Ag Quarterly NewsletterSpring 2017

Agricultural Finance

2 | Ag Quarterly

EconomyU.S. agricultural export volumes are a bright spot in a farm sector currently characterized by large crop inventories, low agricultural commodity prices, and declining farmland values. The volume of U.S. agricultural products exported in the first quarter of 2017 was up 23% on a year over year basis, driven by low prices and improving global economic conditions. Some sectors within the agricultural economy, such as dairy and hogs, are showing signs of improvement, and we expect farmland values to bottom in 2018 and begin a recovery in 2019. For more information on our outlook for farmland values, please see our Farmland whitepaper.1

Annual CropsWith the 20172 annual crop planting season underway, U.S. farmers are expected to reduce plantings by 1.2%, with significant declines in planted acreage of corn, (-5%, or 4.5 million acres) and a rise in soybean plantings (+7.3%, or 6.1 million acres). These changes suggest corn prices will rise marginally, reaching $3.70/bu in 2017 while soybean prices will continue to decline, reaching a marketing year average of $8.60/bu. Farmers are shifting acreage from corn to soybeans due to the relative profitability of planting soybeans. As a result of the shift in acreage, we expect corn inventories to decline for the first time in four years while soybean inventories should continue to rise.

$3.70 & $8.60Expected average price for corn and soybeans,

respectively, in the 2017-2018 marketing year

3

Permanent CropsLow pistachio and almond prices have spurred record export volumes, but we expect ample supplies to limit price increases in 2017. Export prices3 for almonds averaged $2.64/lb in the first quarter of 2017, down 24% on a year over year basis. Similarly, pistachio export prices in the first quarter averaged $3.13/lb, down 14% on a year over year basis. Almond and pistachio prices experienced a correction in 2016 following a slowdown in exports (Figure 1). For more information on the drivers behind this slowdown, see our Fall 2016 Ag Quarterly.4

The volume of almond and pistachio exports has since recovered. Seasonally adjusted export volumes of almonds and pistachios were up 20% and 76%, respectively, on a year over year basis in the first quarter of 2017. While strong exports are beneficial for the sector, we expect supplies to remain burdensome— limiting opportunities for price appreciation this year. The USDA expects California almond production to reach 2.2 billion pounds in 2017. If realized, this would be the largest U.S. almond crop on record. In addition, we currently expect 2017 California pistachio production to reach 550 million pounds, marking the second largest pistachio crop on record.

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Source: USDA FAS & MetLife

Figure 1: Almond and Pistachio Export Price and YOY Change in Export

Pistachio Exports Almond Exports Pistachio Price Almond Price

2.2 billion lbs.CALIFORNIA ALMOND PRODUCTION

USDA expects California almond production to increase 2.8%, reaching 2.2 billion pounds in 2017

4 | Ag Quarterly

Livestock

Livestock fundamentals are improving. U.S. milk and hog prices reported by the USDA were up 16% and 8.5%, respectively, in the first quarter of 2017 due to a global pullback in milk production and strong demand globally for hogs.

MilkSupply side factors are the main driver of higher milk prices. Dairy farmers in the EU, Australia, and New Zealand decreased milk production by 2.5% in the second half of 2016. Milk production in New Zealand is recovering, but a continued slowdown in production in Australia and the EU will provide support for global milk prices in 2017. Together, these three regions account for 30% and 75% of global fluid milk production and exports, respectively. U.S. dairy farmers have been the primary beneficiaries of the pullback in milk production globally. U.S. dairy farmers have continued to increase monthly milk production by 2% on a year over year basis during a period of higher milk prices (Figure 2). We expect the national all-milk price to average $18/cwt in 2017, up 11% from 2016.

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Source: USDA, Dairy Australia, Brian Gould & MetLife

EU (28) New Zealand U.S. Australia

Figure 2: Monthly Change in Milk Production (YOY)

16% & 8.5%from 2016Q1

Increase in milk and hog prices, respectively, reported by the USDA

5

HogsHog prices have risen in spite of increased supplies. The USDA’s Quarterly Hogs and Pigs report, released on March 30, showed a 4% increase in the number of market hogs and breeding animals. Stronger exports and a 6% increase in hog processing capacity in 2017 have provided price support amid growing inventories. YTD pork exports are 31% above 2016 levels and export demand is expected to remain strong due to declining pork production in China. We expect hog prices to average $51/cwt in 2017, up 8% from 2016.

Agribusiness

Processors of soybeans and hogs experienced favorable margins in the first quarter of 2017. However, the large acreage shift to soybeans and increased hog processing capacity suggest margins could be pressured in the second half of 2017.

Soybean crush marginsIllinois soybean crush margins5 were $0.65 per bushel in the first quarter of 2017, up 18% from the first quarter of 2016. Crush margins will likely trend lower in the remainder of 2017 as higher global production weighs on the soybean complex (soybeans, soybean meal, and soybean oil are collectively referred to as the soybean complex). Soybean meal is primarily used for animal feed and soybean oil is used for biodiesel production and human consumption.

Livestock processorsDifferences in wholesale and farm level hog prices can be used to calculate gross margins for livestock processors. Gross margins for pork processors were up 7% on a year over year basis in the first quarter of 2017. We do not expect this trend to continue due to a 6% increase in hog slaughter capacity in 2017, which will increase competition for market hogs.

18% & 7%from 2016Q1

Increase in gross margins for soybean and hog processors, respectively

6 | Ag Quarterly

Timber

Timber demand fundamentals are improving, but we expect ample supplies in the U.S. South to continue weighing on sawtimber prices in the region.

U.S. sawtimber prices in the first quarter were mixed in spite of improved demand. Southern Yellow Pine (SYP) sawtimber prices were down 1.6% while Douglas Fir (DF) sawtimber prices were up 2.5%6 on a year over year basis. SYP forests are located in the U.S. South, while DF forests are located in the Pacific Northwest. The U.S. housing market is the primary demand driver for timber in the U.S. South. The slow recovery of the U.S. housing market has led to deferred harvests and growing inventories in the U.S. South, which have in turn weighed on prices.

U.S. housing starts were up 9% on a year over year basis in the first quarter of 2017, and are on pace to meet our forecast of 1.3 million units in 2017. For more information on our housing starts forecast, see our white paper titled Millennials, Housing, and the Timber Demand Recovery.7 Additionally, the Trump administration placed 20% tariffs on Canadian softwood lumber imports in response to an ongoing dispute between the U.S. and Canada. This benefits U.S. timberland owners because it limits competition and increases domestic log consumption.

Unlike the U.S. South, strong export demand has limited supply growth in the Pacific Northwest. U.S. softwood log export volumes increased 16% on a year over year basis in the first quarter of 2017. Robust construction activity in China is driving growing international demand for U.S. logs and has provided recent support for DF prices. Construction activity in China was up 12% year over year in the first quarter of 2017 (Figure 3) and is expected to grow 5.5% in 2017.8

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Source: China National Bureau of Statitstics, Haver Analytics, MetLife

Figure 3: Construction Activity-China (YOY change)

Endnotes1 https://www.metlife.com/assets/cao/investments/MetLifeAgLandValuesWhitePaper_L1116483575[exp1217].pdf2 2017-2018 marketing year3 Weighted average price of all categories of almonds and pistachios reported by the USDA’s Foreign Agricultural Service4 https://www.metlife.com/assets/cao/investments/MetLifeAgQuarterlyFall2016_L1116483575[exp1217].pdf5 The soybean crush margin represents a gross margin for processing soybeans into soybean meal and oil.6 RISI Log Lines and Timber Mart-South7 https://www.metlife.com/assets/cao/investments/MetLifeMillennialsHousingandtheTimberRecovery_WhitePaper.pdf8 WOOD Markets Int.

L1017499351[exp0818][All States] © 2017 METLIFE, INC.

www.metlife.com/ag

All information contained herein has been obtained by MetLife from sources believed by it to be reliable. The analysis, opinions, forecasts and predictions contained herein are believed by MetLife to be as accurate as the data and methodologies will permit. However, MetLife makes no representations or warranties, either expressed or implied, to any persons as to the completeness, accuracy and reliability of such information, forecast and/or predictions and expressly disclaims any liability with respect to any of the foregoing.

These views are those of MetLife, Inc. in connection with management of its own proprietary accounts. MLIA does not currently provide investment advice concerning agriculture at the present time.

MetLife’s Agricultural Finance Group ranks among the most active private agricultural, agribusiness and timberland mortgage lenders in North America, with a total agricultural mortgage portfolio of almost $15 billion. We specialize in providing intermediate and long-term fixed and adjustable rate mortgage financing.

Our regional network keeps us close to our markets and better positioned to serve your long-term mortgage financing needs on a variety of property types, including dry land and irrigated farms, permanent plantings, ranchland, food and agribusinesses, timberland and forest product companies.

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Fresno, CA | Overland Park, KS | Memphis, TN, and a consulting office in Sao Paulo, Brazil.

Agricultural Market Research

Eric RamaHead of Agricultural Research

Blaine NelsonResearch Associate