Global Dairy Markets Local Execution Michael Swanson Ph.D. Wells Fargo November 2014
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
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 $0 3
3 year cycles seem to be the norm 20 Profit Before Taxes / Total Assets Dairy Cattle and Milk Producers 15 10 5 0-5 -10-15 -20 4/1/98-3/31/99 4/1/00-3/31/01 75th Percentile Median 25th Percentile 4/1/02-3/31/03 4/1/04 3/31/05 4/1/06 3/31/07 4/1/08 3/31/09 4/1/10 3/31/11 4/1/12 3/31/13 proj. 4/1/14 3/31/15 4
How are the cycles linked? NAFTA Economy NAFTA Agriculture Global Agriculture Global Economy 5
Do markets need to converge? Whole Milk Powder Prices ($/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
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 16 1.3 EU-28 Milk Cows 22 Productivity 6,066 Total Use 285 Fluid Use 66 Factory Use 218 3.3 North America Milk Cows 21 Productivity 6,759 Total Use 318 Fluid Use 102 Factory Use 215 2.1 Oceania Milk Cows 5 Productivity 4,502 Total Use 827 Fluid Use 80 Factory Use 739 9.2 7
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
Why? Relative prices 4.5 4.0 3.5 Share of GDP 0.9 GDP Growth Factors Productivity Capital Hours 3.0 2.5 2.0 1.5 1.2 1.7 1.2 1.1 1.2 0.9 1.3 0.3 0.8 0.4 0.4 0.9 1.0 1.0 0.5 1.9 0.8 1.0 1.4 1.5 1.2 1.2 0.0 1950-73 1974-81 1982-90 1991-01 2002-13 2014-17 2018-24
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
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
The result of a mental model + data 7 History + futures Fed Funds 6 5 4 3 2 1 Source: FRED, Wells Fargo Ag Industries 0 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 12
An intersection of policies High Quality Iowa Land Values 10,000 8,000 $ per acre Biofuels 6,000 Global trade Interest rates 4,000 2,000-1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 13
Ask a different question get a different answer What about the consumer? 14
Employment is just one part of the puzzle 145 In Millions US Payroll 140 138.1 139.4 135 132.6 (2.3) (8.8) million 130 129.9 129.3 125 120 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 15
People make choices based on options 68 Civilian Labor Force Participation 67 66 65 64 63 62 6 million people choosing not to work 61 60 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 16
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
Dairy prices stayed in the normal range Food Price Indices 310 290 270 Index Beef Poultry Pork Overall Dairy 250 230 210 190 170 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: BLS, Wells Fargo 18
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
Butter has helped offset fluid milk s decline 0.7 US Per Capita Butter Consumption in lbs. 0.6 0.5 0.4 0.3 0.2 0.1 - Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 20
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
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
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
We are all in on the international consumer What s your comfort level? 24
How fast can panic spread? 5% 4% Real GDP Growth World less USA United States 3% 2% 1% 0% -1% -2% -3% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 25
What is the answer to the question? China 26
The Wal*Mart Effect Billions $25 $20 $15 ROW China/HK Net Trade Balance Ag, Forestry and Fishing 5.2 7.1 0.5 $10 $5 $0 -$5 2.6 2.6 10.3 3.9 6.5 9.1 13.8 16.1 22.0 22.7 2007 2008 2009 2010 2011 2012 2013 Jan - Aug 2014 (1.1) 10.4 (2.5) 27
What has happened in 2014 so far? China/Hong Kong Net Ag Trade in Billions Product 2009 2010 2011 2012 Jan - Aug Jan - Aug Chg 2013 2013 2014 YTD Bulk 10.2 13.4 14.1 19.7 17.8 6.8 7.3 $ 0.5 Intermediate 0.9 2.2 1.9 2.4 3.5 2.2 2.5 $ 0.4 Consumer Oriented 1.1 1.3 2.2 2.6 3.5 1.6 1.9 $ 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 9.1 13.8 16.1 22.0 22.7 9.1 10.4 $ 1.2 28
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 2013 52 123 98 42 24 32 37 112 182 313 419 118 520 2014 23 48 72 46 41 43 33 54 360 Y of Y Percent Chg -56% -61% -27% 10% 71% 34% -11% -52% -31% 29
What s China new target growth? 16 14 Year Over Year Pct Chg China GDP Growth Rate 12 10 8 6 4 2 0 Source: IMF 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 30
Dollars and bodies equal demand 0.7 China Population Growth Rate in Yearly Percentage 0.6 0.5 0.4 0.3 0.2 0.1 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 31
Stronger RMB helps their lift as well 16 China's Per Capita Real GDP Growth in Yearly Percentage 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 32
Compare and contrast 35 30 25 20 Billions of $s US Net Agricultural Trade India China/HK 29.6 15 10 5 0-5 2000 2002 2004 2006 2008 2010 2012 2014 projected (2.2) 33
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 1,483-1970 1980 1990 2000 2010 34
Cause and effect? Is it constant? 60 50 40 KG per capita Chinese GDP and Meat Consumption Meat Per Capita Real GDP $4,000 $3,500 $3,000 $2,500 30 $2,000 20 10 $1,500 $1,000 $500-1990 1995 2000 2005 2010 $0 35
A managed affair 90000 Chinese Meat Production and Imports 80000 70000 60000 Net Imports Domestic production 50000 40000 30000 20000 10000 0 1980 1985 1990 1995 2000 2005 2010 36
Nothing is left to chance 300 Chinese Grain (excluding rice) kilograms per person 250 200 Production Domestic Consumption 150 100 50-2005/2006 2007/2008 2009/2010 2011/2012 2013/2014 37
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