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US & Global Perspective: Agriculture and Land Markets
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US & Global Perspective: Agriculture and Land Markets

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  • 1. US & Global Perspective:Agriculture and Land MarketsMichael Swanson Ph.D.Wells Fargo
  • 2. Economic and Agricultural Risk Everything is connected. We just can’t see how. 2
  • 3. A market that’s on fire 3
  • 4. Simply complex What Drives Net Present Value? •  Future Income •  Opportunity Cost 4
  • 5. Are these trends sustainable? 3
  • 6. Much more than inflation at work 6
  • 7. The market can stay stupid longer thanyou can stay solvent 7
  • 8. Someone is going to be very unhappy Federal Deficit/Surplus 4 As Percent of GD 2 0 -2 -4 -6 -8-10-12 1950 1960 1970 1980 1990 2000 2010 8
  • 9. This market is not what it appears  Drivers   Interconnected global markets   Policies   Biofuels   Fiscal and Monetary  Implications   Asset values   Business strategy 9
  • 10. Stair steps versus trend 10
  • 11. Predictable trends Population and Income are not shocks 11
  • 12. Both growth rates are slowing Global  Growth  Rates  of  GDP  and  PopulaAon   0.065   Chg  in  LN  GDP   0.055   Chg  in  LN  Pop   0.045   0.035   0.025   0.015   0.005  -­‐0.005  -­‐0.015  -­‐0.025   1969   1974   1979   1984   1989   1994   1999   2004   2009   12
  • 13. Getting used to crazy Policy can be a shock 13
  • 14. The demand that “shocked” the system 14
  • 15. What do we know versus believe Massive uncertainty in energy 15
  • 16. Energy volatility = corn volatility 3
  • 17. Very few constants  Ethanol production   Tough demand market   Will the exports be there?  US energy production   Crude oil production   Natural gas production   Chasing the differentials  Global energy issues   Middle East factors   Where’s China really headed? 17
  • 18. Thank you North Dakota US  Crude  Oil  ProducAon   000s  of  barrels  per  day  6500  6000  5500  5000  4500  4000  3500   18 Jan-­‐09   Jan-­‐10   Jan-­‐11   Jan-­‐12   Jan-­‐13   Jan-­‐14   Jan-­‐15   Jan-­‐16  
  • 19. Unsustainable, but how does it get fixed? Ratio: WTI to Natural Gas 60 "6 to 1" is the natural ratio 50 40 30 20 10 - Jan-1992 Jan-1996 Jan-2000 Jan-2004 Jan-2008 Jan-2012 Jan-2016 19
  • 20. The market is on a “crash course” to change Monthly Rig Count2,000 Oil rigs NG rigs1,5001,000 500 371 426 0 20 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
  • 21. The corn market only cares about ethanol 21
  • 22. US gasoline demand continues to fall 22
  • 23. Terrible margins = lower production Ethanol Production975 000s of barrels daily925875825 Source: Wells Fargo Ag Industries775 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 23
  • 24. International Supply Response A lagging effect 24
  • 25. Clear trend plus noise 25
  • 26. The US is the Saudi Arabia of corn 26
  • 27. Markets respond to incentives 27
  • 28. Relative versus absolute Ratio: US Per Capita Grain / Brazil Per Capita Grain7.06.56.0 5.85.55.04.54.03.5 3.93.02.52.0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 28
  • 29. What’s the MN farmer doing about it? 29
  • 30. Farmer expansion flowchart Want to expand? Is land over Yes priced? No Buy more land
  • 31. Farmer expansion flowchart Buy more land! 31
  • 32. What generates the “return”  Land – 25%   On average is paid – 25%   Is just another asset class   Can be overpriced/underpriced  Management – 20%   Net margins with government pmts   Management & own labor  Agronomic impact  Knowledge has economies of scale 32
  • 33. Looking for market inconsistencies Ultra low interest rates have a differential effect 33
  • 34. It’s about bushels not acres  Land prices have responded to:   Crop prices   Low interest rates  Land improvements have not   Tiling   Leveling   Irrigation   Soil enhancement 34
  • 35. How do I buy the cheapest marginal bushel? 35
  • 36. It’s about bushels not acres  $8,000/acre @ 180 bushels/acre   Long-term land share 25%   $8,000 / 45 bushels   $178 per bushel  Can I buy a bushel of yield gain cheaper?   Irrigation $2,000/acre add 25 bushels   $2000 / 25 bushels   $80 per bushel 36
  • 37. The right decision depends onchanging prices and technology 37
  • 38. Take-aways  Unsustainable = high volatility   US ethanol policy   US monetary policy  Land market consequences   Global production response   Once started will continue   Relative matters more than absolute   It’s about bushel not acres   Buy the cheapest bushels   Easy deals are always overpriced 38