Global Economy and Agriculture in Transition

The Global Economy and Agriculture in Transition

Terry Barr, CoBank

U.S. Economy and Agriculture Faced Significant Turmoil Over The Past Decade … What Transitions Are Ahead?

A Fragile Global Economy Will Experience Subpar Growth With Greater Role for Emerging Markets

PolicyRealignment

2014-18???

RisingMiddleClass

2004-08Avg.=4.5%

EconomicTurmoil2009-13

Avg.=2.9%

-2

0

2

4

6

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

Advanced countries Rest of world China India

0

50

100

150

200

250

Agriculture commodity index (2005=100)

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Old Normal

Tran

sition

2004

-200

8 ?Tr

ansiti

on

RisingGlobal

Middle class


PolicyRealignment

2014-18

Data source: World bank

Global Economic Transitions, A New Energy Paradigm and Building Grain Stocks Will Force Market Realignments

Xi JinpingNew President of China

Ben BernankeFED President

John BoehnerMajority Leader

Harry ReidSenate Leader

U.S. President

Angela MerkelGerman Chancellor

Mario DraghiECB President

Christine LegardeManaging Director IMF Mother Nature & Black

Swans

Prime Minister Shinzo Abe

Europe: Debt/deficits/austerity; Merkel victory sets stage; ECB

forward guidance and whatever it takes! Out of recession but …..

Japan: devaluation;

central bank QE actions; debt and consumption tax; more stimulus?

China: Leadership transition; slower

exports limit growth; transition to consumer

sector as driver; vulnerable shadow

banking system.

U.S.: Policy inaction limits growth;

debt/deficit debate may continue for

years; immigration, health care, farm bill, etc. pending; Federal

Reserve tapering.Fracking /horizontal

drilling bring new energy paradigm!.

India

Brazil

Russia

Emerging markets

Emerging markets weakening as trade

and capital flows slow

Global Economy Struggling With Major Unresolved Strategic Issues and Evolving Geo-political Realignments

Mario DraghiECB President

Christine LegardeManaging Director IMF

Angela MerkelGerman Chancellor

German elections clear way for potentially significant policy changes in 2014 but progress

will be slow! New capital infusions needed!

Euro Region Struggling to Transition

Monetary Union Fiscal Union Banking Union

No shortcut

Reality is 2-3 year transition with expanded ECB role!Major structural reform will be required in labor markets.

Countries must forfeit significant sovereignty on banking and fiscal decisions to permit the transition from a monetary

union to a fiscal and banking union!

Euro Region Struggling to Transition

Prime Minister Shinzo Abe“new policy directions”

Competitive devaluations; Bank of Japan pushes QE;

Government debt requires consumption tax next year;

stimulus to offset taxes

Japan Tries Abeconomics

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

Japan and Brazil Have Dramatic Currency Realignments That Enhances Their Competitiveness

50

60

70

80

90

100

110

120

130

140

Indexes of currencies/US$ with January 1999=100

100

120

140

160

180

200

220

240

260

280

Brazil index

S. Korea China Japan Brazil Euro

2000 2002 20061999 2001 2003 2004 2005 20082007 2009 2010 2011 2012 2013

Oct 2012 to Oct. 2013Currency changes

JapanChinaEuroS. KoreaBrazil

-24% +3%

+6% +4%-8%

Xi JinpingNew President of China

Can China’s Leadership Transition to Consumer-Led Economy and Maintain Political Control

November 9th

3rd Plenum of communist party• Rural land reform and

agricultural mechanization• Financial reform and banking• Energy sector (oil & gas)• Pollution cleanup and policy

9.8

11.3

12.7

14.2

9.69.2

10.4

9.3

7.8 7.6 7.3

93-02 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Percent growth rate per year

Fiscal stimulus may be needed to stay

above 7%!

Chinese Growth Likely to Remain Subdued As Export Markets Remain Weak

India

Brazil

Russia

Growth in the Emerging Market Countries Has Shifted as Trade and Capital Flows Slow

Ben BernankeFED President

John BoehnerMajority Leader

Harry ReidSenate Leader

U.S. President

Deficit / Debt and Major Policy Issues Require Balancing Austerity with Growth and Jobs and Removing Pressure on Monetary Policy

U.S. Economy Can’t Build Any Momentum

Virtually every sector of the economy will be impacted and risk management and investment strategies cannot deal with uncertainties. Companies can

measure and adjust to risk based on a set of rules. Can’t assess uncertainty!

Financial sector Financial sector regulatory reform implementation

Energy sector New energy paradigm; Fracking technology changes landscape! Reassessment / infrastructure!!

Immigration Reform groundwork being laid for 2014?

Health care sector Affordable Care Act, Medicare / Medicaid reform?

Regulatory oversight Clean air & water, Food safety

Deficit reduction

Changing tax policy and entitlement programs (including farm and food programs).

U.S. Policy Inaction Creates Business Strategy of Domestic Cost Control and International Expansion

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

-2

0

2

4

6

8

Percent change in real GDP

Average growth:1980-89=1990-99=2000-09=2010-13=

3.2%3.2%1.8%2.2%

U. S. Economic Recovery Remains Subdued by Historical Standards

50

60

70

80

90

100

110

120

130

140

Percent (debt-to-income)

400

480

560

640

720

800

880

960

1040

1120

Percent (net worth-to-income)

Debt-to-Income

Net Worth-to-income

Consumption growth will track income growth with slow credit

expansion. Consumer seems more comfortable with debt level and

home prices are up 13% from year earlier. But jobs and income growth

are issues?

Debt-to-Income Dramatically Improved But Consumer Still Cautious on Credit Card Debt

Consumers Cautious Attitude Regarding Credit Card Usage Will Limit Spending Gains

80-10

-5

0

5

10

Billion dollars (change in 3-month moving average of consumer revolving credit)

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

The change in 3-month moving average of revolving credit has remained weak!

(Note the 1980-82 recession experience)

Home Prices Edge Steadily Higher But Price Momentum May Be Slowing

75

100

125

150

175

200

225

Monthly S&P/Case-Shiller 20-City Home Price Index

2001 2002 2003 2004 2005 2006 2007 2008 2009 20102000 2011 20132012

August housing prices were 12.8% above a year ago but 20% below peak.19th consecutive monthly increase after declines in previous 20 months!

19

-750

-500

-250

0

250

500

Change in nonfarm payrolls (thousand)

Monthly change 12-month moving average

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

September Job Gains Weaker Than Expected; Unemployment Rate Improves

148,000 jobs created in September!(126,000 in private sector)

(averaged 185,000 for last 12 months)

Unemployment rate = 7.2 %Underemployment = 13.6Participation rate = 63.2%

Corporate Profits Slowing; But Investment and Housing Have Good Potential Into 2014

1999200

400

600

800

1000

1200

1400

1600

1800

2000

Billion dollars in profits; investment at annual rates

200

400

600

800

1000

1200

1400

1600

1800

2000

Business fixed investment

Corporate profits (after tax)

Residential investment

2001 2003 2005 2007 2009 2011 2013

Energy Sector Realignments Could Be Major Impetus for Economic Growth and Jobs

Policy Paralysis Is Limiting Growth!

White House

Congress

U.S. Federal Reserve

U.S. Treasury Department

The government will reopen and will be funded though Jan. 15, 2014 at current levels.

The Federal debt ceiling is raised until Feb. 17, 2014.

A House-Senate committee will issue a budget resolution by Dec.13, 2013.

Unclear whether the budget resolution will focus on replacing sequester with alternative budget cuts or defining a long term budget agreement. The 2014 Congressional elections will play a role.

Kick the Can to 2015 or Lay Groundwork for Long Term Budget Agreement?

-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

Deficit in billion dollars

-16

-14

-12

-10

-8

-6

-4

-2

0

2

-6%-5.3%

-2.4%

Reagan ClintonG. Bush

G.W. Bush

Source: Congressional Budget Office (September, 2013), BEA and Treasury Department and forecast

Deficit aspercentof GDP

Percent of GDP

Obama

-11%

Assumptions: phase-out in Iraq/ Afghanistan American Taxpayer Relief Act of 2012 Sequestration

Budget Debate Will Not End This Year!Long Term Budget Challenges Remain

2013 Deficit estimate

Monetary Policy Uncertainties Continue

U.S. Federal Reserve

U.S. Treasury Department

26

0

1

2

3

4

5

6

7

8

9

Percent

10-year Treasuries

FederalFunds Rate

90 91 92 93 94 95 96 97 98 99 00 01 02 0403 05 06 07 0908 1210 11 13 14

Federal Reserve Will Continue To Promote Growth and Employment in 2014-15 But Tapering?

Extend near-zero rate guidance to mid-2015. Total of $85 bil. per month in purchases in 2013. 6.5 % target unemployment; inflation below 2%!

Federal Reserve actions:

Chart source: Cumberland Advisors

Federal Reserve Will Continue To Promote Growth and Employment in 2014-15 But Tapering?

0

1

2

3

4

5

6

Percent rate

10year

7year

5year

3yr

2yr

1yr

30year

20year

Jan, 2010

Jan, 2007

Jan, 2011Jan, 2008

Jan, 2012

Oct. 2013

Jan. 2013

+ 75 basis pts.

Yield Curve Moves on Expectations of Tapering in The Near Future

U.S. FederalReserve

Bank

Bank ofJapan

EuropeanCentralBank

Bank ofEngland

World’s Central Banks Are in Uncharted Waters But How Will Global Unwinding Work?

Chart source: Cumberland Advisors

World’s Central Banks Are in Uncharted Waters: Zero Interest Rates, $6 Trillion Added to Balance Sheets

How do they unwind in a coordinated manner?

* 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 12 14

From 2002 to 2011 ………....... -38 %From August 2011 bottom

to October 2013 ……….… +10 %

U.S. Dollar Has Gained Steadily Since 2011 and Future Path is Linked to Mix of Global Policy Actions

Transitioning from Tight Supplies to Building Stocks, Lower Feed Costs and More Global Competition

0

50

100

150

200

250

Agriculture commodity index (2005=100)

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Old Normal

Tran

sition

2004

-200

8 ?Tr

ansiti

on

RisingGlobal

Middle class


PolicyRealignment

2014-18

Data source: World bank

Global Economic Transitions, A New Energy Paradigm and Building Grain Stocks Will Force Market Realignments

34

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 Stock/use

A Recovery in Global Grain Stocks Will Require Two Years of Large Harvests; Volatility Remains

One good harvest will not remove volatility!

100

200

300

400

500

600

700

800

900

1000

Million metric tons of coarse grains

+20%

+5%Since 2007 U.S. grain production has been at or below the 2007/08 level every year but may be 5% above in 2013/14!

Since 2007 non-U.S. coarse grain production has been volatile but above the 2007/08 level every year and may be 20% above in 2013/14!

U.S. coarse grain output

Non-U.S. coarse grain output

Global Coarse Grain Supplies Have Been Driven By Foreign Production Increases

36

87 89 91 93 95 97 99 01 03 05 07 09 11 130

10

20

30

40

50

60

70

80

Million metric tons of coarse grains

FSU-12

U.S.

Other major non-U.S. exporters*

Brazil

* Argentina, Australia, Canada and South Africa

Other Countries Have Stepped Up to Provide Coarse Grains to the Export Market

37

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

DDG's

Sharp Recovery in Feed Use and Exports Is Key Boost to Corn Demand in 2013/14

Year-over year change : 2012 2013

Corn price … +12% - 31%Feed use ….. 0% + 14%Exports ……. - 52% + 67%Ethanol ……. - 7% + 5%

38

0

10

20

30

40

50

60

70

80

Million metric tons of soybeans

0

5

10

15

20

25

30

35

40

Stocks-to-use percentage

Ending stocks Stocks-to-use

Global Soybean Stocks Reflect RecordWorld Crops in 2012/13 and 2013/14

0

25

50

75

100

125

150

175

Million metric tons or bales

Coarse grains

Wheat

Soybeans

Cotton29% to China

66% to China

27% to N. Africa & Middle east

China Demand Remains Major Focus of Grain, Oilseed and Cotton Markets

Low Cattle Inventory, Record Exports and Declining Feed Costs Spur Meat and Dairy Sectors

41

80

90

100

110

120

130

Million head of inventory

20

22.5

25

27.5

30

32.5

Billion pounds

January 1 Cattle inventory

Beef productionlowest since 1952

Liquidation Phase of Cattle Cycle Signaling Less Beef Output; Turnaround in 2015-16?

42Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Beef Pork Broilers0

1

2

3

4

5

6

7

8

Billion pounds (2000-2014)

01 03 05 07 09 1311 01 03 05 07 09 1311 01 03 05 07 09 1311

Export share of 2013 U.S. production Broilers ….. 20% Beef ………. 9% Pork ……… 22%

All meat .......18% Dairy (skim) ..16%

Beef Exports Limited by Reduced Production; Pork and Broiler Exports Rising


0

100

200

300

400

500

Thousand metric tons (2004-2013)

04 06 08 10 12

Nonfat dry milk Cheese Butter Dry whole milk04 06 08 10 12 04 06 08 10 12 04 06 08 10 12

U.S. Nonfat Dry Milk and Cheese Exports Have Risen Rapidly As World Markets Grow

44

Protein and Dairy Complexes Responding to Lower Feed Costs and Strong Demand


0

5

10

15

20

25

30

35

40

Billion pounds of meat

0

30

60

90

120

150

180

210

240

Billion pounds of milk

Beef

Pork

Broilers

Production Change 2013 2014

-1.2% -5 to -6%Beef

+0.6% +3 to +4%Pork

+2.0% +2 to +3% Broilers

Milk

+0.7% +1 to +2%Milk

2010 2011 2012 2013 2014 1.3% 0.7% 0.2% 1% 0 to +1

Percent change in total meat output


75

100

125

150

175

200

225

250

Index (1990-92=100)

Prices received: crops

Prices paid*

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

Prices received: livestock

Sector is operating at higher price and cost levels with greater volatility …… more working capital to play, less leverage permitted and more emphasis

on well-defined risk management policies!

Lower Crop Prices and Stronger Livestock Prices Bringing Needed Realignment But Costs Rising

46

Farm Income Will Realign with Emerging Transitions And Better Balance Among Commodities

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

0

25

50

75

100

125

150

Billion dollars

Net Farm Cash Income

Direct government payments*

* emergency payments are striped area of government payments)

Improving margins in the protein and dairy sectors could emerge with large 2013 harvests. Declining

crop prices would be offset with larger volumes. Net cash income likely to be third largest but further

declines may be coming in 2014!

The Strong Balance Sheet For Much of Agriculture Will Cushion Any Transition

0

500

1000

1500

2000

2500

3000

Billion dollars

0

100

200

300

400

500

600

Billion dollars

Change 1970-1980

Assets ... +259%Debt ....... +235%

Change 1980-1990

Assets ... -16%Debt ....... -19%

Change 1990-2000

Assets ... +43%Debt ....... +25%

Farm assets(left scale)

Farm debt(right scale)

Change 2000-2010

Assets ... +96%Debt ....... +70%

Change 2010-2013Assets …. +28%Debt ……....+11%

Market Transitions Will Provide More Opportunities and Risk and Place A Greater Premium on Management

Market volatility will continue and the growing export reliance for all ag sectors will increase exposure to global policy shifts and add new risk.

Risk management strategies will need reevaluation with particular focus on integrating margin and marketing strategies, cost controls, crop and revenue insurance, regulatory compliance and counter party risk.

Precision agriculture technologies and data mining to control costs and boost production will be integral ingredients in the transition strategies.

New opportunities will emerge as grain flows shift to feed and export channels and new niche markets and storage options emerge. Understanding these evolving domestic and global supply chains is key.



Competitive pressures in the global market will intensify as foreign productive capacity has expanded. Multinational companies will aggressively seek positions in both U.S. and global supply chains. Infrastructure issues such as locks & dams, widening of Panama Canal & emerging market infrastructure investment will impact competitiveness.

The meat and dairy sectors will need to realign alliances and capital deployment strategies to develop products and global supply chains to serve preferences of foreign markets and avoid residual supplier status .

The market demands for more regulatory scrutiny of the food chains will impact domestic and global supply chains. Food safety, animal welfare, traceability, sustainability and environmental regulations will be global.


The pace of consolidation, both horizontally and vertically, will accelerate at all stages of the global supply chains as margins tighten, scale of economies dominate and liquidity capital is deployed.Major tax code changes are coming. New rules on depreciation, 1031 like-exchanges, accounting options, estate taxes, etc. could alter previously optimal business structures and strategies.Investments in equipment, land ownership and rental commitments will need to be reassessed in new marketplaceA strong balance sheet with significant working capital and strong risk management policies will be critical in accessing the increasingly expensive debt capital required to implement transition strategies.


The Global Economy and Agriculture in Transition

Economy & Finance

Global Economy and Agriculture in Transition