Global Dairy Markets. Local Execution. Michael Swanson Ph.D. Wells Fargo

Transcription

1 Global Dairy Markets Local Execution Michael Swanson Ph.D. Wells Fargo November 2014

2 Key questions for dairy producers 1. What is milk worth globally? 2. Why is milk worth that? 3. Who gets what share? 4. What differentiates the producers? 5. What s your play 2

3 Where does volatility come from? $25 $20 $15 National Milk and Corn Prices Milk $/cwt left Corn $/bu right $8 $7 $6 $5 $4 $10 $3 $5 $2 $1 $0 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 $0 3

4 3 year cycles seem to be the norm 20 Profit Before Taxes / Total Assets Dairy Cattle and Milk Producers /1/98-3/31/99 4/1/00-3/31/01 75th Percentile Median 25th Percentile 4/1/02-3/31/03 4/1/04 3/31/05 4/1/06 3/31/07 4/1/08 3/31/09 4/1/10 3/31/11 4/1/12 3/31/13 proj. 4/1/14 3/31/15 4

5 How are the cycles linked? NAFTA Economy NAFTA Agriculture Global Agriculture Global Economy 5

6 Do markets need to converge? Whole Milk Powder Prices ($/MT) 6,000 5,500 5,000 Oceania Western Europe US 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 6

7 Everyone is gunning for China Commodity Dairy, Milk, Fluid Region Kilograms per capita Factory/ Fluid use ratio People per cow Kilograms milk per cow East Asia Milk Cows 166 Productivity 4,707 Total Use 29 Fluid Use 13 Factory Use EU-28 Milk Cows 22 Productivity 6,066 Total Use 285 Fluid Use 66 Factory Use North America Milk Cows 21 Productivity 6,759 Total Use 318 Fluid Use 102 Factory Use Oceania Milk Cows 5 Productivity 4,502 Total Use 827 Fluid Use 80 Factory Use

8 What is the situation in the US economy? Is low growth the new reality How are we growing The Federal Reserve s response Low interest and valuations The US consumer Real wages Relative prices Substitution and options 8

9 Why? Relative prices Share of GDP 0.9 GDP Growth Factors Productivity Capital Hours

10 Bullish or Bearish? Or wrong? 6% Performance Gap: Actual GDP less Potential 4% 2% 0% -2% -4% -6% -8% -10% Apr-73 Apr-78 Apr-83 Apr-88 Apr-93 Apr-98 Apr-03 Apr-08 Apr-13 10

11 Beliefs versus hard data Policy beliefs Mental models Vintages of learning Idols of the cave, tribe, stage and marketplace Priorities Values Hard data Physical constants Assumed ratios Supplied data and revisions 11

12 The result of a mental model + data 7 History + futures Fed Funds Source: FRED, Wells Fargo Ag Industries 0 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 12

13 An intersection of policies High Quality Iowa Land Values 10,000 8,000 $ per acre Biofuels 6,000 Global trade Interest rates 4,000 2,

14 Ask a different question get a different answer What about the consumer? 14

15 Employment is just one part of the puzzle 145 In Millions US Payroll (2.3) (8.8) million Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 15

16 People make choices based on options 68 Civilian Labor Force Participation million people choosing not to work Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 16

17 The price of anything is what you gave up to get it $850 $830 Weekly Earnings Rates $810 $790 Weekly wages Inflation adjusted $770 $750 $730 $710 $690 $670 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 17

18 Dairy prices stayed in the normal range Food Price Indices Index Beef Poultry Pork Overall Dairy Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: BLS, Wells Fargo 18

19 Fluid milk has been the biggest disappointment 4,700 4,600 Millions of lbs. Fluid Milk Consumption 12 month average 4,500 4,400 4,300 4,200 4,100 Eliminated the need for 212 thousand dairy cows 4,000 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: BLS, USDA, Wells Fargo Ag Industries 19

20 Butter has helped offset fluid milk s decline 0.7 US Per Capita Butter Consumption in lbs Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 20

21 Export demand has stepped up 20% Butter Exports as percent of disappearance 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 21

22 The powder market needs exports more than ever 80% 70% 60% 50% 40% 30% 20% 10% NFDM and SMP Exports as percentage of disappearance 0% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 22

23 Still a low percent but a huge factor 9% 8% 7% 6% 5% 4% 3% 2% 1% Cheese Consumption Export as Percent of Disappearance 0% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 23

24 We are all in on the international consumer What s your comfort level? 24

25 How fast can panic spread? 5% 4% Real GDP Growth World less USA United States 3% 2% 1% 0% -1% -2% -3%

26 What is the answer to the question? China 26

27 The Wal*Mart Effect Billions $25 $20 $15 ROW China/HK Net Trade Balance Ag, Forestry and Fishing $10 $5 $0 -$ Jan - Aug 2014 (1.1) 10.4 (2.5) 27

28 What has happened in 2014 so far? China/Hong Kong Net Ag Trade in Billions Product Jan - Aug Jan - Aug Chg YTD Bulk $ 0.5 Intermediate $ 0.4 Consumer Oriented $ 0.3 Forest Products (1.7) (1.5) (0.6) (1.3) (0.7) (0.5) (0.3) $ 0.2 Fish Products (1.4) (1.5) (1.4) (1.4) (1.4) (0.9) (1.0) $ (0.1) Grand Total $

29 How fast can it go bad? Let s check almonds US Exports of Tree Nuts to China/Hong Kong in Millions Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Y of Y Percent Chg -56% -61% -27% 10% 71% 34% -11% -52% -31% 29

30 What s China new target growth? Year Over Year Pct Chg China GDP Growth Rate Source: IMF

31 Dollars and bodies equal demand 0.7 China Population Growth Rate in Yearly Percentage

32 Stronger RMB helps their lift as well 16 China's Per Capita Real GDP Growth in Yearly Percentage

33 Compare and contrast Billions of $s US Net Agricultural Trade India China/HK projected (2.2) 33

34 Does India ever find a higher gear? 6,000 Billions GDP in Constant US Dollars 5,000 4,000 China India 4,832 3,000 2,000 1,000 1,

35 Cause and effect? Is it constant? KG per capita Chinese GDP and Meat Consumption Meat Per Capita Real GDP $4,000 $3,500 $3,000 $2, $2, $1,500 $1,000 $ $0 35

36 A managed affair Chinese Meat Production and Imports Net Imports Domestic production

37 Nothing is left to chance 300 Chinese Grain (excluding rice) kilograms per person Production Domestic Consumption / / / / /

38 You economic life is in their hands Monetary policy When does cheap money end? Who is the furthest out of line? Values China trade Trade policies Internal supply competition Biofuels policy Energy pricing and arbitrage Lobbyists in action 38