wf crop outlook 2nd qtr 2009

Copy right Wells Fargo 2008. Wells Fargo Economics presents this analysis as a service to its employees and customers. It can not guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates represent a most likely scenario at this point in time.

Vehicle Miles Traveled

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

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

Source: US Dept of Transportation, WF Ag Economics

YOY Pct Chg Last 12 months

Recessions

Michael Swanson Ph.D. Economics Department Wells Fargo & Co. 2nd Qtr 2009

Wells Fargo Economics Row Crop Markets – 2nd Qtr 2009

Summary: The Temporary v. The Permanent

As farmers get ready to race their planters across the fields, the never ending question of how many acres of what will really get planted remains open. 2009 represents a real change from the mentality of the last three years. Starting in 2006, market believed that corn would be in almost perpetual short supply, and its price needed to be high to get enough acres. The last half of 2008 shattered that belief. What will emerge as the next (erroneous) consensus? The idea that corn supply needed to continue to grow came from the belief that corn-based ethanol would grow

almost without constraint. Only paper models can support unconstrained growth. The physical world always has some feedback loops in reserve that kick in to stop runaway growth. In the case of ethanol demand, domestic driving miles and fuel efficiency have hammered fuel demand. The US has seen the largest ever decline in miles driven. This has set a ceiling on fuel demand, and it effectively caps out ethanol and gasoline demand. Going back, corn ethanol demand is off almost a billion bushels from earlier projections. A billion bushels of corn production requires about 7 million acres of planted corn at the current

national yield and historical plant/harvest ratio. So if corn demand doesn’t need these acres, who will pick them up? The economic answer is who ever will pay the highest gross margin per acre. At the moment, global demand growth for most alternative crops such as soybeans, wheat, cotton and others have slowed or even weakened. And, the market’s job remains making farmers equally unhappy about all their options. It can bid down soybean prices because it knows that farmer’s face historical high fertilizer prices. The market figures the farmer’s net margin per acre based on relative yields and input costs. It rarely offers any slam dunk winners. So how much corn does the market need? The biggest question marks come from the feed and ethanol elements. The USDA shows about 5.2 billion bushels of feed usage well down from the low 6 billion bushels of 2005/2006 crop year. US protein production has actually risen in terms of lbs. of beef, pork, poultry and dairy since that crop year. Domestic beef, pork and poultry production has grown by over 7% since 2005. It isn’t that animals have become more efficient converters of feed into weight. Clearly, DDGs have replaced corn in feed rations. DDGs aren’t corn, but you need to explicitly deal with them in the feed demand world.


Yield Progression w/o weather included

153

151

y = 2.35 x + 103.12

R2 = 0.69

80

90

100

110

120

130

140

150

160

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

3.6 billion bushels of corn into ethanol will produce about 101 million tons of DDGs. While DDG exports have grown, the bulk of the increased production has been consumed domestically. If we “value” DDG at its long-term price ratio of 90% to corn, the market has an additional billion bushels of corn. The “additional” billion bushels of “corn” would put the feed usage right back in the low 6 billion bushel range. This accounts for all the livestock feed usage the market needs in the current environment. A reasonable range of corn demand would probably run from 11.8 to 12.5 billion bushels. Upping the trend-line estimate to 156 bushels per acre with a 92.5% plant/harvest ratio gives you 6.9 million acres to produce 1 billion bushels. The combination of demand and productivity would require between 81 and 86 million acres of corn. All the other crops accommodate themselves based on their particular factors, but it is clear that we aren’t running out of acres this year. Longer term, an important question follows from the reassessment of corn-based ethanol’s demand growth. What happens if fuel efficiency continues to improve at faster than anticipated rate and driving miles don’t expand at their historical rate? At the same time, companies like Monsanto continue to introduce yield enhancements at an accelerated rate. You get a completely opposite scenario to the one offered just at the start of last year. In a competitive market, you must adopt cost-effective yield enhancers or exit the business. If you neighbor can

increase their yield through better seed technology, you have to adopt it or risk losing your rented acres. No matter how efficient you are in other areas, you couldn’t compete for rented acres using 5 year old yield varieties in today’s market. If Monsanto and Syngenta can produce the 300 bushel per acre varieties they claim are the future over the next 20 to 25 years, they will dominate the market because of competitive adoption. So let’s look out just 5 to 7 years with a different set of eyes. Let’s cap ethanol’s corn-based demand at 15 billion gallons (fuel efficiency and driving miles) and push ethanol yield to 3 gallons per

bushel. That’s easy math (even for an economist). We would need 5 billion bushels of corn, and we would get back 1.4 billion bushels of “corn equivalent” DDGs. Suppose 5.5 billion (plus the DDGs) would be needed for feeding and 2.5 billion for exports (don’t forget China’s adopting yield innovators as well) and 1.5 billion for FSI, total corn demand would be in 14.5 billion. So what yield should we use? I’ll pick 170 bushels an acre (you can guess your own number) with a 93% plant/harvest ratio. Mix all the numbers, and you’ll come up with a need for 91 million acres. That’s bullish enough, or is it? Now suppose that hybrid cars and a carbon tax are decimating fuel demand, you could cap that ethanol demand at half of the 15 billion gallon estimate. Rerun the numbers just changing the ethanol guess, and you get a need for 76 million acres. Beyond that point, corn acres continue to drop as yields grow and demand stagnates. So what would the industry have to do to grow demand? It would need to drop corn prices. This repeats the stagnant corn price scenario the industry suffered from 1973 to 2007 at a different price level. The combination of ongoing yield enhancements and technological disruption in the fuel demand sector will be the biggest drivers of corn’s long-term value. And, the corn sector remains the dominant price setter for US row crops. This type of scenario represents the “inversion” of last year’s bull scenario. Without a doubt, it continues assumptions that won’t come true, but as the market worries about acres this year, it needs to remember which genies are trying to get out of their bottles.


2050 Ranking2050

MillionsCurrent ranking Pct Chg

1 India 1,808 1 35%2 China 1,424 2 22%3 United States 439 3 43%4 Indonesia 313 4 30%5 Pakistan 295 6 68%6 Ethiopia 278 14 227%7 Nigeria 264 8 77%8 Brazil 261 5 31%9 Bangladesh 234 7 50%10 Congo (Kinshasa) 189 18 176%* Russia 9 and Japan 10 drop out** Source: US Census Bureau

Predicted Population Growth

It’s almost a given that biotechnology will accelerate yields over the next decade. This burst of technology would have happened anyway, but the high corn prices of the last three years have prompted more research and faster adoption. At the same time, substitute biofuels such as cellulosic or algal based keep grinding away at their technological roadblocks. And lastly, hybrids and plug-in technology continue improving mileage efficiencies faster than previously thought dropping total fuel demand. These three factors; corn yield, fuel substitutes and fuel efficiencies would argue for stagnant crop prices further out in the future. Of course, they need to wrestle with the 800 pound gorilla called global economic growth. Combine global population growth and higher standards of living and you get the insatiable demand stream that sent the bulls stampeding last summer. Does this higher demand stream win out in the end with higher prices? I think it only wins in the food/feed arena. The idea that crop based fuels push prices higher loses out to fuel substitutes (cellulosic or algal based) and fuel efficiency (hybrids and pure electric). Crops will refocus on food demand which will be more than sufficient to absorb higher yields. This won’t be “the sky’s the limit” scenario of last year, but it represents a more stable and predictable demand growth. 2009 acreage will be step back to the past. Ultimately, the first acreage survey always gets changed by price fluctuations and spring weather. The biggest driver will be the reevaluation of fuel demand based on the economic conditions and alternatives. As Toyota introduces its second generation Prius with 50+ miles per gallon efficiency, the market should take it as potent example of technological change. And, it should expect more of the same to follow.


Agricultural Cash Prices Forecast Wheat – CBOT Futures Price

2nd Qtr ‘09 Overview: Not surprisingly, prospective wheat acres declined by 7 percent from last year to 59 million acres this year. Lower prices and higher input costs pushed marginal acres back to pasture and other alternatives. Using a standard plant to harvest ratio of 85% and a yield of 42.5 bushels/acre, a standard guess would be 2.1 billion bushels of production. This will certainly be sufficient to keep the supply and demand balance aligned. The domestic food usage remains stuck at .95 billion bushels. The remainder of the production sorts itself out between exports and feed usage. The export market likes the weaker dollar for sourcing US based wheat, but key competitors such as Canada and Australia are not going to be locked out of their sales by any currency issues. Wheat continues to play its role as shock-absorber and last option crop in the national battle for acreage. It will only take the lead in the market if there is a wide spread crop problem in key competitor countries. At the moment, the USDA FAS’s outlook shows global production being strong enough to keep the US from emerging as the supplier of last resort. At the moment, wheat remains a “little” cheap compared to corn on a historical basis. Over the last decade, nationally cash wheat as traded at a ratio of 1.55. The ratio “maxed out” at 2.33 in October 2007, and it “bottomed out” at 1.23 in May 2000. At the moment, 2009 futures are trading at a ratio of 1.36. In a reversion to the mean world, you would expect wheat to see upward price pressure. However, keep in mind the “equally unhappy principle”. The market could just decide to make corn cheaper. Overall, without a significant crop failure domestically or aboard, wheat can only hope for overall commodity to drag it higher.

Expected Price Range (next 12 months): CBOT Futures $4.75 to $7.80 per bushel NASS Spot $3.95 to $7.05 per bushel

Higher Prices Historically weak US dollar Trend-line yields Lower planted acreage

Lower Prices Global economic recession

February March ChangeBeginning stocks: 0.31 0.31 - Production 2.50 2.50 - Imports 0.11 0.12 0.01

Total supply 2.92 2.93 0.01 Domestic use 1.26 1.23 (0.03) Exports 1.00 0.98 (0.02)

Total use 2.260 2.213 (0.05)

Ending stocks 0.66 0.71 0.06 32%

US Supply and DemandWheat

2008/09 Crop Year Billions of Bushels


Agricultural Cash Prices Forecast Wheat – CBOT Futures Price

2nd Qtr ‘09 Nearby Wheat Futures

200

300

400

500

600

700

800

900

1000

1100

1200

Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Source: Wells Fargo Ag Industries

Historical Wheat Range

400

500

600

700

800

900

1000

1100

1200

JUL9 SEP9 DEC9 MAR0 JUL0 DEC0 JUL1


Current

High-low

Wheat Yield Trends

y = 0.25 x + 35.46

R2 = 0.34

3031323334353637383940414243444546

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007Source: Wells Fargo Ag Industries

Bu/acre

Planted Wheat Acres - US

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009Source: USDA

Thousands

Wheat to CornLong-term Price Ratios

-

0.5

1.0

1.5

2.0

2.5

1958 1968 1978 1988 1998 2008Source: Wells Fargo Ag Economics

Wheat to Corn

futures

Global Wheat Production

500,000

520,000

540,000

560,000

580,000

600,000

620,000

640,000

660,000

680,000

700,000

1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009Source: USDA FAS

Th

ou

san

ds

of

Me

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To

ns


Agricultural Cash Prices Forecast #1 Yellow Soybean, Central Illinois Spot

2nd Qtr ‘09 Overview: If there was a surprise in the prospective planting, soybeans delivered it. Many market participants had speculated that more acres would switch to soybeans to avoid the high priced fertilizer. The problem for the market is that the price ratio between soybeans and corn offered little incentive to make that switch. The soybean/corn ratio has ranged from the just under 2 to about 2.2 for most of the winter and early spring. Typically, the market offers a ratio between 2.4 and 2.6 to compensate for the lower yields of soybeans. Analysis of more than fifteen years of cash rent data in Minnesota shows that soybeans have delivered more profits on average than corn. But for most farmers, corn is where the action is. The idea of the homerun corn yield combined with a high price can be almost irresistible. In contrast, soybeans seem to get beat up by every possible yield penalty. Some farmers get the big soybean yields, but too many just plod along. Soybeans share something in common with wheat. The US needs to export a huge chunk of them to clear the domestic market. The domestic market only needs 43 of the 76 million acres (42.5 bushels/acre yield at 98.5% plant/harvest ratio). Domestic soybean demand growth has been very sluggish. Soybean oil demand hardly moves, and the soybean meal has found a new competitor in DDGs. The projected domestic soybean meal usage of 27.8 million metric tons is the lowest since 1999. And, once again, overall meat production is up. This export dependency increases price volatility because of the impact of currencies, global economic growth and export competitors. These are nothing new for the soybean market, but they’re impact will continue to increase.

Expected Price Range (next 12 months): CBOT Futures $7.85 to $11.30 per bushel NASS Cash $7.40 to $10.80 per bushel

Higher Prices A relatively weak dollar Flat production in South America

Lower Prices Relatively high global stocks-to-usage at 22%

February March ChangeBeginning stocks: 0.21 0.21 - Production 2.96 2.96 - Imports 0.01 0.01 -

Total supply 3.12 3.17 0.06 Domestic use 1.81 1.80 (0.01) Exports 1.15 1.19 0.04

Total use 2.96 2.99 0.02 Ending stocks 0.21 0.19 (0.02) 6%

US Supply and Demand EstimatesSoybeans



Agricultural Cash Prices Forecast #1 Yellow Soybean, Central Illinois Spot

2nd Qtr ‘09 Nearby Soybean Futures

400

600

800

1000

1200

1400

1600

1800



Historical Soybean Ranges

650

850

1,050

1,250

1,450

1,650

MAY9 JUL9 AUG9 SEP9 NOV9 JAN0 MAR0 MAY0 JUL0 NOV0 NOV1


High-low

Current

Soybeans to CornLong-term Price Ratios

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1958 1968 1978 1988 1998 2008Source: Wells Fargo Ag Economics

Soybean to Corn

futures ratio

Soybean Meal Usage

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009


000s of Metric Tons

Domestic Exports

Soybean Production

0

10

20

30

40

50

60

70

80

90

100

1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009


Millions of metric tons

China

Argentina

Brazil

US

Soybean Yield Progression

Yield = 0.47 x + 31.48

R2 = 0.61

-

5

10

15

20

25

30

35

40

45

50

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: NASS, Wells Fargo Ag Economics

Bushels per acre


Agricultural Cash Prices Forecast #2 Yellow Corn, Central Illinois Spot

2nd Qtr ‘09 Overview: Corn prices remain the tail wagged by the ethanol dog. The revenue available to ethanol producers continues to cap their ability to pay for corn. The last week of March saw Iowa spot ethanol prices ranging from $1.46/gallon to $1.55/gallon, and DDGs averaged $120/ton. This gave ethanol producers approximately $5.14/bushel in gross revenue. With Iowa spot corn prices averaging $3.70/bushel, there was not too much left over to pay for natural gas and everything else. Higher costs from fertilizer, seed, chemicals and cash rents make $3.70/bushel a hard sell to farmers, and the futures aren’t offering much more incentive. It’s a testament to farmer’s optimism that they are planting an expected 85 million acres anyways. In the short-term, the good news is that there isn’t anymore bad news. Crude oil and gasoline appear to have found a new bottom in the low $40/barrel range. This means that ethanol should have found a bottom to the market as well. That doesn’t mean that there won’t be price volatility around this trough. The gasoline/ethanol complex remains in a grudge match for shrinking market share. This makes the discount between gasoline and ethanol unpredictable. Once the economy shows that it is definitely a recession and not a depression, the energy market should show a strong rebound. This will be the big break that the agricultural market will follow higher. The timing of this turn should be closer at hand than further away. The problem will be that definitive economic statistics typically lag the actual turn around be 5 to 8 months. A better leading indicator will be producer sentiment and the stock market which always look further ahead into the economic murk.

Expected Price Range (next 12 months): CBOT Futures $3.45 to $5.65 a bushel NASS Cash $3.35 to $5.70 a bushel

Higher Prices A rebound in energy prices after the recession

ends

Lower Prices Flat exports Livestock losses

February March ChangeBeginning stocks: 1.6 1.6 - Production 12.1 12.1 -

Co-products 1.0 1.0 0.03 Imports 0.0 0.0 -

Total supply 14.7 14.8 0.03 Feed 5.3 5.3 - Ethanol 3.6 3.7 0.10 Other 1.3 1.3 - Exports 1.8 1.7 (0.05)

Total use 12.0 12.0 0.05 Ending stocks 2.77 2.75 (0.02) 23%

US Supply and Demand EstimatesCorn



Agricultural Cash Prices Forecast #2 Yellow Corn, Central Illinois Spot

2nd Qtr ‘09 Nearby Corn Futures

150

250

350

450

550

650

750



Corn Contracts

300

400

500

600

700

800

CORN MAY9 CORN JUL9 CORN SEP9 CORN DEC9 CORN MAR0 CORN MAY0 CORN JUL0 CORN DEC0 CORN JUL1 CORN DEC1


High-low

Current

Iowa Ethanol Revenue v. Feedstock

$3

$4

$5

$6

$7

$8

$9

$10

Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

Source: Wells Fargo Ag Economics, USDA AMS

Per bushel basis

feedstock

revenue

Iowa Ethanol SpreadGross Revenue - Feedstock+NG

$-

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00


Source: Wells Fargo Ag Economics, USDA AMS

Per Bushel basis

Efficient break-evens

High cost break-evens

IA DDG and Corn Spot Price Ratio

60%

70%

80%

90%

100%

110%

Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09Source: USDA AMS, Wells Fargo Ag Industries

IA DDG and Corn Spot Prices

$75

$95

$115

$135

$155

$175

$195

$215

$235

$255

$275


Source: USDA AMS, Wells Fargo Ag Industries

Per ton


Agricultural Cash Prices Forecast National Spot Price for Middling Cotton

2nd Qtr ‘09 Overview: Cotton acres are expected to be only 8.8 million. The lowest planted acreage since 1983 (the end of the last major recession). This continues the trend of falling US production and ending stocks, but this has failed to ignite a major rally. The market only expects a modest price increase at this time. The problem is that the US has become almost entirely dependent of exports to utilize its cotton production. Too many other countries appear ready to step up their production even in the face of lower prices. The temporary spike in the value of the US dollar at the end of 2008 highlighted the market’s vulnerability to this export demand disruption. 2008’s low acreage and production helped reduce carry-out stocks, but it wasn’t enough. If cotton acres do stay as low as the prospective planting indicate, the carry-out stocks should fall significantly. This would set the stage for higher prices on any sign of recovery in the global economy. Unlike corn and other crops, the fiber market doesn’t get a direct boost from expensive energy as an alternative usage, but it does rise and fall with consumer spending power for clothing and furnishings. The explosive rally of last summer was too much too fast for the cotton market. A slower but steadier rise in prices would be a better development. It would allow the supply chain to adjust better. Unfortunately, cotton producers have shown that they can bury demand under too much supply when prices rise. This implies that long-term prices probably cap out their supply/demand balance when they get above 80 to 85 cents a pound.

Expected Price Range (next 12 months): NYBOT Futures $0.50 to $0.84 per lb. NASS Cash $0.48 to $0.80 per lb.

Higher Prices Lower acreage Falling stocks

Lower Prices Modest domestic usage Stable exports Global recession

February March ChangeBeginning stocks: 10.0 10.0 - Production 13.0 13.0 - Imports 0.0 0.0 -

Total supply 23.1 23.1 - Domestic use 3.9 3.8 (0.2) Exports 11.5 12.0 0.5

Total use 15.4 15.8 0.4

Ending stocks 7.7 7.3 (0.4) 47%

US Supply and Demand EstimatesCotton

2008/09 Crop Year Millions of Bales


Agricultural Cash Prices Forecast National Spot Price for Middling Cotton

2nd Qtr ‘09

Cotton Contracts

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

NYM c1 NYM c2 NYM c3 NYM c4 NYM c5 NYM c6 NYM c7 NYM c8


per lb.

Nearby Cotton Futures

0

10

20

30

40

50

60

70

80

90



US Production 000s Bales

0

5,000

10,000

15,000

20,000

25,000

1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009

Source: WF Ag Industries

US Ending Stocks 000s Bales

0

2,000

4,000

6,000

8,000

10,000

12,000

1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009


Global Production 000s Bales

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009


Global Ending Stocks 000s Bales

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009


wf crop outlook 2nd qtr 2009

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