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Transcript of Global Outlook for Agriculture 2017-10-31¢  Global Outlook for Agriculture Trend versus...

  • October 2017

    Global Outlook for Agriculture Trend 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% annually Trend continues to slow Wide spread between regions Economic growth slows population growth

    Global GDP growth 3% Trend remains stable With sporadic volatility It’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 + 6.5285 R² = 0.0791

    y = 0.018x + 4.7074 R² = 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 + 0.3883 R² = 0.98

    y = 0.022x - 1.5544 R² = 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 + 6.9168 R² = 0.96

    y = 0.039x + 3.153 R² = 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 dominant role 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-12 South 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 demand growth 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 in Annualized 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. Gasoline 52 week moving average YOY Pct Chg

    Domestic ethanol usage Domestic 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 Distributions Monthly 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 + 10.45 R² = 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 Production LN 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 Production in 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

    4/1/10 3/31/11

    4/1/11 3/31/12

    4/1/12 3/31/13

    4/1/13 3/31/14

    4/1/14 3/31/15

    4/1/15 3/31/16

    Animal Slaughter Return on Assets Profit 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 + 10.53 y = 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 beef LN Pork LN 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 Fargo 0

    20

    40

    60

    80

    100

    120

    140

    160

    1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

    Per Capita: Fish and Meat

    China USA Canada

    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

    Africa Asia Europe Northern America

  • Why be bullish about Ag? Demand will grow

    Population Income and food preferences Bioenergy is the “real deal”

    You can differentiate yourself Technological change Regulatory barriers Asset discipline Managing 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