d f flbdegree of belief - crop insuranced f flbdegree of belief cary l. sandell wells fargo – food...

D f B l fDegree of Belief

Cary L. SandellWells Fargo – Food and Agribusiness Group

November 2009November 2009

Wells Fargo Food and Agribusiness Group

E h dEverything is connected.

We just can’t see it.

Every new economic action comes from some other economic action’s end

Wells Fargo Ag Industries - 2

What you want to know Is the recession done?

How can we tell? How can we tell? What type of recovery? For who?

What is holding the economy back What is holding the economy back Fear of the unknown De-leveraging (business and consumer) De-leveraging (business and consumer)

What is pulling the economy ahead Productivity (technological and global) Productivity (technological and global) Trade growth

Implications for agriculture and credit

Wells Fargo Ag Industries - 3

Implications for agriculture and credit

How much GDP makes us happy?

C + I + G (X M)

GDP = 13,014 = 9,265 + 1,497 + 2,583 - 348 *

C + I + G - (X-M)

, , , ,

72% + 11% + 20% - 3%

* Net exports bottomed out at ($757) or 5 7% in the 3rd quarter of 2006

Wells Fargo Ag Industries - 4Source: BEA 3rd Qtr (billions inflation adjusted dollars – base 2005)

Net exports bottomed out at ($757) or 5.7% in the 3 quarter of 2006

How much GDP makes us happy?

C + I + G (X M)

GDP = 13,014 = 9,265 + 1,497 + 2,583 - 348 *

C + I + G - (X-M)

, , , ,

72% + 11% + 20% - 3%

* Net exports bottomed out at ($757) or 5 7% in the 3rd quarter of 2006

Wells Fargo Ag Industries - 5Source: BEA 3rd Qtr (billions inflation adjusted dollars – base 2005)

Net exports bottomed out at ($757) or 5.7% in the 3 quarter of 2006

A very difficult # to get a handle onReal GDPReal GDP

14,000Billions of $s

10,000

12,000

8,000

,

6,000

4,000

Source: WF Ag Industries BEA

Wells Fargo Ag Industries - 6

2,000Apr-59 Apr-69 Apr-79 Apr-89 Apr-99 Apr-09

Source: WF Ag Industries, BEA

Another viewLogarithm of Inflation Adjusted GDPLogarithm of Inflation Adjusted GDP

9.5

y = 0.0026x + 6.1223R2 = 0.9939

9.1

9.3

8.7

8.9

8.5

8.1

8.3

Wells Fargo Ag Industries - 7

7.9Apr-59 Apr-69 Apr-79 Apr-89 Apr-99 Apr-09

Source: BEA, Wells Fargo Ag Industries

“Blinded by the lately”GDP ChGDP Change

Year over Year8%

6%

2%

4%

0%

4%

-2%

Wells Fargo Ag Industries - 8

-4%Apr-59 Apr-69 Apr-79 Apr-89 Apr-99 Apr-09Source: FRED, Wells Fargo Ag Industries

How does the US economy grow?

Long-term GDP growth is 2.7% Output grows with inputs and productivityLarger labor pool 0.4%More capital invested 0.9%Productivity gains 1.3%y g

A recession temporarily reduces demand not supply capacitysupply capacity

Wells Fargo Ag Industries - 9

If you don’t have productivity …R l GDP G th R tReal GDP Growth Rate

4 0

4.5

Annual percent

Productivity Capital Hours

3 0

3.5

4.0

2.5

3.0

1.5

2.0

0.5

1.0

Wells Fargo Ag Industries - 10

-1950-1974 1975-1982 1983-1991 1992-2002 2003-2008 2009-2014 2015-2019

Source: CBO, Wells Fargo Ag Industries

Can fiscal and monetary i i ll k?intervention really work?

And, at what cost?

Wells Fargo Ag Industries - 1111

Does it make sense?History + futures

Fed Funds8

9

6

7

4

5

2

3

0

1

Jan 90 Jan 93 Jan 96 Jan 99 Jan 02 Jan 05 Jan 08 Jan 11

Wells Fargo Ag Industries - 12

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11Source: FRED, Wells Fargo Ag Industries

Water everywhere, but not a drop to drink

M2 Money Supply GrowthYear overYear Pct

8

10 Year Pct

6

4

2

Wells Fargo Ag Industries - 13

0Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08Source: FRED, Wells Fargo Ag Industries

This won’t turn-out like they hopeGovernment Fiscal Stimulus

300

12 month average

260

28012 month average -

Billions $s

Spending

220

240

180

200 Revenues

160

180

Wells Fargo Ag Industries - 14

140Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Source: WF, CBO

The Federal Reserve must have Alzheimer’s U l t d I fl tiUnemployment and Inflation

14%Percentage Inflation

10%

12%

8% Unemployment

4%

6%

2%

Wells Fargo Ag Industries - 15

0%1958 1968 1978 1988 1998 2008

Source: BLS, Wells Fargo Ag Industries

What drives the value of the dollar?

Trade surplus or deficit Relative interest rates Real interest (nominal less inflation) Risk of investment

Stability of government issuing theStability of government issuing the money

Expectations of traders Expectations of traders

Wells Fargo Ag Industries - 16

This one they don’t controlSUS Trade Weighted Dollar

150

C l

130

140 Cycle

100

110

120

80

90

100

60

70

80Trend

Wells Fargo Ag Industries - 17

1-73 1-78 1-83 1-88 1-93 1-98 1-03 1-08Source: Federal Reserve, Wells Fargo Economics

For a quarter century this modelFor a quarter century this model worked. Now what?

Wells Fargo Ag Industries - 1818

DCF: Discounted Cash Flow Model

10 Year Treasury v. CPI

14%Percent

10%

12%

%

6%

8%

10%10 Yr

4%

6%

0%

2%Inflation

Wells Fargo Ag Industries - 19

-2%1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008

Source: Wells Fargo

DCF: Discounted Cash Flow Model Cap Rate: Trend + Cycle + Random NoiseCap Rate: Trend + Cycle + Random Noise

16

18

14

16

BAA

12

8

10

AAA

6

Wells Fargo Ag Industries - 20

4Sep-59 Sep-69 Sep-79 Sep-89 Sep-99 Sep-09

Asset strategy: Trend v. Cycle

Cycle Buy at tops of cycles Sell at bottom of cycles

Trend Falling: Leverage up and buyg g p y Stable: Neutral leverage / asset selective Rising: Leverage down and sell average s g e e age do a d se a e age

and sub-par Random noise

Wells Fargo Ag Industries - 21

Random noise

So why a recovery?y y

And for who?And for who?

Wells Fargo Ag Industries - 2222

All models are wrongAll models are wrong.Some are useful.

Wells Fargo Ag Industries - 2323

Accelerating global demand

Economic activity

Food

Productivity++ Food

TechnologyR&D

Investment Energy

Other

Wells Fargo Ag Industries - 24

Climbing up Maslow’s hierarchyGl b l E i A ti itGlobal Economic Activity

35,000Billions of USD

25,000

30,000

World ex US

15 000

20,000

World ex US and China

10,000

15,000US

5,000 China

Wells Fargo Ag Industries - 25

-1978 1983 1988 1993 1998 2003 2008

Source: USDA, Wells Fargo Ag Industries

Will you bet against it?G GGlobal Economic Growth

16

18Year over Year Pct

12

14 China

6

8

10

World ex US

2

4

6 US

4

-2

0US

Wells Fargo Ag Industries - 26

-41978 1983 1988 1993 1998 2003 2008Source: USDA, Wells Fargo Ag Industries

The net/net is very positive

Global Per Capita Real GDP$8,000

$7,000

$7,500

$6,000

$6,500

$5 000

$5,500

$4,500

$5,000

Wells Fargo Ag Industries - 27

$4,0001969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Source: USDA, Wells Fargo Ag Industries

How will it hit agriculture and How will it hit agriculture and credit?

Wells Fargo Ag Industries - 2828

(Un?)intended Consequence

AgricultureInputcostcost

OutputExpected

Profit

30%

++

LandEnergy

Outputvalue

Cost offood

100%

LandValues

food

Global economic growth

Wells Fargo Ag Industries - 29

g

Guess what? Feedback, delay and noisePetroleum Product Supplied

52 Week Average

21.00Millions

20.50

20.75Millions

of Barrels

20.00

20.25

19 25

19.50

19.75

18 75

19.00

19.25A bottom

has formed

Wells Fargo Ag Industries - 30

18.75Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Source: EIA, Wells Fargo Ag Economics

Convergence: Temporary or permanent?Nearby Crude Oil v Corn

160$s per barrel

800

120

140

600

700

80

100

400

500

40

60

200

300

20

40

100

200

Wells Fargo Ag Industries - 31

0Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09Source: NYMEX, Wells Fargo Economics

-

What do correlations reallyWhat do correlations reallyrepresent?p

Wells Fargo Ag Industries - 3232

One of these things is not like the others

US Supply and Demand Estimates05/06 06/07 07/08 08/09 09/10 Change

Beginning stocks: 2.1 2.0 1.3 1.6 2.6 0.9 Production 11.1 10.5 13.0 12.1 13.0 0.9

Co-products 0 4 0 6 0 8 1 0 1 1 0 1

Corn

Co-products 0.4 0.6 0.8 1.0 1.1 0.1 Imports 0.0 0.0 0.0 0.0 0.0 -

Total supply 13.2 12.5 14.4 14.7 16.6 1.9 Feed 6.2 5.6 5.9 5.4 5.4 - Ethanol 1 6 2 1 3 0 3 8 4 2 0 5Ethanol 1.6 2.1 3.0 3.8 4.2 0.5 Other 1.4 1.4 1.3 1.3 1.3 (0.0) Exports 2.1 2.1 2.4 1.8 2.2 0.5

Total use 11.3 11.2 12.7 12.1 13.0 0.9 E di t k 2 0 1 3 1 6 2 6 3 6 1 0Ending stocks 2.0 1.3 1.6 2.6 3.6 1.0

Crop Year Billions of Bushels

Wells Fargo Ag Industries - 33

They don’t run – just for funI Eth l S dIowa Ethanol Spread

Gross Revenue - Feedstock+NG

$2.75

$3.00

Per Bushel basis

$2.25

$2.50

$2.75

$1.50

$1.75

$2.00 High cost break-evens

$0 75

$1.00

$1.25

$0.25

$0.50

$0.75

Efficient

Wells Fargo Ag Industries - 34

$-Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09

Source: Wells Fargo Ag Economics, USDA AMS

break-evens

The worm always turnsIowa Ethanol Revenue v. Feedstock

$10

Per bushel

$8

$9 basis

$7revenue

$5

$6

$4 feedstock

Wells Fargo Ag Industries - 35

$3Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09Source: Wells Fargo Ag Economics, USDA AMS

Commodities prices will “trend hi h ” b t “ l i l tl ”higher” but “cycle violently”

with the global economy

Prices don’t confuse the “effect” for the “cause”

Implication for Livestock Huge future growth

Global populationp p Global economic activity

Proprietary intellectual property Animal biology is complex relative to crops Animal biology is complex relative to crops

Genetics Practices

Barriers to entry grow Barriers to entry grow Most value-added occurs off-farm Battle for the “hearts and minds” Battle for the hearts and minds Animal welfare and restrictions Carbon taxes

Wells Fargo Ag Industries - 37

Carbon taxes

Living a fool’s paradiseI fl ti C tInflation Components

225

Index

AllB f

205

215 BeefPoultryPorkDairy

175

185

195Dairy

155

165

175

135

145

155

Wells Fargo Ag Industries - 38

135Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09Source: BLS, Wells Fargo

Not sustainable – expect a hysteresis development

Cattle to Corn Price ratio

50

55Beef cattle price per cwt

/ bushel of corn

40

45

30

35

20

25

10

15

20

Wells Fargo Ag Industries - 39

10Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Source: Wells Fargo Ag Industries

A long way from workingMilk t C P i R tiMilk to Corn Price Ratio

10All Milk per CWT

/ All Corn per bushel

8

9/ All Corn per bushel

6

7

4

5

2

3

4

Wells Fargo Ag Industries - 40

2Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Source: WF Ag Industries

Remember fixed cost barriers

Hog to Corn Price ratio35

Hog price per cwt / bushel of corn

25

30

20

10

15

5

Wells Fargo Ag Industries - 41

-Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Source: Wells Fargo Ag Industries

Their row has yet to be hoed

Egg to Corn Price ratio2.25

Price dozen eggs / bushel of corn

1.75

2.00

1.50

1.00

1.25

0.75

Wells Fargo Ag Industries - 42

0.50Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Source: Wells Fargo Ag Industries

Row crop implications

Food, fuel and fiber Great demand but who supplies it? Comparative versus competitive advantage Comparative versus competitive advantage

Fuel is the wildcard Carbon tax collateral damage Technological change Technological change Can we export biofuels?

Wells Fargo Ag Industries - 43

Increasing volatility has consequences

All commodities will have greater price volatilityM i “ i ” Margin management v. “guessing” Risk management is never freeg Deleveraging has a financial cost

The “knowing doing gap” The knowing doing gap Averages mean nothing Timing Inter-industry competitiveness

Wells Fargo Ag Industries - 44

E h dEverything is connected.

We just can’t see it.

Every new economic action comes from some other economic action’s end

Wells Fargo Ag Industries - 45

Cary SandellVice PresidentWells Fargo Food & AgribusinessWells Fargo Food & Agribusiness1248 “O” StreetLincoln NE 68508Lincoln, NE 68508

Ph (402) 434 4117Phone: (402) 434-4117Email: cary.sandell@wellsfargo.com

Wells Fargo Ag Industries - 46