Perspectives on Agriculture in a

Commodity Downturn

December 7, 2015

Presented by: Dan Kowalski, Director of Industry ResearchKnowledge Exchange Division, CoBank, ACBE-mail: dkowalski@cobank.com

51st Colorado Business Economic Outlook Forum

Denver, CO

All slides are property of Knowledge Exchange Division, CoBank, ACB (confidential and proprietary).

This is what the media has been telling us about commodities. Is it this simple?

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March 18, 2015

September 3, 2014

December 30, 2014

March 10, 2015

May 5, 2015

At first glance the Dollar is to blame for commodity price woes

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U.S. Dollar Index24% from 2014 low;now at 13-year high

S&P GSCI Commodity Index50% from 2014 high

Source: Bloomberg

But the commodity sectors have not all performed the same

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40

60

80

100

120S&P Commodity Price Indices

Source: Bloomberg

Energy

Ag crops

Industrial Metals

Ag livestock

And individual commodity prices have moved in a wide range

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40

50

60

70

80

90

100

110

120

130Index of Commodity Prices and the U.S. Dollar

US Dollar Index

CopperGold

AluminumCoalSilver

NatGasWTI

CornSoybeansWheat

CottonRice#16 Sugar

Live CattleLean Hogs

Class 3 Milk

Source: Bloomberg

Crude Oil vs. The U.S. Dollar

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How important are crude oil and the dollar to commodities?

Several commodities have had a strong inverse correlation with the dollar, but others are far less correlated

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-1

-0.8

-0.6

-0.4

-0.2

0

0.2

1 Year Correlation with US Dollar Index

Sources: CoBank, Bloomberg

0 = No Correlation1 = Perfect Correlation

Several commodities have also been strongly correlated with crude oil, but not all

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-1.0

-0.7

-0.3

0.0

0.3

0.7

1.0

1 Year Correlation with Crude Oil Prices

Sources: CoBank, Bloomberg

0 = No Correlation1 = Perfect Correlation

How important is China to commodities?

9Sources: WSJ, NY Times

China has a disproportionate impact on metals prices

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Agriculture – China consumes: 52% of the world’s pork 31% of the world’s cotton 31% of the world’s rice 29% of the world’ soybeans

Energy – China consumes: 12% of the world’s oil 48% of the world’s coal

Metals – China consumes: 40% of the world’s copper 50% of the world’s iron

ore

All 3 sectors are fueled by the rising middle class

But ag and energy consumption continue higher without declines

Metals consumption has fallen since 2014 as China’s economic expansion has slowed

Sources: USDA, BP, WSJ, Censere

China’s GDP has been on a steady decline, dropping to the lowest level since the worst of the financial crisis

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0

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12

2000

2000

2001

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2003

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2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

2013

2013

2014

2014

YoY % Change China GDP

Source: China Natl Bureau of Statistics, Economist

The transition from an export-ledeconomy to a consumer-led economy has been bumpy

China’s debt problem - $26 trillion increase since 2000

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ChinaDebt-to-GDP ratio (%)

Total debt ($ Trillion)

Sources: IMF, McKinsey, WSJ

But despite all the bad news, urban Chinese have more money to spend

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0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Chinese yuanChina Urban Household Disposable Income (Q3)

Source: National Bureau of Statistics of China

…and they are using some of that extra income to buy pricier food

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-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*(Thru1H)

China Urban Household 'Real' Food Spending (Year-over-Year)

Source: National Bureau of Statistics of China

Summary: Macro forces are affecting commodities..but the effects vary significantly

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Macro forces are having disparate effects on commodities Heavy effect on metals (Loss of China growth as production has

increased) Some effect on energy (slow economic growth, slow growth in

energy consumption; but more supply-driven than weak demand) Much less effect on ag (slow econ growth slows EM wealth effect

for meat/dairy, but this is much less pronounced than metals and energy; A supply rebuild story)

Source: CoBank, Cagle

Outlook: Strong dollar and higher interest rates won’t help commodities

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The dollar is having some effect on all commodities

Outlook for the USD – will remain high in 2016

Fed rate hike; Euro QE, slow growth; Japan easy monetary policy, stimulus; China weakness

Interest rate increases are good for banks, usually not for commodities

Check out CoBank’s 2012 Outlook report

Agricultural commodity outlook

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Some buying interest likely to return to some commodities in anticipation of supply peak, especially if inflation returns

Ag price volatility will remain lower than past several years with large supplies slow to recede; Cattle is the exception

China economy to struggle, with heavy debt burden, excess capacity, and slower gains from consumer vs. industry. But ag consumption will continue to increase.

Agricultural Supply & Demand

18Sources: UC Davis, NY Times, CoBank

Global ag consumption moved consistently higher through the economic crisis; demand has not been a problem

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2008 2009 2010 2011 2012 2013 2014 2015

IndexWorld Consumption

CornMilkBeefPorkSoybeansChickenRiceWheat

Sources: CoBank, USDA

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100

200

300

400

500

600

700

800

MMT Equiv U.S. Agricultural Supply

Wheat

Chicken

Soybeans

Pork

Beef

Milk

Corn

We have transitioned: Demand to supply driven market

20Source: USDA

Most ag markets are oversupplied; 2013 was a historic supply build year for corn

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-50 0 50 100 150 200

1977-78

2004-05

2007-08

1975-76

2006-07

1985-86

1984-85

1978-79

2012-13

2013-14

MMT

Largest Consecutive Year Increases in World Corn Supply

Sources: CoBank, USDA

The combination of 2013 and 2014 soybean supply increases have swamped the market

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0 10 20 30 40 50 60 70 80

2001-02

2000-01

1997-98

1977-78

2005-06

2012-13

2004-05

2014-15

2009-10

2013-14

MMT

Largest Consecutive Year Increases in World Soybean Supply

Sources: CoBank, USDA

Same story in dairy: 2015 will be the 3rd consecutive year of significant supply increase

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0 5 10 15 20 25 30 35 40 45 50

2001-02

1983-84

2002-03

2010-11

2013-14

2011-12

2014-15

1966-67

1982-83

1965-66

MMT

Largest Consecutive Increases in World Milk Supply

Sources: CoBank, USDA

The pork supply increase is a domestic story, but historic nonetheless and caused prices to crater in late 2014

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0 200 400 600 800 1,000 1,200

1974

1992

1980

2008

1988

1967

1971

2015

1998

1979

Thou MT

Largest 1-Year Increases in U.S. Pork Supply

Sources: CoBank, USDA

Domestic rice supplies increased 11% in 2014; Prices over the past year have fallen 33%

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0 200 400 600 800 1,000 1,200

2010/11

1976/77

1992/93

1974/75

1978/79

2014/15

2001/02

1981/82

2004/05

1994/95

Thou MT

Largest 1-Year Increases in U.S. Rice Supply

Sources: CoBank, USDA

Price volatility has been record high over the past decade; Will it subside for Colorado ag commodities?

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D-09 D-10 D-11 D-12 D-13 D-14 D-15

Futures Price Index

CornWheatLive CattleFeeder CattleMilk Class 3Lean Hogs

Corn

27Source: Informa

Wheat

28Source: Informa

Meat supplies are rising; Cattle and beef prices next to fall

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10

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2012 2013 2014 2015 2016 2017

Bil Lbs

U.S. Meat and Poultry Production

Beef Pork BroilerSource: Livestock Marketing and Information Center

Dairy

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Colorado has the fastest growing milk supply of any state in 2015

Source: Informa

Questions?

December 7, 2015

Presented by: Dan Kowalski, Director of Industry ResearchKnowledge Exchange Division, CoBank, ACBE-mail: dkowalski@cobank.com

51st Colorado Business Economic Outlook Forum

Denver, CO