Farm Financial Standards Council Annual Meeting

August 1, 2012

Economic and Financial Outlook

By Kevin G. Waspi, CFALecturer, Department of Finance, College of Business

Where Are We, and How Did We Get Here?

Why has Gold run from $1381 to $1931, (a 40% increase) and now trades at $1557? (up 12.7%)

Why do Interest rates continue to decline (and bond price continue to rise)

Graph courtesy of: http://www.bloomberg.com/markets/rates/index.html July 24, 2012

Why are Record Lows followed by more Record Low Interest Rates

13:01 EDT 12:01pmCDTIn a low-yield environment, the long bond offers the best option for investors to grab some extra yields. As such, it's no surprise the 30-year has been the best-performing Treasury of late. After breaking the 2.505% low on Monday set in December 2008, it's gotten down to 2.47% today. But that still leaves it way above the 2.14% yield on 30-year German government bonds and the US 10-year's 1.406%. Some analysts say further flight for safety could send the 30-year Treasury down to 2.3% or less. (min.zeng@dowjones.com) (END) Dow Jones Newswires

13:11 EDT 12:11pmCDTAnd the 10-year yield is at 1.39%, a record low.The US sells $35B of 2-year debt at a record-low 0.220% yield as overall demand was strong with a bid-to-cover ratio of 4--the highest since November. Indirect bidders took 30.9% of the $35B offering while direct buyers scooped up 9.9%. Both proportions are just a bit below recent averages. The decent results reflect the ongoing demand for safer assets despite the paltry payout. The secondary market hasn't moved much since the sale, with focus now shifting to tomorrow's auction of 5-year notes; they were recently up 2/32, yielding 0.551%. (cynthia.lin@dowjones.com) (END) Dow Jones Newswires

13:26 EDT 12:26pmCDTThe continued decline in Treasury yields just shows how nervous investors are on the fate of the euro zone. Treasurys make fresh session highs, pushing the 10-year yield to a new low of 1.394%. Charles Comiskey at Bank of Nova Scotia says 1.25% is a possible target. "We are in uncharted territory in terms of yields. At the end of the day, there is simply no sellers here." The 10-year note is 11/32 higher, yielding 1.396%. (min.zeng@dowjones.com) (END) Dow Jones Newswires

13:29 EDT 12:29pmCDTStrong demand and a record-low yield at a 2-year Treasury auction help lift futures to new highs. September 5-year climbs to 124-31, the highest ever for a lead contract, while September 10-year reaches 135-11, testing Monday's contract high of 135-12. September classic Treasurys, covering 15-25yr maturities, match the June 4 record of 153-03. (howard.packowitz@dowjones.com) (END) Dow Jones Newswires

Why are Stock Prices Little Changed in a YearFrom: http://finance.yahoo.com/q/ta?s=%5EGSPC&t=2y&l=on&z=l&q=l&p=&a=&c= (July 24, 2012)

Why Be Surprised?Japanese Monetary Policy: A Case of Self-Induced Paralysis?*

Ben S. BernankePrinceton University

December 1999• The Japanese economy continues in a deep recession. (Rather than discuss the

issues further in the abstract, I now consider some specific policy options of which the Japanese monetary authorities might now avail themselves.)

• Commitment to zero rates—-with an inflation target• Depreciation of the yen• Money-financed transfers (An alternative strategy, which does not rely at all on trade diversion,

is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money.)

• Nonstandard open-market operations• Needed: Rooseveltian Resolve (But Roosevelt’s specific policy actions were, I think, less

important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again.)

• For presentation at the ASSA meetings, Boston MA, January 9, 2000. • From: http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf

One of my favorite pictures, from “The Result of 35 Years of a Paper Global Monetary System”, By: Paul Kasriel, Northern Trust

Wednesday, August 29, 2007 Titled:“I'll skip the thousand words - the picture says it all”

Total US Debt / Sum of US Nominal Physical and Human Capital*%

*Human capital is defined as capitalized value of educational and research expenditures.

Interpreting Data

• We React to the most recent news• We Often feel comfort doing what others do• We Overlook long-term evolution in favor of

short-term information (frontopolar cortex)• We See patterns where none exist

• We want answers, and if none are available, we make them up

John Maynard Keynes

• “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” (The General Theory of Employment, Interest and Money,1936, pp. 161-162)

Is it possible that our current situation is nothing more than transition ?

• Inflation? Gold (commodities and farm land) perform

• Deflation? Fixed Income (Treasuries) perform

• Normal Growth? Equities perform

• Stagflation? (Don’t take me there!)

Condition X?Illinois Farm Land

From: http://www.farmdoc.illinois.edu/manage/land_value.asp

Thoughts From CropLife® MagazineFrom: http://www.croplife.com/article/24813/too-much-of-a-good-thing-can-spoil-ag-s-party (March 19, 2012)

• Over the last five issues of CropLife® magazine, starting in September 2011, we discussed our views on various dimensions to a question that we have been concerned about since late 2010: “Is Agriculture Facing a Bubble?”

• November 2011 conference sponsored by the Federal Reserve Bank of Chicago entitled “Rising Farmland Values: Causes and Cautions.”

• CropLife® sees a “structural shift” in the long-term trend of crop prices and presents three “scenarios” leading to lower land values

• All three cases suggest that corn prices will trend downwards from a forecasted $3.50 to $6.50 price range in 2012 to a new base price level of $3.75 to $4.25 per bu., over the next five years.

• Based on forecasted corn prices, our net present land valuation model (based on a detailed multi-year corn profit model) suggests that our current valuation of $7,800 per acre for high productivity farmland (180 to 200 bushels/acre), could decline 43% to 52%, to $3,700 to $4,500 per acre.

• Our $7,800 per acre value is somewhat less than the $8,198 per acre value for high-grade farmland, based on Iowa State’s recently announced 2011 land value survey. It is important to note that our estimated downside value range would fall in line with comparable Iowa farmland values in 2006 and 2007.

Consider Demographics In The U.S.• On January 1st, 2011 the very first Baby Boomers (those born between 1946 and 1964) started

to retire. For almost the next 20 years, more than 10,000 Baby Boomers will be retiring every single day.

• Right now, there are somewhere around 40 million senior citizens (>65). By 2050 that number is projected to increase to 89 million.

• In 1950, each retiree's Social Security benefit was paid for by 16 U.S. workers. Data from the U.S. Bureau of Labor Statistics shows there are now only 1.75 full-time private sector workers for each person that is receiving Social Security benefits in the United States.

• The Congressional Budget Office reports the Social Security system paid out more in benefits than it received in payroll taxes in 2010. That was not supposed to happen until at least 2016.

• Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern's Kellogg School of Management have calculated the combined pension liability for all 50 U.S. states. What they found was that the 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside in state pension funds. That is a difference of 3.2 trillion dollars.

• Back in FY 1979, combined Social Security and Medicare expenditures represented 33.7% of total federal nondefense expenditures. In FY 2011, this percentage had risen to 42%. Using current law, the Congressional Budget Office projects that in FY 2022, combined Social Security and Medicare expenditures will represent 51% of total federal nondefense expenditures. So, we seniors have been in recent years and will continue to account for larger and larger absolute and relative amounts of federal government expenditures.

Graphically, from the U.S. Census BureauFrom: http://www.census.gov/prod/cen2010/briefs/c2010br-09.pdf

Another Look From the Census BureauFrom: http://www.census.gov/prod/cen2010/briefs/c2010br-09.pdf

Impact on Federal ExpendituresFrom: http://www-ac.northerntrust.com/content/media/attachment/data/econ_research/1205/document/econtrarian_050112.pdf

While Tax Receipts Have FallenFrom: http://www-ac.northerntrust.com/content/media/attachment/data/econ_research/1205/document/econtrarian_050112.pdf

Leaving a growing Debt on YouthFrom: http://www-ac.northerntrust.com/content/media/attachment/data/econ_research/1205/document/econtrarian_050112.pdf

Public (Federal) DebtRecent US Federal Debt Numbers

From: http://www.usgovernmentdebt.us/ (July 24, 2012)

Gross Federal Debt Debt Held by Public

FY 2012 $16.4 trillion $9.7 trillion

FY 2011 $14.8 trillion $8.5 trillion

FY 2010 $13.5 trillion $8.2 trillion

FY 2009 $11.9 trillion $6.8 trillion

FY 2008 $10.0 trillion $5.3 trillion

Gross Federal Debt is the total debt owed by the United States federal government.

It comprises “debt held by the public” and “debt held by federal government accounts,” such as IOUs owed to the Social Security trust fund. “Debt held by the public” includes debt actually held by the

public and foreign governments, and also debt held by the Federal Reserve System, i.e., monetized as part of the monetary base.

U.S. Debt as % of GDPFrom: http://www.usgovernmentdebt.us/spending_chart_2005_2017USp_13s1li111lcn_H0t

Let’s Look at EuropeFrom: http://esa.un.org/unpd/wpp/population-pyramids/population-pyramids_absolute.htm

Population by age groups and sex (absolute numbers)

European GrowthFrom: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00115

And European DebtFrom: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00115

And European UnemploymentFrom: http://epp.eurostat.ec.europa.eu/portal/page/portal/employment_unemployment_lfs/data/main_tables

European Youth UnemploymentFrom: http://epp.eurostat.ec.europa.eu/portal/page/portal/employment_unemployment_lfs/data/main_tables

China?From: http://esa.un.org/unpd/wpp/population-pyramids/population-pyramids_absolute.htm

Population by age groups and sex (absolute numbers)

China Real GDP Growth RateFrom: http://www.indexmundi.com/g/g.aspx?c=ch&v=66

Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

China 7 8 8 8 9.1 9.1 10.2 11.9 9 9.1 10.3

China GDP per capitaFrom: http://www.indexmundi.com/g/g.aspx?v=67&c=ch&l=en

Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

China 3,800 3,600 4,400 5,000 5,600 6,800 7,700 5,400 6,000 6,700 7,600

Contrast this to the U.S.From: http://www.indexmundi.com/g/g.aspx?v=67&c=us&l=en

Country 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

United States 33,900 36,200 36,300 37,600 37,800 40,100 41,600 44,000 45,800 46,900 46,000 47,200

So Let’s Look at Crops & Implications

Corn (December 2012 Futures)http://www.cmegroup.com/popup/mdq2.html?code=ZCZ2&title=December_2012_Corn&type=p#symbol=C_XCBT;link=weekly

Corn AcresFrom: http://quickstats.nass.usda.gov/results/574E9EBC-BE0A-336B-B7FD-1D44C3590568?pivot=short_desc

Year CORN - ACRES PLANTED

CORN, GRAIN - ACRES HARVESTED

CORN, GRAIN - PRODUCTION, MEASURED IN BU

CORN, GRAIN - YIELD, MEASURED IN BU / ACRE

2012 96,405,000 88,851,000 2011 91,921,000 83,981,000 12,358,412,000 147.2 2010 88,192,000 81,446,000 12,446,865,000 152.8 2009 86,382,000 79,490,000 13,091,862,000 164.7

2008 85,982,000 78,570,000 12,091,648,000 153.9 2007 93,527,000 86,520,000 13,037,875,000 150.7 2006 78,327,000 70,638,000 10,531,123,000 149.1 2005 81,779,000 75,117,000 11,112,187,000 147.9 2004 80,929,000 73,631,000 11,805,581,000 160.3 2003 78,603,000 70,944,000 10,087,292,000 142.2 2002 78,894,000 69,330,000 8,966,787,000 129.3 2001 75,702,000 68,768,000 9,502,580,000 138.2 2000 79,551,000 72,440,000 9,915,051,000 136.9 1999 77,386,000 70,487,000 9,430,612,000 133.8

1998 80,165,000 72,589,000 9,758,685,000 134.4 1997 79,537,000 72,671,000 9,206,832,000 126.7 1996 79,229,000 72,644,000 9,232,557,000 127.1

1995 71,479,000 65,210,000 7,400,051,000 113.5 1994 78,921,000 72,514,000 10,050,520,000 138.6 1993 73,239,000 62,933,000 6,337,730,000 100.7

1992 79,311,000 72,077,000 9,476,698,000 131.5 1991 75,957,000 68,822,000 7,474,765,000 108.6 1990 74,166,000 66,952,000 7,934,028,000 118.5 1989 72,322,000 64,783,000 7,531,953,000 116.3 1988 67,717,000 58,250,000 4,928,681,000 84.6 1987 66,200,000 59,505,000 7,131,300,000 119.8 1986 76,580,000 68,907,000 8,225,764,000 119.4

Watch Out for Demand Destruction!From: http://www.indexmundi.com/commodities/?commodity=corn&months=360

Realized Corn PricesFrom: http://www.farmdoc.illinois.edu/manage/pricehistory/PriceHistory.asp

Soybeans (November 2012 Futures)From: http://www.cmegroup.com/popup/mdq2.html?code=ZSX2&title=November_2012_Soybean&type=p#link=weekly

Soybean AcresFrom: http://quickstats.nass.usda.gov/results/41FC29CB-32AC-3803-943F-0CF965874886?pivot=short_desc

Year SOYBEANS - ACRES HARVESTED

SOYBEANS - ACRES PLANTED

SOYBEANS - PRODUCTION, MEASURED IN BU

SOYBEANS - YIELD, MEASURED IN BU / ACRE

2012 75,315,000 76,080,000 2011 73,636,000 74,976,000 3,056,032,000 41.5 2010 76,610,000 77,404,000 3,329,181,000 43.5 2009 76,372,000 77,451,000 3,359,011,000 44

2008 74,681,000 75,718,000 2,967,007,000 39.7 2007 64,146,000 64,741,000 2,677,117,000 41.7 2006 74,602,000 75,522,000 3,196,726,000 42.9 2005 71,251,000 72,032,000 3,068,342,000 43.1 2004 73,958,000 75,208,000 3,123,790,000 42.2 2003 72,476,000 73,404,000 2,453,845,000 33.9 2002 72,497,000 73,963,000 2,756,147,000 38 2001 72,975,000 74,075,000 2,890,682,000 39.6 2000 72,408,000 74,266,000 2,757,810,000 38.1 1999 72,446,000 73,730,000 2,653,758,000 36.6

1998 70,441,000 72,025,000 2,741,014,000 38.9 1997 69,110,000 70,005,000 2,688,750,000 38.9 1996 63,349,000 64,195,000 2,380,274,000 37.6

1995 61,544,000 62,495,000 2,174,254,000 35.3 1994 60,809,000 61,620,000 2,514,869,000 41.4 1993 57,307,000 60,085,000 1,869,718,000 32.6

1992 58,233,000 59,180,000 2,190,354,000 37.6 1991 58,011,000 59,180,000 1,986,539,000 34.2 1990 56,512,000 57,795,000 1,925,947,000 34.1 1989 59,538,000 60,820,000 1,923,666,000 32.3 1988 57,373,000 58,840,000 1,548,841,000 27 1987 57,172,000 58,180,000 1,937,722,000 33.9 1986 58,312,000 60,405,000 1,942,558,000 33.3

Watch Out for Demand Destruction!From: http://www.indexmundi.com/commodities/?commodity=soybeans&months=360

Realized Soybean Prices

Which Brings Us Back to…

Concluding Thoughts(Four things I would do, Four I would not do)

• I would not be a bond buyer• I would not be a corn buyer• I would not believe in soft landings• I would investigate production options• I would be diversifying my asset holdings• I would be expecting higher taxes• I would accumulate savings• I would not be the last bidder if that ¼

section down the road goes up for auction!

References• http://www.bloomberg.com/markets/rates/index.html (July 24, 2012)• http://finance.yahoo.com/q/ta?s=%5EGSPC&t=2y&l=on&z=l&q=l&p=&a=&c= (July 24, 2012)• http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf• http://www.safehaven.com/print/8303/the-result-of-35-years-of-a-paper-global-monetary-system• http://www.farmdoc.illinois.edu/manage/land_value.asp• http://www.croplife.com/article/24813/too-much-of-a-good-thing-can-spoil-ag-s-party (March 19, 2012)• http://www.census.gov/prod/cen2010/briefs/c2010br-09.pdf• http://www-ac.northerntrust.com/content/media/attachment/data/econ_research/1205/document/

econtrarian_050112.pdf• http://www.usgovernmentdebt.us/ (July 24, 2012)• http://www.usgovernmentdebt.us/spending_chart_2005_2017USp_13s1li111lcn_H0t• http://esa.un.org/unpd/wpp/population-pyramids/population-pyramids_absolute.htm• http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00115• http://epp.eurostat.ec.europa.eu/portal/page/portal/employment_unemployment_lfs/data/main_tables• http://esa.un.org/unpd/wpp/population-pyramids/population-pyramids_absolute.htm• http://www.indexmundi.com/g/g.aspx?c=ch&v=66• http://www.indexmundi.com/g/g.aspx?v=67&c=ch&l=en• http://www.cmegroup.com/popup/mdq2.html?

code=ZCZ2&title=December_2012_Corn&type=p#symbol=C_XCBT;link=weekly• http://www.indexmundi.com/commodities/?commodity=corn&months=360• http://www.farmdoc.illinois.edu/manage/pricehistory/PriceHistory.asp• http://www.cmegroup.com/popup/mdq2.html?code=ZSX2&title=November_2012_Soybean&type=p#link=weekly• http://quickstats.nass.usda.gov/results/574E9EBC-BE0A-336B-B7FD-1D44C3590568?pivot=short_desc • http://www.nass.usda.gov/Statistics_by_Subject/index.php?sector=CROPS• http://www.cmegroup.com/market-data/delayed-quotes/commodities.html

Thank you for allowing me to be with you today !(No really! I’ll stop talking now!)

Questions & Comments ?