Financial Outlook for Agriculture · 2016-12-19 · Total crop acres 954 1,264 543 574 846 1,542 Total crop acres owned 276 338 170 179 266 428 Total crop acres cash rented 621 848

December 2016

Financial Outlook for AgricultureTrend versus Cycle

Michael Swanson Ph.D.

Wells Fargo

2

Everything is connected

we just don’t see how.

3

Connection corollary:

Nothing natural moves in

a straight line

Every number is relative to something

4

186

118

166

5767

0

50

100

150

200

250

2000 2002 2004 2006 2008 2010 2012 2014 2016F

Agricultural Revenue and Net Income

Crop receiptsLivestock receceiptsNet Farm Income

Billions$s

Source: USDA

The typical gap is 61% higher cost per bushel

5

1.37 1.43

0.99 1.28

1.53 1.52 1.50 1.54

1.89 1.80 2.12

2.57

3.03 2.88

3.07

4.04 4.24 4.30 4.39

2.81

3.333.04

2.42 2.47 2.532.77 2.76

3.02

2.69 2.78

3.62

4.79

4.384.17

4.45

6.33

7.23

5.715.47

4.16

0

1

2

3

4

5

6

7

8

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

MN Cash Rent Corn ProductionTotal cost per bushel

Low cost quintile

High cost quintile

Same year, same prices and the same inputs

6

Financial Summary 2015 FINBIN

(Farms Sorted By Net Farm Income)

All Farms Low 20% 20 - 40% 40 - 60% 60 - 80% High 20%

Number of farms 3,309 661 662 662 662 662

Income Statement

Gross cash farm income 811,422 1,213,822 391,849 403,874 589,944 1,458,230

Total cash farm expense 689,408 1,134,790 341,038 337,793 472,302 1,161,789

Net cash farm income 122,015 79,032 50,811 66,081 117,643 296,441

Inventory change (24,068) (133,229) (27,710) (10,121) (2,522) 53,079

Depreciation (58,345) (79,280) (33,005) (32,554) (46,431) (100,485)

Net farm income from operations 39,602 (133,476) (9,904) 23,406 68,689 249,035

Average net farm income 40,802 (133,570) (8,824) 24,145 69,760 252,237

Profitability (cost)

Rate of return on assets 0.9% -5.3% -2.1% 0.6% 2.7% 5.5%

Rate of return on equity -1.2% -14.6% -7.2% -1.7% 2.1% 6.5%

Operating profit margin 2.8% -18.9% -7.4% 1.9% 8.6% 15.9%

Crop Acres

Total crop acres 954 1,264 543 574 846 1,542

Total crop acres owned 276 338 170 179 266 428

Total crop acres cash rented 621 848 334 358 523 1,041

Total crop acres share rented 57 78 39 37 57 73

Machinery value per crop acre 641 669 643 615 610 642

* U of MN Center For Farm Finances

You only get paid for

what you bring to the game.

7

Yield and efficiency → MAD

8

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Percentage: Seed+Crop Inputs / Crop Revenue

Seed purchases

Electricity

Fertilizer, lime, and soil conditioners

Pesticides

Fuel and oils

Factor shares for corn

9

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Seed Fertilizer Crop chemicals Land rentMachinery cost per acre

Factor shares for soybeans

10

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Seed Fertilizer Crop chemicals Land rentMachinery cost per acre

The US economy is the fastest

turtle on the track

11

Facts remain in the

witness protection

program

The numbers are brutal

12

1.9

1.0 1.11.4

1.7

0.8 0.91.2

1.2

1.21.2

1.31.0

0.60.8

0.7

0.9

1.51.0

0.9

0.2

0.3

0.2

0.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1950-1973 1974-1981 1982-1990 1991-2001 2002-2007 2008-2015 2016-2020 2021-2026

Share of GDPGrowth

GDP Growth FactorsProductivity Capital Hours

Not expecting much

13

8,500

9,500

10,500

11,500

12,500

13,500

14,500

15,500

16,500

17,500

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

GDP versus Potential GDP

GDPC1

Potential GDP

All economics are personal

14

Do I have income?

All economics are personal

15

138.4

145.1

154.9

159.5

125

130

135

140

145

150

155

160

165

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Employment v. Labor Forcein millions of people

Employment payroll

Labor Force

6.7

4.6

This isn’t about interest rates

16

60

61

62

63

64

65

66

67

68

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

Civilian Labor Force Participation

7 million

workers

People makes choices based on self interest

17

$650

$700

$750

$800

$850

$900

Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

Weekly Earnings Rates

Weekly wages

Inflation adjusted

The market moves before the Fed

18

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

1 month LIBOR

The land market moves with the 10 year

19

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

10 Year Treasury

Interest rate drivers

Wages are the largest cost component

Bidding in new workers

Paying all workers the higher wages

Energy inflation has more upside

Highly visible

Very volatile

The “Asset Bubble” is a real threat

Cash as trash

Riding the tiger

20

It is not about us so don’t take it personal

21

50

60

70

80

90

100

110

120

130

140

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US Agricultural Export Dollar Index: USDA2010=100

Without the global market we have issues

22

2.6 6.5

9.1 13.8

16.1

22.0 22.7 21.6 16.3

12.0

(6.1)

10.3 3.9

5.2

7.1 0.5

(1.1)(4.3)

(17.9) (18.6)

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan - Oct2016

Billions

Net Trade BalanceAg, Forestry and Fishing

ROW

China/HK

The Chinese Central Bankers are not Rotarians

23

1. Is it the truth?

2. Is it fair to all concerned?

3. Will it build goodwill and better friendships?

4. Will it be beneficial to all concerned?

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Yuan to Dollar Ratio

Ethanol disconnected

agriculture from food

24

Love or hate it depends

Por la plata baila el perro

25

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

US Corn Utilization

TY Exports (1000 MT)

Feed and Residual (1000 MT)

FSI Consumption (1000 MT)

Iowa became an energy producer

26

$0

$20

$40

$60

$80

$100

$120

$140

$160

Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

West Texas Intermediate

What does mean for agriculture?

27

Gasoline = 0.025*Crude + 0.23R² = 0.88

$0.75

$1.25

$1.75

$2.25

$2.75

$3.25

$3.75

$30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140

Gasoline

WTI Crude Oil

WTI Crude versus Gulf Coast CBOB

What does “unpredictable”

mean to you?

28

A commodity type of attitude

1. Don’t try predicting your future1. You’ll be wrong anyways

2. You’ll be wasting flexibility

2. The spending will be there1. Machinery is indispensable

2. Crop revenues (price * yield)

3. The “problem” is internal not

external

29