Global Recession the impact on Agriculture March

Global Recession – the impact on Agriculture March 2010 Bill Cordingley Head, Food & Agribusiness Research and Advisory Americas Rabobank International

For the love of farming! Rabobank International

Rabobank International • Subsidiary of Rabobank Group – Cooperative bank based in the Netherlands • Present in 43 countries worldwide with 1, 508 offices • Over 60, 000 staff serving over 9, 000 clients • Ranked 4 th safest bank in the world • AAA rated • Best Investment Bank in the Netherlands • Total assets of EUR 570. 5 billion • Net profit of EUR 2. 7 billion Global Finance, September 2008 Standard & Poor’s, Moody’s, since 1981 Dominion Bond Rating Service, since 2001 July 2008 Rabobank, December 2007 3 Rabobank International

The global Food and Agribusiness Research (FAR) group has 80 members in 13 countries Utrecht (Global HQ) New York Mexico City Beijing New Delhi Shanghai Hong Kong Mumbai Kuala Lumpur Singapore Jakarta Santiago São Paulo Buenos Aires Melbourne Sydney Christchurch Rabobank International

The GFC and global recession Rabobank International

What the crisis looked like • The deepest economic contraction in the last 50 years, and not just in the U. S. - The great recession! • The worst financial and banking crisis since the Great Depression of the 1930’s • Large and growing US deficit • Lack of liquidity in the financial system and rapid deleveraging adding to the credit crisis • Millions of insolvent individuals (foreclosures) • Contraction in consumption and consumer confidence at lowest levels since they started measuring • Doubling in unemployment • Fear and uncertainty prevail! Rabobank International

The Credit Crunch Rabobank International

Rabobank International

Income and population growth are key drivers of increased food consumption Income and population growth in selected countries CAGR population (06 -11) BRIC countries GDP growth (2008) Rabobank International

… 2009 retraction… Income and population growth in selected countries CAGR population (06 -11) CHINDIA the savior in 2009 GDP growth (2009) Rabobank International

… 2010 …a rebound – but risks to the downside! CAGR population (06 -11) Income and population growth in selected countries GDP growth (2010) Source: UN, IMF, Rabobank, 2010 Rabobank International

U. S. Growth still an important driver for global economy 8% U. S. GDP US Economy 25% of global GDP 6% 4% 2% 0% -2% 2006 2007 2008 2009 2010 -4% 5. 7% for 4 Q 09 Boom in Q 4 GDP driven by stimulus and inventory cycle -6% -8% 21% Components -3% 11% 71% of GDP private consumption Personal Consumption Growth expected to fall back in Q 2 -4 Private Investment 71% Net Exports Government Rabobank International

Rabobank thinks we are in for a funny shaped recovery! • Traditional talk of recovery usually a letter of the alphabet. . . − V, W, L, U. . . • But what if it’s a mathematical symbol instead? − Square root − Lack of a long-term growth driver − Jobless recovery 13 Rabobank International

US Consumer shell shocked! Rabobank International

Worst unemployment since early 1980’s 10. 8% • 9. 7% Over 7 million US jobs lost in this recession Rabobank International

Consumer wealth battered! Income and population growth in selected countries 250 Indexed 100=2000 200 150 100 50 0 Jan-01 Jan-02 Jan-03 Home Prices Jan-04 Jan-05 DJIA Jan-06 Jan-07 Jan-08 Jan-09 Rabobank International

Very difficult busting of the credit bubble has seen mortgage debt growth flat line! • • • A quarter of U. S. homeowners with mortgages have negative equity in their homes. Another quarter have <10% equity No easy way out of this soon for home owners or the Rabobank International building industry

There has been a significant change in consumer mindset! Rabobank International

Major roadblock for consumption and thus demand through the value chain! Personal Consumption Expenditures Indexed 2005=100 110 Food and beverages off-premises Food services and accommodations Total personal consumption 105 100 95 90 85 80 2000 • 2001 2002 2003 2004 2005 2006 2007 2008 2009 CPI -0. 4% in 2009: first full-year decline since 1955 Rabobank International

Foodservice Quarterly sales, Q 3 09 v Q 4 08 -18. 80% Mc. Cormic & Schmick -16. 80% Morton's -24. 00% Ruth's Chris -5. 30% -6. 00% Darden Q 3 '09 Brinker Q 4 '08 -2. 80% Cheesecake Factory -6. 00% Yum! -2. 80% Burger King Mc. Donald's -30. 0% -25. 0% -20. 0% -15. 0% -10. 0% -5. 0% 0. 0% 2. 50% 5. 0% 10. 0% Rabobank International

Impact on global Agriculture Rabobank International

Crisis felt throughout the agribusiness supply chain Primary Production • Strong profits and land values buffered the sector initially • Pressure on farm gate prices for most commodities • High input costs made 2009 a write off for many producers • Credit from banks available but more stringent Retail/Food Service Processing / Trade • Softening demand • Increasing FX volatility • Trade finance availability tightened, especially for riskier destinations and counterparties • First contraction in global trade since WWII • Inventory deleveraging Fall in business confidence • Tightening credit lines • Running down inventories • • Falling consumer confidence - wealth effect • Change in eating patterns - trading out - trading down Hand to mouth Excess processing, shipping capacity • • Consumers Rabobank International

Aggregate impact in the US significant but far from catastrophic 100 90 80 2000 -2009 average $US billion 70 60 50 40 30 20 10 0 2005 • • • 2006 2007 2008 2009 P 2010 F US net farm income down by $30 billion in 2009 Set to recover by $7 billion in 2010 Just $1. 4 b below 10 yr average Rabobank International

Lower production costs in 2010, but still historically high • • Crop production costs fell 6 -14% in 2009, expected flat in 2010 - 2011 Still about 30 -40% higher than 1999 -2009 average. Rabobank International

Relief due to fuel and fertilizer price declines 70 Key U. S. Farm Sector Variable Costs $US Expense (billions) 60 50 Seed 40 Pesticide Fuel 30 Fertilizer 20 10 0 2006 2007 2008 2009 P 2010 F Rabobank International

Divergent fortunes for two big drivers – livestock and crops Rabobank International

Market volatility has receded; but still remains historically elevated CBOT Corn Volatility, 2000 -2009 CBOT Soybean Volatility, 20002009 Rabobank International

Farmers on average have strong equity and are reasonably well positioned to weather the downturn 2500 Total debt Equity DRCU 100% 90% 2000 80% 70% 1500 60% 50% 1000 40% 30% 500 20% 10% 0% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 P 2010 F 0 • However those that have used debt to build scale without achieving rapid productivity growth in recent years are facing an uncertain future with returns unlikely to rebound quickly and uncertain lenders much tougher on covenants going forward! Rabobank International

Conclusions • • • Agriculture not a bad place to be in the GFC – in relative terms 2010 will see a slow and unsteady recovery in the global economy which will be tested by mid year as govt stimulus wears off, inventory cycle recedes and unemployment growth lags! Moderating costs will help both crops, meat and other sectors improve returns despite the soft demand environment in 2010 Volatility a factor for all farmers going forward – possibly new ways to look at risk in the supply chain will be necessary – partnership v’s adversarial? ? Crystal ball is cloudy for everyone – only answer is to eliminate catastrophic risk, remain flexible, eliminate unnecessary costs and enhance productivity consistently and diligently Rabobank International

Thank you The World’s Leading Specialist Food and Agribusiness Bank Rabobank International