Global environment, commodities, and agricultural markets analysis
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Dr. Michael Swanson's presentation from the 2014 Minnesota AgriGrowth Council Annual Meeting and Conference
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Global environment, commodities, and agricultural markets analysis
- 1. Global environment Local execution Michael Swanson Ph.D. Wells Fargo November 2014
- 2. Key questions 1. What are commodities worth? 2. Why are commodities worth that? 3. Who gets what share? 4. What differentiates the producers? 5. What’s your “play” 2
- 3. Where does volatility come from? $8 $7 $6 $5 $4 $3 $2 $1 $0 Minnesota Corn Prices and Cost of Production per bushel GRAIN in $ / BU Average cost of production Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 3
- 4. More money – More risk 4 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 MN Farm Income in Billions Gross expenses Net Farm Income 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F
- 5. Loops create cycles Monetary Policy Economy Fiscal Policy Agriculture Energy 5
- 6. Interest rates and valuations Federal Reserve Ultra low rates are not about ag They have inflated valuations They have influenced exchange rates Foreign central banks Respond to the Federal Reserve Focused on their economies 6
- 7. Bullish or Bearish? Or wrong? 6% 4% 2% 0% -2% -4% -6% -8% -10% Performance Gap: Actual GDP less Potential Apr-73 Apr-78 Apr-83 Apr-88 Apr-93 Apr-98 Apr-03 Apr-08 Apr-13 7
- 8. Farm the best – Forget the rest 8 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- Per Acre MN South Central Farm Land Productivity 50s Productivity 70s Productivity 90s 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
- 9. 42 degrees in Fargo ND 9 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 MN Ag Land Sales Price $ per acre 25th 75th Median Source: U of MN MLE, Wells Fargo 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
- 10. What about Minnesota? 10 "Cash flow v. Opportunity Cost" Per acre Percent 9 8 7 6 5 4 3 2 1 0 $600 $500 $400 $300 $200 $100 $- Returns w/o labor, mgmt or land 15 Fixed Rate Mortgage Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
- 11. Keep an eye on the future not past 11 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $- Implied Net Present Values Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
- 12. How are the cycles linked? NAFTA Economy NAFTA Agriculture Global Agriculture Global Economy 12
- 13. How fast can panic spread? 5% 4% 3% 2% 1% 0% -1% -2% -3% Real GDP Growth World less USA United States 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 13
- 14. What is the answer to the question? China 14
- 15. A Standard Pareto Distribution 15 16% 32% 54% 45% 61% 59% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% China/Hong Kong Canada Mexico Japan Korea, South Taiwan Indonesia Germany(*) Philippines Vietnam United Kingdom Netherlands Turkey Brazil Spain Australia(*) Egypt Venezuela Colombia Thailand Cumulative Agricultural Exports by Country
- 16. The Wal*Mart Effect 16 2.6 6.5 9.1 13.8 16.1 22.0 22.7 11.3 2.6 10.3 3.9 5.2 7.1 0.5 (1.1) (3.3) $25 $20 $15 $10 $5 $0 -$5 2007 2008 2009 2010 2011 2012 2013 Jan - Sep 2014 Billions Net Trade Balance Ag, Forestry and Fishing ROW China/HK
- 17. What has happened in 2014 so far? 17 China/Hong Kong Net Ag Trade in Billions Product 2009 2010 2011 2012 2013 Jan - Sep 2013 Jan - Sep 2014 Chg YTD Bulk 10.2 13.4 14.1 19.7 17.8 7.7 7.9 $ 0.2 Intermediate 0.9 2.2 1.9 2.4 3.5 2.5 2.7 $ 0.2 Consumer Oriented 1.1 1.3 2.2 2.6 3.5 2.0 2.2 $ 0.2 Forest Products (1.7) (1.5) (0.6) (1.3) (0.7) (0.6) (0.4) $ 0.1 Fish Products (1.4) (1.5) (1.4) (1.4) (1.4) (0.9) (1.1) $ (0.2) Grand Total 9.1 13.8 16.1 22.0 22.7 10.6 11.3 $ 0.6
- 18. Which countries drive prices Same commodity different price Market based signals Policy based signals Which commodity Protein Energy Minerals Sell Side Buy Side 18
- 19. Compare and contrast 29.6 (2.2) 35 30 25 20 15 10 5 0 -5 2000 2002 2004 2006 2008 2010 2012 2014 projected Billions of $s US Net Agricultural Trade India China/HK 19
- 20. Does India ever find a higher gear? 4,832 1,483 6,000 5,000 4,000 3,000 2,000 1,000 - Billions GDP in Constant US Dollars China India 1970 1980 1990 2000 2010 20
- 21. Question your assumptions Global demand growth Population GDP Diet Global supply growth Acreage Productivity Trade barriers Policy shocks 21
- 22. Productivity Income Population 22 The gears work together
- 23. The numbers everyone quotes $80 $70 $60 $50 $40 $30 $20 $10 $0 8 7 6 5 4 3 2 1 - Global Population (left axis) Global GDP (right axis) 1970 1975 1980 1985 1990 1995 2000 2005 2010 23
- 24. Same numbers different dimension 7 6 5 4 3 2 1 - (1) (2) (3) 2.5 2.0 1.5 1.0 0.5 - Global Population (left axis) Global GDP (right axis) 1970 1975 1980 1985 1990 1995 2000 2005 2010 24
- 25. Big numbers all around Millions of metric tons Global Grain Production Global grain = 28 million metric tons per year + 804 R² = 0.98 2,500 2,000 1,500 1,000 500 1960 1970 1980 1990 2000 2010 25
- 26. The feedback mechanism in action 355 345 335 325 315 305 295 285 Kilograms Global Grain per Capita 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 26
- 27. No one punches harder than the US in the grain world Top 10 countries 86% of the acreage 90% of the production Remaining 112 countries 14% of acreage 10% of the production That still misses the point 27
- 28. Just like the “Big 10” a mix of champs and chumps Area Harvested Production Yield Country Grain (1000 HA) Grain (1000 MT) Grain (MT/HA) % of acreage % of production Yield Punch China 62,271 343,322 5.5 14.1 21.8 1.5 United States 58,009 404,141 7.0 13.2 25.6 1.9 European Union 57,308 296,740 5.2 13.0 18.8 1.4 India 54,877 135,140 2.5 12.5 8.6 0.7 Russia 38,071 84,401 2.2 8.6 5.3 0.6 Brazil 18,860 86,920 4.6 4.3 5.5 1.3 Australia 18,700 36,920 2.0 4.2 2.3 0.6 Kazakhstan 14,882 15,504 1.0 3.4 1.0 0.3 Canada 14,845 55,894 3.8 3.4 3.5 1.1 Ukraine 14,580 55,930 3.8 3.3 3.5 1.1 28
- 29. How much grain does the world need? Per capita Best measure Substitutes Grain Meat Efficiency of conversion Diet Demographics Distribution 29
- 30. Trend versus Cycle Log of Per Capita Global Supplies Per Capita y = 0.0002x + 2.5004 R² = 0.0221 y = 0.0097x + 1.4366 R² = 0.9627 y = 0.002x + 1.296 R² = 0.6505 2.65 2.45 2.25 2.05 1.85 1.65 1.45 1.25 Grains Oilseeds Sugar 1972 1977 1982 1987 1992 1997 2002 2007 2012 30
- 31. You “economic” life is in their hands Monetary policy When does “cheap” money end? Who is the furthest out of line? Values China trade Trade policies Internal supply competition Biofuels policy Energy pricing and arbitrage Lobbyists in action 31