Industry Update Food and Agribusiness

Transcription

1 September 218 Industry Update Food and Agribusiness Key Demand Developments Revisions to second quarter GDP released end of August boosted the growth rate to a 4. pace during the second quarter based on a faster rate of business spending and a record high for corporate profits. Further, evidence continues to mount, based on recent economic releases, that economic growth is poised to remain solid in the third quarter as well. Overall business activity remains strong as both the ISM manufacturing and non-manufacturing indices advanced higher in August, and the labor market continues to add jobs across a wide array of industries. Employment growth picked back up in August with employers adding 21, new jobs. Gains were broad based, with most industries adding jobs over the month. While transportation, warehousing and construction sectors added jobs, manufacturing jobs fell slightly. The unemployment rate remained unchanged at 3.9% due to a 5, downward revision to the prior two monthly jobs reports. Food Retail Sales Trade tensions continue to escalate. The surge of exports in the second quarter as businesses rushed to get merchandise shipped ahead of the retaliatory tariffs is expected to reverse in the third quarter, as consecutive drops in exports for June and July will likely lead to a reversal of trade s second quarter boost to overall GDP growth. The trade deficit rose to $5.1 billion in July as exports dropped 1., however, strong consumer spending and business investment continued to support demand for imports, which rose.9% in July. According to Nielsen, U.S. Food Retail posted an increase in total sales volume by dollars of 1. Y/Y, while volume measured by equivalent units decreased. over the last 52 weeks. Price per equivalent unit increased over same period by 1.7%, trending upward from the previous period Y/Y % of.9%. Retailers are rolling out new e-commerce and customer engagement strategies to address consumer preferences for convenience. Y/Y Change (%) Consumer and Producer Price Indices 1 CPI Food Away From Home CPI Food At Home PPI All Food 8% 6% % -8% Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Price and Food Inflation Developments The Producer Price Index for All Foods during August was down 1.6% from the previous year, reflecting the largest Y/Y decline in 18 months. Restaurant pricing, measured by the CPI Food Away from Home index, was up 2.6% Y/Y in August, while the CPI Food At Home index was up. Y/Y. Both of these measurements have been relatively steady the past several months. The spread between restaurant and food retail has widened slightly in the past year. Over the past 3-5 years, these trends appear to be demonstrating less volatility in macroeconomic indicators as CPI and PPI are moving in a smaller channel. Source: U.S. Bureau of Labor Statistics Industry Research Update: Food and Agribusiness 1 1

2 Grocery Department Trends: Frozen Food, Deli and Fresh Produce volumes showed Y/Y increases in 2Q 18. Dry Grocery, Dairy and Bakery volumes were below year-ago levels. Dry Grocery 3% Volume Price Frozen Foods Volume Price 3% 1% 1% -1% - -1% -3% - - 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Source: Nielsen AOC+C Dairy 8% Volume Price 6% % 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Source: Nielsen AOC+C Fresh Produce 1 Volume Price 8% 6% % 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Source: Nielsen AOC+C -3% 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Source: Nielsen AOC+C Deli 1 Volume Price 8% 6% - 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Source: Nielsen AOC+C Bakery 1 1 Volume Price 1 8% 6% - - 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Source: Nielsen AOC+C Dry Grocery 2Q 18 price/mix increased 1. Y/Y, while Dry Grocery volumes decreased 1. Y/Y. Dairy 2Q 18 price/mix increased 2.3% Y/Y, while Dairy unit sales volume decreased 1.8% Y/Y. Fresh Produce 2Q 18 price/mix decreased 2.8% Y/Y. Fresh Produce volumes increased 3.7% Y/Y. Frozen Food 2Q 18 price/mix increased 1. Y/Y. Frozen Food volumes increased 1. Y/Y. Deli 2Q 18 price/mix increased.6% Y/Y, while Deli volumes increased 3.8% Y/Y. Bakery 2Q 18 price/mix decreased 1. Y/Y. Bakery volumes decreased 3. Y/Y. 2

3 Food Company Margin Heat Map Y/Y Price vs. Volume Grain Protein Labor Energy Constructive Mixed Mixed Inflationary Mixed Food Company Input Cost Summary: As we end 3Q 18 a large portion of commodities have shown moderate deflation vs. Q3 17 levels. Economic Backdrop: Economic activity continues to improve with Real GDP coming in at a revised rate of 4. for the second quarter. Further, the economy added 21, jobs in August while the jobless rate remained flat at 3.9% and average hourly earnings rose 2.9% Y/Y on a nominal basis. Corn, Wheat & Soybeans: USDA projects U.S. corn and wheat ending stocks to decline in 218/19 from large levels in 217/18. Soybean stocks are forecast to be record large, and prices are forecast to be the lowest in 12 years. Chicken: Prices on most chicken parts continued lower in August on weak demand; despite lower prices, supplies are increasing as year-to-date placements are up 1%. Beef: Live cattle prices appear to be at seasonal lows early as they begin to rebound. Export demand remains strong with YTD beef exports up 1 Y/Y. Growth in exports is helping absorb increasing beef supplies. Pork: Lean hog and pork cut-out prices fell sharply in August as increasing supplies and trade uncertainly weighs on the market. Hope could be on the horizon for the industry with possible global supply disruptions and a new trade agreement. Packer Margin Environment: Beef packer margins continue to be at record levels. Pork margins jumped higher in August, chicken margins fell slightly on seasonality. Seafood: Shrimp prices saw a modest rebound in August as disease issues in India impacted supply. Despite price rebound, shrimp demand remains strong with increasing imports and a strengthening U.S. dollar. Dairy: Dairy product exports in the 1st half of 218 were 17% higher than 217, setting a new record pace. However, this pace could be in jeopardy in the 2nd half of the year due to the tariff war and a strengthening U.S. dollar. Forest Products: Framing lumber and structural panel prices have dropped in two straight months after high prices in prior months, along with rising interest rates, led to a slowdown in housing starts. Crop Inputs: Nitrogen prices rose 1-11% in August as producers raised fill prices on tight supplies. DAP prices continued to firm, but potash was essentially unchanged. Fuel prices remain well above 217. Energy and Labor: Current consensus as we head into the fall season is for oil prices to remain around $68-$72 a barrel. Specialty Crops: Sugar, orange juice, cocoa, cotton and coffee prices continue to trend downward. Wine: Harvest has started for some white wine varietals. Most growers are preparing for the majority of harvest to commence in September and October. Most custom crush facilities are looking to exit bulk products to make room for the new harvest. Key Commodity Heat Map Commodity Price* Y/Y M/M Corn $ % HRW Wheat $ % Soybeans $ % +1.3% Broilers $ % -21. Cattle $ Hogs $ % -25. Class III Milk $ % +6. Shrimp $ % +1. Salmon $ % -2. Natural Gas $ % +1. Electricity $ % +2.9% Heating Oil $ %. Restaurant Labor $ % Supermarket Labor $ % +.1% Food Labor $ % *All prices for August except natural gas (June), Electricity (June), heating oil (June) and supermarket labor (July) Monthly avg. corn, wheat, soybeans in $/bu; broilers, shrimp in ; cattle, hogs, milk in $/cwt; salmon in $/kg; gas in $/Mct; oil in $/gal; electricity in $/kwh; labor in $/h Sources: CBOT, USDA, Urner Barry, EIA, BLS Fruit Crops: Table grapes, raisins, stone fruit, apples and strawberries continue to be harvested. Avocados are in crop transition with production moving to Mexico from California. Vegetable Crops: Cucumbers, peppers, and tomatoes continue to be harvested in the California Central Valley. Processing tomato harvest is in full swing plants running 24 hours a day to get the product processed. Nuts: Markets were quiet coming into harvest season. The market is waiting to see what harvest will bring ahead of the heavy shipment season in October, November and December, and how tariffs will affect sales going forward. 3

4 Economics: Economic activity continues to improve with Real GDP coming in at a revised rate of 4. for the second quarter. Further, the economy added 21, jobs in August while the jobless rate remained flat at 3.9% and average hourly earnings rose 2.9% Y/Y on a nominal basis. Voluntary Quits as % of Employment 3. Trade Weighted Dollar vs. Ag Index Jan 214= Sources: BLS, Wells Fargo 1 95 Ag Bulk Commodities Sources: USDA, Federal Reserve, Wells Fargo Trade Weighted Weekly Earnings Rates $95 Weekly Wages $9 $85 $8 $75 $7 $65 Sources: BLS, Wells Fargo Miles Driven (Billion) Food Inflation Adjusted Source: Federal Highway Admin. July 218 voluntary quits as a percentage of employment of 2.7% was up from 2. in both the previous month and previous year due to continued strong employment gains, and matched the highs from August 216 and August 217. Weekly average earnings were up 3. Y/Y in August on a nominal basis; when deflated by food and beverage CPI the August average wage of $736/week was up 2. Y/Y, driven primarily by continued labor shortages. July 218 miles driven of 288 billion were up.3% Y/Y as stronger consumer spending offset higher gas prices. Net Trade Balance $28 China & Hong Kong $21 $14 $7 $ -$7 -$14 -$21 -$ (6.1) Net Exports as % of Production (1.1) (4.5) The August 218 trade weighted dollar index value of vs. bulk commodity dollar index value of continues to widen when compared to the July 218 values of and , respectively. The net trade balance for YTD July 218 of $1.6 billion widened by approximately $2.6 billion compared to the $8 billion trade deficit for the 7 months ending July 217. Currency relationships have a greater influence on the U.S. pork and broiler markets as net exports comprised 18. and 16.3%, respectively, of total production for the 6 months ending June 218, while the U.S. was a small net importer (.1%) of beef. 5.5 (17.8) (21.6) (26.) (16.1) Sources: USDA FAS, Wells Fargo 21% 18% 1 1 9% 6% 3% -3% -6% Rest of World Pork Chicken Beef Sources: USDA, Wells Fargo F 4

5 Grain Prices: August average prices were up M/M and Y/Y for corn and wheat. Soybeans up slightly, but remain well below recent years on export concerns and forecast of record-large U.S. and world stocks. Corn $4.2 $4. Futures Nearby corn futures averaged $3.59 per bushel in August, up 1 cents from July and up 5 cents from August 217. $/Bushel $3.8 $3.6 $3.4 $3.2 Source: CME Support came from higher wheat prices early in the month before USDA s forecast for record yields in the U.S. pressured prices. USDA forecasts world corn production to rise 3% in 218/19 on increases for South America, China, the U.S. and Ukraine. However, world stocks are forecast to drop 19% to the lowest level in six years with usage exceeding production. Wheat $5.7 $5.4 Futures Nearby Kansas City wheat futures averaged $5.47 per bushel in August. This was up 5 cents from July and up $1.18 from August 217. $/Bushel $5.1 $4.8 $4.5 Lower production estimates in the EU and Australia, along with a weaker U.S. dollar, were supportive early in the month before the market saw pressure from U.S. spring wheat harvest. Mixed signals from Russia s government about whether it would limit exports this year has enhanced price volatility. $4.2 $3.9 Source: CME USDA projects global wheat production down 3% in 218/19 on large declines in the EU and Russia. Global stocks are forecast to decline after increasing five straight years to a record level. Soybeans $12. $11.5 Futures Nearby soybean futures averaged $8.62 in August, up 11 cents from July but 78 cents below August 217. $/Bushel $11. $1.5 $1. $9.5 Lower U.S. crop condition ratings and news that the U.S. and China would resume trade talks boosted prices early in the month, but the gains were mostly given back as USDA s U.S. yield and ending stocks forecasts topped expectations and the U.S. and China raised tariffs on more products. $9. $8.5 $8. Source: CME USDA is forecasting world soybean production up 1 in 218/19 on the larger U.S. crop and an assumed rebound in Argentina s yields in 219. World ending stocks are projected to jump 1 to a record level. 5

6 Grain Fundamentals: USDA projects U.S. corn and wheat stocks to decline in 218/19 from large levels in 217/18. Soybean stocks are forecast to be record large, and prices are forecast the lowest in 12 years. Corn 216/17 217/18E 218/19F 218/19F M/M Change Y/Y Change September August September 18/19 Forecast 18/19 Forecast Area Planted (mm) Area Harvested Yield per Harvested Acre (bu) Beginning Stocks (mm bu) 1,737 2,293 2,27 2, Production 15,148 14,64 14,586 14, Imports Total Supply 16,942 16,937 16,664 16, Feed and Residual 5,47 5,45 5,525 5, Food, Seed & Industrial 6,885 7,6 7,15 7, Ethanol 5,432 5,6 5,625 5, Total Domestic 12,355 12,51 12,63 12, Exports 2,294 2,425 2,35 2, Total Use 14,649 14,935 14,98 15, Ending Stocks 2,293 2,2 1,684 1, Stocks to Use (%) 15.7% % -1.7%. Average Farm Price ($/bu) $3.36 $3.4 $3.6 $3.5 $.1 -$.1 USDA raised its U.S. corn production forecast 241 million bushels to 14.8 billion in September as its yield forecast was increased 2.9 bushels per acre to bushels, which would be up 4.7 bushels from last year s record. USDA s 218/19 carryout projection was raised 9 million bushels to 1,774 million as the larger crop partly offset by smaller beginning stocks and increases of 25 to 5 million bushels in feed and residual usage, usage in ethanol production, and exports. The implied stocks-to-use ratio of 11.7% would be below each of the previous four years. WASDE Wheat 216/17 217/18E 218/19F 218/19F M/M Change Y/Y Change September August September 18/19 Forecast 18/19 Forecast Area Planted (mm) Area Harvested Yield per Harvested Acre (bu) Beginning Stocks (mm bu) 976 1,181 1,1 1,1-81 Production 2,39 1,741 1,877 1, Imports Total Supply 3,42 3,79 3,112 3, Food Seed Feed and Residual Total Domestic 1,171 1,77 1,152 1, Exports 1, ,25 1, Total Use 2,222 1,978 2,177 2, Ending Stocks 1,181 1, Stocks to Use (%) % 42.9% 42.9% % Average Farm Price ($/bu) $3.89 $4.72 $5.1 $5.1 $. $.38 USDA s 218/19 U.S. wheat balance sheet was unchanged in its September supply and demand report, with ending stocks forecast to moderate to 935 million bushels from 1.1 billion bushels in 217/18. Although the implied stocks-to-use ratio of 43% would be below recent years, it reflects ample supplies. U.S. export sales have been sluggish to start 218/19, but exports are forecast to rise 124 million bushels (1) due to smaller production in Russia and the EU. USDA held its farm price forecast at $5.1, up $.38 from 217/18. WASDE Soybeans WASDE 216/17 217/18E 218/19F 218/19F M/M Change Y/Y Change September August September 18/19 Forecast 18/19 Forecast Area Planted (mm) Area Harvested Yield per Harvested Acre (bu) Beginning Stocks (mm bu) Production 4,296 4,392 4,586 4, Imports Total Supply 4,515 4,715 5,4 5, Crushings 1,899 2,55 2,6 2, Exports 2,174 2,13 2,6 2,6-7 Seed Residual Total Use 4,213 4,321 4,256 4, Ending Stocks Stocks to Use (%) % % % Average Farm Price ($/bu) $9.47 $9.35 $8.9 $8.6 -$.3 -$.75 USDA cut its 217/18 soybean carryout 35 million bushels in September on increases to crush and exports. USDA raised its soybean yield forecast to a record 52.8 bushels per acre, pushing its production forecast further into record territory at 4,693 million bushels. USDA s 218/19 ending stocks forecast increased 6 million bushels to 845 million, which would be a record by about 27 million. The stocks-to-use ratio would be the largest in 32 years. USDA lowered its 218/19 average farm price forecast another $.3 to $8.6, which would be the lowest in 12 years. 6

7 Chicken: Prices on most chicken parts continued lower in August on weak demand; despite lower prices, supplies are increasing as year-to-date placements are up 1%. Whole Broiler Prices $1.25 $1.15 $1.5 $.95 $.85 Cold Storage Inventories 9 Million Pounds Y/Y Change (%) $.75 $.65 Boneless Skinless Breast Prices $1.7 $1.6 $1.5 $1.4 $1.3 $1.2 $1.1 $1. $.9 Boneless Skinless Thigh Prices $1.5 $1.35 $1.2 $1.5 $.9 $.75 $ Egg Sets 235 8% Million Y/Y% Change 23 7% 225 6% % 25 1% % Broiler Exports million lbs The August USDA broiler price of $.87/lb. decreased 21% vs. the prior month and decreased 6% vs. August 217. The August average breast price of $1.1/lb. decreased 13% vs. the prior month and decreased 18% vs. August 217. The August average thigh price of $1.7/lb. decreased vs. the prior month and decreased 2 vs. August 217. Chicken part prices faced strong headwinds in August due to weaker demand. Low prices on competing meats, especially turkey and pork, are weighing down chicken demand. Grain and meal prices are expected to remain low with large crops expected to be harvested this fall. The low prices will be supportive to producer margins. Broiler-type egg-sets continue to grow and indicate continued production increases despite low chicken prices. 7

8 Beef: Live cattle prices appear to be at seasonal lows early as they begin to rebound. Export demand remains strong with YTD beef exports up 1 Y/Y; growth in exports is helping absorb increasing beef supplies. $/cwt Live Cattle Prices Heifer Slaughter $ Futures $1.35 $1.25 $1.15 $1.5 Source: CME $.95 Cut Out Values Beef and Veal Exports Cold Storage Inventories 6 Million Pounds Y/Y Change (%) Monthly Cattle Processing Baseline Slaughter Incremental Weight Y/Y Change (%) head million lbs million lbs , Head Y/Y Change (%) % 1 6% -6% % Y/Y change Nearby live cattle futures prices averaged $1.9/lb. in August. This is up 1% from July and unchanged from August 217. Increasing futures prices indicate summer seasonal lows could be in place. The August average beef cut-out value increased vs. the prior month and was up 6% from August 217. Strong demand is helping support higher prices. The recent WASDE report had no changes to production estimates. 218 production is estimated up 3. Y/Y and 219 production is estimated up 2.3% Y/Y. July beef export volume increased 2. vs. the prior month and was up 16.7% from July 217. July beef import volume increased 1. vs. June and was down 2.1% Y/Y. Tariff situation is having limited impact on beef prices. Growth in exports has been primarily to South Korea and Japan, which do not have retaliatory tariffs in place on U.S. products. Washington announced a new trade deal with Mexico on August 27th, which would replace the current NAFTA agreement. Mexico is one of the largest trade partners to the U.S. for both beef imports and exports. 8

9 Pork: Lean hog and pork cut-out prices fell sharply in August as increasing supplies and trade uncertainly weighs on the market. Hope could be on the horizon for the industry with possible global supply disruptions and a new trade agreement. Lean Hog Prices $1. Futures $.9 Sow Slaughter 12 Million Head 1 Y/Y Change 1 8% $.8 $.7 $.6 million head Y/Y change $.5 2-8% Source: CME $.4 Cut Out Values Pork Exports $/cwt Cold Storage Inventories 75 2 Million Pounds Y/Y Change (%) million lbs Monthly Processing million lbs 2.4 Baseline Slaughter Incremental Weight Y/Y Change (%) Nearby lean hog futures averaged $.55/lb. in August. This is down 2 from July, and down 2 Y/Y. Large hog supplies and continued slow ramp-ups at new pork packing plants weighed heavily on prices. The average cut-out value decreased 16% in August, and was down 2 Y/Y. The market is continuing to feel the impacts of growing pork supplies and retaliatory tariffs from Mexico and China. The fast spreading African Swine Fever has been discovered on hog farms in multiple regions of China. As the first (China) and second (EU) largest producers of pork in the world, any possible disruptions in the global supply could have a ripple effect. Washington announced a new trade deal with Mexico on August 27th, which would replace the current NAFTA agreement. Mexico is the largest trade partner for U.S. pork, so the agreement is expected to help partially clear up the trade uncertainty. An agreement with Canada has not yet been reached. 9

10 Packer Margin Environment: : Beef packer margins continue to be at record levels. Pork margins jumped higher in August, chicken margins fell slightly on seasonality. 1st Q Ratio 3rd Q Chicken Low prices for broiler meat are weighing down margin levels for packers. Turkey, the 4th largest meat industry, continues to see low pricing, which is likely adding price pressure on chicken. The chicken industry will likely see lower margins the next several years due to expanding slaughter space in the industry. 1st Q 3rd Q Ratio 1st Q 3rd Q Ratio Beef Pork Strong beef demand is supporting cutout prices, while larger cattle supplies continue to give packers leverage, creating wide margins. Limited expansion in the fed-beef slaughter industry is expected to keep competition low and packer margins high. Though it is building slower than the last several years, the cattle herd is still increasing in numbers and providing ample supplies for beef packers. A sharp drop in lean hog prices in August helped widen pork packer margins. The expanding pork packing industry is likely to face tighter margins in the future as competition increases for hogs. A tighter labor pool and higher trucking costs are impacting the packer margins. 1

11 Seafood: Shrimp prices saw a modest rebound in August as disease issues in India impacted supply. Despite price rebound, shrimp demand remains strong with increasing imports and a strengthening U.S. dollar. Urner Barry Farm-Raised White Shrimp Index Source: Urner Barry 3.8 Urner Barry Fresh Farmed Salmon Index Source: Urner Barry 4. Alaskan Pollock 1.65 Single Freeze Alaskan Minced Source: Urner Barry.6 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 million lbs million kg million kg Shrimp Import Volume Source: NOAA 35 Atlantic Salmon Import Volume Source: NOAA 2 Wild Alaskan Landings by Specie 1, Pink Sockeye Chum Coho Chinook 1, Source: Urner Barry The UB farm-raised white shrimp index in August was $3.95/lb., down 16% Y/Y. YTD 18 shrimp imports are 792MM lbs., up 3.3% Y/Y. The UB fresh-farmed salmon index dropped in August to $5.42/lb., which is up Y/Y. YTD Atlantic salmon imports through July totaled 417MM lbs., up 9.3% Y/Y. Single Freeze Alaskan Pollock prices remained unchanged at $1.51/lb. in August. Alaskan Minced Pollock prices stayed flat at $.86/lb. July shrimp imports of 56.1 million kg were up 13% from June, and down 8% from July 217. Atlantic salmon imports of 26.8 million kg were down 1% M/M and up 7% Y/Y. The recent increase in U.S. dollar strength has been supportive of an increasing volume of seafood imports. 11

12 Dairy: Dairy product exports in the 1st half of 218 were 17% higher than 217, setting a new record pace. However, this pace could be in jeopardy in the 2nd half of the year due to the tariff war and a strengthening U.S. dollar. Class I Milk Milk Production 2 Million Pounds Y/Y Change (%) % $/cwt billion lbs % % $/cwt 13 Class III Milk 18 Futures Sources: USDA, CME 12 Cheddar Cheese, 4-lb. block bil lbs, milk equivalent 13 Dairy Exports 18 Butter Prices, Grade AA Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F Skim solids Milkfat Y/Y Change (%) The August USDA Class I milk price of $14.15/cwt decreased 8% vs. the prior month and decreased 1 vs. August 217. The August average Class III milk price of $14.95/cwt. increased 6% vs. the prior month and decreased 1 vs. August 217. The August USDA average cheddar cheese price of $1.63/lb. increased 6% vs. the prior month and decreased 3% Y/Y. U.S. milk production in June was up modestly at. Y/Y. The milk cow herd size was slightly lower at.1 vs. the prior year. The recent WASDE report had only slight changes to production estimates. 218 production is estimated up 1.1% Y/Y and 219 production is estimated up 1. Y/Y. A bumper corn harvest is anticipated this crop season based on the latest WASDE reports. The large harvest is expected to keep grain prices low, helping dairy producers with input costs. August average USDA Grade AA butter prices of $2.3/lb. increased 3% vs. the prior month and decreased 13% vs. August

13 Specialty Crops: Sugar, orange juice, cocoa, cotton and coffee prices continue to trend downward. c/lb Sugar, #16 (U.S.) c/lb Sugar, #11 (World) Source: ICE 24 Orange Juice Source: ICE 1. Cocoa 3, 3, 2,8 2,6 12 Source: ICE 1 Cotton Source: ICE.55 Coffee $/MT 2, , 1.2 2, 1.1 1,8 Source: ICE 1. Source: ICE Sugar (#16 and #11): Consensus forecast from multiple commodity traders state that the global market is in the midst of a two-year 2-22 million tonne sugar surplus (the largest ever) which continues to drive world raw prices down. Large production increases in India and Thailand have offset lower production in Brazil. While U.S. sugar production is now forecast by the USDA to decline 3. in 218/19, consumption is also forecast to decline.6% Y/Y which has helped push domestic prices down as well. The August average orange juice price of $1.6/lb. decreased vs. the prior month and increased 18% vs. the prior year. The August average cocoa price of $2,177/MT decreased 8% vs. the prior month and decreased 11% vs. the prior year. USDA s forecast of the Florida orange crop for the 217/18 season remains unchanged at 45 million boxes, the lowest in the last 75 years. The negative effects of hurricanes and citrus greening disease were the main reasons for this decline. August prices rose due to the reluctance of Brazil s farmers to begin harvesting the 218/19 crop due to dry weather. The August average cotton price of $.85/lb. decreased vs. the prior month and increased 21% vs. the prior year. The August average coffee price of $1.3/lb. decreased 6% vs. the prior month and decreased 23% vs. the prior year. 13

14 Specialty Crops: Tree Nut outlook is cautious on tariff concerns. Almonds Pistachios 1, 5 3 Bearing Acres Price Bearing Acres Price 45 1, , acres 1, acres /81 85/86 9/91 95/96 /1 5/6 1/11 15/16 Walnuts 4 45 Bearing Acres Price /81 85/86 9/91 95/96 /1 5/6 1/11 15/ c/lb c/lb 1, acres 1, acres /81 85/86 9/91 95/96 /1 5/6 1/11 15/16 Hazelnuts 4 35 Bearing Acres Price /81 85/86 9/91 95/96 /1 5/6 1/11 15/ c/lb c/lb Almond crop may be closer to 2.2B to 2.3B vs. 2.45B lb. USDA estimate. Incoming almond inventory is balanced and prices are stable. Pecan prices are down from $2.97/lb. to $2.2/lb. on tariff news and concern that alternative markets (Mexico/Africa) will supply traditional U.S. channels. Navel Orange Worm damage was high in 217 crop, and growers are spending money in 218 to combat the pest. Extra sprays may elevate growing costs. Pistachio crop is large, but carry-in inventory is low. Walnut prices dropped from $1.2 to $.9/lb. for Chandler variety. Crop is large, and tariff concerns are prevalent in the market. Pistachio pricing looks stable. Almond, Walnut, and Pecan pricing may be down based on inventory and tariff outlook. Hazelnuts are continuing to expand U.S. production. Tariff concerns combined with foreign competition have depressed Hazelnut prices. million tons Grape Crush Trends, Grape Crush Results White wine grapes have started harvest as the industry preps for the annual crush. Red grapes are still a few weeks out as brix levels need more time to reach optimum ripeness between 25 to 27 brix. Earlier varieties that are being harvested suggest a larger than expected crop. It is still too early to tell what supply will be available for pricing adjustments Raisin Table Red White Source: Gomberg Fredrikson and Wine Institute Bulk sellers looking to move small lots of wine can find some spot buyers, but sellers looking to move large volumes of wine are having a tough time. 14

15 Forest Products: Framing lumber and structural panel prices have dropped in two straight months after high prices in prior months, along with rising interest rates, led to a slowdown in housing starts. $/1, sq ft $/1, sq ft Framing Lumber Index $6 $56 $52 $48 $44 $4 $36 $32 $28 Source: Random Lengths Structural Panel Index $6 $56 $52 $48 $44 $4 $36 1, units $ billion U.S. Housing Starts 1,4 New Units Y/Y Change (%) 1,3 1, 1,1 1, 9 8 Source: U.S. Fed Repair & Remodel Expenditures (LTM total) 34 $ Billion Y/Y Change (%) % 7% 6% 3% 1% $32 Jan Feb Mar Apr May Jun Source: Random Lengths Jul Aug Sep Oct Nov Dec 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 Source: jchs.harvard.edu The Framing Lumber Composite Index averaged $45/thousand sq. ft. in August. This was 13% below July and down significantly for the second straight month with housing starts declining Y/Y in both June and July. Despite the recent decline, the August average was up 9% Y/Y. The Structural Panel Composite Index fell another 9% during August to $466/thousand sq. ft. amid the lower lumber prices and the decline in housing starts. The structural panel index was above August 217. After showing Y/Y declines in June and July, U.S. housing starts rebounded to 1.28 million units in August. This was up 9% from August 217 as the drop in lumber and structural panel prices helped offset rising interest rates. LTM repair and remodel expenditures of $324.1 billion during 2Q 18 were up from the previous quarter and up 7% from the previous year, reflecting the largest Y/Y increase since before the recession. 15

16 Crop Inputs: Nitrogen prices rose 1-11% in August as producers raised fill prices on tight supplies. DAP prices continued to firm, but potash was essentially unchanged. Fuel prices remain well above 217. Ammonia DAP $/ton Source: Green Markets 25 Urea 32 3 $/ton Source: Green Markets 33 Potash $/ton 26 $/ton Source: Green Markets 21 Source: Green Markets Ammonia prices in the Corn Belt rose 11% to an average of $4/ton in August as producers raised fall prepay offers twice in four weeks. This was up 3 Y/Y. Urea prices in the Corn Belt increased 1 in August and were up 37% Y/Y because of firmer prices at the Gulf and tight supplies at several inland locations. DAP prices in the Corn Belt rose to an average of $439/ton in August due to limited near-term supplies at the Gulf. This was up 26% Y/Y, mainly due to a plant closing in Florida. Potash prices in the Corn Belt were essentially unchanged in August vs. July, but were up 13% Y/Y as suppliers have posted higher fill prices because of tighter supplies. Diesel Fuel Prices $3.5 $3.25 $3. Gasoline Prices $3.25 $3. $2.75 $/gallon $2.75 $2.5 $/gallon $2.5 $2.25 $2.25 $2. $2. $1.75 Source: EIA $1.75 $1.5 Source: EIA The U.S. average on-highway diesel price averaged $3.22/gallon during August, which was down 1 cent from July but up 2 from the August 217 average of $2.5. Retail U.S. gasoline prices averaged $2.84 in August, down 1 cent from July but up 19% from the previous year s $

17 Energy and Labor: Current consensus as we head into the fall season is for oil prices to remain around $68-$72 a barrel. $/tcf $/gallon cents/kwh $9.5 $9. $8.5 $8. $7.5 $7. $6.5 Natural Gas Retail Prices Source: EIA Heating Oil Retail Prices $3.2 $3. $2.8 $2.6 $2.4 $2.2 $2. $1.8 Source: EIA Commercial Electricity Prices Source: EIA The U.S. average retail price for natural gas increased in June, but was below the previous year. The U.S. average heating oil retail price of $3.13/gallon in June was unchanged from May, but was up 37% Y/Y. The U.S. average retail electricity price of $1.82/kWh during June was up 3% from May, but was down Y/Y. Restaurant Hourly Earnings Y/Y Change % 3% 1% Source: BLS Supermarket Hourly Earnings (3-Month Moving Avg.) 3% 1% -1% Y/Y % Change (3-Month Avg) - Source: BLS -3% Food Manufacturing Hourly Earnings Y/Y Change % 3% 1% Source: BLS -1% The restaurant labor index was up 3.6% Y/Y in August, and increased.3% from the prior month. The 3-month average of the supermarket labor index was up 2.7% Y/Y in July, and up.3% from June. The food manufacturing labor index in August was up 3.6% Y/Y and was unchanged from July. 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 Ken 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 Michael Swanson, Ph.D. Chief Agriculture Economist michael.j.swanson@wellsfargo.com Denise Cahill Food and Agribusiness Industry Advisors Director cahilldl@wellsfargo.com Matt Stommes Protein Poultry, Pork 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