The Business of Agriculture

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The Business of Agriculture

  1. 1. A WHOLE NEW WORLD
  2. 2. Some Key Issues Decisions ahead with big impacts Feed prices: High and going higher 1 Policy issues: Farm bill – COOL – Competition – 2 Budget cuts Trade Policy: Obama change – So. Korea –✓ 3 Colombia – Panama – TPPA - DOHA 4 Immigration reform: After 2012 Food Industry: Labels – Dietary guidelines 5
  3. 3. MEGA-TRENDS IN AGRICULTURE: Policy Impacts • Yield losses • Prices • Food demand • Export policy • Biofuels • Farmland • Food prices • Declining stocks • Acreage battle • Weather • Energy • Globalization • La Nina • China • Population • Russia, Ukraine • Alternatives • Growing wealth • GMO products
  4. 4. Market & Policy Volatility: Fasten Your Seat BeltsVISULIZE ACTIVITIES WITH TIMELINES! BEFORE NOW FUTURE China impact Volatility Risk Mgmt. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
  5. 5. Obama and Election Impacts Turning to the center 1 Changes: White House✓ 2 State of Union address Obama FY ‘12 budget 3 Congress: Fewer moderates 4 Gridlock: Halting Obama – Or: Growth & Budget Cuts
  6. 6. The New HouseGOP controls with net gain of 63 seats -- Leaders: GOP: Boehner Dems: Pelosi -- ‘New’ approach: * Committee chairs: Power - Markup sessions - Floor amendments
  7. 7. House Committee Leaders New players, different approaches 1 Ways and Means: Dave Camp (Mich.) • Tax Issues - Trade Policy 2 Budget: Paul Ryan (Wis.) • Key role in coming budget-cut proposals Ag: Frank Lucas (Okla.) – 14 Dems lost; No GOP✓ 3 •Direct payments - conservation - equity - regs Appropriations: Hal Rogers (Ky.) 4 •No longer fun panel – cuts ahead Energy and Commerce: Fred Upton (Mich.) 5 • Supported proposed cut in ethanol payment rate
  8. 8. New SenateDems still in control, but weakened majority Same leaders: Dems: Reid GOP: McConnell  Election Math: * 2012: Dems: 23 seats; GOP: 10 -- 8 Ag members up, only 1 GOP (Lugar) -- Dems: Conrad, Stabenow, Nelson, Brown, Casey, Klobuchar, Gillibrand * 2014: Dems: 20; GOP: 13
  9. 9. New Leader for Senate Ag PanelImpact of Sen. Lincoln’s reelection loss New Chair Past two farm bills Stabenow (Mich.) pushed fruit, vegetable funding Ranking GOP Other commodities in Roberts (Kan.) Mich.: Sugar beets, corn, soybeans, wheat, Keys dairy No./So. coalition Up for reelection in ‘12 - Conrad (N.D.)
  10. 10. How to cut deficitChanges ahead
  11. 11. U.S. National DebtIn dollars and percent of GDP Trillions of dollars Percent of GDP 20 Eisenhower 120 G.W. Bush Carter Johnson H.W. Bush Nixon / Ford Kennedy Reagan Clinton Obama Truman Roosevelt 18 108 16 96 14 84 12 72 10 60 8 48 6 36 4 24 National debt Percent of GDP 2 12 0 0 40 50 60 70 80 90 00 10 20 45 55 65 75 85 95 05 15
  12. 12. Passing Spending Cuts Will be DifficultEventually most programs will face cuts FY 2009 FY 2015 23% $1,058 bil. 35% Discretionary $1,246 bil. 19% and other mandatory 21% Discretionary and other Social Social mandatory Security Security Medicare / Defense Medicaid 19% Medicare / Medicaid Defense 21% Net Net Interest Interest 25% 19% 5% 12% Source: Congressional Budget Office, August 2010
  13. 13. Projected 10-Year Costs of Ag ProgramsOnly 2.15% of all federal government spending FY 2009 FY 2015 23% $1,058 bil. 35% Discretionary $1,246 bil. 19% and other mandatory 21% Discretionary and other Social Social mandatory Security Security Medicare / Defense Medicaid 19% Medicare / Medicaid Defense 21% Net Net Interest Interest 25% 19% 5% 12% Source: Congressional Budget Office, August 2010
  14. 14. Agriculture’s 10-Year Projected SpendingPercentage breakdown of how $924 billion is spent
  15. 15. Farm Program Budget Breakdown of the $64 Billion in Commodity Support 2% 3%3% 10% Direct Payments ACRE5% CCP MLG Disaster Dairy 77%
  16. 16. Farm Program Budget Breakdown of the $89 Billion in Crop Insurance Spending 13% Farmer Premium Subsidy18% Delivery Expenses Underwriting Gains 69%
  17. 17. Farm Program Budget Breakdown of the $65 Billion in Conservation Spending 2% 6% 3% CRP 37% CSP EQIP26% FPP WRP Other 26%
  18. 18. Farm Policy Linkages Crop Insurance Safety Net Economy Ethanol
  19. 19. Next Farm Bill Key issues ahead 1 Timing: 2012? Senate before House? – Funding No budget baseline: 38 programs, $9-$10 billion 2 - Biggest program impacted: SURE✓ 3 Budget cuts ahead: When and where? Direct payments: Dems want reform, Lucas doesn’t 4 -Loan rates, target prices: Increases? 5 Other Issues: Dairy - CRP - Crop insurance - Sugar 6 Obama position: No bill, analyze options
  20. 20. THANK YOU!
  21. 21. Ag Outlook: Volatility Ahead
  22. 22. General Overview• Extremely tight grain and oilseed fundamentals• 2010 US production hurt by adverse August• Shortfalls in world wheat production• La Nina undermines Argentine crops• Strong demand – High livestock and petroleum prices making it difficult to ration usage despite historically high grain prices• Minimal 2010/11 corn and soybean ending stocks• Intense competition for 2011 acreage – Outcome of South American crops and Chinese demand will determine how intense• Limited prospects for stock building in 2011/12 even with trend yields
  23. 23. Grains Outlook• Grain shortages in 2010/11 due to FSU drought, hot US 2010 August, strong bio-energy demand, record Chinese soybean imports – US and world stocks reduced to critically low levels for corn and oilseeds: wheat stocks relatively adequate – High gasoline prices and ethanol tax credit extension cause corn ethanol demand surge – Argentine 2011crops struggling with sporadic drought – US summer corn and soy supplies extremely tight• Price highs supported by central bank inflationary monetary policy and economic recovery – Demand rationing difficult with ethanol and China leading• Global crop production rebound in 2011 essential – US 2011 acreage battle as cotton demand rebounds; soy could fall short – La Nina Pacific weather cycle positive for N. Hemisphere crops – FSU crop yields should rebound from 2010 extreme drought• Prices likely to remain high and volatile until fall harvests in hand – Extreme spring and summer volatility expected as weather reaction – Late planting, summer heat, etc.• Economic excess in China, US could lead to next burst price bubble
  24. 24. Dairy Summary• Milk production growth has topped out globally for this cycle, andgrowth will be slowing worldwide. A lack of rain in New Zealand andArgentina, too much rain in Australia, blizzards in Europe, and $6.50 corn inthe US are slowing milk production growth.• Prices on the world market have responded to the lower supply byshooting higher, and the next chance to bring those back down will be whenthe new production season ramps up in New Zealand in August. US priceshave been along for the ride despite adequate inventories of most dairyproducts (the exception being butter).• US butter and cheese prices have jumped too high too fast and couldretrace a bit over the next two-three months before turning back higheragain. Prices for the various powders will trend higher until September orOctober when the world market will potentially come under pressure.
  25. 25. Uneven Global Economic Rebound Contains Downside RisksPercent change in annual world growth (purchasing-power parity rates) Advanced countries Rest of world China India6420 Advanced economies accounted for over half of world growth rate from 1970 to 2008. From 2010-2 to 2012 they will account for less than one-third. 70 72 78 80 82 88 90 92 98 00 02 08 10 12 74 76 84 86 94 96 04 06
  26. 26. Dollar Erosion Has Boosted Foreign Buying Power and Commodity PricesIndexes of major currencies/US$ (March 1973=100)150 Competitive devaluations140 and protectionism will be130 significant issues in 2011-12120110100 90 80 From March 2009 ………. -14% 70 From 1997-03 average … -28% 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10* Currencies weighted by relative market importance to total U.S. trade.
  27. 27. Oil Price Recovery Will Track Global Rebound and U.S. Dollar into 2011Dollars per barrel; spot price West Texas Intermediate$140 Questions for oil: 2009 avg.$130 Middle East keeps uncertainties in the 2008 avg. $62$120 market. $100$110 US dollar value still a factor. OPEC: limited output adjustments$100 Global recovery will set pace of price $90 rebound. 2007 avg. $80 $72 $70 2011-12 avg. $60 $90-100 $50 $40 2010 avg. $30 $79 $20 $10 19 1 20 1 20 1 19 6 19 7 19 8 19 9 19 0 19 2 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 12 9 0 1 8 8 8 8 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 1 19
  28. 28. Strong Fourth Quarter in U.S. Signals Momentum For 2011 First Half 2009 ----------- 2010 ----------- 2011 IV I II III IV I ---------- Percent change at annual rate ----------Real Gross Domestic 5.0 3.7 1.7 2.6 3.2 4.0Product (GDP) ---------- Percent change from year earlier ---------- 0.2 2.4 3.0 3.2 2.8 2.9 Percent points of contribution at annual rate:Personal Consumption 0.7 1.3 1.5 1.7 3.0 2.1Fixed investment - 0.1 0.4 2.1 0.2 0.5 0.6 Nonresidential -0.1 0.7 1.5 0.9 0.4 0.8 Residential 0.0 -0.3 0.5 -0.8 0.1 -0.2Change in Inventories 2.8 2.6 0.8 1.6 -3.7 2.0Net exports 1.9 -0.3 -3.5 -1.7 3.4 -0.1Government spending -0.3 -0.3 0.8 0.8 -0.1 -0.6
  29. 29. Annual Sources of Growth: U.S. Economy Forecast 2006 2007 2008 2009 2010 2011 ---------- Percent change at annual rate ----------Real Gross Domestic 2.7 2.0 0.0 -2.6 2.9 3.1Product (GDP) ---------- Percent change 4th qtr-to-4th qtr ---------- From 1998-2007 2.4 2.3 -2.8 0.2 2.8 3.2 over 75% of growth was personal consumption Percent points of contribution at annual rate:Personal Consumption 2.0 1.7 -0.2 -0.8 1.3 2.3Fixed investment 0.4 -0.3 -1.0 -2.7 0.5 1.0 Nonresidential 0.8 0.8 0.0 -2.0 0.5 0.9 Residential -0.5 -1.1 -1.0 -0.7 -0.1 0.1Change in Inventories 0.1 -0.2 -0.5 -0.6 1.4 0.0Net exports -0.1 0.6 1.2 1.1 -0.5 -0.1Government spending 0.3 0.3 0.5 0.3 0.2 -0.1
  30. 30. Major Changes in the February WASDEWorld / U.S. Wheat/ Soybean and Cotton Largely UnchangedCoarse Grain Stocks:World ….. -4.7 mmtU.S. ……. -1.8 mmt (70 million bushels) (price range $5.05-5.75/bu.) (2010 ending stocks estimated 675 mil. bu.; Avg trade estimate = 725)Foreign … -2.9 mmt (Brazil … -1.5 mmt; Mexico …. -0.5 mmt)Small increases in meat and milk production for 2011.Significant changes in prices: Steers ……… + $3 /cwt. ………. ($102-109 / cwt.) Hogs ………. + $4 /cwt. ………. ($58-61 / cwt.) Broilers …. - 1 cent/lb. ………. (80-85 cents/ lb.) Milk ……… + $1.60 / cwt. …….. $17.70-18.40 / cwt.)
  31. 31. A Deleveraging Consumer Will Temper Potential Demand GrowthPercent Percent150 30140 28130 26 Debt-to-Income120 24110 22100 2090 1880 16 Debt-to-Net Worth70 1460 1250 10 70 72 78 80 82 88 90 92 98 00 02 08 10 74 76 84 86 94 96 04 06
  32. 32. Budget Deficits Have Become Focus of Congress and Administration Deficit in billion dollars Percent of GDP Reagan G. Clinton G.W. Bush Obama 200 Bush 2 0 69 126 23628 1 0 -108 -22 -79 -200 -128 -185 -208 -150 -155 -153 -212 -221 -221 -164 -203 -158 -162 -248 -2 -269 -290 -255 -318 -375 -400 -413 -4 -4.7% -3.6% -600 -6 -6% Deficit as -800 percent -8 of GDP -1000 -10 -1200 -12 Assumptions: -9.8 % -1400  4 year phase-out in Iraq/ Afghanistan -14  Permanent extension of tax provisions -1414 -1600 -16 81 91 01 11 83 85 87 89 93 95 97 99 03 05 07 09 13 15 17 19Source: Congressional Budget Office (January, 2011), BEA and Treasury Department and forecast
  33. 33. Declining Grain Stocks Will Drive Acreage Decisions in 2011Million metric tons of wheat & coarse grains Stocks-to-use percentage500 40400 32300 24200 16100 8 World stocks Total stocks-to-use 0 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
  34. 34. Acreage Shifts Will Favor Corn But Weather / Input Costs Will Play Role Change 2007 2008 2009 2010 2011 10 to 11 ----------------- million acres -----------------Corn 93.5 86.0 86.5 88.2 90-92 +2 to +4Soybeans 64.7 75.7 77.5 77.7 76-79 -1 to +1Wheat 60.5 63.2 59.2 53.6 56-58 +2 to +4Upland Cotton 10.8 9.3 9.2 11.0 12-13 +1 to +37 other crops* 20.2 23.7 20.8 21.2 20-21 -1 to 0Hay harvested 61.0 60.1 59.8 59.7 60-61 +0 to +1CRP 36.8 34.6 33.7 31.3 31 -1 to 0Double crops 5.0 7.1 4.7 2.8 4-5 +1 to +2 Total acreage 349.2 348.6 346.4 343.4 346-349 +3 to +6* Barley, oats, sorghum, rice, sunflowers, peanuts and canola
  35. 35. Key Crop Input Prices Set Globally and Likely to Remain VolatileIndex (1990-92=100)700 Feed Nitrogen Potash & Phosphate Change600 from year ago500400 +39%300 +24% +17%200100 01 11 92 93 94 95 96 97 98 99 00 02 03 04 05 06 07 08 09 10 20 20 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20
  36. 36. World Wheat Stocks Fall As Global Production DeclinesMillion metric tons of wheat Stocks as percent of use250 40200 32150 24100 16 50 8 0 0 72 78 80 82 88 90 92 98 00 02 08 10 74 76 84 86 94 96 04 06
  37. 37. Declining FSU-12 Wheat Production Driving MarketsMillion metric tons125 Domestic use100 75 Production 27% of 50 world trade 25 Ending stocks 0(25) Net exports 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
  38. 38. Rebound in Global Wheat Production Could Push U.S. Stocks Higher in 2011Billion bushels U.S. Winter wheat seedings: +3.7 mil. acres (+10%)3.0 Total use Production2.52.01.51.00.5 Ending stocks0.0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
  39. 39. Sharply Reduced Coarse Grain Stocks Push Markets HigherPercent (stocks as a percent of use)70 What if China develops U.S. World60 even a small appetite for corn in 2011-12?5040 Lowest in over 50 years302010 0 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
  40. 40. Corn Stocks Remain Tight Even With Large HarvestBillion bushels14 Production Total Use Free stks Govt stks1210 8 Nearly 40 percent of the crop 6 is utilized for ethanol. Total corn use is now over 4 13.5 billion bushels. (need 89 mil. acres at trend yield) 2 0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
  41. 41. Corn Acreage and Yields Will be Strategic in 2011 2011 Corn Planted Acreage (Mil. Acres) 88 89 90 91 92 93 Harvested Acreage 81 82 83 84 85 86 Need Billion bushels yield of 154 12.47 12.63 12.78 12.94 13.09 13.24 160 or 160 12.96 13.12 13.28 13.44 13.60 13.76 above even with 161 13.04 13.20 13.36 13.52 13.69 13.85 92-93 162 13.12 13.28 13.45 13.61 13.77 13.93 millionYield 163 13.20 13.37 13.53 13.69 13.86 14.02 acres 164 13.28 13.45 13.61 13.78 13.94 14.10 165 13.37 13.53 13.70 13.86 14.03 14.19 166 13.45 13.61 13.78 13.94 14.11 14.28 167 13.53 13.69 13.86 14.03 14.20 14.36
  42. 42. South American Crop Size Will Set Tone for 2010 - 2011 Crop YearsMillion metric tons250200 World150100 50 United States Brazil and Argentina 0 70 72 76 78 80 82 86 88 90 92 96 98 00 02 06 08 10 74 84 94 04
  43. 43. Continued Large Global Soybean Stocks Offset by China DemandMillion metric tons of soybeans Stocks-to-use percentage70 35 Ending stocks Stocks-to-use60 3050 2540 2030 1520 1010 5 0 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
  44. 44. China’s Appetite for Soybeans is Major Market DriverMillion metric tons75 Domestic use604530 Production15 0 Ending stocks-15-30 In last 10 years domestic consumption has tripled with no significant Net exports-45 increase in domestic production.-60 Increase of 8-9 mmt. in 2009 & 2010.-75 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
  45. 45. U.S. Soybean Stocks Limited by Strong Demand and Acreage CompetitionMillion bushels3,500 Production Total Use Stocks3,0002,5002,0001,5001,000 500 0 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
  46. 46. Meat Industry Will Be Cautious About Expansion in 2011-12Billion pounds40 Change in 2010 201135 Broilers + 4.0 % 0 to +2% Beef +1.3 % -1 to -2% Broilers30 Pork - 2.4 % 0 to 1%25 Beef20 Pork1510 Percent change in total meat output5 2007 2008 2009 2010 2011 +2.2% + 3% -3.2% 1.3 % -1 to 1 %0 88 90 92 98 00 02 08 10 78 80 82 04 06 84 86 94 96 74 76
  47. 47. Export Market Will Be Key to Positive Returns Through Mid-2011Billion pounds (red meat: carcass weight; poultry: ready-to-cook)15 Imports Exports Balance12 Export share of 2011 U.S. production 9  Broilers ….. 18%  Beef ………. 9%  Pork ……… 21% 6  All meat .......16% 3 0-3 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
  48. 48. Cow Calf Returns Likely to Remain Positive As Inventory Continues DeclineDollars per cow Million head200 125150 120 Cow-calf returns100 115 50 110 0 105 -50 100-100 95 Cattle inventory (January 1) Lowest since 1958-150 90 81 91 01 11 83 85 87 89 93 95 97 99 03 05 07 09 19 19 20 20 19 19 19 19 19 19 19 19 20 20 20 20
  49. 49. Meat Exports at Plateau Following Strong Upward TrendBillion pounds (1999-2011)76543210 99 02 03 05 07 09 11 99 02 03 05 07 09 11 99 02 03 05 07 09 11 Beef Pork Broilers
  50. 50. Recovering Export Markets Will Help U.S. Dairy SectorMillion metric tons400 NFDM Cheese Butter & Milkfat Whole Milk powder350300250200150100 50 0 91 01 11 90 92 93 94 95 96 97 98 99 00 02 03 04 05 06 07 08 09 10
  51. 51. Milk Feed Ratios Likely To Be Pressed Lower in 2011 Quarterly ratio: pounds of feed equal to value 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 11 quarterly data* Number of pounds of 16% protein Mixed Dairy Feed (C51/S8/AH41) equal in value to 1 lb all milk.
  52. 52. Livestock and Dairy Prices Must Move Higher to Catch Grains Index (1990-92=100) 200 Prices paid* 180 160 Prices received: crops 140 120 100 Prices received: livestock 80 01 11 92 93 95 96 97 98 99 00 02 03 05 06 07 08 09 10 94 04 20 20 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 19 20*Prices paid commodities & services, interest, taxes and wage rates
  53. 53. Farm Income: Agriculture Continues Strong PerformanceBillion dollars100 Net cash income in agriculture is now Record high averaging around $80 billion a year 80 compared with an average of $60 billion for Net Farm Cash Income the previous decade….. but more volatility 60 40 20 Direct government payments* 0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11* emergency payments are striped area of government payments)
  54. 54. Farm Debt Leveraging Has Not Followed Land Prices HigherBillion dollars Billion dollars2500 500 Change 1970-1980 Change 1980-1990 Change 1990-2000 Change 2000-2010 Assets ... +259% Assets ... -16% Assets ... +43% Assets ... +74% Debt ....... +235% Debt ....... -19% Debt ....... +25% Debt ....... +43%2000 4001500 300 Farm assets (left scale)1000 200 Farm debt (right scale) 500 100 0 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

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