- The agriculture and land markets are interconnected globally and driven by many factors including policies, population growth, and income growth. However, these driving factors are all slowing over time. - Energy markets, and corn and land markets are also highly connected. Volatility in oil and natural gas translates directly to volatility in corn and land prices. Government policies around biofuels have also impacted these connections. - Long-term trends suggest that high crop and land prices driven by factors like biofuels policies are unsustainable. Global supply responses will increase production over time and land values may fall from current highs as incentives change. The key for farmers is to find ways to cheaply increase bushel production rather than focus

1. US & Global Perspective:
Agriculture and Land Markets
Michael 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 than
you 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
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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 Count
2,000
Oil rigs
NG rigs
1,500
1,000
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 Production
975
000s of
barrels
daily
925
875
825
Source: Wells Fargo Ag Industries
775
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 Grain
7.0
6.5
6.0
5.8
5.5
5.0
4.5
4.0
3.5
3.9
3.0
2.5
2.0
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!
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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
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33. Looking for market inconsistencies
Ultra low interest rates have a
differential effect
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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
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35. How do I buy the cheapest
marginal bushel?
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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
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37. The right decision depends on
changing prices and technology
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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
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