December 2017 Industry Update Food and Agribusiness Supermarket Sales According to Nielsen, food deflation has impacted all channels, with US supermarket retail sales up only 0.2% YOY (52 week period). Census data indicating slower population growth combined with an aging population, and increased use of e-commerce appear to be impacting sales. Key Demand Developments Growth in housing prices remain a positive to consumer balance sheets, with the Case-Shiller 20 city index rising +6.19% Y/Y in September. The performance of the S&P 500 was up +19% YoY, a tailwind for the consumer balance sheet. Tailwinds for consumer income statement with job and wage growth as non-farm employment increased by +2.1M and average hourly earnings increased +2.9% Y/Y for Nov 2017. Gas prices are a tailwind for the consumer; oil futures have hovered above $55/barrel, up +17% YoY. Average prices remain -2 below the 5 year average. The Nov Consumer Confidence Index as measured by the Conference Board now stands at 129.5 (1985=100), up from 126.2 in Oct, up for fifth consecutive month and a 17 year high (Nov 2000, 132.6). Y/Y Change (%) Consumer and Producer Price Indices 1 CPI Food Away From Home CPI Food At Home PPI All Food 8% 6% 4% 2% -2% -4% -6% -8% Jan- 12 Jul- 12 Jan- 13 Jul- 13 Jan- 14 Jul- 14 Jan- 15 Jul- 15 Jan- 16 Jul- 16 Jan- 17 Jul- 17 Source: U.S. Bureau of Labor Statistics Price & Food Inflation Developments We maintain a constructive outlook for volumes with pricing levels inching above 3%. The spread between restaurant and food retail pricing has narrowed -309bp from Aug 16 highs and continues to drop. Restaurant pricing measured by the CPI food away from home index (CPI-FAFH) increased +2.34% in October Y/Y, which is up +31bp vs. the prior month and up +2.34% Y/Y. Food Retail pricing measured by the CPI food at home index increased +0.59% in October Y/Y, which is up +33bp vs. the prior month and up +140bp vs. the prior year. The Producer Price Index (PPI All Food) increased +3.3% in October Y/Y, which is up +110bp vs. Industry the Research prior month Update: and Food up +660bp and Agribusiness Y/Y. 1 1
Grocery Department Trends: Perimeter-winning themes continue in 3Q17 as the Deli category posts strong volume gains; Dairy volumes lag as the input pricing cycle begins to impact retail. Dry Grocery Frozen Foods 4. 3. Volume Price 6. 4. Volume Price 1. -1. - -3. - -4. 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C -4. 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Dairy Deli 8. 6. Volume Price 1 1 Volume Price 4. 8. 6. 4. - -4. - -6. 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C -4. 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Fresh Produce 7. 6. 5. 4. 3. 1. -1. - -3. -4. 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Volume Price Dry Grocery 3Q17 price/mix increased +1.8% YoY, an increase of +50bp vs. 2Q17. Dry Grocery volumes decreased -1. YoY, a decrease of -60bp vs. 2Q17. Dairy 3Q17 price/mix increased +2.2% YoY, an increase of +90bp vs. 2Q17. Dairy volumes decreased -3.1% YoY, a decrease of -90bp vs. 2Q17. Fresh Produce 3Q17 price/mix decreased -0.3% YoY, a decrease of -120bp vs. 2Q17. Fresh Produce volumes increased +3.9% YoY, an increase of +70bp vs. 2Q17. Bakery 3. 1. -1. - -3. -4. 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Nielsen AOC+C Volume Price Frozen Food 3Q17 price/mix increased +2.4% YoY, an increase of +60bp vs. 2Q17. Frozen Food volumes decreased -1.5% YoY, an increase of +40bp vs. 2Q17. Deli 3Q17 price/mix decreased -2.2% YoY, a decrease of -270bp vs. 2Q17. Deli volumes increased +9.4% YoY, an increase of +420bp vs. 2Q17. Bakery 3Q17 price/mix increased +1.8% YoY, a decrease of -10bp vs. 2Q17. Bakery volumes decreased -1. YoY, an increase of +190bp vs. 2Q17. 2
Food Company Margin Heat Map YoY Price vs. Volume Commodities Labor Energy Grain Protein Constructive Inflationary Inflationary Inflationary Mixed Inflationary Food Company Input Cost Summary: As we exit 2H17 a large portion of commodities have shown moderate inflation vs. 2016 levels. Economic Backdrop: Positive economic indicators continue to inch forward; USD measures are now below pre-election levels. Corn, Wheat & Soy Prices: 16/17 exhibited low price levels for corn and wheat on increased production, but higher soy prices based on increased exports. 17/18 forecasts point to slightly higher corn yields but lower wheat and soy prices. Annual price estimates are mixed. Chicken: Broiler and thigh prices have remained above 2015/16 levels on strong exports. Egg sets once again start to build. Beef: Prices are above 2016 levels as YoY inventory levels are lower and exports continue to strengthen. Pork: Prices are above 2015 and well above decade-low Oct16 levels as inventories stay lower, slaughter counts remain above prior year levels and exports seasonally increase. Packer Margin Environment: Chicken, beef and pork estimated packer ratios are all near 2016 levels with beef and port cut-out values strengthening. Seafood: Shrimp and salmon prices are in line with 2015/16 levels on strong imports; pollock prices are at multi-year lows. Dairy: Current prices are in-line with 2016 levels as exports level off and supplies remain ample. Specialty Crops: Current sugar, cocoa and orange juice prices are trending up, while coffee and cotton prices appear to have bottomed following periods of decline. Outlook for nut growers in 217 is positive, but need to keep an eye on trade issues and the opportunity for expanding markets overseas. Forest Products: Strength in housing starts and remodel activity continues to support demand for framing lumber and structural panel prices. ; BLS; IMF; IntraFish Key Commodity Heat Map Commodity Price Y/Y M/M Corn $3.44-0.1% -1.6% Wheat $4.22 +5. -2.9% Soybeans $9.84-2.4% +0.8% Broilers $0.86 +8.6% +1.4% C attle $1.21 +13.2% +5.6% Hogs $0.63 +26.9% +0.1% Class III Milk $16.88 +0.7% +1.1% Shrimp $4.72-3. +0.4% Salmon $4.74-5.8% -2.3% Nat. Gas $7.85 +3.4% -3.2% Electricity $10.56 +3.1% -1.8% Heating Oil $2.70 +19.7% +7.1% Rest. Labor $13.51 +3.8% 0.4% Sup. Labor $13.17 +3.1% 0.1% Food Labor $17.03 +1.4% +0.6% *Monthly average corn, wheat, soybeans in $/bu; broiler, shrimp in ; cattle, hogs, milk in, $/cwt; salmon, cod in $/kg; gas in $/Mct; oil in $/gal; electricity in $/kwh; labor in $/hr Crop Inputs: Fertilizer prices remain under pressure with higher than expected imports; all 4 fertilizers are near 2016 levels as DAP ticks higher and Urea trends downward. Energy & Labor: Global oil prices have kept energy prices in check while we observe wage inflation gains in restaurants and supermarkets. 3
Economics: Positive economic indicators continue to inch forward; USD measures are now below pre-election levels. Voluntary Quits as % of Employment Trade Weighted Dollar vs. Ag Index 3. Ag Bulk Commodities Trade Weighted 120 Jan 2014=100 115 110 105 100 1. Source: BLS, Wells Fargo 95, Federal Reserve, Wells Fargo Weekly Earnings Rates $950 Weekly Wages Food Inflation Adjusted 90 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Net Trade Balance $900 $30.0 $25.0 China HK ROW $20.0 7.1 0.7 $850 $15.0 5.3 $800 $750 $10.0 $5.0 $0.0 -$5.0 2.6 (6.1) 10.3 3.9 6.5 9.1 13.8 16.1 22.0 22.7 21.6 (1.1) (4.5) 16.3 18.4 12.3 $700 -$10.0 -$15.0 (17.9) (21.6) (20.8) $650 Source: BLS, Wells Fargo -$20.0 -$25.0, Wells Fargo 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan-Oct 2017 Billions of Miles Driven 300 25% Net Export as % of Production Beef Pork Broiler 290 2 280 270 15% 260 250 1 240 5% 230 220 210 Source: Federal Highway Admin 200 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 The October 2017 voluntary quits as a percentage of employment of 2.3% was slightly above the Oct16 level of 2.2%. The 12 month rolling average is near prerecessionary levels. The October 2017 weekly average earnings are growing +4. YoY on a nominal basis; when deflated by food & beverage CPI the Oct17 average wages of $738/week increased +2.9% vs. Oct16. The pre-recession inflation adjusted peak was $703/week in December of 2006. The September 2017 monthly average miles driven of 263 billion decreased -1.1% vs. Sep16 as gas prices peaked, though stronger employment continued to provide tailwinds. -5%, Wells Fargo 2012 2013 2014 The October 2017 trade weighted dollar index value of 113.1 vs. bulk commodity dollar index value of 105.9 represents a wider gap when compared to the October 2016 values of 115.2 and 108.9, respectively. The 2017 YTD net trade balance of -$8.5 billion represents a larger deficit compared the Jan-Oct 2016 total of -$6.7 billion. The 2016 full year net trade balance of -$3.3 billion is the largest full year trade deficit since pre 2007. The 2017 pork and broiler markets face a stronger headwind from dollar strengthening as net exports comprise 17.7% and 16.5% percent of total production vs. -0.1% for beef. 4
Soft Commodities Prices: 16/17 exhibited low price levels for corn and wheat on increased production, but higher soy prices based on increased exports. Corn $/Bushel $4.50 $4.00 $3.50 $3.00 Futures Source: FactSet The November monthly average corn price of $3.44/bu decreased -1.6% vs. the prior month and decreased -0.1% vs. the prior year period. The WASDE s (World Agricultural Supply and Demand Estimates) median average farm price projection for 2017/18 is $3.20/bu, down -4.8% from $3.36/bu in 2016/17. The prior estimate for 2017/18 was $3.20/bu. WASDE forecasts global corn production to be 1,044 million tons in 2017/18 which is down -2.9% vs. 2016/17 est. Wheat $/Bushel $7.00 $6.00 $5.00 $4.00 $3.00 Futures The November monthly average wheat price of $4.22/bu decreased -2.9% vs. the prior month and increased +5. vs. the prior year period. The WASDE U.S. median average farm price forecast for 2017/18 is $4.60/bu, up +18.3% from $3.89/bu in 2016/17. The prior estimate for 2017/18 was $4.60/bu. WASDE forecasts global wheat production to be 752 million tons for 2017/18, which is down -0.22% vs. 2016/17. Source: FactSet Soybeans $/Bushel $14.00 $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 Futures Source: FactSet The November monthly average soybean price of $9.84/bu increased +0.8% vs. the prior month and decreased -2.4 vs. the prior year period. The WASDE U.S. median average farm price forecast for 2017/18 is $9.30/bu, down -1.8% from $9.47/bu in 2016/17. The prior estimate for 2017/18 was $9.30/bu. WASDE forecasts global soybean production at 349 million tons for 2017/18, which is down -.69% vs. 2016/17. 5
Soft Commodities Fundamentals: 17/18 forecasts point to slightly higher corn yields but lower wheat and soy yields. Annual price estimates are mixed. Corn 2015/2016 2016/2017E 2017/2018P 2017/2018P M/M Change Y/Y Change October November Forecast Forecast Area Planted (mm) 88.0 94.0 90.4 90.4-3.8% Area Harvested 80.8 86.7 83.1 83.1-4.2% Yield per Harvested Acre (bu 168.4 174.6 171.8 175.4 2.1% 0.5% Beginning Stocks (mm bu) 1,731 1,737 2,295 2,295 32.1% Production 13,602 15,148 14,280 14,578 2.1% -3.8% Imports 67 57 50 50-12.3% Total Supply 15,401 16,942 16,625 16,922 1.8% -0.1% Exports 1,898 2,293 1,850 1,925 4.1% -16. Total Use 13,664 14,647 14,285 14,435 1.1% -1.4% Ending Stocks 1,737 2,295 2,340 2,487 6.3% 8.4% The November WASDE report for the 2017/18 corn harvest year forecasts yield per acre to increase 0.5% YoY and total supply to decrease -0.1% YoY. Ending stocks are expected to be up +8.4% YoY and stocks to use up +1.6% YoY. The November WASDE report estimate for total supply increased +1.8% vs. the prior month; the estimate for ending stocks increased +6.3% vs. the prior month and estimated stocks to use was up +0.8% from prior month. Stocks to Use (%) 12.7% 15.7% 16.4% 17.2% 0.8% 1.6% Wheat 2015/2016 2016/2017E 2017/2018P 2017/2018P M/M Change Y/Y Change October November Forecast Forecast Area Planted (mm) 55.0 50.1 46.0 46.0-8.2% Area Harvested 47.3 43.9 37.6 37.6-14.4% Yield per Harvested Acre (bu) 43.6 52.7 46.3 46.3-12.1% Beginning Stocks (mm bu) 752 976 1,181 1,181 21. Production 2,062 2,309 1,741 1,741-24.6% Imports 113 118 150 150 27.1% Total Supply 2,927 3,402 3,071 3,071-9.7% Exports 779 1,055 975 1,000 2.6% -5.2% Total Use 1,951 2,222 2,111 2,136 1.2% -3.9% Ending Stocks 976 1,181 960 935-2.6% -20.8% The November WASDE report for the 2017/18 wheat harvest year forecasts yield per acre to decrease -12.1% YoY and total supply to decrease -9.7% YoY. Ending stocks are expected to be down -20.8% YoY and stocks to use down -9.4% YoY. The November WASDE report estimate for total supply flat vs. the prior month; the estimate for ending stocks decreased -2.6% vs the prior month and estimated stocks to use decreased -1.7%. Stocks to Use (%) 5 53.2% 45.5% 43.8% -1.7% -9.4% Soybeans 2015/2016 2016/2017E2017/2018P 2017/2018P M/M Change Y/Y Change October November Forecast Forecast Area Planted (mm) 82.7 83.4 90.2 90.2 8.2% Area Harvested 81.7 82.7 89.5 89.5 8.2% Yield per Harvested Acre (bu) 48.0 52.0 49.5 49.5-4.8% Beginning Stocks (mm bu) 191 197 301 301 52.8% Production 3,926 4,296 4,431 4,425-0.1% 3. Imports 24 22 25 25 13.6% Total Supply 4,140 4,515 4,757 4,752-0.1% 5.2% Exports 1,942 2,174 2,250 2,250 3.5% Total Use 3,944 4,214 4,326 4,326 2.7% Ending Stocks 197 301 430 425-1.2% 41.2% The November WASDE report for the 2017/18 soybean harvest year forecasts yield per acre to decrease -4.8% YoY and total supply to increase +5.2% YoY. Ending stocks are expected to be up +41.2% YoY and stocks to use up +2.7% YoY. The November WASDE report estimate for total supply decreased -0.1% vs. the prior month; the estimate for ending stocks decreased -1.2% vs. the prior month and estimated stocks to use decreased -0.1%. WASDE Stocks to Use (%) 5. 7.1% 9.9% 9.8% -0.1% 2.7% 6
Chicken: Broiler and thigh prices have remained above 2015/16 levels on strong exports. Egg sets once again start to build. Whole Broiler Prices Cold Storage Inventories $1.20 900 Chicken (Million Pounds) Y/Y Change (%) 4 $1.10 850 3 $1.00 800 2 $0.90 750 700 1 $0.80 650-1 $0.70 600 550-2 -3 $0.60 500 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17-4 Boneless Skinless Breast Prices Egg Sets $1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 220 6% Egg Sets ( In million) Y/Y% Change 215 4% 210 2% 205 200 195-2% 190-4% 185 180-6% Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 Boneless Skinless Thigh Prices $1.50 $1.35 Broiler Exports 700 650 $1.20 $1.05 $0.90 $0.75 million lbs 600 550 500 $0.60 450 The November USDA broiler price of $0.86/lb. increased +1.4% vs. the prior month and increased +8.6% vs. Nov 2016. The WASDE U.S. median average price forecast for 2017 is $0.934/lb., up +10.8% from $0.843/lb. in 2016. The prior projection for 2017 was $0.93.8/lb. Total 2017 production is estimated to be 41.54mm lbs., up + vs. 2016. The November average breast price of $0.98/lb. decreased -6.9% vs. the prior month and -3.4% vs. November 2016. The November average thigh price of $1.23/lb. decreased -9.34% vs. the prior month and increased +17.3% vs. November 2016. Fundamentals: Cold storage increased +12.1% in November Y/Y, which is up +5.36% vs. the prior month. Egg sets increased 1.9% in November Y/Y, and up -1.02% vs. the prior month. Exports increased +13.3% in October Y/Y, which is up 22% vs. the prior month. The November average combined regional large egg price of $1.26/dozen increased +5. vs. the prior month and +97% vs. Nov 16. 7
Beef: Prices are above 2016 levels as YoY inventory levels are lower and exports continue to strengthen. Live Cattle Prices Heifer Slaughter $1.80 $1.70 Futures 3 25. 2 $1.60 15. $1.50 $1.40 $1.30 % Chg YoY 1 5. -5. $1.20-1 $1.10-15. $1.00 $0.90 Source: FactSet -2-25. Cut Out Values Beef and Veal Exports 270 255 270 250 240 230 $/cwt 225 210 million lbs 210 190 195 170 180 150 Cold Storage Inventories Monthly Cattle Processing 600 550 Beef (million pounds) Y/Y Change (%) 4 3 2 2,600 2,400 Baseline Slaughter Incremental Weight Y/Y Change (%) 2 15. 1 500 450 400 350 1-1 -2-3 Pounds (000s) 2,200 2,000 1,800 5. -5. -1 300 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17-4 1,600 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17-15. The November cattle price of $1.21/lb. increased +5.6% vs. the prior month and increased +13.2% vs. Nov16. The WASDE U.S. median average price forecast for 2017 is $121.4/cwt, up 0.4% from $120.86/cwt in 2016. The prior projection for 2017 was $121.8/cwt. Total 2017 production is estimated to be 26.3mm lbs., up +4.3% vs. 2016. The November average cut-out value decreased -2.9% vs. the prior month and increased +4.8% vs. Sep16. Fundamentals: Cold storage increased +4.8% in November Y/Y, which is up +4% vs. the prior month. Heifer slaughter numbers increased +15. in October Y/Y, which is up +6.7% vs. the prior month. Exports increased +13.6% in October Y/Y, which is up +7. vs. the prior month. Cattle head processed increased +6.2% in October Y/Y which is up +3.9% vs. the prior month. Slaughter weight data indicates that heavier weights contributed to +6.5% of total slaughter volume, which decreased -160bp vs. the prior year period. 8
Pork: Prices are above 2015 and well above decade-low Oct16 levels as inventories stay lower, slaughter counts remain above prior year levels and exports seasonally increase. Live Hog Prices $1.20 Futures $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 Source: FactSet Cut Out Values 110 100 % Chg YoY Sow Slaughter (3 Month Rolling Average) 1 8. 6. 4. - -4. -6. Pork Exports 600 550 90 500 $/cwt 80 70 million lbs 450 400 350 60 300 50 250 Cold Storage Inventories Monthly Processing 750 700 Pork (million pounds) Y/Y Change (%) 25% 2 2,400 Baseline Slaughter Incremental Weight Y/Y Change (%) 2 650 15% 2,200 1 600 550 500 450 400 1 5% -5% -1-15% Pounds (000s) 2,000 1,800-1 350 300 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17-2 -25% 1,600 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17-2 The November average hog price of $0.63/lb. was unchanged vs. the prior month and increased +26.9% vs. Nov16. The WASDE U.S. median average price forecast for 2017 is $50.38/cwt, up +9.1% from $46.16/cwt in 2016. The prior projection for 2017 was $49.01/cwt. Total 2017 production is estimated to be 25.6mm lbs., up +2.5% vs. 2016. The November average cut-out value increased +1.1% vs. the prior month and decreased -1. vs. Nov16. Fundamentals: Cold storage decreased -0.1% in November Y/Y, which is down -3.3% vs. the prior month. Sow slaughter increased +0.4% in October Y/Y, which is up +5.48% vs. the prior month. Exports increased +9.6% in October Y/Y, which is up +17.4% vs. the prior month. Hogs processed increased +5.3% in October Y/Y which is down -30bp vs. the prior month. Slaughter weight data indicates that heavier weights contributed to +3.3% of total slaughter volume, which is up +50bp vs. the prior year period. 9
Packer Margin Environment: Chicken, beef and pork estimated packer ratios are all near 2016 levels with beef and pork cut-out values strengthening. Chicken 1st Q Ratio 3rd Q 25.0 20.0 15.0 10.0 The November USDA monthly average chicken breast price to feed cost ratio of 12.8 decreased -0.9 vs. the prior month and was down 0.4 vs. the prior year period. The 10 year average ratio of 14.9 places the Nov17 result in the second quartile of the 2007-2017 monthly results 5.0 Beef 2.10 1st Q Ratio 3rd Q 2.00 1.90 1.80 1.70 1.60 1.50 The October USDA monthly average beef cut-out to live cattle ratio of 1.73 increased +0.03 vs. the prior month and decreased -0.01 vs. the prior year period. The 10 year average ratio of 1.62 places the Oct17 result in the top 25% of the 2007-2017 monthly results. 1.40 Pork 1st Q Ratio 3rd Q 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 The November USDA monthly average pork cut-out to live hog ratio of 1.28 increased +0.08 vs. the prior month and decreased -0.14 vs. the prior year period. The 10 year average ratio of 1.09 places the November result in the top 25% the 2007-2017 monthly results. 10
Seafood: Shrimp and salmon prices are in line with 2016 levels on strong imports; pollock prices are at multi-year lows.. Urner Barry Farm-Raised White Shrimp Index 6.0 5.5 75 70 65 Shrimp Imports Total Volume 5.0 4.5 4.0 million kg 60 55 50 45 40 35 3.5 Source: Urner Barry 30 Source: NOAA Urner Barry Fresh Farmed Salmon Index 6.5 6.0 5.5 Salmon Imports Total Volume 36 34 32 5.0 4.5 4.0 3.5 million kg 30 28 26 24 22 3.0 Source: Urner Barry 20 Source: NOAA Alaskan Pollock Wild Alaskan Landings by Specie 3400 1,200 Pink Sockeye Chum Coho Chinook 3200 1,000 3000 800 $/Metric Ton 2800 2600 600 400 2400 200 2200 Source: Undercurrent News 0 2011 2012 2013 2014 2015 Source: Urner Barry The October Urner Barry farm-raised white shrimp price of $4.72/lb. increased +0.4% vs. the prior month and decreased -3. vs. the prior year period. The October Urner Barry fresh farmed salmon price of $4.74/lb. decreased -2.3% vs. the prior month and decreased -5.8% vs. the prior year period. The Undercurrent News 1H17 Alaskan Pollock price of $2400/metric ton decreased -11.1% vs. the 2H16 price of $2700/metric ton. 2017 Prices remained under pressure due to increased supply levels from remaining 2016 stock and are the lowest season A price levels on record since 2005. The October NOAA measure of total US shrimp imports was 68.8mm kg, an increase of +12.2% vs. the prior month and an increase of +16.5% vs. Oct16. The October NOAA measure of total US salmon imports was 32.6mm kg, a increase of +9.1% vs. the prior month and an increase of +7.8% vs. October 2016. 2015 wild Alaskan landings by specie increased +49.5% vs. 2014 and was slightly above 2013 total landings. The increase in landings was led by a +98% rise in pink salmon. 11
Dairy: Current prices are in-line with 2016 levels as exports level off and supplies remain ample. $/cwt 19 18 17 16 15 14 13 12 18 17 Class I Milk Class III Milk Futures million lbs Milk Production 20,000 5% Production (mil lbs) Y/Y Change (%) 4% 19,000 3% 18,000 2% 1% 17,000-1% 16,000-2% 15,000-3% -4% 14,000-5% Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 Dairy Exports 16 4 Skim solids Milkfat Y/Y Change (%) 14 3 $/cwt 16 15 14 13 Bn lbs milk equivalent 12 10 8 6 4 2 2 1-1 -2-3 12 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17F 3Q17F -4 Cheddar Cheese, 40lb. block Butter Prices Grade AA 2.6 3.0 2.2 2.5 1.8 2.0 1.4 1.5 1.0 1.0 The November USDA class I milk price of $16.44/cwt decreased -1.6% vs. the prior month and decreased -1. vs. October 2016. The October average class III milk price of $16.69/cwt increased + vs. the prior month and increased +12.6% October 2016. The WASDE U.S. median average all milk price forecast for 2017 is $17.65/cwt, up +8.2% from $16.30/cwt in 2016. The prior projection for 2017 was $17.70/cwt. Total 2017 production is estimated to be 215.7 bn lbs., up +1.6% vs. 2016. Fundamentals: Milk production increased +1.4% in October Y/Y, which increased +375bp vs. the prior month. The milk cow herd size was up +70bp vs. the prior year period. Total milkfat and skim solid exports are expected to increase +4.1% in 3Q17 Y/Y, which is down - 350bp vs. the prior quarter. November average USDA Grade AA butter prices of $2.22/lb. decreased -4.5% vs. the prior month and increased +11.87% vs. November 2016. The November USDA average cheese price of $1.66/lb. decreased -4.17% vs. the prior month and decreased +11.6% vs. November 2016. 12
Specialty Crops: Current sugar, cocoa, and orange juice are trending up, while coffee and cotton prices appear to have bottomed following periods of decline. Sugar #16 Prices Sugar #11 Prices 33 31 24 22 29 20 18 c/lb 27 c/lb 16 25 14 23 12 21 Source: ICE 10 Source: ICE Orange Juice Cotton 2.40 2.20 0.80 0.75 2.00 0.70 1.80 1.60 0.65 1.40 0.60 1.20 0.55 1.00 0.50 Source: ICE Source: FactSet Cocoa Coffee 3,650 3,350 1.80 1.70 1.60 3,050 1.50 $/MT 2,750 2,450 2,150 1.40 1.30 1.20 1.10 1,850 Source: FactSet 1.00 Source: Factset The October ICE sugar #16 average price of $0.270/lb. increased +0.7% vs. the prior month and decreased -5.1% vs. the prior year period. The October ICE orange juice average price of $1.55/lb. increased +3.8% vs. the prior month and decreased -22.8% vs. the prior year period. The October cocoa average price of $2,086/MT decreased - -4. vs. the prior month and decreased -12.8% vs. the prior year period. The October ICE sugar #11 average price of $0.142/lb. increased +2.2% vs. the prior month and decreased -37.9% vs. the prior year period. The October average cotton price of $0.68/lb. increased +0.5% vs. the prior month and +10.6% vs. the prior year period. The October average coffee price of $1.26/lb. increased +2.2% vs. the prior month and increased +24.4% vs. the prior year period. 13
Specialty Crops: The outlook for growers in 2017 is positive, but need to keep an eye on trade issues and the opportunity for expanding markets overseas. Almond Prices Pistachio Prices $4.50 $4.00 $3.50 $3.00 $/Pound $4.00 $3.50 $3.00 $2.50 $/Pound $2.50 $2.00 $2.00 $1.50 $1.00 $0.50 $0.00 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 $1.50 $1.00 $0.50 $0.00 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Almond Acres & Yield Pistachio Acres & Yield million lbs 2,400 2,000 1,600 1,200 800 Millions Pounds Yield Per Acre 3,000 2,600 2,200 1,800 1,400 Pounds million lbs 950 850 750 650 550 450 350 250 150 Millions Pounds Yield Per Acre 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Pounds 400 '03 '05 '07 '09 '11 '13 '15 1,000 50 '03 '05 '07 '09 '11 '13 '15 500 Walnut Prices Walnut Acres & Yield $2.00 $/Pound 1,600 Millions Pounds Yield Per Acre 4,500 $1.60 1,400 4,100 $1.20 $0.80 million lbs 1,200 1,000 800 3,700 3,300 Pounds $0.40 600 2,900 $0.00 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 400 '03 '05 '07 '09 '11 '13 '15 2,500 The 2016 USDA average grower price for almonds of $2.44/lb. decreased -2 vs. the 2015 average price of $3.13/lb. The 2016 total annual almond production of 2,140 million pounds increased +12.6% vs. the 2015 annual production of 1,900 million pounds. The 2016 average yield per acre of 2,280 pounds increased +10.1% vs. the 2015 average of 2,070 pounds. The 2016 USDA average grower price for walnuts of $0.91/lb. increased +11.1% vs. the 2015 average price of $0.81/lb. The 2016 USDA average grower price for pistachios of $1.68/lb. decreased -32.3% vs. the 2015 average price of $2.48/lb. The 2016 total annual pistachio production of 897mm pounds increased +231% vs. the 2015 production of 270mm pounds. The 2016 average yield per acre of 3,750 pounds increased +241% vs. the 2015 average of 1,160 pounds. The 2016 total annual walnut production of 1,372mm pounds increased +13.2% vs. the 2015 production of 1212mm pounds. The 2016 average yield per acre of 4,360 pounds increased +7.9% vs. the 2015 average of 4,040 pounds. 14
Forest Products: Strength in housing starts and remodel activity continues to support demand for framing lumber and structural panel prices. Framing Lumber Index U.S. Housing Starts $/Thousand Sq Ft $460 $440 $420 $400 $380 $360 $340 $320 $300 $280 $260 Source: Random Lengths Thousand Units 1,400 6 New Units Y/Y Change (%) 1,300 4 1,200 1,100 2 1,000 900-2 800 700-4 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 Source: US Fed Structural Panel Index Repair & Remodel Expenditures (LTM total) $/Thousand Sq Ft $530 $510 $490 $470 $450 $430 $410 $390 $370 $350 $330 Source: Random Lengths $ Billions 335 $ Billions Spent Y/Y Change (%) 8% 315 7% 295 6% 275 5% 255 4% 235 3% 215 2% 195 1% 175 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: jchs.harvard.edu The October Framing Lumber Composite Index of $438/thousand sq. ft. increased +3.3% vs. the month prior and increased +23. vs. the prior year period. The October Structural Panel Composite Index of $534/thousand sq. ft. increased +4.9% vs. the prior month and increased +42.4% vs. the prior year period. The October U.S. Housing Starts of 1.29 million units increased +13.7% vs. the prior month and decreased -2.3% vs. the prior year period. The 3Q17 LTM repair and remodel total expenditure of $309.7Bn increased +1.9% vs. the prior quarter and +6.4% vs. the prior year period. 15
Crop Inputs: Fertilizer prices remain under pressure with higher than expected imports; all 4 fertilizers are near 2016 levels as DAP ticks higher and Urea trends downward. Urea 450 400 Potassium Chloride 450 400 350 350 $/ST 300 $/ST 300 250 250 200 200 150 150 Source: Green Markets Report; US corn belt Source: Green Markets Report; US corn belt DAP Ammonia 550 500 680 630 580 450 530 480 $/ST 400 350 $/ST 430 380 330 300 280 230 250 180 Source: Green Markets Report; US corn belt Source: Green Markets Report; US corn belt The November US corn belt urea average price of $270/ST decreased -2.4% vs. the prior month and increased +5.18% vs. the prior year period. The November US corn belt DAP average price of $377/ST increased +4.2% vs. the prior month and increased +9.7% vs. the prior year period. The November US corn belt potassium chloride average price of $260/ST increased +0.7% vs. the prior month and increased +5.5% vs. the prior year period. The November US corn belt ammonia average price of $325/ST increased +1.2% vs. the prior month and decreased -10.7% vs. the prior year period. Diesel Fuel Prices $3.40 Gasoline Prices $3.20 $3.00 $2.80 $\Gallon $2.60 $2.20 $\Gallon $2.40 $2.00 $1.80 Source: EIA $1.60 Source: EIA The November average diesel fuel price of $2.91/gal increased +4.1% vs. the prior month and increased +19.3% vs. the prior year period. The November average regular grade gasoline price of $2.56/gal decreased -2.4% vs. the prior month and increased +17.5% vs. the prior year period. 16
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 Restaurant Hourly Earnings $9.50 4. Y/Y Change % $9.00 $8.50 3. $/tcf $8.00 $7.50 $7.00 1. $6.50 Source: EIA -1. Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Source: BLS Heating Oil Retail Prices Supermarket Hourly Earnings (3 Month Rolling Average) 5. 4. Y/Y Change % 3 Month Avg 3. 1. -1. - -3. Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Source: BLS Commercial Electricity Prices Food Manufacturing Hourly Earnings 11.2 11.0 5. 4. Y/Y Change % 10.8 3. cents/kwh 10.6 10.4 10.2 10.0 1. 9.8 Source: BLS -1. Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Source: BLS The November average natural gas price of $7.85/Mcf decreased -3.2% vs. the prior month and increased +3.4% vs. the prior year period. The November average heating oil price of $2.70/gal increased +7.1% vs. the prior month and increased +19.7% vs. the prior year period. The November average electricity price of $10.56/kWh decreased -1.8% vs. the prior month and increased +23.1% vs. the prior year period. The restaurant labor index increased +3.8% Y/Y in October, but was flat vs. the prior month. The supermarket labor index increased +3.1% Y/Y in October, which was up +10bp vs. the prior month and up +310bp vs. the prior year period. The food manufacturing labor index increased +0.8% Y/Y in October, which was up +20bp vs. the prior month and up +80bp vs. the prior year period. 17
Food and Agribusiness Industry Advisors Kevin Bergquist Forest Products Sector Manager bergquk@wellsfargo.com 503-886-4148 David Branch Specialty and Non-Grain Crop Sector Manager David.e.branch@wellsfargo.com 704-410-8997 Matt Dusi Specialty and Non-Grain Crop Sector Manager Matt.w.dusi@wellsfargo.com 559-203-2994 Scott Etzel Protein - Seafood Sector Manager etzel@wellsfargo.com 503-886-4164 Rob Fox Dairy Sector Manager Robert.g.fox@wellsfargo.com 312-845-9743 Michael Swanson, Ph.D. Chief Agriculture Economist Michael.j.swanson@wellsfargo.com 612-667-5136 Denise Cahill Industry Advisors Group Manager cahilldl@wellsfargo.com 559-622-3012 Karol Aure-Flynn Specialty Crops Analyst, Analyst Team Lead Karol.aure-flynn@wellsfargo.com 559-622-3045 Chris Eggerman Sector Analyst, Grains, Crop Inputs, Forest Products Chris.eggerman@wellsfargo.com 913-234-7702 Courtney Schmidt Sector Analyst, Protein, Dairy Courtney.b.schmidt@wellsfargo.com 361-574-5207 Tim Luginsland Grain & Oilseed Sector Manager luginstr@wellsfargo.com 913-234-2921 Lee Ann Pearce Specialty and Non-Grain Crop Sector Manager Leeann.pearce@wellsfargo.com Matt Stommes Protein - Poultry & Beef Sector Manager Matthew.j.stommes@wellsfargo.com 612-316-3724 Lon Swanson Crop Inputs/Feed Sector Manager Lon.k.swanson@wellsfargo.com 913-234-2922 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