Global Recession – the
impact on Agriculture
March 2010
Bill Cordingley
Head, Food & Agribusiness Research and Advisory
Americas
Rabobank International
For the love of farming!
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Rabobank International
•
Subsidiary of Rabobank Group –
Cooperative bank based in the Netherlands
•
Present in 43 countries worldwide with
1,508 offices
•
Over 60,000 staff serving over 9,000,000
clients
•
Ranked 4th safest bank in the world
•
AAA rated
•
Best Investment Bank in the Netherlands
•
Total assets of EUR 570.5 billion
•
Net profit of EUR 2.7 billion
Global Finance, September 2008
Standard & Poor’s, Moody’s, since 1981
Dominion Bond Rating Service, since 2001
July 2008
Rabobank, December 2007
Rabobank, December 2007
3
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The global Food and Agribusiness Research (FAR)
group has 80 members in 13 countries
Utrecht (Global HQ)
New York
Mexico City
Beijing
New Delhi
Shanghai
Hong Kong
Mumbai
Kuala Lumpur
Singapore
Jakarta
Santiago
São Paulo
Buenos Aires
Melbourne
Sydney
Christchurch
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The GFC and global
recession
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What the crisis looked like
•
The deepest economic contraction in the last 50 years, and not just in the
U.S. - The great recession!
•
The worst financial and banking crisis since the Great Depression of the
1930’s
•
Large and growing US deficit
•
Lack of liquidity in the financial system and rapid deleveraging adding to
the credit crisis
•
Millions of insolvent individuals (foreclosures)
•
Contraction in consumption and consumer confidence at lowest levels since
they started measuring
•
Doubling in unemployment
•
Fear and uncertainty prevail!
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The Credit Crunch
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CONFIDENCIAL
The financial market has been severely impacted:
credit write-downs are almost USD 1.1 trillion so far IMF predicts losses of USD 2.2 trillion
Change in market value (USD billion) of selected banks
Value Jan. 20, 2009
Value 2Q 2007
RBS
Morgan
Stanley
120
Deutsche
Bank
Credit
Agricole
76
Societe
Generale
80
Barclays
BNP
Paribas
108
91
UBS
Unicredit
116
93
67
49
4.6
16
10.3
17
26
7.4
32.5
26
35
Citigroup
HSBC
255
JP Morgan
215
165
Goldman
Sachs
Credit Suisse
Santander
116
100
75
27
35
Source: Bloomberg, 10th 2009
64
19
85
97
Food & Agribusiness Research and Advisory
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Income and population growth are key drivers of
increased food consumption
Income and population growth in selected countries
CAGR population (06-11)
BRIC
countries
GDP growth (2008)
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…2009 retraction…
Income and population growth in selected countries
CAGR population (06-11)
CHINDIA
the savior
in 2009
GDP growth (2009)
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…2010 …a rebound – but risks to the downside!
CAGR population (06-11)
Income and population growth in selected countries
GDP growth (2010)
Source: UN, IMF, Rabobank, 2010
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U.S. Growth still an important
driver for global economy
8%
U.S. GDP
6%
US Economy 25% of global
GDP
4%
2%
0%
2006
-2%
2007
2008
2009
2010
-4%
5.7% for 4Q09 Boom in Q4
GDP driven by stimulus and
inventory cycle
-6%
-8%
21%
Components
-3%
11%
71% of GDP private
consumption
Personal Consumption
Growth expected to fall back
in Q2-4
Private Investment
71%
Net Exports
Government
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Rabobank thinks we are in for
a funny shaped recovery!
• Traditional talk of recovery usually a letter of the
alphabet...
− V, W, L, U...
• But what if it’s a mathematical symbol instead?
− Square root
− Lack of a long-term growth driver
− Jobless recovery
13
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US Consumer shell shocked!
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Worst unemployment since early
1980’s
12
U.S. Unemployment Rate
10.8%
10
9.7%
Percent
8
6
4
5%
4.4%
2
1948
1949
1951
1953
1955
1957
1959
1960
1962
1964
1966
1968
1970
1971
1973
1975
1977
1979
1981
1982
1984
1986
1988
1990
1992
1993
1995
1997
1999
2001
2003
2004
2006
2008
0
•
Over 7 million US jobs lost in this recession
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Consumer wealth battered!
Income and population growth in selected countries
250
Indexed 100=2000
200
150
100
50
0
Jan-00
Jan-01 Jan-02 Jan-03 Jan-04
Jan-05 Jan-06 Jan-07 Jan-08
Home Prices
Jan-09
DJIA
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Household Debt Outstanding
(billions)
Very difficult busting of the
credit bubble has seen mortgage
debt growth flat line!
$14,000
$12,000
$10,000
$8,000
Credit
$6,000
$4,000
$2,000
Mortgage
+ $16
trillion
$0
•
•
•
A quarter of U.S. homeowners with mortgages have negative
equity in their homes.
Another quarter have <10% equity
No easy way out of this soon for home owners or the
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building industry
There has been a significant
change in consumer mindset!
Lower Net Worth and Increased Savings
Savings as Percent of Income
12%
22% drop
$70,000
Net Worth ($USD Million)
Percent of Income Saved
14%
$60,000
10%
$50,000
8%
$40,000
6%
$30,000
4%
$20,000
0%
1% to over
5%
$10,000
$0
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2%
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Major roadblock for consumption
and thus demand through the
value chain!
Personal Consumption Expenditures
Indexed 2005=100
110
Food and beverages off-premises
Food services and accommodations
Total personal consumption
105
100
95
90
85
80
2000
•
2001
2002
2003
2004
2005
2006
2007
2008
2009
CPI -0.4% in 2009: first full-year decline since 1955
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Foodservice Quarterly sales, Q3
09 v Q4 08
-18.80%
McCormic & Schmick
-16.80%
Morton's
-24%
Ruth's Chris
-5.30% Darden
-6%
Q3 '09
Brinker
Q4 '08
-2.80%
Cheesecake
Factory
-6%
Yum!
-2.80% King
Burger
McDonald's
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
2.50%
5.0%
10.0%
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Impact on global
Agriculture
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Crisis felt throughout the agribusiness supply
chain
Primary
Production
•
Strong profits and
land values
buffered the sector
initially
•
Pressure on farm
gate prices for
most commodities
•
High input costs
made 2009 a write
off for many
producers
•
Credit from banks
available but more
stringent
Retail/Food
Service
Processing
/ Trade
•
Softening demand
•
Increasing FX volatility
•
Trade finance
availability tightened,
especially for riskier
destinations and
counterparties
•
First contraction in
global trade since
WWII
•
Excess processing,
shipping capacity
•
Inventory
deleveraging
•
Fall in business
confidence
•
Tightening credit
lines
•
Running down
inventories
•
Hand to mouth
Consumers
•
Falling consumer
confidence
- wealth effect
•
Change in eating
patterns
- trading out
- trading down
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Aggregate impact in the US significant
but far from catastrophic
100
90
80
2000-2009
average
$US billion
70
60
50
40
30
20
10
0
2005
•
•
•
2006
2007
2008
2009P
2010F
US net farm income down by $30 billion in 2009
Set to recover by $7 billion in 2010
Just $1.4 b below 10 yr average
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Lower production costs in 2010,
but still historically high
$350
Variable Production Costs
$300
per planted acre
$250
10-yr averages
Corn
$200
Wheat
$150
Soy
$100
$50
$0
•
•
Crop production costs fell 6-14% in 2009, expected flat in 2010 - 2011
Still about 30-40% higher than 1999-2009 average.
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Relief due to fuel and fertilizer
price declines
70
Key U.S. Farm Sector Variable Costs
$US Expense (billions)
60
50
Fertilizer
40
Fuel
Pesticide
30
Seed
20
10
0
2006
2007
2008
2009P
2010F
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Divergent fortunes for two big
drivers – livestock and crops
Farm Cash Receipts
200
180
Crops
Livestock
160
-3.6%
$US billion
140
120
+9.7%
100
80
60
40
20
0
2005
2006
2007
2008
2009P
2010F
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Market volatility has receded; but
still remains historically elevated
CBOT Corn Volatility, 2000-2009
CBOT Soybean Volatility, 2000-2009
70
700
60
1900
60
1700
55
50
1500
40
400
30
300
40
1100
35
900
30
700
25
500
20
200
100
Jan 00
US¢ / bushel
500
45
1300
50
% Volatility
US¢ / bushel
600
10
Jan 01 Jan 02 Jan 03 Jan 04
CBOT Corn Price
Jan 05 Jan 06 Jan 07 Jan 08
30 Day Hist. Volatility
Jan 09
Long-term Avg. Volatility
20
300
15
100
Jan 00
10
Jan 01
Jan 02
Jan 03
CBOT Soybean Price
Jan 04
Jan 05
Jan 06
60 Day Hist. Volatility
Jan 07
Jan 08
Jan 09
Long-term Avg. Volatility
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% Volatility
800
Farmers on average have strong
equity and are reasonably well
positioned to weather the downturn
Total debt
Equity
DRCU
2500
100%
90%
2000
80%
70%
1500
60%
50%
1000
40%
30%
500
20%
10%
0%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009P
2010F
0
•
However those that have used debt to build scale without achieving rapid
productivity growth in recent years are facing an uncertain future with
returns unlikely to rebound quickly and uncertain lenders much tougher
on covenants going forward!
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Conclusions
•
•
•
•
•
Agriculture not a bad place to be in the GFC – in relative
terms
2010 will see a slow and unsteady recovery in the global
economy which will be tested by mid year as govt stimulus
wears off, inventory cycle recedes and unemployment
growth lags!
Moderating costs will help both crops, meat and other
sectors improve returns despite the soft demand
environment in 2010
Volatility a factor for all farmers going forward – possibly
new ways to look at risk in the supply chain will be
necessary – partnership v’s adversarial??
Crystal ball is cloudy for everyone – only answer is to is to
eliminate catastrophic risk, remain flexible, eliminate
unnecessary costs and enhance productivity consistently and
diligently
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Thank you
The World’s Leading Specialist Food and Agribusiness Bank
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