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Agriculture Economic Drivers in 2013 and Beyond

Agriculture Economic Drivers in 2013 and Beyond. March 13, 2013. Steven L. Elmore Director of Global M arket Intelligence – DuPont Pioneer and Chief Agricultural Economist . Why did prices go high in 2012? CBOT Nearby Weekly Prices. Soybeans ($/Bushel). Corn ($/Bushel).

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Agriculture Economic Drivers in 2013 and Beyond

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  1. Agriculture Economic Drivers in 2013 and Beyond March 13, 2013 Steven L. Elmore Director of Global Market Intelligence – DuPont Pioneer and Chief Agricultural Economist

  2. Why did prices go high in 2012? CBOT Nearby Weekly Prices Soybeans ($/Bushel) Corn ($/Bushel)

  3. Why did prices go high in 2012? Supply or Demand & Outlook for 2013… SUPPLY SHOCK When production goes down, prices increase.* DEMAND SHOCK Both Price and Production Go Up* Price Price Supply Demand Production Production * The converse is true.

  4. Why did prices go high in 2012? Drought? This started in the previous year as Argentina and Brazil had lower production. The US & Canada needed to produce a big crop to rebuild world stocks. Then the drought hit…

  5. U.S. Nominal Corn Price – 1866-2012 We had droughts before, but never these price levels. 2006-2012 Average = $4.78 $/Bushel It has to be something more…a DEMAND SHOCK? 1970-2005 Average = $2.30 1940-1969 Average = $1.20 1911-1939 Average = $0.73 1866-1910 Average = $0.44

  6. Are Income & Population Driving High Prices? Trillion Billion Population and Income have been going up for a long time, why are prices now going up?

  7. Agriculture Growth Periods in the past 50 years Political Demand Shocks With Economic Consequences for the Global Grain Complex

  8. World Population: A Closer View Billion Income changes in the developing word are improving people’s diets on a global basis.

  9. Dynamics of Food Demand Growth • 1.4 billion people live on less that $1.25/day ($456/yr) • 1 billion cannot afford 1,800 calories per day. • 2.6 billion people live on less than $2.00/day ($730/yr) • At $2.00 per day most hunger (calorie) problems solved, but 1 billion still suffer nutritional deficiencies. • As their incomes rise from about $2 to $10 per day, people eat more meat, dairy products, eggs, edible oils, fruits & vegetables causing rapid growth in raw ag commodity demand. ($730-$3,650/yr) • After about $10 per day, people buy more processing, services, packaging, variety, and luxury forms, but not more raw ag commodities. (>$3,650/yr)

  10. US & World Real Per Capita GDP ($/person) In aggregate, it appears the world is above the income level where diets change.

  11. China’s Middle Class Impact U.S. Dollars China is an example of an economy that is improving dramatically. As more of their population moves to the middle class, the world commodity sectors have been changed forever.

  12. China’s Trade with the United States Billion $ Exports to the world fueled China’s growth in income.

  13. China’s Trade with the United States Billion $ Exports to the world fueled China’s growth in income.

  14. China’s Growing Middle Class – Driving from an Exporter to an Importer in Major Commodities Crude Oil Trade (Mil BBL/Day) Soybean Trade (MMT/Year) Policy changes in the mid 1990s changed China from a net exporter to importer of crude oil and soybeans.

  15. China’s Growing Middle Class – Driving from an Exporter to an Importer in Major Commodities Crude Oil Trade (Mil BBL/Day) Soybean Trade (MMT/Year) Policy changes in the mid 1990s changed China from a net exporter to importer of crude oil and soybeans.

  16. Crude Oil Nearby Weekly Prices $/BBL Higher crude oil prices caused reverberations around the world.

  17. Crude Oil Nearby Weekly Prices $/BBL Higher crude oil prices caused reverberations around the world.

  18. U.S. Department of Energy Forecasts U.S. Blended Motor Gasoline Consumption The RFS was set in the environment of the 2007 forecast. Because of the economic slowdown, fewer miles have been driven, and the newer cars are more fuel efficient. In 2007 they forecast 149.5 bil gal would be consumed in 2013; the current forecast is 133.8 or a difference of 15.7 bil gal. This implies that the 10% level (E10) is also reduced by 1.57 bil gal. Translated to ethanol production (2.7 gal/1 bu) it equates to 580 mil bushels of corn. [~800 mil bu at the end of the forecast.] Billion Gallons Source: DOE-Energy Information Administration, Annual Energy Outlook (AEO).

  19. Global Sugar & Ethanol Situation As a result of policy actions, the corn and soybean markets are tied to the volatility in the sugar market and the crude oil markets.

  20. Brazil Sugar Situation Sugar Cane Production Sugar Cane Area & Yield When sugar cane yields rebound, prices will entice more ethanol made from sugar.

  21. EU Biodiesel Policy Implications - Biodiesel Production by Source Rapeseed (Canola) Oil is the main source for biodiesel in Europe. Their primary biofuel.

  22. EU Biodiesel Policy Implications – Canada Canola Impacts Canola Oil Utilization Canada Canola Utilization Canola area in Canada is 2.2x as big as it was in 2001. The EU biofuel policy is a key driver.

  23. China’s Economic Growth from 2000-2010 Driving the Agricultural Demand Population +5.8% 1.27 bil to 1.34 bil Income (Real GDP) +174% $1.4 tril to $3.9 tril (Indexed to 2005) Per Cap Income (Real GDP) +159% $1,118 to $2,890 (Indexed to 2005) Per Cap Meat Consumption +21% 43 kg/yr to 52 kg/yr (Beef, Pork, Chicken) Per Cap Dairy Consumption +212% 7 kg/yr to 22 kg/yr (Fluid and Manufacturing) Crop Consumption +26% (Soybeans +191%, Corn+50%, Wheat +0.2%, Rice+1%, Cotton +96%) The magnitude of the growth on a per capita basis is phenomenal.

  24. World Consumption of Ag Products Diets are changing. This is easy to see in per capita meat consumption. This could underestimate the impact, because fish is not included.

  25. China Meat Production & Feed Use Meat Production Feed Use MMT MMT The growth the past decade is a prime example of the growing income per person driving demand of agricultural products.

  26. China Self-Sufficiency They are holding to their stated policy and soybeans are supplied by the world...the Americas!

  27. World Ending Stocks-to-Use World consumption did not only impact soybeans, but all major crops. Data Source: USDA WASDE February 2013

  28. Recent global consumption increases of Soybeans are coming from China, Argentina and Brazil Consumption of Soybeans –2004 to 2012e Change in Consumption of Soybeans2004 to 2012e MMT U.S. : -8% China accounts for 2/3 of the growth in domestic crush.

  29. Soybean Meal For Argentina and Brazil Brazil Argentina Mil MT Mil MT Argentina and Brazil have two different policy assumptions around the domestic crush growth.

  30. Recent global consumption increases of 5 major grains are coming from India, China and Biofuels Consumption of 5 Major Grains –2006 to 2012e Change in Consumption of 5 Major Grains2006 to 2012e MMT High crude oil prices, and biofuel policy, drove more corn to ethanol However, in 2012 it is estimated that U.S. ethanol only accounts for 4.8% of the total. Note: The five major grains are: corn, wheat, rice, sorghum, and barley

  31. Meat Per Capita Consumption Kg/person China’s meat consumption growth was phenomenal AND there is room to grow.

  32. China Corn Production & Consumption Lester R. Brown’s book, Who Will Feed China? A Wake-Up Call for A Small Planet, was released in 1995. Since that time, people have speculated that the new corn demand will create a tight global supply-demand balance and drive up prices. However, China has been an exporter of corn more years than an net importer. Million MT Billion Bushels

  33. Geographical Mismatch in Agriculture Production and Consumption It varies by agricultural product, but generally N. America, S, America and the Black Sea Regions are net exporters (black ovals) and developing Asia and Africa (red ovals) are net importers. Disparity in the global supply and demand balance is forecast to continue as income and population are forecast to rise in those regions of the world that are currently importers.

  34. Global Area Harvested by Crop 2002-2012 Farmers responded to the positive economics by increasing area in highly demanded crops.

  35. Cotton Situation and Outlook China India United States Brazil

  36. Global Area Harvested by Area 2002-2012 Farmers responded to the positive economics by increasing area.

  37. The Other Supplier to the World Corn Market? Ukraine Black Sea Mil MT Mil MT Can the Black Sea be a pressure relief valve in terms of world production? Black Sea Countries = Bulgaria, Georgia, Kazakhstan, Moldova, Romania, Russia, Turkey and Ukraine

  38. World Soybean Situation MMT 2011 Argentina and Brazil production set the stage for the high prices. The Western Hemisphere has benefitted from the China demand.

  39. Current Crop Situation (Production) The production estimates in South America indicate bigger crops coming. However, the Northern Hemisphere also needs to produce a big crop to increase ending stocks.

  40. Leading Corn Importers Corn Demand is increasing from many parts of the globe. Unlike soybeans, China is not the only driver.

  41. Leading Corn Exporters China is no longer a big net exporter. That has centered the world market on the traditional suppliers of U.S. and Argentina. Brazil has become a bigger player since the turn of the century. Who is the other emerging exporter?

  42. World Area is Encumbered to a Degree The corn, soybean and canola markets are going to have volatility as major portions of the markets are locked down with policy decisions.

  43. Global Crop Situation Corn is still king. The world, again, needs a good crop to provide a pressure relief valve for the ag commodities complex.

  44. 2012/13 Was an Anomaly in Corn! $/Bushel Average of 500 outcomes Yield: 162.1 bu./a. Price: $4.81/bu. Only 2 of 500 outcomes Yield: 124.6 bu./a. Price: $7.20/bu. (Source: FAPRI, University of Missouri stochastic baseline, prepared in February 2012)

  45. Global Impact of the Drought 2012/13 Rank in History: Corn 2nd highest production ever, Cotton: 3rd, Soybean: 1st, Rice: 1st, Wheat: 5th, Sugar is also projected to be a new record.

  46. Corn & Soybean Futures Prices Corn Futures Forward Prices Soybean Futures Forward Prices Corn Record High posted on Aug. 10, 2012 Soybean Record High posted on Sept. 4, 2012

  47. Drought Severity IndexJuly: 1934, 1935 & 1936 Historically, droughts do not reverse in a year.

  48. Drought Severity IndexJuly: 1954, 1955 & 1956 Historically, droughts do not reverse in a year.

  49. Drought Severity IndexJuly: 1987, 1988 & 1989 Historically, droughts do not reverse in a year.

  50. Drought Does Not Look to Be Over What will be the impact on plantings and yields?

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