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US & Global Perspective: Agriculture and Land Markets

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US & Global Perspective: Agriculture and Land Markets

  1. 1. US & Global Perspective:Agriculture and Land MarketsMichael Swanson Ph.D.Wells Fargo
  2. 2. Economic and Agricultural Risk Everything is connected. We just can’t see how. 2
  3. 3. A market that’s on fire 3
  4. 4. Simply complex What Drives Net Present Value? •  Future Income •  Opportunity Cost 4
  5. 5. Are these trends sustainable? 3
  6. 6. Much more than inflation at work 6
  7. 7. The market can stay stupid longer thanyou can stay solvent 7
  8. 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. 9. This market is not what it appears  Drivers   Interconnected global markets   Policies   Biofuels   Fiscal and Monetary  Implications   Asset values   Business strategy 9
  10. 10. Stair steps versus trend 10
  11. 11. Predictable trends Population and Income are not shocks 11
  12. 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. 13. Getting used to crazy Policy can be a shock 13
  14. 14. The demand that “shocked” the system 14
  15. 15. What do we know versus believe Massive uncertainty in energy 15
  16. 16. Energy volatility = corn volatility 3
  17. 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. 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. 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. 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. 21. The corn market only cares about ethanol 21
  22. 22. US gasoline demand continues to fall 22
  23. 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. 24. International Supply Response A lagging effect 24
  25. 25. Clear trend plus noise 25
  26. 26. The US is the Saudi Arabia of corn 26
  27. 27. Markets respond to incentives 27
  28. 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. 29. What’s the MN farmer doing about it? 29
  30. 30. Farmer expansion flowchart Want to expand? Is land over Yes priced? No Buy more land
  31. 31. Farmer expansion flowchart Buy more land! 31
  32. 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. 33. Looking for market inconsistencies Ultra low interest rates have a differential effect 33
  34. 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. 35. How do I buy the cheapest marginal bushel? 35
  36. 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. 37. The right decision depends onchanging prices and technology 37
  38. 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

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