April 2017

Global Outlook for AgricultureTrend versus Trend

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

1. Population growth is 1.1% annually1. Trend continues to slow2. Wide spread between regions3. Economic growth slows population growth

2. Global GDP growth 2.9%1. Trend remains stable2. With sporadic volatility3. It’s has survived many “crises”4. 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 AfricaAfrica

Source: UN data, Wells Fargo analysis

Many moving pieces – relatively stable performance

7

$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

Dietary change is a slow process

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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)

GrainsOilseed

Source: FAO, Wells Fargo

Global population growth is 1.1 percent and falling

9

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)

GrainsOilseed

Source: FAO, Wells Fargo

Michigan agriculture competes with everyone else.

10

Specialty crops compete by profits

11

0%

10%

20%

30%

40%

50%

60%

1914 1924 1934 1944 1954 1964 1974 1984 1994 2004 2014

Share of US Crop Revenue by Class

CottonFeed and oil cropsFood grainsFruits and nutsVegetables and melonsAll other crops

Every number is relative to something

12

$0

$50

$100

$150

$200

$250

2000 2002 2004 2006 2008 2010 2012 2014 2016F

Billions

Agricultural Revenues and Income

Crop ReceiptsLivestock receiptsNet Farm Income

There are averages for a reason

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0%

5%

10%

15%

20%

25%

30%

35%

1990 1994 1998 2002 2006 2010 2014

Ratio: Net Farm Income to Farm Revenue

Biofuels and international markets

14

0%

5%

10%

15%

20%

2000 2003 2006 2009 2012 2015

Percent: Government Program Payments/ Total Revenue

CaliforniaIowaMichigan

Why be bullish about Ag?

Demand will growPopulation Income and food preferencesBioenergy is the “real deal”

You can differentiate yourselfTechnological changeRegulatory barriersAsset disciplineManaging supply chain difficulties

15

Don’t confuse agriculture and food

16

Ag commodities are inputs to the food sector

170

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 …

180

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 homeAway from home

Where do you want to compete for the value-added

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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

Excellence of execution matters the most

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0

1

2

3

4

5

6

7

8

9

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

RMA Data: Profits B4 Taxes / Total Assets

Median Food MfgMedian Crop Production

Percent

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Value to Consumers

Shelf-life

Variety

Packaging

Marketing

Availability

Basic product

Willingness to pay

Craft beer offered the consumer something new

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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

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-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

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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?

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A new day A new story

26

-2

-1

0

1

2

3

4

5

6

Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17

CPI Overall: Pct Change from previous year

Markets try to anticipate. They fail badly.

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0

1

2

3

4

5

6

7

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18

Source: FRED, Wells Fargo Ag Industries

History + futuresFed Funds

Historical

Futures

A complicated blend of many factors

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-8

-6

-4

-2

0

2

4

6

8

10

2000 2003 2006 2009 2012 2015 2018

Annualized Nominal GDP Change

GermanyJapanU.S.

Source: OECD, Wells Fargo

Money flows at the speed of greed

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-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

GermanyJapanU.S.

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

30

50

60

70

80

90

100

110

120

130

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

US Ag Dollar Index2010 = 100

Source: USDA, Wells Fargo

Inflation adj. weighted by trade

China’s hanging in there as a buyer

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36 9

14 1622 23 22

16 18

3

(6)

10 4

5 7

1

(1)(4)

(18)(22)

(3)

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan - Feb2017

Billions

Net Trade BalanceAg, Forestry and Fishing

ROWChina/HK

Source: USDA, Wells Fargo

An “adaptive” type of attitude

1. Don’t try predicting your future1. You’ll be wrong anyways2. You’ll be wasting flexibility

2. The economy always grows1. Trend2. Cycle

3. The “problem” is internal not external

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