The Food Crisis: Analysis and Assessments

Transcription

1 Agricultural Situation and Outlook: The Food Crisis: Analysis and Assessments Dr. Michael R. Rahm Vice President Market Analysis Merrill Lynch Agricultural Chemicals Conference New York, NY

2 Safe Harbor Statement Certain statements contained herein constitute forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of Although we believe the assumptions made in connection with the forward-looking statements are reasonable, they do involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of The Mosaic Company, or industry results generally, to be materially different from those contemplated or projected, forecasted, estimated or budgeted (whether express or implied) by such statements. These risks and uncertainties include but are not limited to the predictability of fertilizer, raw material and energy markets subject to competitive market pressures; changes in foreign currency and exchange rates; international trade risks including, but not limited to, changes in policy by foreign governments; changes in environmental and other governmental regulation; adverse weather conditions affecting operations in central Florida or the Gulf Coast of the United States, including potential hurricanes or excess rainfall; actual costs of closure of the South Pierce, Green Bay and Fort Green facilities differing from management s current estimates; accidents involving our operations, including brine inflows at our Esterhazy, Saskatchewan potash mine as well as potential mine fires, floods, explosions or releases of hazardous or volatile chemicals, as well as other risks and uncertainties reported from time to time in The Mosaic Company s reports filed with the Securities and Exchange Commission. Actual results may differ from those set forth in the forward-looking statements. This presentation may not be distributed, reproduced, or used without the express written consent of The Mosaic Company. 1

3 More details in the May issue of Market Mosaic 2

4 The Food Crisis of 2008 Soaring energy and agricultural commodity prices are pushing up food costs for consumers in all corners of the globe. For the poorest consumers who spend one-half to three-quarters of their income on food, rising prices are putting hundreds of millions of the world s most vulnerable people at risk of extreme hunger. Market Mosaic May

5 The Rice Crisis Rice is life itself in Southeast Asia, and this year there is not enough to go around. Freakishly bad weather last year has turned the region's usual bare sufficiency into severe shortage. The result: smuggling, hoarding, soaring prices and hungry people. 4

6 The Rice Crisis of 1973 Rice is life itself in Southeast Asia, and this year there is not enough to go around. Freakishly bad weather last year has turned the region's usual bare sufficiency into severe shortage. The result: smuggling, hoarding, soaring prices and hungry people. A Rice Crisis is Boiling Time Magazine July 2,

7 The Food Crisis: Analysis and Assessments Treat the Symptoms Diagnosis the Illness Complicating factors or root causes Root causes Accelerating demand growth Decelerating yield growth - The case of wheat - The case of rice Cure the Illness Near term prescription Bring land into production Narrow the yield gap Long term prescription Boost yield potential Plot the second Green Revolution A Medical Analogy 6

8 Treat the Symptoms = More Food Aid Famine Definition Temporary cut-off of food supplies due to a natural or man-made disaster Characteristics Makes headlines Rallies governments and international relief agencies Confined to a specific region Food supplies eventually return to normal Hunger Definition Chronic lack of calories due to poverty Characteristics Less visible or silent in most cases Widely dispersed Alleviation is a complex issue tied to economic development 7

9 Food Aid Challenges Today Soaring costs of food aid Rising energy and agricultural commodity prices Swelling ranks of extreme hunger in many regions Scale and scope needed to treat extreme hunger Different from famine/disaster aid Requires more resources, greater delivery capabilities and a coordinated effort by many countries Program design to avoid depressing local prices and production incentives Coping with the troubling response of many governments Use of failed policies (e.g. price controls, export bans, export taxes) The case of rice: export bans exacerbate the run-up in prices 8

10 The Food Crisis: Analysis and Assessments Treat the Symptoms Diagnosis the Illness Complicating factors or root causes Root causes Accelerating demand growth Decelerating yield growth - The case of wheat - The case of rice Cure the Illness Near term prescription Bring land into production Narrow the yield gap Long term prescription Boost yield potential Plot the second Green Revolution 9

11 Complicating Factors or Root Causes Speculation Export Bans Price Controls Drought Export Taxes Monetary Policy Biofuels 10

12 A Range of Opinions about a Complex Illness Complex illness with a range of opinions From bungled U.S. monetary policy At one end of the spectrum is the editorial board of the Wall Street Journal (WSJ). They concluded in an April 28 editorial that surging commodity prices are the result of bungled U.S. monetary policy that has caused a collapse of the dollar. They reasoned that the rise in the prices of internationally traded commodities has been so rapid and so broad that it couldn t merely be a function of supply glitches or new demand for specific grains (i.e. from biofuels). In fact, they chided popular media explanations of surging food prices such as rising global demand, greedy speculators and human profligacy and questioned how, all of sudden and without warning, the world was running out of food. 11

13 A Range of Opinions about a Complex Illness Complex illness and a range of opinions To Biofuels At the other end of the spectrum are a growing number of others who place the blame for rising food costs squarely on biofuels. At a meeting of the International Monetary Fund and World Bank on April 12-13, the Indian finance minister called the use of grain for the production of biofuels a crime against humanity. The Turkish minister described the use of food for fuel as appalling. The United Nations Special Rapporteur on the Right to Food and a group of food scientists have called for a ban on biofuels production. Even the WSJ editorial board hedged its previous week s opinion in a May 7 editorial by blaming U.S. ethanol for higher food prices for Americans and an emerging humanitarian crisis in the developing world. 12

14 Assessment There are many complicating factors But none is a root cause And some are embedded deeply in political agendas The root causes of higher commodity prices Accelerating demand growth Due mostly to increases in food demand A deceleration of yield growth Caused by a loss of focus on production agriculture 13

15 This Was Not a Quick Onset Illness Mil Tonnes 650 Source: USDA World Grain and Oilseed Stocks Stocks Percent of Use Percent 34% 32% 30% 28% 26% 24% 22% 20% 18% 16% 14% 12% The world has consumed more grains and oilseeds than it has produced in seven of the last eight years. Global stocks of the 16 leading grain and oilseed crops are projected to drop to 380 million tonnes or 15.2% of use at the end of the 2007/08 crop year, the lowest percentage since the food crisis of the 1970s. The 380 million tonnes of inventory at this crop year would be the smallest pile in the global granary since the end of the 1983/84 crop year. Unsustainable Trends This Decade 14

16 Root Cause 1: Accelerating Demand Growth Mil Tonnes 2,600 2,500 Source: USDA 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 World Grain and Oilseed Use CAGR: 2.3% 9% 8% 7% CAGR: 1.3% 6% 5% 4% 3% 2% 1% 0% Food/Feed/Other U.S. Ethanol U.S. Ethanol Percent of Total Biofuels have contributed but are not a root cause Demand growth is accelerating due to growing food demand, especially in Asia, as well as increases in biofuels production, particularly U.S. ethanol output. World grain and oilseed use has increased 2.3% per year during the last five years, up 100 basis points from the rate for the previous 12 years. The net amount of corn used for U.S. ethanol production accounts for 2.1% of global grain and oilseed use. Uses other than corn for U.S. ethanol production have accounted for 87% of the growth in grain and oilseed use during the last five years. 15

17 Root Cause 1: Accelerating Demand Growth The Good News The good news is that the world is developing more rapidly today than in the past. For example, McKinsey & Company estimates that about 1.1 billion people will join middle class income groups in China and India alone between 2005 and The development of an increasingly large and affluent middle class who demand more protein rich diets is the main demand driver. The Challenging News The challenging news is more rapid development is stressing global resources, especially basic agricultural and industrial commodities. Most resource based industries today are challenged to develop more productive, efficient and environmentally friendly ways to utilize current resources and to discover the new resources and technologies that are needed to meet the growing demands of a developing world. 16

18 Root Cause 2: Decelerating Yield Growth World Average Yield Growth Rates by Major Crop Crop Corn 1.9% 2.2% 1.5% Rice 2.1% 1.2% 0.7% Soybeans 1.1% 2.2% 1.0% Wheat 2.6% 1.1% 0.7% Yield growth has decelerated during the last 15 years especially for the key food grains of rice and wheat. Large surpluses and a strong record of productivity growth caused the world to lose focus on production agriculture. 17

19 Losing Focus on Production Agriculture 18

20 World Wheat Yields Flatten Tonnes Hectare Source: USDA World Average Wheat Yield After peaking at 2.88 tonnes per hectare in 2004, global wheat yields have declined three years in a row to 2.79 tonnes per hectare in Weather explains part of the decline. For example, drought ravaged the 2006 and 2007 Australian wheat crops. The last two Aussie crops ranked as the lowest back-to-back harvests since 1976 and Weather, however, does not explain the slowdown in yield growth. Wheat yields remain low in some countries and have leveled off in others. 19

21 Wide Yield Gaps Between Countries Tonnes Hectare Range for Top 40 Countries Average of Upper Quintile Average of Lower Quintile Source: USDA Wheat Yields We analyzed the yield history of the top 40 wheat producing countries in Using threeyear averages, the world yield was 2.80 tonnes per hectare in 2007, but yields ranged from 1.11 tonnes per hectare in Kazakhstan to 6.45 tonnes per hectare in Egypt last year. In fact, the difference or yield gap between the top and bottom quintiles has widened over time. The top quintile harvested 5.25 tonnes of wheat per acre during the last three years. The bottom quintile harvested just 1.33 tonnes per hectare during the same period. The difference of 3.92 tonnes per hectare is more than double the gap of 1.85 tonnes per hectare in

22 Similar Countries Exhibit Different Trends Tonnes Hectare Source: USDA Wheat Yields - India and Pakistan India Pakistan World Similar countries have exhibited different yield trends, especially this decade. Indian wheat yields have leveled off this decade even though monsoons have delivered average to above-average rainfall during this period. By contrast, yields in neighboring Pakistan have continued to increase this decade and the average yield in Pakistan last year exceeded the average yield in India for the first time in 25 years. 21

23 India Draws Down Stocks and Imports Wheat Mil Tonnes India Wheat Stocks Percent 45% Source: USDA 40% 35% 30% 25% Mil Tonnes India Net Wheat Imports 10 20% 15% Stock Pct of Use 10% 5% 0% -4-6 Source: USDA India has drawn down stocks and imported wheat to make up for the impact of flat yields and production during the last several years. India depleted its wheat stocks from 23.0 million tonnes at the end of the 2001/02 crop year to a low of just 2.0 million tonnes at end of 2005/06. India exported 5.6 million tonnes of wheat in 2003/04 but transitioned to a net importer of 6.5 million tonnes in 2006/07, a 12.1 million tonne swing in just three years. 22

24 Ukrainian Wheat Yields Fall Tonnes per Hectare Source: USDA Wheat Yields - FSU and Ukraine Ukraine FSU World Ukrainian wheat yields averaged 2.58 tonnes per hectare during the last three years, about eight percent less than the global average in Ukrainian yields and harvested area have declined markedly since the break-up of the former Soviet Union. Ukraine s average wheat yield was 3.77 tonnes per hectare in 1990, more than 60 percent greater than the world average. 23

25 World Rice Yield Growth Slows Tonnes Hectare Source: USDA World Average Rice Yield World yields increased 2.1 percent per year from 1970 to 1990, but then dropped to 1.2 percent per year during the 1990s. Yield growth slowed further to just 0.7 percent per year so far this decade

26 Wide Yield Gaps Between Countries Tonnes Hectare Range for Top 35 Countries Average of Upper Quintile Average of Lower Quintile Source: USDA Rice Yields We analyzed the yield history for the top 35 rice producing countries in Using threeyear averages, the world yield was 2.75 tonnes per hectare in 2007, but yields ranged from 0.83 tonnes per hectare in Tanzania to 6.43 tonnes per hectare in Egypt last year. Like wheat, the yield gap between the top and bottom quintiles has widened over time. The top quintile harvested 5.32 tonnes of rice per acre during the last three years. The bottom quintile harvested just 1.25 tonnes per hectare during the same period. The difference of 4.08 tonnes per hectare today is almost 50% greater than the gap of 2.79 tonnes per hectare in

27 Rice Yields for Key Exporters Tonnes Hectare Source: USDA Rice Yields - Largest Exporters Thailand Vietnam India World Similar countries again exhibit much different yield trends. Rice yields in Thailand and India - - the number one and number three exporters -- have leveled off this decade and are less than the world average. However, yields in Vietnam, the second largest exporter, have trended sharply upward this decade and now exceed the global average by a significant margin. Agronomists have a straightforward explanation: Vietnam is working hard to increase yields. 26

28 The Food Crisis: Analysis and Assessments Treat the Symptoms Diagnosis the Illness Complicating factors or root causes Root causes Accelerating demand growth Decelerating yield growth - The case of wheat - The case of rice Cure the Illness Near term prescription Bring land into production Narrow the yield gap Long term prescription Boost yield potential Plot the second Green Revolution 27

29 Near Term Prescription Let markets work Try the commodity trader s remedy The cure for high prices is high prices and the cure for low prices is low prices The case of wheat Dismantle failed government policies Price controls Export bans and taxes Reform food aid programs Cash donations vs. in-kind contributions Incent local farmers 28

30 The Case of Wheat: 2008 Supply Response $ BU Source: KCBOT Hard Red Winter Wheat Price Daily Close of the Nearby Futures Contract Mil Tonnes 225 Source: USDA World Wheat Stocks Percent 39% 36% 33% % 27% 24% Wheat prices soared to record highs earlier this year in response to extremely low global inventories. Stocks have dwindled because wheat production has lagged demand during seven of the last eight years. The closing price of the nearby contract for hard red winter wheat peaked at $13.37 per bushel on February 27, but has declined about 40% to the $8.00 per bushel range at the end of May due in large part to expectations of a larger 2008 crop Stocks Percent of Use Wheat looks like an increasingly good example of the commodity trader s remedy assuming the weather cooperates this year. Initial USDA estimates indicate that higher wheat prices will cause farmers to plant more area, intensify cropping practices and boost global production 8.2 percent or 50 million tonnes in Global stocks are projected to increase about 14 million tonnes during the 2008/09 crop year, the first increase in three years. 21% 18% 15% 12% 29

31 Near Term Prescription Rev up the engines of production agriculture Plenty of RPMs/horsepower to meet medium term demand Global agriculture has significant underutilized capability Bring land into production without jeopardizing the environment - Americas - Africa - Former Soviet Union Narrow the yield gap (example from A. Dobermann) - Additional rice production required in SE Asia during the next 15 years Two-thirds from narrowing the yield gap (more than 25% of gain from crop nutrients) One-third from increasing yield potential 30

32 Bring Land into Production Mil Hectares World Wheat Harvested Area Source: USDA World wheat acreage is down from its peak in Much of the decline is due to competition from feed grains and oilseeds, key crops for protein production, but some is due to government policies that have idled land for conservation and supply control purposes Global wheat area last year was 9.0 percent or 21.5 million hectares less than the peak of million hectares in Initial USDA estimates indicate that harvested area will climb to 225 million hectares in 2008, the highest level in 10 years. In the United States, about 14 million hectares remain out of production in the Conservation Reserve Program (CRP). In Europe, reforms of the Common Agricultural Policy (CAP) in 1992 established a 10 percent set aside (waived for the 2008 crop). In the former Soviet Union, harvested area last year was off more than 36 million hectares from the level in

33 Narrow the Yield Gap Investments in agricultural infrastructure World Bank (Double agricultural lending to Africa to $800 million next year) UN FAO (Call for $1.7 billion of finance aid for farmers in the developing world) Adoption of modern technologies/practices Minimize losses (10%-20% rice losses in SE Asia) Nitrogen use efficiency (e.g. deep placement of urea briquettes in rice production) GMO seed varieties Institutional reforms Development of viable commodity markets Development of viable credit markets Revitalize agricultural extension services 32

34 Long Term Prescription Boosting yield potential reasons for optimism Completion of the genome sequencing of major crops Powerful and diverse arsenal of weapons Plotting the next Green Revolution Application of science and technology to increase crop yields (or enhance crop characteristics) Institutional reforms required for the adoption and successful implementation of new technologies Focus on Africa 33

35 Thank You Agricultural Situation and Outlook: The Food Crisis: Analysis and Assessments Dr. Michael R. Rahm Vice President Market Analysis Merrill Lynch Agricultural Chemicals Conference New York, NY 34