Economic Update: Managing Risk in a Deleveraging and Rebalancing Global Economy

1. Economic Update: Managing Risk in a Deleveraging and Rebalancing Global Economy 13th Annual Farmer Cooperatives Convention December 6-7, 2010 Presented by: Terry N. Barr, Senior Director of Industry Research Knowledge Exchange Division, CoBank, ACB E-mail: tbarr@cobank.com Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

2. The Emerging Business Environment Will Include …….. • Continuing volatility … meaning more working capital, lower acceptable levels of leverage and mandatorywell-defined strategies for risk management. • Increasing costs from regulatory compliance and declining support from federal programs. • More challenging access to capital markets with broader risk analysis, including counterparty. • Changing U.S. consumer behavior & demographics. • Growing trade dependency (more risk & volatility) • Increasing consolidation and realignment of supply chains. Domestic integrated into global chains. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

3. Labor Force Growth is Driver of Future Growth and Potential Trade Issues 1. A labor force of 1.7 billion workers must be integrated into the global economy! 2. A consumer base of 1.7 billion people with more purchasing power must also be integrated! Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

4. Asia Becoming More Significant Factor in Balancing Global Growth Advanced economies accounted for over half of world growth rate from 1970 to 2008. From 2010 to 2012 they will account for less than one-third! Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

5. Dollar Erosion Has Boosted Foreign Buying Power and Commodity Prices Competitive devaluations and protectionism will be significant issues in 2011-12! From March 2009 ………. -14% From 1997-03 average … -28% Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

6. The U. S. Transition Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

7. Recovery Shaped by Cautious Consumer and Financial Headwinds Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Consumer holds the key to the pace of this recovery! Recovery path dramatically different!

8. Continued High Unemployment and Excess Capacity in Labor Markets This transition required 5 years with average growth rate of 4.5%! Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

9. Federal Reserve White House Congress Fiscal and Monetary Policy: Setting Stage for 2011 and Beyond Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

10. What Will Election Mean For The Evolving Business Environment? Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) • Lame duck session: • Tax extenders • 2011 budget spending • New 2011 Congress ? • Deficit reduction will dominate Congress through session. Policy changes through funding levels. • Spending cuts • Revenue increases • No farm bill but change through budget cuts! • Regulatory activities: • Agenda may accelerate! • Food safety, environment, nutrition, etc.

11. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Economic Conditions Increasingly Diverse in Agriculture

12. Smaller Than Expected 2010 Crops Lead Grain Stocks Lower Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

13. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Acreage Shifts Will Favor Corn But Weather / Input Costs Will Play Role!

14. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Key Crop Input Prices Set Globally and Likely to Remain Volatile China has increased loans to their agricultural sector, particularly sectors with supply shortages!

15. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Reduced Global Harvest Boosts Prospects for Wheat market

16. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) World Wheat Stocks Rebounding

17. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Declining FSU-12 Wheat Production Driving Markets 28% of world trade

18. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Rebound in Global Wheat production Could Push U.S. Stocks Higher in 2011

19. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) U.S. Corn Market Riding the Ethanol Wave

20. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Corn Stocks Remain Tight Even With Large Harvest Nearly 40 percent of the crop is utilized for ethanol. Total corn use is now over 13.5 billion bushels!!

21. Ethanol Increases Continue to Drive Corn Markets Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

22. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Corn Prices Rally Strongly into 2011

23. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Soybean Market Riding Export Wave to China

24. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Global Trade Remains Strong 60% to China 39% to China

25. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) South American Crop Size Will set Tone for 2010 and 2011 Cropyears

26. Sharply Larger Global Soybean Stocks Weighing on Markets Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

27. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) U.S. Soybean Stocks Limited by Strong Demand and Acreage Competition

28. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Soybean Prices Reflect Increasing Pressures From Larger Supplies

29. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Cotton Market Riding Export Wave to China and Low Stocks

30. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) World Cotton Stocks Beginning Rapid Adjustment

31. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Increased Acreage and Output in 2011 Would Still Leave Stocks Low

32. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Cotton Prices Sharply Higher As Global Stocks Decline

33. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Livestock, Dairy and Poultry Can Domestic Meat and Dairy Industry Bid Grain Out of Ethanol and Export Sectors?

34. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Meat Industry Will Be Cautious About Expansion in 2011-12

35. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Higher Broiler Shipments in 2011 Will Boost Meat Exports • Export share of • 2011 U.S. production • Broilers ….. 18% • Beef ………. 9% • Pork ……… 20% • All meat .......16% • Dairy (fat)… 3%

36. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Meat Exports at Plateau Following Strong Upward Trend

37. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Broiler Industry Gauging 2011 Exports, Consumers and Feed Costs

38. Data source: Livestock Marketing Information Center; USDA, NASS Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Cow Calf Returns Likely to Remain Positive As Inventory Continues Decline

39. Data source: Livestock Marketing Information Center; USDA, NASS Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Ability to Pass Increased Costs to Consumer Will Set Cattle Prices

40. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) International Dairy Product Prices: Oceania

41. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Dairy Sector Challenged by Volatility in Product and Feed Prices Increasing competition in a smaller global marketplace!

42. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Milk Production Potential Likely to be Limited by Feed Cost Escalation

43. Agriculture Sector Rebounding Sharply in 2010-11 Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

44. Farm Income: Agriculture Continues Strong Performance Record high Net cash income in agriculture is now averaging around $80 billion a year compared with an average of $60 billion for the previous decade….. but more volatility! Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

45. Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) Farm Debt Leveraging Has Not Followed Land Prices Higher

46. We May All Have to Get Out and Push But Opportunities Abound! Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary) The Road Ahead