Managing Agricultural Risk July 2011

Transcription

1 Managing Agricultural Risk July 2011 Michael Swanson Ph.D. Wells Fargo Ag Industries

2 Easy to confuse Dangerous when confused Wells Fargo Ag Industries - 2

3 Is Agricultural Risk Rising? Yes Quantifiably Qualitatively Emotionally Drivers Interconnected markets Policy Implications Wells Fargo Ag Industries - 3

4 Count Count Proportion per Bar Not a physical constant 300 Daily percent price volatility CME corn Proportion per 0.1 Bar OLD Daily Percentage Change in CME nearby corn contract NEW 2007 to June to 2006 N of Cases 1,120 1,120 Minimum -7.8% -6.5% Maximum 9.8% 8.4% Range 17.6% 14.9% Median 0.0% 0.0% Arithmetic Mean 0.1% 0.1% Mode 0.0% 0.0% Standard Deviation 2.3% 1.7% Skewness (G1) Kurtosis (G2) Wells Fargo Ag Industries - 4

5 Everything is connected Malting Barley Price $14 $13 $/cwt in MT $12 $11 $10 $9 $8 $7 $6 $5 $4 USDA, Wells Fargo Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Wells Fargo Ag Industries - 5

6 Emotions matter in risk management Credit decisions Probable (when will it happen?) Possible (could it happen?) Fear and Greed Integrating risk and reward Single owner/operator Multi-party Trader or risk manager Treasury versus operations Wells Fargo Ag Industries - 6

7 Cohorts Old school Haven t financially managed risk Won t financially manage risk Current Crop Selectively managed financial risk Increasingly managing financial risk Next Up From the start managed financial risk Wells Fargo Ag Industries - 7

8 Why now? The Drivers Wells Fargo Ag Industries - 8

9 An intersection of factors Global economic growth China moves to the next stage The US dollar makes US agriculture cheap Biofuels policy Deliberate Secondary consequences Speculative tools and fools Wells Fargo Ag Industries - 9

10 A bad forecast China: Real Per Capita Income $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ Wells Fargo Ag Industries - 10

11 Look at the impact already China Agricultural Imports 70 Millions of metric tons Grain Oilseed Source: USDA FAS, Wells Fargo Ag Industries Wells Fargo Ag Industries - 11

12 What if they want to eat meat? Kgs. Commodity Meat, Beef and Veal Meat, Swine (KG) Poultry, Meat, Broiler Country Grand Total Hong Kong United States Argentina Kuwait Brazil Australia Qatar Canada United Arab Emirates EU Chile Belarus Uruguay Singapore Taiwan Mexico Korea, South Russia Kazakhstan Switzerland Venezuela Jamaica Bahrain China Wells Fargo Ag Industries - 12

13 A razor sharp two-edged sword 45% The Value of Agricultural Exports Relative to Farm Gate Revenue 40% 35% 30% 25% 20% Source: Wells Fargo Ag Industries F Wells Fargo Ag Industries - 13

14 What if China stumbles? YOY Pct Chg 15% China: Real Per Capita Income 10% 5% 0% -5% Source: USDA Wells Fargo Ag Industries - 14

15 The role of biofuels policy How do you get off the tiger? Is ethanol policy factored into land? Can you replace the BTUs and octane? What numbers are right? Net benefit? How much growth will there be? Follow the money Wells Fargo Ag Industries - 15

16 Biofuels inside the US US Domestic Grain Usage 70% Feed 60% 50% FSI 40% 30% 20% Exports 10% 1969/ / / / / / / / /2010 Wells Fargo Ag Industries - 16

17 Ag payments are now routed thru transportation Government Payments 14 Billions of dollars VEETC Pmts Total ag direct pmts E 2012E Wells Fargo Ag Industries - 17

18 What are the implications Different sector different tools Wells Fargo Ag Industries - 18

19 Row crops Marketing versus hedging Farmers have always been marketers Hedging is a completely different animal Covering both sides simultaneously Living with limited return The seen and the unseen Income earned The risk avoided Do they need new tools or new attitudes Wells Fargo Ag Industries - 19

20 Are the tools important? Risk Tool Pro Con Hedge To Arrive Futures Accounts Over the Counter No margin funding required Cost established upfront Delivery point established at sale Local connection Liquidity Transparency Options trading possible No counter-party risk Open on basis and delivery No margin funding required Cost established upfront Known counter-party risk Counter parties typically stronger financial institutions Open on basis and delivery Locked into single delivery point Limits ability to negotiate better basis Rolling risks Hard to evaluate counterparty risk Typically more expensive Margining required Harder to manage emotionally due to constant repricing Can become speculative instead risk managing Open on basis and delivery Open on basis and delivery Dodd-Frank act reduces number of parties willing to enter swap Wells Fargo Ag Industries - 20

21 Livestock It depends on who you are Key Livestock Risk Factors Feed Self supplied Purchased Replacement animals Self supplied Purchased Output price Open bid Contracted Technology Open market Proprietary Land base Significant Minor Permitting Minor Significant Broilers Looking for further tolling arrangements Cattle feeders Generational split Small operators with large feed bases still open Larger operators almost completely hedged Hog feeders increasingly hedged Dairy still the wild west of financial risk Wells Fargo Ag Industries - 21

22 Summary Agricultural risk is rising What creates opportunity increases risk Prediction versus planning Fools believe in their predictions Management by scenario Policy makers have a limited role Unintended consequences Trying to save everyone won t work Wells Fargo Ag Industries - 22