Global Recession the impact on Agriculture

1. Bill Cordingley Head, Food & Agribusiness Research and Advisory Americas March 2010 Global Recession – the impact on Agriculture Rabobank International

2. For the love of farming! Rabobank International

3. Rabobank International 3 Subsidiary of Rabobank Group – Cooperative bank based in the Netherlands Present in 43 countries worldwide with 1,508 offices Over 60,000 staff serving over 9,000,000 clients Ranked 4th safest bank in the worldGlobal Finance, September 2008 AAA ratedStandard & Poor’s, Moody’s, since 1981Dominion Bond Rating Service, since 2001 Best Investment Bank in the NetherlandsJuly 2008 Total assets of EUR 570.5 billion Rabobank, December 2007 Net profit of EUR 2.7 billion Rabobank, December 2007

4. The global Food and Agribusiness Research (FAR) group has 80 members in 13 countries Rabobank International

5. The GFC and global recession Rabobank International

6. The deepest economic contraction in the last 50 years, and not just in the U.S. - The great recession! The worst financial and banking crisis since the Great Depression of the 1930’s Large and growing US deficit Lack of liquidity in the financial system and rapid deleveraging adding to the credit crisis Millions of insolvent individuals (foreclosures) Contraction in consumption and consumer confidence at lowest levels since they started measuring Doubling in unemployment Fear and uncertainty prevail! What the crisis looked like Rabobank International The crisis has shocked the US and global economy. In broad strokes what we have seen is:The crisis has shocked the US and global economy. In broad strokes what we have seen is:

7. The Credit Crunch Rabobank International

8. Rabobank International In comparison, US farm assets total nearly $2 trillion (Farm real estate assets=farmland, Machinery and equipment, Value of crops stored, Livestock and poultry inventories, Purchased inputs on hand, Investments in cooperatives, Other financial assets such as cash and checkable deposits) In comparison, US farm assets total nearly $2 trillion (Farm real estate assets=farmland, Machinery and equipment, Value of crops stored, Livestock and poultry inventories, Purchased inputs on hand, Investments in cooperatives, Other financial assets such as cash and checkable deposits)

9. Rabobank International Income and population growth are key drivers of increased food consumption The global financial crisis in late 2008 and 2009 led to a world wide recession last yearScarcity of credit, declining U.S. demand for imports and collapsing asset valuations globally precipitated a serious global recession in 2009. The International Monetary Fund (IMF) expects the global economy to contract 2.3 percent in 2009. However, due to the early and coordinated government intervention around the world a much worse scenario appears to have been avoided. The IMF is currently predicting a global rebound of 3.1 percent growth in 2010. This will recapture the year of lost growth in 2009, effectively putting the global economy 24 months behind its growth path prior to the crisis. China’s population – 1.4 bln India – 1.2 bln US + Canada – 350 mln In the next ten years India’s population is expected to grow by over 150 mln. The global financial crisis in late 2008 and 2009 led to a world wide recession last yearScarcity of credit, declining U.S. demand for imports and collapsing asset valuations globally precipitated a serious global recession in 2009. The International Monetary Fund (IMF) expects the global economy to contract 2.3 percent in 2009. However, due to the early and coordinated government intervention around the world a much worse scenario appears to have been avoided. The IMF is currently predicting a global rebound of 3.1 percent growth in 2010. This will recapture the year of lost growth in 2009, effectively putting the global economy 24 months behind its growth path prior to the crisis. China’s population – 1.4 bln India – 1.2 bln US + Canada – 350 mln In the next ten years India’s population is expected to grow by over 150 mln.

10. …2009 retraction… Rabobank International

11. …2010 …a rebound – but risks to the downside! Rabobank International

12. U.S. Growth still an important driver for global economy US Economy 25% of global GDP 71% of GDP private consumption 5.7% for 4Q09 Boom in Q4 GDP driven by stimulus and inventory cycle Growth expected to fall back in Q2-4 Rabobank International Billions of current dollars, seasonally adjusted: Personal consumption $10132.9 Private investment $2022.1 Net exports/imports $590.5 Government consumption/expenditures $2905.9 Billions of current dollars, seasonally adjusted: Personal consumption $10132.9 Private investment $2022.1 Net exports/imports $590.5 Government consumption/expenditures $2905.9

13. Rabobank thinks we are in for a funny shaped recovery! Traditional talk of recovery usually a letter of the alphabet... V, W, L, U... But what if it’s a mathematical symbol instead? Square root Lack of a long-term growth driver Jobless recovery 13 Rabobank International

14. US Consumer shell shocked! Rabobank International

15. Worst unemployment since early 1980’s Over 7 million US jobs lost in this recession Rabobank International

16. Consumer wealth battered! Rabobank International DJIA; October 07 to March 09 drop of 54%, Markets have rallied since then but sill 25% off highs of 07 Home values were relatively stable throughout the 1990’s (CAGR= 1.97%) From 2000 to 2006 home values in the U.S. began to spike (CAGR= 12.1%) driven by more flexible credit terms From June 2006 to February 2009, housing values declined more than 32% Very anemic recovery in housing values so far with no real signs that there will be any significant rebound soon. Government incentives for first time home buyers helps prices to rebound, but prices then begin to decline again once the initial closing date of the program is reached DJIA; October 07 to March 09 drop of 54%, Markets have rallied since then but sill 25% off highs of 07 Home values were relatively stable throughout the 1990’s (CAGR= 1.97%) From 2000 to 2006 home values in the U.S. began to spike (CAGR= 12.1%) driven by more flexible credit terms From June 2006 to February 2009, housing values declined more than 32% Very anemic recovery in housing values so far with no real signs that there will be any significant rebound soon. Government incentives for first time home buyers helps prices to rebound, but prices then begin to decline again once the initial closing date of the program is reached

17. Very difficult busting of the credit bubble has seen mortgage debt growth flat line! Rabobank International A quarter of U.S. homeowners with mortgages have negative equity in their homes. Another quarter have <10% equity No easy way out of this soon for home owners or the building industry

18. There has been a significant change in consumer mindset! Rabobank International

19. Major roadblock for consumption and thus demand through the value chain! Rabobank International CPI -0.4% in 2009: first full-year decline since 1955

20. Foodservice Quarterly sales, Q3 09 v Q4 08 Rabobank International

21. Impact on global Agriculture Rabobank International

22. Rabobank International

23. Aggregate impact in the US significant but far from catastrophic Rabobank International US net farm income down by $30 billion in 2009 Set to recover by $7 billion in 2010 Just $1.4 b below 10 yr average US Net Farm Income measures income from production in the current year, whether or not sold within the calendar year. USDA predicts Net Farm Income to rise $6.7 billion (11.8%) from 2009 to $63 billion in 2010 This recovery is still $1.4 billion below the 10-year average of $64.5 billion Whereas Net CASH Income measures only cash transactions within the calendar year and is expected to rise above it’s 10-year average in 2010. US Net Farm Income measures income from production in the current year, whether or not sold within the calendar year. USDA predicts Net Farm Income to rise $6.7 billion (11.8%) from 2009 to $63 billion in 2010 This recovery is still $1.4 billion below the 10-year average of $64.5 billion Whereas Net CASH Income measures only cash transactions within the calendar year and is expected to rise above it’s 10-year average in 2010.

24. Lower production costs in 2010, but still historically high Crop production costs fell 6-14% in 2009, expected flat in 2010 - 2011 Still about 30-40% higher than 1999-2009 average. Rabobank International Corn production costs (-14%) in 2009 and are expected to stay flat in 2010 rising slightly in 2011. Still about 30% higher than 1999-2009 average. Wheat production costs (-16%) in 2009 and will slightly rise in 2010/2011. Remaining 35-40% higher than 10 year average Soybean production costs fell less (-6%) in 2009 and will see a slightly higher rise in 2010/2011. Remaining 30-40% higher than 10 year averages. Corn production costs (-14%) in 2009 and are expected to stay flat in 2010 rising slightly in 2011. Still about 30% higher than 1999-2009 average. Wheat production costs (-16%) in 2009 and will slightly rise in 2010/2011. Remaining 35-40% higher than 10 year average Soybean production costs fell less (-6%) in 2009 and will see a slightly higher rise in 2010/2011. Remaining 30-40% higher than 10 year averages.

25. Relief due to fuel and fertilizer price declines Rabobank International The two inputs which had the biggest impact to rising production costs during the “boom” are also the same inputs which saw the biggest decreases; fuel and fertilizer. In 2009 fertilizer expenditures dropped 27% driven by lower prices and volumes. Volumes are expected to recover in 2010 albeit at lower prices driving total expenditure down a further 8%. Fuel expenditures dropped 35% in 2009 and rising prices in 2010 are expected to increase expenditures 12% in 2010. Biotech seeds showed not impact from the recession as farmers sought to drive yeild growth and reduce other costs through adoption of this technology. The DOJ and USDA have expressed concerns that the concentration in this sector is also playing a part in ensuring strong price growth for these technologies and this battle lies ahead! The two inputs which had the biggest impact to rising production costs during the “boom” are also the same inputs which saw the biggest decreases; fuel and fertilizer. In 2009 fertilizer expenditures dropped 27% driven by lower prices and volumes. Volumes are expected to recover in 2010 albeit at lower prices driving total expenditure down a further 8%. Fuel expenditures dropped 35% in 2009 and rising prices in 2010 are expected to increase expenditures 12% in 2010. Biotech seeds showed not impact from the recession as farmers sought to drive yeild growth and reduce other costs through adoption of this technology. The DOJ and USDA have expressed concerns that the concentration in this sector is also playing a part in ensuring strong price growth for these technologies and this battle lies ahead!

26. Divergent fortunes for two big drivers – livestock and crops Rabobank International Abundant crop production and shrinking demand is expected to lower crop receipts for a second year in a row in 2010. Wheat and soybeans, respectively, will see the largest drop in cash receipts. Livestock cash receipts are expected to improve, particularly for dairy farmers and cattle producers. As consumers increase their consumption of animal products market prices will improve to benefit the livestock sector’s earnings. Abundant crop production and shrinking demand is expected to lower crop receipts for a second year in a row in 2010. Wheat and soybeans, respectively, will see the largest drop in cash receipts. Livestock cash receipts are expected to improve, particularly for dairy farmers and cattle producers. As consumers increase their consumption of animal products market prices will improve to benefit the livestock sector’s earnings.

27. Market volatility has receded; but still remains historically elevated Rabobank International Creates liquidity squeeze and need for better cash management as a result of margin calls Uncertainty around profitability as a result of volatility in movement of production costs vs revenue Creates liquidity squeeze and need for better cash management as a result of margin calls Uncertainty around profitability as a result of volatility in movement of production costs vs revenue

28. Farmers on average have strong equity and are reasonably well positioned to weather the downturn However those that have used debt to build scale without achieving rapid productivity growth in recent years are facing an uncertain future with returns unlikely to rebound quickly and uncertain lenders much tougher on covenants going forward! Rabobank International Farm equity is expected to drop for the third consecutive year, but with the decreases being low single digit moves this leaves total equity (at $1.6bln) still above 2004 levels. 2010 farm sector debt is expected to see the biggest drop (-7%) in 2010 since the 80’s. Farm liquidity, as measured by Debt Repayment Capacity Utilization (DRCU), is expected to improve in 2010 due to higher net income. Farm equity is expected to drop for the third consecutive year, but with the decreases being low single digit moves this leaves total equity (at $1.6bln) still above 2004 levels. 2010 farm sector debt is expected to see the biggest drop (-7%) in 2010 since the 80’s. Farm liquidity, as measured by Debt Repayment Capacity Utilization (DRCU), is expected to improve in 2010 due to higher net income.

29. Conclusions Agriculture not a bad place to be in the GFC – in relative terms 2010 will see a slow and unsteady recovery in the global economy which will be tested by mid year as govt stimulus wears off, inventory cycle recedes and unemployment growth lags! Moderating costs will help both crops, meat and other sectors improve returns despite the soft demand environment in 2010 Volatility a factor for all farmers going forward – possibly new ways to look at risk in the supply chain will be necessary – partnership v’s adversarial?? Crystal ball is cloudy for everyone – only answer is to is to eliminate catastrophic risk, remain flexible, eliminate unnecessary costs and enhance productivity consistently and diligently Rabobank International

30. Thank you Rabobank International However, new challenges to ongoing M&A activity are emerging that may complicate the picture. Early in 2009, the Department of Justice (DOJ) in the new administration flagged significant concerns over the impact of recent and potential future consolidation on market competitiveness in agriculture, indicating that it would be scrutinizing future proposals closely to ensure they are not anti-competitive.While it is unclear what approach the DOJ and other enforcement agencies such as the Federal Trade Commission will take, future M&A proposals that could substantially lessen competition for farmers’ products will receive close scrutiny and could potentially be blocked or have substantial conditions imposed, including divestments of assets and other such measures.This will be an important issue for the industry in 2010, although it remains to be seen whether it will become a barrier to consolidation and M&A activity in 2010.   As debt and equity markets continue to recover and the economy stabilizes, Rabobank expects these key strategic drivers to foster further aggressive M&A activity as buyers’ and sellers’ valuation expectations converge and buyers’ financial capacity to complete transactions improves. However, new challenges to ongoing M&A activity are emerging that may complicate the picture. Early in 2009, the Department of Justice (DOJ) in the new administration flagged significant concerns over the impact of recent and potential future consolidation on market competitiveness in agriculture, indicating that it would be scrutinizing future proposals closely to ensure they are not anti-competitive.While it is unclear what approach the DOJ and other enforcement agencies such as the Federal Trade Commission will take, future M&A proposals that could substantially lessen competition for farmers’ products will receive close scrutiny and could potentially be blocked or have substantial conditions imposed, including divestments of assets and other such measures.This will be an important issue for the industry in 2010, although it remains to be seen whether it will become a barrier to consolidation and M&A activity in 2010.   As debt and equity markets continue to recover and the economy stabilizes, Rabobank expects these key strategic drivers to foster further aggressive M&A activity as buyers’ and sellers’ valuation expectations converge and buyers’ financial capacity to complete transactions improves.