The New Realities of the Ag Economy... What It Means for Agri-Marketers

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The New Realities of the Ag Economy... What It Means for Agri-Marketers

  1. 1. The New Realities of the Ag Economy... What It Means for Agri-Marketers December 15, 2008 © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  2. 2. Introduction • B.S. Iowa State University, Agricultural Journalism and Mass Communications • Owner, Henderson Communications, LLC • Former President/CEO of Doane Agricultural Services Co. • Member: • National 4-H Council Board of Trustees, • American Business Media’s Agri- Council, • National Agri-Marketing Assn. (NAMA), Lynn Henderson • St. Louis AgriBusiness Club, • Farm Foundation Roundtable, Publisher • Board of Directors of the World AgriMarketing Magazine Agricultural Forum, • Board of Directors of the Agriculture Council of America © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  3. 3. Agenda •Introduction Lynn Henderson, Publisher, AgriMarketing •The Current State of the Grain Markets: Where We've Been and the Impact on Producers Dr. Kevin McNew - President, CashGrainBids.com •The Energy Situation and Outlook Paul Corby - Sr. VP Energy, Planalytics Inc. •Impact on Land Values, Rents and Anticipated Cropping Plan/Purchase Changes. Jim Farrell - President/CEO, Farmers National Co. •Key Issues Facing the Ag Industry Mark A. Lakers - President, AgriBusiness and Food Associates •What This Means for Agri-marketers, and What They Do About It. Dr. David Downey - Purdue University Center for Agricultural Business © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  4. 4. The Current State of the Grain Markets: Where We’ve Been and the Impact on Producers • Bachelors degree from Oklahoma State University • Masters and PhD from North Carolina State University in agricultural economics • Professor of Agricultural Economics at the University of Maryland and Montana State University focusing on commodity markets • Founded Cash Grain Bids Inc in 1999 • Unique commentary on cash markets can be seen weekly on Bloomberg, Agweb.com. Agriculture.com and other Dr. Kevin McNew publications President CashGrainBids.com © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  5. 5. What We Do • Collect prices on over 3,300 local grain markets…including spot and forward contract price information up to a year in advance. • Provide intelligence to farmers, grain merchandisers and end-users about where and when to sell local grain. • Handle trade execution through our electronic platforms direct to the Grain Exchanges.
  6. 6. Grain Market Drivers • Weak Demand – Livestock – Exports – Ethanol – Economy • Grain Prices Plummet in the last 6 months – Soybeans off 50% – Corn off 60% – Wheat off 70%
  7. 7. US Wheat Price
  8. 8. Verasun - Ethanol • Currently operate large plants in ND, SD, IA & NE. • A few plants have stopped buying corn in recent weeks. • What is the impact on local grain markets if Verasun stops buying corn?
  9. 9. Impact of Verasun Closing? • Cash Grain Bids collects daily spot and forward prices on over 3,300 grain buyers around the U.S. • Utilize our proprietary „grain sourcing‟ model that projects local grain flows and prices. • Utilize Planalytics satellite-based county-level corn production for 2008. • Where Does Verasun Get Corn… and if they stop buying, what is the price impact?
  10. 10. Verasun Corn Sourcing Regions
  11. 11. Expected Price Decline if Verasun Stops Buying Corn
  12. 12. Expected Price Decline if Verasun Stops Buying Corn
  13. 13. Expected Price Decline if Verasun Stops Buying Corn Hankinson, ND Albert City, IA Ord, NE Steamboat Rock, IA
  14. 14. Final Thoughts • Impact will be largely localized, within 50 to 100 miles of the plants with price declines normally 5 to 15 cents/bu. • Basis in the US should be strong this year – Lower transport costs – Tight-fisted farmers in the face of falling futures markets. • Futures markets should continue to be weak, but a bottom may be near • Farmer profitability for 2009 seems dire with rising input costs and lower crop prices.
  15. 15. Kevin McNew Cash Grain Bids Inc GoGrain LLC 231 Bozeman, MT 59715 (866) 290-1196 www.cashgrainbids.com www.gograin.com
  16. 16. The Energy Situation and Outlook • Manager of Planalytics’ Energy Division • Provides risk management, decision support and forecasts • Responsible for product development, client services, sales and marketing • Chief architect of Planalytics’ EnergyBuyer® and ImpactPower • Regular presenter at Public Utility Paul Corby Commissions as well as National Association of Regulatory Utility Senior Vice President Commissioners meetings. Planalytics, Inc. © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  17. 17. The Current Energy Situation How We Got to Where We Are Today • Nuclear explosions following Tokyo earthquake in Summer of 2007 • Asian Demand for Liquid Natural Gas (LNG) skyrockets • Prices increased dramatically on rumors U.S. would run out of natural gas • By end of ’07, hedge funds started bidding up prices of natural gas • Other commodities – including crude and corn for ethanol – followed $147 peak in summer ‘08 NATURAL GAS CRUDE OIL $13-14 summer ‘08 $10-11 early ‘08 Late ’07 around $9 Late ’07 around $70-85 Currently under $6 Currently below $50 © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  18. 18. The Current Energy Situation How We Got to Where We Are Today • By end of 2007, global funds were pushing more dollars into Energy • $140 Billion in Energy funds before the end of March ’08 • Natural gas increased to $13.00 by summer, crude was $147/barrel • Assumption by many that prices would continue to go up • Fear of running out led companies to buy contracts through 2009 $147 peak in summer ‘08 NATURAL GAS CRUDE OIL $13-14 summer ‘08 $10-11 early ‘08 Late ’07 around $9 Late ’07 around $70-85 Currently under $6 Currently below $50 © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  19. 19. The Current Energy Situation After the Crash • Crude is currently trading in low-$40s… Natural gas around $6.00 • Companies that locked in contracts at high prices are facing:  Margin calls from exchanges  Collateral calls from banks... cash is scarce  Higher production costs going into 2009 © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  20. 20. The Current Energy Situation What We See Happening Leading into 2009 • Begun to see the fallout among ethanol companies and others • Terra’s announcement that they are shutting down their fertilizer plant • Low Energy prices will remain for first six-months • Second half of 2009 will be very volatile • Domestic supply will not be an issue © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  21. 21. Paul Corby Jed Lafferty Senior Vice President, Energy Managing Director, Life Sciences PCorby@planalytics.com Jlafferty@planalytics.com Planalytics, Inc. 1325 Morris Drive Suite 201 Wayne, PA 19087 800.882.5881 www.planalytics.com © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  22. 22. Impact on Land Values, Rents and Anticipated Cropping Plan/Purchase Changes • Grew up on a grain and livestock farm in northwest Iowa, near Storm Lake, and graduated from high school in Fonda, Iowa. • BA Degree from Iowa State University • University Of Pennsylvania ESOP Program for CEO's • President and CEO of Farmers National Company since November of 2004. • Serve on the FNC Board of Directors as Jim Farrell Chairman. President/CEO • Continue to supervise the Marketing/Sales Farmers National Co. Department for Farmers National Company. © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  23. 23. Professional Farm Management 70 Professional Farm Managers • Our Clients - Non Operating Land Owners • We Manage - 3,825 Farms – 1.3 Million Acres • 20 States – Midwest & Mid South 40% Crop Share 20% Custom Operated 40% Cash Rent
  24. 24. Professional Farm Managers • Work for Non Operating Land Owners Own 50%+ of Land in Midwest & Mid South • Select Operators • Complete Lease Negotiations • Make Planting Decisions • Make Buying Decisions • Currently Creating 2009 Budgets
  25. 25. Rural Real Estate Brokerage • 200+ Licensed Professionals 2008 Fiscal Year Volume • 220 Farm & Ranch Auctions • 765 Total Properties Sold • $390,000,000 Total Consideration
  26. 26. LAND MARKET Demand has softened During November 15 Confirmed Auctions in NE 10 Sold above comparative sales 5 Sold below comparative sales 22 Confirmed Auctions in IA, IL, IN 15 Sold @ Avg. 3.85% below comparative sales 7 No Sales – 4 had below market leases for 2009 2 Sold later 1st Week of December 5 No sale auctions Iowa Led the Market Up Has had the most resistance this Fall
  27. 27. Factors Impacting . . . 2009 Planning • Late Harvest • Wet/Cold Soil Conditions • Drop in Commodity Prices • Crop Insurance – Revenue & Production Claims • High Fertilizer Prices • Increases in Seed Cost • Negative Projected Cash Flows
  28. 28. Sample Corn Budget
  29. 29. 2009 Adjustments • Later Leasing • Later Crop Planning • More Soybeans • Less Fertilizer – Will Impact Yields • More Credit Problems • More Crop Insurance Volatility and uncertainty – along with Inability to forward price gain has limited our willingness to lock in inputs.
  30. 30. CHALLENGES for Agri-Marketers Winners and Losers! What we see coming down the road. . . • 17 years in major agribusiness firms including 13 years with Ralston Purina • VP First National Bank of Omaha • Former McCarthy Group agribusiness partner • Founded AFA in 1999 • MBA from Washington University Mark A. Lakers President Agribusinesss and Food Associates © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  31. 31. Intro to Ag and Food Associates (“AFA”) • Investment banking firm established in 1999; • Headquartered in Omaha, NE; • Premier middle market merger & acquisitions advisor West of the Mississippi River; • Specializes in agribusiness, livestock production, renewable fuels, food processing, and financial services; • Mergers/acquisitions, restructuring debt, raising capital, building equity, mezzanine debt and equity.
  32. 32. Drivers of Ethanol Production Consolidation 1. New Technologies (fractionation and fluidized beds); 2. Tight Credit; 3. Lower Future Crush Margins; 4. Ethanol may become the by-product rather than the primary product; 5. Developers driven out of industry; 6. Integration from back and front; 7. Need for Economies of Scale; 8. Large equity and credit market losses in sector NOW! “Deterioration” of Lenders‟ Mindset 9.
  33. 33. Ethanol‟s Likely 3 – 5 Year Picture • Go from 150 producers to 25 – 50 – and could be FASTER! • Expect 5 – 10 producers to go to Chapter 11 in 4th Quarter 2008! • Expect Foreign-Owned Banks and Non- Traditional Lenders and Farm Credit to dominate ethanol production credit markets.
  34. 34. Ethanol‟s Grim Short-term • Expect about 40 plants to be in Chapter 11 by January 31, 2009! • Big Winners and Big Losers in early ‟09.
  35. 35. Protein Market Changes USA‟s Beef Production Industry Will Shrink! [up to 10-20% in Five Years] • USA is the only developed country where beef consumption exceeds pork (but demand has weakened in 2007 & 2008); • Relative Efficiency in Converting Feed to Protein – Beef is 8:1 – Pork is 2.8:1 – Chicken is 2:1 – Fish is 1:1
  36. 36. Protein Market Changes (continued) • Five time the historical “normal” number of feed yards over 10,000 head capacity for sale today; • 2008 was second year for large production losses; • Worldwide recession may reduce per capita consumption of beef nearly 20% domestically! • Domestic pork and chicken demand may not increase 1:1 with reductions in beef consumption. • 95% of capital is “mobile”.
  37. 37. Ag Credit Markets • Expect Mega Trends to Accelerate! – Foreign-owned banks gain market share – Non-traditional (often supplier-owned) lenders grow market share – Domestic commercial banks consolidate and lose market focus – Farm Credit Services is a “Wild Card” – may grow shares or may get distracted • Federal Policies for Energy, Food, and Ag will drive Credit, Production and Processing MORE than in the past.
  38. 38. Mark Lakers, President Ag and Food Associates, LLC 100 Millennium Plaza I 15858 W. Dodge Road Omaha, NE 68118 Phone: (402) 933-8700 Fax: (402) 933-4411 Email: mlakers@af-advisors.com
  39. 39. What This Means for Agri-Marketers ….And What They Can Do About It • Professor Emeritus of Agricultural Sales and Marketing at Purdue University • Consultant to Agribusiness Industry • Recognized by American Agricultural Economics Association • B.S. Agronomy, M.S. and Ph.D in W. David Downey Agricultural Economics from Purdue Executive Director Center for Food and Agricultural Business, Purdue University © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential
  40. 40. Center for Food and Agricultural Business Purdue University The Center for Food and Agricultural Business provides professional development programming for Agribusiness and AgriMarketers, backed by ongoing research into a variety of agribusiness topics. The most recent is a nation wide study of the buying behavior and attitudes of over 2500 large commercial producers that is now available through the CAB. For more information, contact Aissa Good, CAB Program Manager
  41. 41. The Outlook For Agribusinesses The long term outlook for agribusiness is positive and strong  World population growth is strong and will continue to grow  The number of people entering middle class is dramatically increasing and they want to live better  US Ag is in a strong position to provide Food, Fiber, and Fuel  Great natural resources (climate, soil, water)  Good infrastructure (waterways, rail, roads)  Well educated farmers who adopt technology quickly  Land Grant system of research and education  System of property rights and sanctity of contracts  A strong agribusiness industry to support production Ag The issue is….How do we get there from here? National Agri Marketing Webinar
  42. 42. The Short Term Climate for Farmers • In general, agriculture may not be impacted as much as others • Many crop farmers are coming off a good year and have cash • Many livestock and dairy farmers have had it really tough • All are dominated by --- Uncertainty – Nervousness -- Caution -- From the general economic recession and fear of reduced exports -- From the sudden rise and drop of commodity prices and for many……commitments to high production costs • Higher costs: Cash Rents; Interest; Seed; Chemicals; Fertilizer • Dramatically higher feed and nutrition costs • Tighter credit and capital markets ….especially for livestock • Increased risk because of market volatility National Agri Marketing Webinar
  43. 43. Estimated Variable Costs/Acre: Average Quality Indiana Land (158 bu. corn; 49 beans; 70 wheat) $489 $500 +29% $450 2005 2006 2007 2008 2009 $400 $380 $350 $/Acre $300 $255 $249 239 $250 222 +40% +39% +59% $200 184 $179 $182 $150 125 120 112 119 114 98 $100 +50% +52% $50 $0 Rotation CORN Rotation BEANS Wheat National Agri Marketing Webinar
  44. 44. Implications for AgriMarketers Anticipate:  More nervousness and caution….. slow to decide  More resistance to higher prices  Some shift to lower cost alternatives  Much wider variation in financial situations of farmers  Many highly interested in ‘09 pre-payments (but they will want price protection if they can get it)  More discerning ….careful decisions  Consolidation of farms will continue National Agri Marketing Webinar
  45. 45. Implications for AgriMarketers Anticipate:  Consolidation of Agri-businesses will continue maybe even faster as some are in difficult positions  Cash flow and working capital problems will be major challenges….especially for some  Dramatic volatility of ag commodities and inputs will continue as grain prices follow energy prices and general economic conditions  Short term inventory challenges because of reluctance of farmers to commit putting Agribusinesses in difficult position  More demand for credit from farmers National Agri Marketing Webinar
  46. 46. Implications for AgriMarketers Plan to:  Work harder and longer to sell added value  Educate, Communicate, Demonstrate value  Prioritize and target coveted prospects carefully  Spend time helping customers understand the terms of sale and risks involved  Be pro-active with selling strategies ….targeting, planning, preparation, professionalism will be more important than ever before  Work strategically ….targeting the farmers you believe are best positioned to grow ….. to consistently be a valued sustaining resource who understands and delivers unique value National Agri Marketing Webinar
  47. 47. Thank you for Attending The recording of today’s presentation will be available in approximately 48 hours on the AgriMarketing Website at www.agrimarketing.com
  48. 48. Thank you for Attending The recording of today’s presentation will be available in approximately 48 hours on the AgriMarketing Website at www.agrimarketing.com © 2008 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential

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