Industry Update Food and Agribusiness

Transcription

1 March 2018 Industry Update Food and Agribusiness Key Demand Developments Growth in housing prices remain a positive to consumer balance sheets, with the Case-Shiller 20 city index rising +5.8% Y/Y in December. The performance of the S&P 500 was up +16.1% YoY through February, a tailwind for the consumer balance sheet. Mixed signals for consumer income statement as the U.S. Bureau of Labor Statistics reported December non-farm employment quits of 1.9% (not seasonally adjusted) while average hourly earnings increased +1.8% Y/Y for January Gas prices have benefited the consumer; oil futures have hovered above $60/barrel, up +21% YoY but average prices remain -13% below the 5 year average. The February Consumer Confidence Index as measured by the Conference Board now stands at (1985=100), up from in January, it s highest level since November Supermarket Sales According to Nielsen, total store gains across departments posted less than spectacular results for the 52 weeks ending 12/31/2017. Dollar trends are up.3% but unit trends are down -1. despite moderate price increases of 1.6%. Q results are being closely monitored for the seismic impact of e-commerce sales. The retail landscape is undergoing transformation including a decline in traditional mass-merchandiser store counts, yet some retail channels are showing some resilience. Others like supercenters, home improvement, sporting goods, and club stores are showing signs of greater vulnerability to evolving disruptive forces. Consumer and Producer Price Indices Y/Y Change (%) Price and Food Inflation Developments 1 We maintain a constructive outlook for volumes CPI Food Away From Home CPI Food At Home PPI All Food with pricing levels inching above 3%. The 8% spread between restaurant and food retail pricing 6% has narrowed -360bp from August 2016 highs and continues to drop. Restaurant pricing measured by the CPI Food Away From Home index (CPI-FAFH) increased +2.56% in January Y/Y, which is down -50bp vs. the prior month. - Food Retail pricing measured by the CPI Food at - Home index increased +0.6% in February Y/Y, which is down -50bp vs. the prior month. -6% The Producer Price Index (PPI All Food) increased -8% +0.9% in February Y/Y, but was down -130bp Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 vs. the prior month. Source: U.S. Bureau of Labor Statistics Industry Research Update: Food and Agribusiness 1 1

2 Grocery Department Trends: Dry Grocery and Dairy volume continued to lag year-ago levels in 4Q 17, but volumes increased YoY for Deli (up 8%), Fresh Produce (), and Bakery (). Dry Grocery 3% Volume Price Frozen Foods Volume Price 3% 1% -1% - -3% - 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Dairy 8% Volume Price 6% - - 1% -1% - -3% 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Deli 1 Volume Price 8% 6% -6% 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Fresh Produce 8% 6% - - 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Volume Price Dry Grocery 4Q 17 price/mix increased +1.8% YoY, a decrease of 20bp vs. 3Q 17. Dry Grocery volumes decreased -1.3% YoY, an increase of +20bp vs. 3Q 17. Dairy 4Q 17 price/mix increased +1.8% YoY, a decrease of 20bp vs. 3Q 17. Although dairy volumes decreased - 1.3% YoY, they were up +90bp vs. 3Q 17. Fresh Produce 4Q 17 price/mix decreased -0.3% YoY but remained flat vs. 3Q 17. Fresh Produce volumes increased +4.8% YoY, but were down -10bp vs. 3Q Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Bakery 7% 6% 3% 1% -1% - Volume Price -3% 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Frozen Food 4Q 17 price/mix increased +1.8% YoY, a decrease of -60bp vs. 3Q 17. Frozen Food volumes increased +0. YoY, an increase of +130bp vs. 3Q 17. Deli 4Q 17 price/mix decreased -0.3% YoY, a decrease of -10bp vs. 3Q 17. Deli volumes increased +7.7% YoY, and were also up +120bp vs. 3Q 17. Bakery 4Q 17 price/mix decreased -2. YoY, a decrease of -130bp vs. 3Q 17. Bakery volumes increased +4.7% YoY, and increased +20bp vs. 3Q 17. 2

3 Food Company Margin Heat Map YoY Price vs. Volume Commodities Labor Grain Protein Constructive Mixed Inflationary Mixed Mixed Energy Mixed Food Company Input Cost Summary: As we end 1Q 18 a large portion of commodities have shown moderate inflation vs. Q1 17 levels. Economic Backdrop: The start of the new year is historically a time when firms test pricing power. With the economy on an upswing and commodity prices continuing to rise, upward momentum should continue into Corn, Wheat & Soybean Prices: Nearby corn and soybean futures slightly below last year, but up solidly from January. Wheat prices above January and year ago with dryness reducing US yield potential. Chicken: Broiler and thigh prices have remained above 2015/16 levels on strong exports. Egg sets once again start to build. Beef: Cut-out values, though trending down, are above 2017 levels as YoY inventory levels are down sharply and exports continue to be strong. Pork: Prices are above 2017 YTD and well above decade-low October 2016 levels; however, cold storage inventories, slaughter counts, and exports continue to build year-over-year. Packer Margin Environment: Chicken, beef and pork estimated packer ratios are all near 2017 levels with all cut-out values declining M/M. Seafood: Shrimp prices are below 2017 levels due to strong imports, while salmon prices have moved above last year despite strong imports. Pollock prices have firmed in early Dairy: Milk prices remain pressured as international milk supplies continue to outpace demand. Ample global skim powder stocks should limit potential price upside. USDA is forecasting Feb 2018 National All Milk price at $16.05/cwt, down $1.58/cwt from 2017 levels. Specialty Crops: Currently orange juice and cocoa prices are trending up, while sugar, cotton, and coffee prices are trending down. The outlook for nut growers in 2017/18 is positive, but need to keep an eye on trade issues and the opportunity for expanding markets overseas. Key Commodity Heat Map Commodity Price Y/Y M/M Corn $ % +3.8% Wheat $ % +8. Soybeans $ Broilers $ % -3.1% Cattle $ % +7. Hogs $ Class III Milk $ % - 4.3% Shrimp $ % -0.7% Salmon $ % Natural Gas $ % Electricity $ % +2. Heating Oil $ % Restaurant Labor $ % +0.1% Supermarket Labor $ % Food Labor $ % *Monthly avg. corn, wheat, soybeans in $/bu; broilers, shrimp in ; c attle, hogs, milk in $/cwt; salmon in $/kg; gas in $/Mct; oil in $/gal; electricity in $/kwh; labor in $/hr Sources: CBOT, USDA, Urner Barry, EIA, BLS Forest Products: US housing starts and remodeling continue to trend upward driving demand. As a result, framing lumber prices are at record highs, and structural panel prices are near decadal highs. Crop Inputs: Nitrogen prices supported by tight supplies after strong fall application season in the US. DAP prices higher due to closure of a large US plant. Fuel prices well above early Energy & Labor: With the exception of natural gas, energy prices have continued to climb due to rising global oil prices. Conversely, we observe declines in labor wages for restaurants and supermarkets. Wine: 2017 grape crush was 4.2 million tons, with the average price per ton rising 1%. In addition, increasing competition for premium wine grapes continues to push commodity prices higher as consumers trade up to above $10/bottle. 3

4 Economics: The start of a new year is historically a time when firms test pricing power. With the economy on an upswing and commodity prices continuing to rise, upward momentum should continue into Voluntary Quits as % of Employment Trade Weighted Dollar vs. Ag Index Ag Bulk Commodities Trade Weighted Jan 2014= Source: BLS, Wells Fargo, Federal Reserve, Wells Fargo 95 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Weekly Earnings Rates Weekly Wages $950 Food Inflation Adjusted Net Trade Balance $40 China HK ROW $900 $30 $850 $800 $20 $10 $0 2.6 (6.1) (1.1) (4.5) $750 -$10 (17.9) (21.6) -$20 (35.1) $700 -$30, Wells Fargo $650 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 -$ Source: BLS, Wells Fargo Billions of Miles Driven 290 Net Export as % of Production % 18% 1 1 9% Beef Pork Chicken 240 6% 230 3% Source: Federal Highway Admin 200 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18-3% -6%, Wells Fargo The January 2018 voluntary quits as a percentage of employment was 2. which is the same as the Jan17 level. The 12 month rolling average is near prerecessionary levels. The February 2018 weekly average earnings are growing +2.9% YoY on a nominal basis; when deflated by food & beverage CPI the February 2018 average wages of $730/week increased +2.9% YOY. The pre-recession inflation adjusted peak was $699/week in December The December 2017 monthly average miles driven of 262 billion increased +0.7% vs. December 2017 as stronger employment offset an increase in gas prices. The February 2018 trade weighted dollar index value of vs. bulk commodity dollar index value of represents a wider gap when compared to the January 2018 values of and 110.1, respectively. The 2017 net trade balance of 7.1 billion represents a larger surplus compared the 2016 total of 3.3 billion The 2017 pork and broiler markets face a stronger headwind from dollar strengthening as net exports comprise 17.8% and 16.3% percent of total production vs. -0. for beef. 4

5 Grain Prices: Nearby corn and soybean futures slightly below last year, but up solidly from January. Wheat prices above January and year ago with dryness reducing US yield potential. Corn $4.20 Futures $/Bushel $4.00 $3.80 $3.60 $3.40 $3.20 Source: CBOT Wheat $5.60 Futures $5.20 $/Bushel $4.80 $4.40 $4.00 $3.60 Source: CBOT Nearby corn futures averaged $3.66 per bushel during February. This was down 3 cents from a year earlier, but was up 14 cents from January because of strong US export sales and declining yield expectations in Argentina due to persistent dryness. USDA is forecasting 2017/18 global corn production at 1,042 million tonnes, which would be down -3.1% from 2016/17 because of declines in the US, South America and Ukraine. Nearby Chicago wheat futures averaged $4.73 per bushel in February. This was up 21 cents from a year earlier and up 37 cents from January. The market is being supported by dry conditions in the Southern Plains, which are reducing yield potential for the hard red winter wheat crop. US projects global wheat production at 759 million tonnes for 2017/18, which would be up +1.1% from 2016/17 with increases in Russia and the EU more than offsetting declines in the US and Australia. Soybeans $12.00 $11.50 $11.00 $/Bushel $10.50 $10.00 $9.50 $9.00 $8.50 Futures Source: CBOT Nearby soybean futures averaged $10.09 per bushel in February. This was 26 cents below last year, but up 40 cents from January. USDA projects the US carryout to be more than double that from nine of the past 10 years, but prices have rallied with Argentina s soybean crop now forecast to be the smallest in six years. USDA projects 2017/18 world soybean production at 341 million tonnes, which would be down -3. from 2016/17 with declines in Argentina and Brazil more than offsetting increases in the US and China. 5

6 Grain Fundamentals: 2017/18 stocks/use forecast below 2016/17 for corn and wheat; up sharply for soybeans. Prices seen slightly below 2016/17 for corn and soybeans, higher for wheat. Corn 2015/ / /18F 2017/18F M/M Change Y/Y Change February March Forecast Forecast Area Planted (mm) Area Harvested Yield per Harvested Acre (bu) Beginning Stocks (mm bu) 1,731 1,737 2,293 2, Production 13,602 15,148 14,604 14, Imports Total Supply 15,401 16,942 16,947 16, Feed and Residual 5,114 5,467 5,550 5, Food, Seed & Industrial 6,648 6,889 6,995 7, Ethanol 5,224 5,439 5,525 5, Total Domestic 11,763 12,356 12,545 12, Exports 1,901 2,293 2,050 2, Total Use 13,664 14,649 14,595 14, Ending Stocks 1,737 2,293 2,352 2, Stocks to Use (%) 12.7% 15.7% 16.1% % -1.3% USDA raised its 2017/18 US corn export forecast 175 million bushels in March due to smaller production and export projections for Argentina. USDA also raised its projection of corn usage in ethanol by 50 million bushels. The larger usage forecasts reduced USDA s 2017/18 ending stocks forecast to 2,127 million bushels. The projected stocks-to-use ratio of 14. is down from 2016/17, but would be the second largest in 12 years. The midpoint of USDA s marketing year average price forecast range was raised $0.05 per bushel to $3.35. Average Farm Price ($/bu) $3.61 $3.36 $3.30 $3.35 $0.05 -$0.01 WASDE Wheat 2015/ / /18F 2017/18F M/M Change Y/Y Change February March Forecast Forecast Area Planted (mm) Area Harvested Yield per Harvested Acre (bu) Beginning Stocks (mm bu) ,181 1, Production 2,062 2,309 1,741 1, Imports Total Supply 2,927 3,402 3,076 3, Food Seed Feed and Residual Total Domestic 1,174 1,167 1,117 1, Exports 778 1, Total Use 1,951 2,222 2,067 2, Ending Stocks 976 1,181 1,009 1, Stocks to Use (%) % % Average Farm Price ($/bu) $4.89 $3.89 $4.60 $4.65 $0.01 $0.76 WASDE USDA lowered its 2017/18 US wheat export forecast 25 million bushels to 925 million in March as the recent rally in prices has made US supplies less competitive in the world market. Prices have risen with dry weather in the Southern Plains hurting yield potential. USDA s 2017/18 US carryout forecast was raised 25 million bushels to 1,034 million. This reflects a stocks-to-use ratio of 50., which would be below the previous year but among the largest in 30 years. USDA s average farm price forecast for 2017/18 was raised $0.05 per bushel to $4.65, up from $3.89 in 2016/17. Soybeans 2015/ / /18F 2017/18F M/M Change Y/Y Change February March Forecast Forecast Area Planted (mm) Area Harvested Yield per Harvested Acre (bu) Beginning Stocks (mm bu) Production 3,926 4,296 4,392 4, Imports Total Supply 4,140 4,515 4,718 4, Crushings 1,886 1,899 1,950 1, Exports 1,942 2,174 2,100 2, Seed Residual Total Use 3,944 4,213 4,188 4, Ending Stocks Stocks to Use (%) % 13.3% 0.6% 6.1% Average Farm Price ($/bu) $8.95 $9.47 $9.30 $9.30 $0.00 -$0.02 WASDE USDA cut its 2017/18 US soybean export forecast 35 million bushels in March with sales and shipments lagging last year s record pace amid strong competition from Brazilian supplies. The cut in exports was partly offset by a 10-million-bushel increase in crush. USDA s ending stocks forecast was raised 25 million bushels to 555 million. This reflects a stocks-to-use ratio of 13.3% that would be well above each of the past 10 years. USDA s 2017/18 farm price forecast was unchanged at $9.30, which is down from $9.47 in 2016/17. 6

7 Chicken: Broiler and thigh prices have remained above 2016/17 levels on continued strong exports. Egg sets once again start to build. Whole Broiler Prices $1.15 $1.05 $0.95 $0.85 $0.75 Cold Storage Inventories Chicken (Million Pounds) Y/Y Change (%) $0.65 Boneless Skinless Breast Prices $1.70 $1.60 $ Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Egg Sets Egg Sets (million) Y/Y% Change 225 8% % $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 Boneless Skinless Thigh Prices Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 Broiler Exports - - $ $ $ $1.05 $0.90 million lbs $ $ The February USDA broiler price of $0.918/lb. decreased -3.1% vs. the prior month and increased +7.1% vs. February The WASDE U.S. median average price forecast for 2018 is $0.91/lb., down -2.7% from $0.935/lb. in The prior projection for 2018 was $0.905/lb. Total 2018 production is estimated to be 42.1 billion lbs., up +2.3% vs The February average breast price of $1.11/lb. decreased -1. M/M but was up +3. vs. February The January average thigh price of $1.21/lb. decreased -2.1% M/M but was up +41.6% vs. February Fundamentals: Chicken cold storage increased +12.1% in February Y/Y, but is down -1.53% vs. the prior month. Egg sets increased 2.6% in February Y/Y, and were up +1.07% vs. the prior four weeks. Broiler exports decreased -1. in January Y/Y, and was down -4. M/M. The February average combined regional large egg price of $1.61/dozen increased +35.1% vs. the prior month and vs. February The WASDE U.S. per capita disappearance is estimated at 274.2, down -0.18% compared to 2016 s actual of is projected to increase to 278.6, up +1.6% from 2017 estimates, though down from January s projected

8 Beef: Cut-out prices are above 2017 levels as YoY inventory levels are down sharply and exports continue to be strong. Live Cattle Prices $1.40 $1.30 Futures Heifer Slaughter $1.20 $1.10 $1.00 % Chg YoY 1 - $/cwt $0.90 Source: CBOT Cut Out Values Cold Storage Inventories Beef (million pounds) Y/Y Change (%) Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 million lbs -1 Beef and Veal Exports Pounds (000s) Monthly Cattle Processing 2,550 2 Baseline Slaughter Incremental Weight Y/Y Change (%) 2, , ,100 1,950 1,800-1, ,500-1 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 The February cattle price of $1.28/lb. increased +5.3% vs. the prior month and increased +7. vs. February The WASDE U.S. median average price forecast for 2018 is $119.52/cwt, down -1.6% from $121.52/cwt in Total 2018 production is estimated to be 27,792 million lbs., up +5.98% vs The February average cut-out value increased +3. vs. the prior month and increased +40 bp vs. February Fundamentals: Cold storage decreased -7.1 in February Y/Y, which is up 2.3 vs. the prior month. Beef and veal exports increased +2.76% in January Y/Y and was flat vs. the prior month. Heifer slaughter numbers increased +7.33% in January Y/Y, which is up +1.71% vs. the prior month. Cattle head processed increased +7.0 in January Y/Y which is up +6.9% vs. the prior month. 8

9 Pork: Prices are above 2017 YTD and well above decade-low October 2016 levels. The build in cold storage inventories and slaughter counts is offset by the increase in exports Y/Y. Lean Hog Prices $1.00 $0.90 Futures Sow Slaughter (3-Month Rolling Average) 8% 6% $0.80 $0.70 $0.60 % Chg YoY - $ $0.40 Source: CBOT Cut Out Values % Pork Exports $/cwt million lbs Cold Storage Inventories 750 Pork (million pounds) Y/Y Change (%) Monthly Processing Pounds (000s) 360 2,400 2 Baseline Slaughter Incremental Weight Y/Y Change (%) 2,300 2, ,100 2,000 1, ,800 1, Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 The February average hog price of $0.72/lb. decreased -0. vs. the prior month and increased +1. vs. February The WASDE U.S. median average price forecast for 2018 is $48/cwt, down -4.9% from $50.48/cwt in The prior projection for 2018 was $47.50/cwt. Total 2018 production is estimated to be 26,901 million lbs., up +7.79% vs The February average cut-out value decreased -2.6 vs. the prior month and decreased -7. vs. February ,600-2 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Fundamentals: Cold storage inventories increased +7.8% in February Y/Y, which is up +15.9% vs. the prior month. Three month average sow slaughter increased +2. in January Y/Y, which is up +0.48% vs. the prior month. Exports increased +6. in January Y/Y, but were down - 5. vs. the prior month. Hogs processed were up +5.8% in January Y/Y and up +7. vs. the prior month. Slaughter weight data indicates that total slaughter volume is up +5.8% vs. the prior year period. 9

10 Packer Margin Environment: Chicken, beef and pork estimated packer ratios are all near 2017 levels with all cut-out values declining M/M. Chicken 1st Q Ratio 3rd Q The February USDA monthly average chicken breast price-to-feed cost ratio of 13.7 decreased -5. vs. the prior month and was up +4.6 vs. the prior year period. The 10 year average ratio of 14.3 places the February 2018 result in the third quartile of the monthly results. 10 Beef st Q 3rd Q Ratio The February USDA monthly average beef cut-out to live cattle ratio of 1.65 was down -3. vs. the prior month but was up +0.6%vs. the prior year period. The 10 year average ratio of 1.63 places the February 2018 result in the top 5 of the monthly results Pork 1st Q 3rd Q Ratio The February USDA monthly average pork cut-out to live hog ratio of 1.10 decreased -2.6 vs. the prior month and decreased vs. the prior year period. The 10 year average ratio of 1.10 places the February result in the upper 3 rd Quartile of the monthly results. 10

11 Seafood: Shrimp prices are below 2017 levels due to strong imports, while salmon prices have moved above last year despite strong imports. Pollock prices have firmed in early Urner Barry Farm-Raised White Shrimp Index Shrimp Imports Total Volume million kg Source: Urner Barry 35 Source: NOAA Urner Barry Fresh Farmed Salmon Index Source: Urner Barry Alaskan Pollock Single Freeze Alaskan Minced 0.60 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Urner Barry The Urner Barry farm-raised white shrimp average price of $4.45/lb. in February was down -0.7% from the prior month and was below the previous year. The Urner Barry fresh farmed salmon price of $5.76/lb. for February was up +7% from January and up + YOY. Single Freeze Alaskan Pollock prices increased further in February to $1.33/lb. (or $2900/mt). Alaskan Minced Pollock prices increased to $0.86/lb. Industry sources report the overall Pollock market has firmed; B season 18 pbo Pollock block market is firming to $ $3300/mt range. NOAA indicated CY 2017 US shrimp imports increased +1 over 2016 to 1.46 billion lbs. US Atlantic Salmon imports jumped 16% in million kg million lbs Salmon Imports Total Volume Wild Alaskan Landings by Specie 1,200 1, Source: NOAA 0 Pink Sockeye Chum Coho Chinook Source: Urner Barry January shrimp imports of 61.7 million kg were up +3% from December and up 2 from January Salmon imports of 34.2 million kg were down -3% from December, but were up 1 from a year earlier. Wild Alaskan landings increased 7 in 2017 and were down slightly from The increase was led by Pink salmon, which more than doubled from 2016 s low level. The 2018 Bristol Bay Sockeye salmon forecast is for a chart-topping 51.3 million fish and a harvest of over 37 million. That compares with a 2017 forecast of 40 million Sockeye, though the run was 4 above forecast and the harvest of 37.7 million was the second-largest on record. 11

12 Dairy: Milk prices remain pressured as international milk supplies continue to outpace demand. Ample global skim powder stocks should limit potential price upside. USDA is forecasting Feb 2018 National All Milk price at $16.05/cwt, down $1.58/cwt from 2017 levels. $/cwt Class I Milk $/cwt Class III Milk Bn lbs milk equivalent Milk Production 20 Production (mil lbs) Y/Y Change (%) 19 3% % % 14 - Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Dairy Exports billion lbs 16 4 Skim solids Milkfat Y/Y Change (%) Cheddar Cheese, 40lb. block Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18F 2Q18F 3Q18F 4Q18F Butter Prices Grade AA The February USDA Class I milk price of $14.25/cwt decreased -7.7% vs. the prior month and decreased -14.8% vs. February The February average Class III milk price of $13.40/cwt decreased -4.3% vs. the prior month and decreased -20.6% vs. February The WASDE U.S median average all milk price forecast as of February 2018 is $16.05/cwt, down -8.9% from $17.63/cwt in Total 2018 production is estimated to be bn lbs., up +1.53% vs The February USDA average cheddar cheese price of $1.52/lb. increased +1. vs. the prior month and decreased -6. vs. February Fundamentals: Milk production increased +1.8% in January Y/Y and increased +0. vs. the prior month. The milk cow herd size was up +.0 vs. the prior year period. Total milkfat and skim solid exports are projected to increase Y/Y, vs 11. from 2016 to February average USDA Grade AA butter prices of $2.12/lb. decreased -1.7% vs. the prior month and decreased -1. vs. February

13 Specialty Crops: Currently orange juice and cocoa prices are trending up, while sugar, coffee, and cotton are trending down. Sugar #16 Prices Sugar #11 Prices c/lb c/lb Source: ICE 2.40 Orange Juice Source: ICE Cotton Source: ICE Cocoa 3,200 3, Source: ICE Coffee $/MT 2,800 2,600 2, , ,000 1,800 Source: ICE 1.10 Source: ICE The February ICE sugar #16 average price of $0.26/lb. decreased -3. vs. the prior month and decreased -15.9% vs. the prior year period. The February ICE orange juice average price of $1.48/lb. increased +3.6% vs. the prior month and decreased -13.7% vs. the prior year period. The February cocoa average price of $2,104/MT increased +8.7% vs. the prior month and increased +4. vs. the prior year period. The February ICE sugar #11 average price of $0.13/lb. decreased -3. vs. the prior month and decreased -33. vs. the prior year period. The February average cotton price of $0.78/lb. decreased -3.3% vs. the prior month and increased +3.3% vs. the prior year period. The February average coffee price of $1.20/lb. decreased -3% vs. the prior month and decreased -17.3% vs. the prior year period. 13

14 Specialty Crops: Price for almonds trending higher as 2018 yields likely affected by frost and rain. Tree nut acreages continue to push higher. Almonds Pistachios Walnuts Hazelnuts Severe frost and late rains in the Central Valley of California have affected 2018 almond bloom. Initial loss estimates range from 20-4 of almond crop depending on location. Almond exports increased 8% in volume and 1% in dollar value in Almond price to growers rose, currently ranging from $2.45/lb. to $3.30/lb. depending on quality and variety. Productive acreage of hazelnuts in the U.S. doubled over the past 10 years on strong demand reflects 37,000 total acres. Exports increased 1 by volume and 9% in dollar value in Pistachio prices firm as existing inventories see strong demand. Exports increased 4 in volume and 3 in value during is expected to be a high yielding crop due to alternate bearing nature of pistachios. Mixed results in the 2017 walnut market as exports of in-shell walnuts drop 2 and shelled drop 3%. Dollar value dropped for in-shell walnuts by 1, however, shelled walnuts increased 1 by dollar value. Price to growers up slightly ranging from $1.00 to $1.30/lb. depending on variety and quality Grape Crush Results 2017 crush at 4.2 million tons Average price per ton rose 1% Increasing competition for premium wine grapes continues to push commodity prices higher as consumers trade up to above $10/bottle. Source: Gomberg Fredrikson and Wine Institute 14

15 Forest Products: US housing starts and remodeling continue to trend upward driving demand. As a result, framing lumber prices are at record highs, and structural panel prices are near decade highs. $/Thousand Sq Ft Framing Lumber Index $520 $480 $440 $400 $360 $320 Thousand Units U.S. Housing Starts 1,400 New Units Y/Y Change (%) 1,300 1,200 1,100 1, $280 Source: Random Lengths 700 Source: US Fed -4 Structural Panel Index $560 $520 Repair & Remodel Expenditures (LTM total) 335 $ Billions Spent Y/Y Change (%) 315 8% 7% $/Thousand Sq Ft $480 $440 $400 $ Billions % 3% $ % $320 Source: Random Lengths 175 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: jchs.harvard.edu The February Framing Lumber Composite Index of $496/thousand sq. ft. increased +9. vs. the month prior and increased +26. vs. the prior year period. The February Structural Panel Composite Index of $516/thousand sq. ft. increased +14. vs. the prior month and increased +3 vs. the prior year period. February U.S. Housing Starts of 1.24 million units decreased -6.8% vs. the prior month and decreased - vs. the prior year period. The 4Q17 LTM repair and remodel total expenditure of $314.8Bn increased +1.7% vs. the prior quarter and +6. vs. the prior year period. 15

16 Crop Inputs: Nitrogen prices supported by tight supplies after strong fall application season in the US. DAP prices higher due to closure of a large US plant. Fuel prices well above early Ammonia DAP $/ton 400 $/ton Source: Green Markets; US Corn Belt Urea Source: Green Markets; US Corn Belt Potash $/ton $/ton Source: Green Markets; US Corn Belt 210 Source: Green Markets; US Corn Belt Ammonia prices in the Corn Belt increased + to $428/ton in February as tight near-term supplies following a strong fall application season continued to support the market. Urea prices in the Corn Belt averaged $287/ton in February. This was in line with last year, but up + from January as the fall application season also has boosted urea prices. Diesel Fuel Prices $/Gallon $3.25 $3.00 $2.75 $2.50 $2.25 $2.00 $/Gallon DAP prices rose through the fall after it was announced that a large plant in Florida would close at the end of Prices increased another +1% to $397/ton in February. Potash prices averaged $278/ton in February in the Corn Belt. This was up +3% from January and 9% above a year ago as Canadian producers nudged their fill prices higher. Gasoline Prices $2.75 $2.50 $2.25 $2.00 $1.75 $1.75 Source: EIA $1.50 Source: EIA The US average on-highway diesel price of $3.05/gallon during February was up +1% from January and was 19% ($0.40) higher than in February Retail US gasoline prices averaged $2.59 in February. This was up +1% from January and was 1 ($0.28) higher than a year earlier. 16

17 Energy and Labor: Global oil prices have kept energy prices relatively in check, while we observe wage inflation gains in restaurants and supermarkets. Natural Gas Retail Prices $9.00 $8.50 Restaurant Hourly Earnings Y/Y Change % $/tcf $8.00 $7.50 3% $7.00 1% $6.50 Source: EIA Heating Oil Retail Prices Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: BLS Supermarket Hourly Earnings (3-Month Rolling Avg.) Y/Y Change % 3-Month Avg 3% 1% -1% - -3% Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: BLS cents/kwh Commercial Electricity Prices Food Manufacturing Hourly Earnings Y/Y Change % 3% 1% 9.8 Source: BLS -1% Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: BLS The February average natural gas price of $7.70/Mcf decreased -2. vs. the prior month and increased +2.9% vs. the prior year period. The February average heating oil price of $2.82/gal decreased -2.8% vs. the prior month and increased +1 vs. the prior year period. The February average electricity price of $10.57/kWh increased +0.9% vs. the prior month and increased +2. vs. the prior year period. The restaurant labor index increased +3.3% Y/Y in February, and was up just +0.1% vs. the prior month. The supermarket labor index increased 0.6% M/M in January, and up +1. YOY. The food manufacturing labor index increased +2. Y/Y in February, but decreased -0.7% vs. the prior month. 17

18 Food and Agribusiness Industry Advisors Kevin Bergquist Forest Products Sector Manager David Branch Specialty and Non-Grain Crops Sector Manager Matt Dusi Specialty and Non-Grain Crops Sector Manager Scott Etzel Protein - Seafood Sector Manager etzel@wellsfargo.com Rob Fox Dairy Sector Manager Robert.g.fox@wellsfargo.com Tim Luginsland Grains and Oilseeds Sector Manager luginstr@wellsfargo.com Lee Ann Pearce Specialty and Non-Grain Crops Sector Manager Leeann.pearce@wellsfargo.com Michael Swanson, Ph.D. Chief Agriculture Economist Michael.j.swanson@wellsfargo.com Denise Cahill Industry Advisors Group Manager cahilldl@wellsfargo.com Ken Scott Zuckerberg Packaged Food and Ag/Food Tech Sector Manager Kenneth.S.Zuckerberg@wellsfargo.com Karol Aure-Flynn Specialty Crops Analyst, Analyst Team Lead Karol.aure-flynn@wellsfargo.com Chris Eggerman Sector Analyst: Grains, Crop Inputs, Forest Products Chris.eggerman@wellsfargo.com Courtney Schmidt Sector Analyst: Protein, Dairy Courtney.b.schmidt@wellsfargo.com Brad Rubin Sector Analyst: Specialty and Non-Grain Crops Brad.Rubin@wellsfargo.com Matt Stommes Protein - Poultry and Beef Sector Manager Matthew.j.stommes@wellsfargo.com Lon Swanson Crop Inputs/Feed Sector Manager Lon.k.swanson@wellsfargo.com General disclosures The views expressed are intended for Wells Fargo customers only. They present the opinions of the authors on prospective trends and related matters in food and agribusiness as of this date, and do not necessarily reflect the views of Wells Fargo & Co., its affiliates and subsidiaries. Opinions expressed are based on diverse sources that we believe to be reliable, though the information is not guaranteed and is subject to change without notice. This is not an offer to sell or the solicitation to buy or sell any security or foreign exchange product. 18