October 2017

Global Outlook for AgricultureTrend versus Cycle

Michael Swanson Ph.D.Wells Fargo

Everything is connected

we just don’t see how.

2

Connection corollary: Nothing natural moves in a straight line

Yield growth exceeds population growth

Expect flat agricultural prices

3

Global trends are stable

Population growth is 1.1% annuallyTrend continues to slowWide spread between regionsEconomic growth slows population growth

Global GDP growth 3%Trend remains stableWith sporadic volatilityIt’s has survived many “crises”Careful with “it’s different this time”

4

Demand = People * Income

5

1.1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Global Population Growth Rates

Source: UN data, Wells Fargo analysis

How much money will they have to spend

6

6.27

7.25

1.25

2.48

0

1

2

3

4

5

6

7

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Global Population in Billions

World less Africa

Africa

Source: UN data, Wells Fargo analysis

Will they buy US farmers top dollar?

7

0.33 0.39

1.25

2.48

0

1

2

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Global Population in Billions

USA

Africa

Source: UN data, Wells Fargo analysis

Many moving pieces – relatively stable performance

8

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Global GDP in Trillions of USD

Source: USDA, Wells Fargo

9

Supply Price Demand

Why the market always cycles and never settles

Acreage goes to the most profitable

10

y = 0.001x + 6.5285R² = 0.0791

y = 0.018x + 4.7074R² = 0.9924

4.5

5.0

5.5

6.0

6.5

7.0

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Natural Log of Acreage (millions of Hectares)

Grains

Oilseed

Source: FAO, Wells Fargo

Global population growth is 1.1 percent and falling

11

y = 0.019x + 0.3883R² = 0.98

y = 0.022x - 1.5544R² = 0.99

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Natural Log (yield MT/HA)

Grains

Oilseed

Source: FAO, Wells Fargo

Dietary change is a slow process

12

y = 0.019x + 6.9168R² = 0.96

y = 0.039x + 3.153R² = 0.99

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Natural log (Production millions of MTs)

Grains

Oilseed

Source: FAO, Wells Fargo

The U.S. has a dominantrole in global agriculture

for a reason

13

Critical mass plus a surplus per person

14

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000

Total Production (Grain+Oilseed) v. Per Capita

North America

Oceania

FSU-12South America

EU-28

East Asia

South Asia

Southeast Asia

Sub-Saharan Africa

Middle East

Other Europe

North Africa

Kilograms /

Per capita

Production

000s of MT

Average per capita

consumption in

kilograms

Yield gains of 1.6%+ are double population of 0.7%

15

400

800

1200

1600

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

U.S. Corn, Soybean and Wheat:Kilograms per capita

Source: USDA, Wells Fargo

Ethanol's usage of corn

per capita

There is not enough demandgrowth to lift prices.

16

Miles driven is offset by fuel efficiency

17 200

210

220

230

240

250

260

270

280

290

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Billions of miles Driven

Source: Federal Highway Admin

We are now dependent on ethanol exports as well

18

3.8

4.3

4.8

5.3

5.8

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Ethanol Usage and Production in Billions of Bushels

Annualized corn inAnnualized corn out

Ethanol demand growth will go negative in 2018

19

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Growth Rate Domestic Ethanol Usage v. Gasoline52 week moving average YOY Pct Chg

Domestic ethanol usageDomestic gasoline usage

Diesel growth is supports biodiesel, but it’s a slow climb.

20

Truck traffic miles show flat distributions

21

0

20000

40000

60000

80000

100000

120000

140000

Mar-00 Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12 Jul-13 Nov-14 Mar-16 Jul-17

Distallate Fuel Oil DistributionsMonthly average 000s of barrels

Source: EIA, Wells Fargo

Cheap corn drives more meat and poultry.

22

It is possible to kill protein prices

23

y = 0.0101x + 10.45R² = 0.90

10.40

10.45

10.50

10.55

10.60

10.65

10.70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. Meat ProductionLN of thousands of MTs beef, pork and poultry

Source: USDA, Wells Fargo

This will require better exports

24

7,000

9,000

11,000

13,000

15,000

17,000

19,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. Annual Meat Productionin 000s of Metric Tons

Meat, Beef and Veal

Meat, Swine

Poultry, Meat, Broiler

Source: USDA, Wells Fargo

Better volumes are supporting better returns

25

0

5

10

15

20

4/1/103/31/11

4/1/113/31/12

4/1/123/31/13

4/1/133/31/14

4/1/143/31/15

4/1/153/31/16

Animal Slaughter Return on AssetsProfit B4 Taxes / Total Assets

75th Percentile

Median

25th Percentile

Global demand growth is slow but reliable.

26

Different growth rates imply pricing decisions

27

y = 0.011x + 10.53y = 0.029x + 10.39

y = 0.055x + 9.03

9.0

9.5

10.0

10.5

11.0

11.5

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Global Protein Production: Natural Log of 000s of Metric Tons

LN beefLN PorkLN Broiler

Source: USDA, Wells Fargo

Protein has increase twice as fast as population

28

y = 0.029x + 11.23

y = 0.015x + 12.8

11.0

11.5

12.0

12.5

13.0

13.5

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Natural Log of Global Population and Protein Production

LN Total Protein Production

LN Population

Is there an “right” amount of protein?

Source: FAO, Wells Fargo0

20

40

60

80

100

120

140

160

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Per Capita: Fish and Meat

ChinaUSACanada

29

Kg/per capita

Are we reaching “stable” per capita rates?

30

0

20

40

60

80

100

120

140

160

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Per Capita Protein Consumption: KGs

AfricaAsiaEuropeNorthern America

Why be bullish about Ag?Demand will grow

PopulationIncome and food preferencesBioenergy is the “real deal”

You can differentiate yourselfTechnological changeRegulatory barriersAsset disciplineManaging supply chain difficulties

31

Don’t confuse agriculture and food

32

Ag commodities are inputs to the food sector

33

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Food and BeverageSpending in Billions of Dollars

Ag Revenues

Food and Beverage Spending

People crave convenience, variety …

34

0

100

200

300

400

500

600

700

800

900

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Food and BeverageSpending in Billions of Dollars

At home

Away from home

Where do you want to compete for the value-added

35

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1950 1960 1970 1980 1990 2000 2010

Ratio: Food/Beverage Crops/Livestock

36

Value to Consumers

Shelf-life

VarietyPackaging

Marketing

Availability

Basic product

Willingness to pay

Craft beer offered the consumer something new

37

0

20

40

60

80

100

120

140

160

180

200

4/1/983/31/99

4/1/003/31/01

4/1/023/31/03

4/1/043/31/05

4/1/063/31/07

4/1/083/31/09

4/1/103/31/11

4/1/123/31/13

4/1/143/31/15

RMA Breweries# of Statements Analyzed

Every market has a feedback loop

38

-3

-1

1

3

5

7

9

11

4/1/983/31/99

4/1/003/31/01

4/1/023/31/03

4/1/043/31/05

4/1/063/31/07

4/1/083/31/09

4/1/103/31/11

4/1/123/31/13

4/1/143/31/15

Industry Average Breweries: Percent Profit Before Taxes

Economic growth equals opportunity

39

0%

5%

10%

15%

20%

25%

1947 1957 1967 1977 1987 1997 2007

Food and Beverage Spending as a Pct of GDP

What about the outlook for the US dollar and interest rates?

40

Relative opportunity drives change▪ Stronger dollar

▪ Better “risk adjusted” returns▪ Faster growth + inflation = opportunities▪ Regulatory predictability

▪ Weaker dollar▪ Others grow faster than expected today▪ Perceived risk declines in the BRICs▪ Regulatory burden grows

41

It is not about us so don’t take it personal

42

50

60

70

80

90

100

110

120

130

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

U.S. Agricultural Exports to the Rest of the World2010 = 100

Source: USDA, Wells Fargo

Not all “dollars” are equal

43

70

80

90

100

110

120

130

1990 1994 1998 2002 2006 2010 2014

Different Commodities equal Different Dollars

U.S. agricultural exports to the World

Soybeans

Pork & Pork ProductsSource: USDA, Wells Fargo

Markets try to anticipate. They fail badly.

44

0

2

4

6

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

Source: FRED, Wells Fargo Ag Industries

History + futuresFed Funds

Historical

Futures

Low inflation still adds up over time.

45

$850,000

$870,000

$890,000

$910,000

$930,000

$950,000

$970,000

$990,000

$1,010,000

$1,030,000

$1,050,000

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

What Does the Federal Reserve Mean Exactly by "Low Inflation"

1 Million Dollars compounded at Fed Funds

Inflation Adjusted Fed Funds Returns

Source: Wells Fargo

Money flows at the speed of greed

46

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017

Long-term Interest Rates: OECD Data

Germany

Japan

U.S.

Can we count on China?

Yes, to take of China.

47

Chinese Yuan to US Dollar exchange rate

48

1. Is it the truth?2. Is it fair to all concerned?3. Will it build goodwill and better friendships?4. Will it be beneficial to all concerned?

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Source: Federal Reserve, Wells Fargo

China is a great buyer (for now)

49

36 9

14 1622 23 22

16 18

8

(6)

10 4

5 7

1

(1)(4)

(18)(22)

(16)

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan - Aug2017

Billions

Net Trade BalanceAg, Forestry and Fishing

ROWChina/HK

Source: USDA, Wells Fargo

An “adaptive” type of attitude

▪ Don’t try predicting your future▪ You’ll be wrong anyways▪ You’ll be wasting flexibility

▪ The economy always grows▪ Trend▪ Cycle

▪ The “problem” is internal not external

50