Cary L. Sandell. Wells Fargo Food and Agribusiness Group

Transcription

1 Degree of Belief Cary L. Sandell Wells Fargo Food and Agribusiness Group November 2009

2 Everything 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

3 What you want to know Is the recession done? How can we tell? What type of recovery? For who? What is holding the economy back Fear of the unknown De-leveraging (business and consumer) What is pulling the economy ahead Productivity (technological and global) Trade growth Implications for agriculture and credit Wells Fargo Ag Industries - 3

4 How much GDP makes us happy? C + I + G - (X-M) GDP = 13,014 = 9, , , * 72% + 11% + 20% - 3% * Net exports bottomed out at ($757) or 5.7% in the 3 rd quarter of 2006 Source: BEA 3 rd Qtr (billions inflation adjusted dollars base 2005) Wells Fargo Ag Industries - 4

5 How much GDP makes us happy? C + I + G - (X-M) GDP = 13,014 = 9, , , * 72% + 11% + 20% - 3% * Net exports bottomed out at ($757) or 5.7% in the 3 rd quarter of 2006 Source: BEA 3 rd Qtr (billions inflation adjusted dollars base 2005) Wells Fargo Ag Industries - 5

6 A very difficult # to get a handle on 14,000 Billions of $s Real GDP 12,000 10,000 8,000 6,000 4,000 2,000 Source: WF Ag Industries, BEA Apr-59 Apr-69 Apr-79 Apr-89 Apr-99 Apr-09 Wells Fargo Ag Industries - 6

7 Another view 9.5 Logarithm of Inflation Adjusted GDP y = x R 2 = Source: BEA, Wells Fargo Ag Industries 7.9 Apr-59 Apr-69 Apr-79 Apr-89 Apr-99 Apr-09 Wells Fargo Ag Industries - 7

8 Blinded by the lately 8% GDP Change Year over Year 6% 4% 2% 0% -2% -4% Apr-59 Apr-69 Apr-79 Apr-89 Apr-99 Apr-09 Source: FRED, Wells Fargo Ag Industries Wells Fargo Ag Industries - 8

9 How does the US economy grow? Long-term GDP growth is 2.7% Output grows with inputs and productivity Larger labor pool 0.4% More capital invested 0.9% Productivity ygains 1.3% A recession temporarily reduces demand not supply capacity Wells Fargo Ag Industries - 9

10 If you don t have productivity Annual percent 4.5 Real GDP Growth Rate Productivity Capital Hours Source: CBO, Wells Fargo Ag Industries Wells Fargo Ag Industries - 10

11 Can fiscal and monetary intervention i really work? And, at what cost? Wells Fargo Ag Industries - 11

12 Does it make sense? 9 8 History + futures Fed Funds Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Source: FRED, Wells Fargo Ag Industries Wells Fargo Ag Industries - 12

13 Water everywhere, but not a drop to drink M2 Money Supply Growth 10 Year over Year Pct Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Source: FRED, Wells Fargo Ag Industries Wells Fargo Ag Industries - 13

14 This won t turn-out like they hope 300 Government Fiscal Stimulus month average - Billions $s 260 Spending Revenues Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: WF, CBO Wells Fargo Ag Industries - 14

15 The Federal Reserve must have Alzheimer s Unemployment and Inflation 14% Percentage Inflation 12% 10% 8% Unemployment 6% 4% 2% 0% Source: BLS, Wells Fargo Ag Industries Wells Fargo Ag Industries - 15

16 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 the money Expectations of traders Wells Fargo Ag Industries - 16

17 This one they don t control 150 US Trade Weighted Dollar 140 Cycle Trend Source: Federal Reserve, Wells Fargo Economics Wells Fargo Ag Industries - 17

18 For a quarter century this model worked. Now what? Wells Fargo Ag Industries - 18

19 DCF: Discounted Cash Flow Model 10 Year Treasury v. CPI 14% Percent 12% 10% 8% 10 Yr 6% 4% 2% 0% Inflation -2% Source: Wells Fargo Wells Fargo Ag Industries - 19

20 DCF: Discounted Cash Flow Model 18 Cap Rate: Trend + Cycle + Random Noise BAA AAA 6 4 Sep-59 Sep-69 Sep-79 Sep-89 Sep-99 Sep-09 Wells Fargo Ag Industries - 20

21 Asset strategy: Trend v. Cycle Cycle Buy at tops of cycles Sell at bottom of cycles Trend Falling: Leverage up and buy Stable: Neutral leverage / asset selective Rising: Leverage e down and sell average age and sub-par Random noise Wells Fargo Ag Industries - 21

22 So why a recovery? And for who? Wells Fargo Ag Industries - 22

23 All models are wrong. Some are useful. Wells Fargo Ag Industries - 23

24 Accelerating global demand Productivity Economic activity Technology + Food R&D Investment Energy Other Wells Fargo Ag Industries - 24

25 Climbing up Maslow s hierarchy 35,000 30,000 Global l Economic Activity it Billions of USD 25,000 20,000 World ex US and China 15,000 US 10,000 5,000 - China Source: USDA, Wells Fargo Ag Industries Wells Fargo Ag Industries - 25

26 Will you bet against it? Year over Year Pct Global Economic Growth China 8 World ex 6 US US Source: USDA, Wells Fargo Ag Industries Wells Fargo Ag Industries - 26

27 The net/net is very positive $8,000 Global Per Capita Real GDP $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 $4, Source: USDA, Wells Fargo Ag Industries Wells Fargo Ag Industries - 27

28 How will it hit agriculture and credit? Wells Fargo Ag Industries - 28

29 (Un?)intended Consequence Input cost 30% Energy + Agriculture Output value 100% Cost of food Expected Profit Land Values Global economic growth Wells Fargo Ag Industries - 29

30 Guess what? Feedback, delay and noise Millions of Barrels Petroleum Product Supplied 52 Week Average A bottom has formed Jan-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 Wells Fargo Ag Industries - 30

31 Convergence: Temporary or permanent? $s per barrel Nearby Crude Oil v Corn Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Source: NYMEX, Wells Fargo Economics Wells Fargo Ag Industries - 31

32 What do correlations really represent? Wells Fargo Ag Industries - 32

33 One of these things is not like the others US Supply and Demand Estimates Corn 05/06 06/07 07/08 08/09 09/10 Change Beginning stocks: Production Co-products Imports Total supply Feed Ethanol Other (0.0) Exports Total use Ending stocks Crop Year Billions of Bushels Wells Fargo Ag Industries - 33

34 They don t run just for fun Per Bushel basis $3.00 Iowa Ethanol Spread Gross Revenue - Feedstock+NG $2.75 $2.50 $2.25 $2.00 $1.75 $1.50 High cost break-evens $1.25 $1.00 $0.75 $0.50 $0.25 Efficient break-evens $- Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Source: Wells Fargo Ag Economics, USDA AMS Wells Fargo Ag Industries - 34

35 The worm always turns $10 Iowa Ethanol Revenue v. Feedstock $9 Per bushel basis $8 $7 revenue $6 $5 $4 feedstock $3 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Source: Wells Fargo Ag Economics, USDA AMS Wells Fargo Ag Industries - 35

36 Commodities prices will trend higher h but cycle violently with the global economy Prices don t confuse the effect for the cause

37 Implication for Livestock Huge future growth Global population p Global economic activity Proprietary intellectual property Animal biology is complex relative to crops Genetics Practices Barriers to entry grow Most value-added occurs off-farm Battle for the hearts and minds Animal welfare and restrictions Carbon taxes Wells Fargo Ag Industries - 37

38 Living a fool s paradise Index Inflation Components 225 All 215 Beef Poultry 205 Pork 195 Dairy Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Source: BLS, Wells Fargo Wells Fargo Ag Industries - 38

39 Not sustainable expect a hysteresis development Beef cattle price per cwt / bushel of corn Cattle to Corn Price ratio Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Wells Fargo Ag Industries Wells Fargo Ag Industries - 39

40 A long way from working Milk to Corn Price Ratio 10 9 All Milk per CWT / All Corn per bushel Jan- 94 Jan- 95 Jan- 96 Jan- 97 Source: WF Ag Industries Jan- 98 Jan- 99 Jan- 00 Jan- 01 Jan- 02 Jan- 03 Jan- 04 Jan- 05 Jan- 06 Jan- 07 Jan- 08 Jan- 09 Wells Fargo Ag Industries - 40

41 Remember fixed cost barriers Hog price per cwt / bushel of corn Hog to Corn Price ratio Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Wells Fargo Ag Industries Wells Fargo Ag Industries - 41

42 Their row has yet to be hoed Price dozen eggs / bushel of corn Egg to Corn Price ratio Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Wells Fargo Ag Industries Wells Fargo Ag Industries - 42

43 Row crop implications Food, fuel and fiber Great demand but who supplies it? Comparative versus competitive advantage Fuel is the wildcard Carbon tax collateral damage Technological change Can we export biofuels? Wells Fargo Ag Industries - 43

44 Increasing volatility has consequences All commodities will have greater price volatility Margin management v. guessing Risk management is never free Deleveraging has a financial cost The knowing doing gap Averages mean nothing Timing Inter-industry competitiveness Wells Fargo Ag Industries - 44

45 Everything 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

46 Cary Sandell Vice President Wells Fargo Food & Agribusiness 1248 O Street Lincoln, NE Phone: (402) cary.sandell@wellsfargo.com Wells Fargo Ag Industries - 46