Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) 13 th Annual Farmer Cooperatives Convention December 6-7, 2010 Economic

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

13th Annual Farmer Cooperatives ConventionDecember 6-7, 2010

Economic Update: Managing Risk in a Deleveraging and Rebalancing

Global Economy

Presented by: Terry N. Barr, Senior Director of Industry ResearchKnowledge Exchange Division, CoBank, ACBE-mail: [email protected]


• Continuing volatility … meaning more working capital, lower acceptable levels of leverage and mandatory well-defined strategies for risk management.

• Increasing costs from regulatory compliance and declining support from federal programs.• More challenging access to capital markets with broader risk analysis, including counterparty.

• Changing U.S. consumer behavior & demographics.

• Growing trade dependency (more risk & volatility)•Increasing consolidation and realignment of supply chains. Domestic integrated into global chains.

The Emerging Business Environment Will Include ……..


Labor Force Growth is Driver of Future Growth and Potential Trade Issues

0

200

400

600

800

1000

1200

Million people in the 15-64 age group

BrazilChina

IndiaMexico

RussiaU.S.

W. Europe

Source: UN population database

1. A labor force of 1.7 billion workers must be integrated into the global economy! 2. A consumer base of 1.7 billion people with more purchasing power must also be integrated!


Asia Becoming More Significant Factor in Balancing Global Growth

-2

0

2

4

6

Percent change in annual world growth (purchasing-power parity rates)

Advanced countries Rest of world China India

Advanced economies accounted for over half of world growth rate from 1970 to 2008. From 2010 to 2012 they will account for less than one-third!


* Currencies weighted by relative market importance to total U.S. trade.

70

80

90

100

110

120

130

140

150

Indexes of major currencies/US$ (March 1973=100)

80 82 84 86 88 90 92 94 96 98 00 02 04 06 0874 76 78 10

From March 2009 ………. -14%From 1997-03 average … -28%

Dollar Erosion Has Boosted Foreign Buying Power and Commodity Prices

Competitive devaluations and protectionism will be significant issues in 2011-

12!


The U. S. Transition


75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

-2

0

2

4

6

Percent change Gross Domestic Product (Chained 2005$)

Recovery Shaped by CautiousConsumer and Financial Headwinds

Recovery path dramatically different!

Consumer holds the key to the pace of this recovery!


Continued High Unemployment and Excess Capacity in Labor Markets

2

4

6

8

10

12

Percent rate of unemployment

6

12

18

24

30

36

Average weeks of unemployment

unemployment rate

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Recessions

12

This transition required 5 years with average growth rate of 4.5%!


Fiscal and Monetary Policy: Setting Stage for 2011 and Beyond

CongressWhite House

Federal Reserve


What Will Election Mean For The Evolving Business Environment?Lame duck session: Tax extenders 2011 budget spendingNew 2011 Congress ? Deficit reduction will dominate Congress through session. Policy changes through funding levels.• Spending cuts• Revenue increases• No farm bill but change

through budget cuts!Regulatory activities:Agenda may accelerate!

Food safety, environment, nutrition, etc.


Economic Conditions Increasingly Diverse in Agriculture


Smaller Than Expected 2010 Crops Lead Grain Stocks Lower

0

100

200

300

400

500

Million metric tons of wheat & coarse grains

0

8

16

24

32

40

Stocks-to-use percentage

World stocks Total stocks-to-use


Acreage Shifts Will Favor Corn But Weather / Input Costs Will Play Role!

Corn

Soybeans

Wheat

Upland Cotton

7 other crops*

Hay harvested

CRP

Double crops

Total acreage

93.5

64.7

60.5

10.8

20.2

61.0

36.8

5.0

349.2

2007

+1 to +4

-2 to +1

+2 to +4

+1 to +2

-1 to 0

+0 to +1

-1 to 0

+1 to +2

0 to +2

Change10 to 11

----------------- million acres -----------------

* Barley, oats, sorghum, rice, sunflowers, peanuts and canola

86.0

75.7

63.2

9.3

23.7

60.1

34.6

7.1

348.6

2008

86.5

77.5

59.2

9.2

20.8

59.8

33.7

4.7

346.4

2009

88.2

77.7

53.6

11.0

21.2

59.7

31.3

2.8

343.4

2010

90-93

76-79

56-58

12-13

20-21

60-61

31

4-5

346-349

2011


Key Crop Input Prices Set Globally and Likely to Remain Volatile

100

200

300

400

500

600

700

Index (1990-92=100)

Feed Nitrogen Potash & Phosphate

China has increased loans to their agricultural sector, particularly sectors with supply shortages!


Reduced Global Harvest Boosts Prospects for Wheat market


World Wheat Stocks Rebounding

0

50

100

150

200

Million metric tons of wheat


(25)

0

25

50

75

100

125

Million metric tons

Ending stocks

Domestic use

Production

Net exports

Declining FSU-12 Wheat Production Driving Markets

28% of world trade


0.0

0.5

1.0

1.5

2.0

2.5

3.0

Billion bushels

Ending stocks

Total useProduction

Rebound in Global Wheat production Could Push U.S. Stocks Higher in 2011


U.S. Corn Market Riding the Ethanol Wave


Corn Stocks Remain Tight Even With Large Harvest

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

0

2

4

6

8

10

12

14

Billion bushels

Production Total Use Free stks Gov't stks

Nearly 40 percent of the crop is utilized for ethanol.

Total corn use is now over 13.5 billion bushels!!


Ethanol Increases Continue to Drive Corn Markets

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Billion bushels of corn

Feed and residual

Exports

Food, seed & industrial

Ethanol use is key driver!

(38% of use)

Ethanol

DDG's


$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Dollars per bushel (monthly prices received by farmers, USDA)

Corn price

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Loan rate

Season average price levels

Corn Prices Rally Strongly into 2011


Soybean Market Riding Export Wave to China


Global Trade Remains Strong

0

25

50

75

100

125

150

Million metric tons or bales

Coarse grains

Wheat

Soybeans

Cotton 39% to China

60% to China


South American Crop Size Will set Tone for 2010 and 2011 Cropyears

0

50

100

150

200

250

Million metric tons

Brazil and Argentina

United States

World


Sharply Larger Global Soybean Stocks Weighing on Markets

0

10

20

30

40

50

60

70

Million metric tons of soybeans

0

5

10

15

20

25

30

35

Stocks-to-use percentage

Ending stocks Stocks-to-use


U.S. Soybean Stocks Limited by Strong Demand and Acreage Competition

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Million bushels

Production Total Use Stocks


$2

$4

$6

$8

$10

$12

$14

Dollars per bushel (monthly prices received by farmers, USDA)

Soybean price

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Loan rate

Season average price levels

Soybean Prices Reflect Increasing Pressures From Larger Supplies


Cotton Market Riding Export Wave to China and Low Stocks


World Cotton Stocks Beginning Rapid Adjustment

0

10

20

30

40

50

60

Million 480-pound bales of cotton

0

10

20

30

40

50

60

Stocks-to-use percent

Stocks Stocks-to-use


Increased Acreage and Output in 2011 Would Still Leave Stocks Low

0

5

10

15

20

25

Million 480 pound bales

Production Total Use Stocks


20

30

40

50

60

70

80

90

Cents per pound (monthly prices received by farmers, USDA)

Upland cotton price

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Loan rate

Cotton Prices Sharply Higher As Global Stocks Decline


Livestock, Dairy and Poultry

Can Domestic Meat and Dairy Industry Bid Grain Out of Ethanol and Export Sectors?


Meat Industry Will Be Cautious About Expansion in 2011-12

0

5

10

15

20

25

30

35

40

Billion pounds

Beef

Pork

Broilers - 0.4 % -1 to -3%

- 3.0 % 0 to 3%

Change in 2010 2011 + 3.1 % 0 to +2%

Beef

Pork

Broilers

2007 2008 2009 2010 2011 +2.2% + 3% -3.2% 0.2 % 0 to 1 %

Percent change in total meat output


Higher Broiler Shipments in 2011 Will Boost Meat Exports

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10-3

0

3

6

9

12

15

Billion pounds (red meat: carcass weight; poultry: ready-to-cook)

Imports Exports Balance

Export share of 2011 U.S. production Broilers ….. 18% Beef ………. 9% Pork ……… 20% All meat .......16%Dairy (fat)… 3%


Meat Exports at Plateau Following Strong Upward Trend

Beef Pork Broilers0

1

2

3

4

5

6

7

Billion pounds (1999-2011)

99 02 03 05 07 09 11 99 02 03 05 07 09 11 99 02 03 05 07 09 11


Broiler Industry Gauging 2011 Exports, Consumers and Feed Costs

3

4

5

6

7

8

9

Ratio: pounds of broiler feed equal in value to 1 lb. of live broilers

quarterly data* Number of pounds of Broiler Grower Feed equal in value to 1 lb. Broilers, live weight.

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0907 08 10 11

Data source: Livestock Marketing Information Center; USDA, NASSChart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Cow Calf Returns Likely to Remain Positive As Inventory Continues Decline

-150

-100

-50

0

50

100

150

200

Dollars per cow

90

95

100

105

110

115

120

125

Million head

Cattle inventory(January 1)

Cow-calf returns

Data source: Livestock Marketing Information Center; USDA, NASSChart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Ability to Pass Increased Costs to Consumer Will Set Cattle Prices

50

60

70

80

90

100

110

120

130

140

Dollars per cwt.

500-600 lb steer calves

700-800 lb feeder steers

Fed steers


International Dairy Product Prices: Oceania

0

1000

2000

3000

4000

5000

6000

U.S. dollars per metric ton

butter skim milk powder Chedddar cheese

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Dairy Sector Challenged by Volatility in Product and Feed Prices

8

10

12

14

16

18

20

Dollars per hundredweight

Price support

All milk price

Increasing competition in a

smaller global marketplace!


Milk Production Potential Likely to be Limited by Feed Cost Escalation

120

130

140

150

160

170

180

190

200

210

220

Million pounds milkfat basis

Commercial supply Commercial disappearance

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 100

5

10

15

20

25Ending stocks

Market keys 2011-12:Domestic consumer?International market volatility;Feed costs


Agriculture Sector Rebounding Sharply in 2010-11

80

100

120

140

160

180

200

Index (1990-92=100)

Prices received: crops

Prices paid*

*Prices paid commodities & services, interest, taxes and wage rates

Prices received: livestock


75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 110

20

40

60

80

100

Billion dollars

Net Farm Cash Income

Direct government payments*

* emergency payments are striped area of government payments)

Net cash income in agriculture is now averaging around $80 billion a year

compared with an average of $60 billion for the previous decade….. but more volatility!

Farm Income: Agriculture Continues Strong Performance

Record high


Farm Debt Leveraging Has Not Followed Land Prices Higher

0

500

1000

1500

2000

2500

Billion dollars

0

100

200

300

400

500

Billion dollars

Change 1970-1980Assets ... +259%Debt ....... +235%

Change 1980-1990Assets ... -16%Debt ....... -19%



Farm assets(left scale)

Farm debt(right scale)


We May All Have to Get Out and Push But Opportunities Abound!

The Road Ahead

Documents

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) 13 th Annual Farmer Cooperatives Convention December 6-7, 2010 Economic