow Recovery in Advanced
Economies; Emerging Markets Key
P ercent change in annual world growth (purchasing-power parity rates)
Advanced countries
6
Rest of world
China
India
4
2
0
-2
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Advanced Economies in
Collective Recession
Percent growth rate per year
(21% GDP / 5% pop)
4
United States
3
Percent growth rate per year
(16% GDP / 5% pop)
4
Euro Area
3
2
2
1
1
n.a.
0
0
-1
-1
-2
-3
-2
-4
-3
91-00
2003
2004
2005
2006
P er cent gr owth r ate per year
2007
2008
2009
2010
(6% GDP / 2% pop)
4
-5
91-00
2003
2004
2005
2006
P er cent gr owth r ate per year
2007
2008
2009
2010
(3% GDP / 1% pop)
4
Japan
2
2
0
0
-2
-2
-4
-4
-6
-6
United Kingdom
91-00
2003
2004
2005
2006
2007
2008
2009
2010
91-00
2003
2004
2005
2006
2007
2008
2009
2010
BRIC Lead Emerging Markets
Economic Rebound
Percent growth rate per year
(3% GDP / 3% pop)
Percent growth rate per year
Brazil
6
(3% GDP / 2% pop)
8
6
4
4
2
0
2
-2
Russia
-4
0
-6
-2
91-00
2003
2004
2005
2006
Percent growth rate per year
12
2007
2008
2009
2010
(5% GDP / 18% pop)
-8
91-00 2002
10
10
8
8
6
6
4
4
2
2
0
91-00
2003
2004
2005
2006
2007
2008
2009
2010
2005
2006
Percent growth rate per year
12
India
2003 2004
2007 2008
2009
2010
(11% GDP / 21% pop)
China
How long can China inject
infrastructure stimulus to
replace exports without
overheating?
0
91-00
2003
2004
2005
2006
2007
2008
2009
2010
Sustaining Growth in China Will
Require Shift of Growth Sources
P ercent of nominal GDP
60
50
Personal consumption
40
30
20
Exports
10
Rebalancing needed!
0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
The Global Current Account
Imbalances Were Unsustainable
U.S.
2006
2007
2008
Euro Region
Japan
Developing
Asia
Middle East
Central and
Eastern Europe
Rest of World
-750 -625 -500 -375 -250 -125
0
125
Current Account Balances in Billion US dollars (2006-08)
250
375
The Global Growth Drivers Will
Change: What are Implications?
European growth fueled
by exports to all of these
regions and Central &
Eastern Europe.
Into Asia and
resource rich
developing
countries
Growth in
China
consumer
sector
Global Imbalances Will Keep
U.S. Dollar Under Pressure
Indexes of major currencies/US$ (March 1973=100)
150
140
130
120
110
100
90
80
70
74
76
78
80
82
84
86
88
90
92
94
96
98
00
* Currencies weighted by relative market importance to total U.S. trade.
02
04
06
08
10
U.S. Dollar Continues to Decline
Against Major Currencies
Indexes of currencies/US $ with January 1999=100
70
80
90
100
110
120
130
140
150
S. Korea
Japan
Mexico
Australia
China
Euro
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Will New Price Levels Prevail or
Return to Historical Levels
CRB Indexes (1967=00) (commodity futures)
500
450
Reuters/ Jefferies-CRB
Three Views
of the World?
400
350
Or this?
1980-82
recession
300
250
200
150
This?
100
50
0
57 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
08 10
Energy Sector Remains Strategic
• Declining U.S. Dollar and Optimism
on Global Growth Boost Oil
• Potentially Larger Natural Gas
Supplies Moderate Price Outlook
• More Predictable Feedstock Costs
Will Aid Ethanol Returns
Oil Prices Will Track
Global Recovery
Dollars per barrel; spot price West Texas Intermediate
$140
$130
$120
$110
$100
$90
$80
Questions for oil:
Middle East, Nigeria, Venezuela keep
uncertainties in the market.
US dollar premium has returned.
OPEC: adjusting output to weakness
Global recovery will set pace of price
rebound.
2008 avg.
$100
2009 avg.
$60
2010 avg.
$75
2007 avg.
$72
$70
$60
$50
$40
$30
$20
19
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
10
$10
Commodities Continue to Reflect
Denomination in U.S. Dollars
U.S. dollar & Euros per bushel
150
Average 98-05 to Sept. 09
125
U.S. price
Japanese yen
Canadian dollar
Euro
+ 93 %
+ 55 %
+ 55 %
+ 46 %
in U.S. dollars
100
75
50
in Euros
25
0
1995
1997
1999
2001
2003
2005
2007
2009
Natural Gas Prices
Likely to Hold Steady
Dollars per mcf (commercial sector)
$18.00
Questions for natural gas:
Economic recovery will boost prices
$15.00
New discoveries may sharply
increase future supplies!
2008 avg.
$12.60
2009 avg.
$9.40
2010 avg.
$9.50
2007 avg.
$11.30
$12.00
$9.00
$6.00
$3.00
19
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
20 01
0
20 2
0
20 3
2004
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
10
$0.00
More Predictable Feedstock
Costs Will Aid Ethanol Returns
Cents per gallon at wholesale
400
E thanol
Gasoline
300
200
100
0
2004
2005
2006
2007
2008
2009
2010
U.S. Economy in Transition
• Inventory Cycle and Cash for
Clunkers Fuel Rebound
• Job Losses Push Unemployment
Higher
• Housing Sector Begins Slow
Rebound
Economic Stimulus / Inventories
Spur End of Recession
P ercent change in quarterly Gross Domestic P roduct (Chained 2000$)*
8
Cash for clunkers and
buyer tax credit! Stimulus
carries into 2010!
6
4
2
0
-2
-4
-6
2000
2001
2002
2003
* Seasonally adjusted at annual rate
2004
2005
2006
2007
2008
2009
2010
The Shape of This Economic
Recovery is Still Unfolding
P ercent change Gross Domestic P roduct (Chained 2000$)
6
4
W
2
0
-2
“Broken V”
“double
dip”
-4
75
77
79
81
83
(Jobless Recovery)
85
87
89
91
93
95
97
99
01
03
05
07
09
11
Falling Net Worth Compromises
Consumer Rebound
Change in trillion dollars
6
4
2
0
-2
-4
-6
-8
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
-10
The Consumer Begins the
Deleveraging Process
Percent
Percent
150
140
130
120
30
This consumer is gone and the
retail and manufacturing capacity
to serve them will be downsized
both domestically and globally!
28
26
24
Debt-to-Income
(left scale )
110
22
100
20
90
18
80
Debt-to-Net Worth
(right scale)
70
16
14
10
06
08
02
04
98
00
94
96
90
92
86
88
82
84
10
78
80
50
74
76
12
70
72
60
Unemployment Rates Peak
Well After Recession Ends
P ercent rate
10
Recessions
8
6
4
2
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Investment Not a Significant
Growth Factor for 2009-10
Billion dollars in profits; inv estment at annual rates
1800
1800
1600
1400
1600
Business
fixed
investment
1400
1200
1200
1000
1000
800
Corporate
profits (after tax)
800
600
400
600
Residential
investment
200
400
200
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Fiscal and Monetary Policy:
Setting Stage for 2010 and Beyond
Congress
White House
Federal Reserve
Government Spending is Major
Growth Driver; Record Deficits
Deficit in billion dollars
Reagan
200
G.
Bush
Percent of GDP
Clinton
0
-108
-200
-79
G.W. Bush Obama
2
0
236
128
69 126
-22
-164
-150 -155 -153
-128
-185
-203
-208
-212 -221
-221
-255
-269 -290
-158
-2
-162
-248
-318
-400
-4
-375
-413
-4.7%
-600
-6%
-800
-3.6%
-6
Deficit as
percent
of GDP
-8
-1000
-12
-11.2%
-14
-1391
-1587
Source: Congressional Budget Office (Sept, 2009), BEA and Treasury Department and forecast
19
15
17
-16
11
13
01
03
97
99
95
91
93
89
85
87
81
83
-1600
09
-1400
Assumptions:
 4 year phase-out in Iraq/ Afganistan
 Extention of tax provisions except
high income
05
07
-1200
-10
Taxpayer Expectations
Addendum: 23 states have proposed tax
increases, 13 are considering increases. This is
in addition to 10 states that raised taxes in 2008!
U.S. National Debt in Dollars
and as a Percent of GDP are Rising
Percent of GDP
Trillions of dollars
Obama
G.W. Bush
Clinton
H.W. Bush
Reagan
Carter
Nixon / Ford
Johnson
Kennedy
16
Truman
18
Eisenhower
120
Roosevelt
20
108
96
14
84
12
72
10
60
8
48
6
36
4
24
N a t iona l de bt
2
Pe rc e nt of GD P
12
20
15
10
05
00
95
90
85
80
75
70
65
60
55
50
45
0
40
0
Federal Reserve Will Seek
Improved Capital Markets
Percent
9
10-year Treasuries
8
7
Rates are lower but qualifications and
covenants are much tougher!
The acceptable degree of leverage has
changed for every consumer, farmer
and business! Capital markets are key
to sustaining recovery.
6
5
4
3
2
Federal
Funds Rate
1
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
AGRICULTURE’S TRANSITION IN RETURNING
TO A RESOURCE CHALLENGED WORLD
Agriculture is one of stronger
sectors in the U.S. economy but the
next several years will provide
significant challenges. Managing
risk associated with current
challenges and positioning for
opportunities will be the key to the
strategic deployment of capital.
Remember: After this economic
realignment the world will remain
resource challenged due to the
continued growth of consumer
demand in China and the emerging
markets!
A Resource Challenged World
Still Lies in the Future
Million people
1000
Growing Middle Class
China and India will account
for 70 % of the increase in the
middle class from 2000-2030.
Their “ability to pay” will set
global market prices!
Income growth (source?)
Market access (protectionism)
Yield technology (biotech)
Political decisions (inward?)
950 million
800
600
Rest-of-World
532 mil.
431 million
400
200
0
Rest-of-World
375 mil.
China - 361 mil.
China - 56 mil.
India - 58 mil.
2000
419
million
2030
But it is not a straight line
growth path!!! Significant
volatility will prevail around
the growth path!
Global Trade Will Recover Slowly
Million metric tons or bales
140
120
Wheat
100
80
Coarse grains
60
Soybeans
40
Cotton
20
0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Grain Stocks Building But
Crop Is Not In the Bin Yet
Million metric tons of wheat and coarse grains
500
400
300
200
100
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
0
Global Stocks-to-Use Building
World stocks rebounding
as demand weakens and
crop conditions improve!
World Wheat Stocks Rebounding
Million metric tons of wheat
200
150
100
50
08
06
04
02
98
00
96
94
92
90
88
86
84
80
82
78
76
74
72
0
EU Harvests Boost
Global Supplies
Million metric tons of wheat and coarse grains
300
250
Domestic use
Production
200
150
100
Ending stocks
50
0
08
06
04
02
00
98
96
94
92
90
88
86
84
80
78
76
74
72
70
82
Net trade
-50
Declining U.S. Acreage
Slows U.S. Wheat Stock Buildup
Billion bushels
3.0
Total use
Production
2.5
2.0
1.5
1.0
0.5
Ending stocks
0.0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Wheat Prices Have Settled
to Historical Levels
U.S. dollar & Euros per bushel
11
10
9
Average 99-05 to Sept. 09
U.S. price
+ 35 %
Thai Baht
+ 12 %
Canadian dollar
+ 5 %
Euro
+ 0 %
in U.S. dollars
8
7
6
5
4
3
in Euros
2
95/96
97/98
99/00
01/02
03/04
05/06
07/08
09/10
Corn Stock Increases
Limited by Harvest Weather
Billion bushels
14
P roduction
Total Use
Free stks
Gov 't stks
12
10
8
6
4
?
2
0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
Ethanol Continues to
Support Grain Markets
Billion bushels of corn
6.0
Feed and residual
5.0
Is ethanol
use peaking?
4.0
3.0
2.0
Exports
1.0
Food, seed & industrial
Ethanol
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
0.0
Production Rebound in Argentina
Could Reshape Soybean Market
Million metric tons
250
Production rebound in 2009/10?
200
World
150
100
50
United States
06
08
02
04
98
00
94
96
90
92
86
88
78
80
74
76
70
72
82
84
Brazil and Argentina
0
U.S. Soybean Stocks Could
Build Quickly in 2010
Million bushels
3,500
Production
Total Use
Stocks
3,000
2,500
2,000
1,500
1,000
500
0
79
81 83
85
87
89
91 93
95
97
99
01 03
05
07
09
Livestock, Poultry and Dairy
Cattle and poultry sectors ahead of
adjustment curve! Dairy trying to catch up!
H1N1 (SW) surprise just won’t stop!
“Reacted to feed costs and now to domestic /
foreign consumer!”
Consumer is cutting back …. but how far?
Feed cost declines may limit liquidations
and boost turnaround.
Hog Sector Unable to
Follow Cattle Turn
Ratio: bushels of corn equal in v alue to 100 lbs. of liv eweight animal
50
Steer & Heifer-Corn Feed Ratio
40
30
20
10
Hog-Corn Feed Ratio
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
quarterly data
* Steers & Heifers, live weight and all hogs live weight.
Hog Sector Has Been Under
Pressure for Over Two Years
Dollars per hundredweight
90
80
70
60
50
40
30
Breakeven levels
Lean hogs
20
40
Lean hog prices less breakeven price levels
30
20
10
0
-10
-20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Poultry Struggling to Hold
Its Positive Turn
Ratio: pounds of broiler feed equal in v alue to 1 lb. of liv e broilers
9
8
7
6
5
4
3
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
quarterly data
* Number of pounds of Broiler Grower Feed equal in value to 1 lb. Broilers, live weight.
Meat Industry Will Be Cautious
About Expansion in 2010
Billion pounds
40
35
Broilers
30
Change in
2010
2009
+1 to +2%
-4%
Beef
-3%
-1 to -2%
Pork
-2 %
-2 to -3%
Broilers
25
Beef
20
Pork
15
10
Percent change in total meat output
2006
+2.6%
5
2007
+2.2%
2008
+ 3%
2009
-3.2%
2010
-1 to 1 %
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
0
A Growing Meat and Dairy Industry
Must Become More Export Reliant!
Export share of
U.S. production
 Broilers ….. 18%
 Beef ………. 7%
 Pork ……… 20%
 All meat .......14%
Dairy …...… 10%
Dairy Sector Challenged
by Volatility
Dollars per hundredweight
20
Increasing
competition in a
smaller global
marketplace!
18
16
All milk price
14
12
10
Price support
8
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
Milk Feed Ratios
Beginning to Turn
Quarterly ratio: pounds of feed equal to v alue of one pound of all milk
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
quarterly data
* Number of pounds of 16% protein Mixed Dairy Feed (C51/S8/AH41) equal in value to 1 lb all milk.
Weak Demand / Productivity Limits
Effectiveness of Dairy Liquidation
Million pounds milkfat basis
210
200
Commercial supply
Commercial disappearance
190
180
170
160
Market keys 2010-11:
Domestic consumer?
International market
volatility
Pace of liquidation
150
140
130
120
25
Ending stocks
20
15
10
5
0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Economic Conditions Increasingly
Diverse in Agriculture
Farm Income Conditions Will be
Diverse Again in 2010
Billion dollars
100
Livestock and dairy losses will drive income back to
2006 levels! Recovery in 2010 will be limited with
grains complex watching stock buildup and
livestock/dairy completing liquidation process. Note:
Income has averaged $80 billion over last seven years
80
60
Net Farm Cash Income
40
Net Cash Income less
gov't payments
20
Direct government payments*
0
75
77
79
81
83
85
87
89
91
93
95
* emergency payments are striped area of government payments)
97
99
01
03
05
07
09
Agriculture Sector
Balance Sheet Still Solid
Billion dollars
100
80
Net Cash income
60
40
Net Income falls but
balance sheet strong!
20
Percent
20
Debt-to-asset ratio
15
10
Deleveraging is not issue
for much of agriculture!
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
5
Prices Received and Paid by
Farmers Increasingly Volatile
Index (1990-92=100)
200
180
160
140
Sector is operating at higher price and
cost levels with greater volatility ……
more working capital to play, less
leverage permitted and more emphasis on
well-defined risk management policies!
Prices paid*
Prices received: crops
120
100
Prices received: livestock
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
80
*Prices paid commodities & services, interest, taxes and wage rates
Key Crop Input Prices Set Globally
and Likely to Remain Volatile
Index (1990-92=100)
700
Feed
Nitrogen
Potash & Phosphate
600
500
400
300
200
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
100
The Emerging Business
Environment
• Greater price, cost and cash flow variability requiring
increased working capital, better risk strategies.
• Increasing cost structure from regulatory compliance
(taxes, energy, environment, health care etc.).
• Near term deflation then higher inflation & interest rates.
• Less leveraging of capital will be permitted.
• More limited and costly access to capital markets.
•Weaker dollar (favoring exports but increasing costs
for globally priced inputs).
• Greater vulnerability to global trade policy actions as
export dependency increases with industry size.
• Greater global policy uncertainties.
REMEMBER!
The market can stay irrational longer
than you can stay solvent!
John Maynard Keynes, (attributed)
“The Economic Climate:
A Global Transition That Will
Challenge Agriculture”
Presented by:
Terry Barr, Senior Director of Industry Research
E-mail: [email protected]
“Thriving in Uncertain Times”
12th Annual Farmer Cooperatives Convention
November 9-10, 2009