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Global Recession – the
impact on Agriculture
Bill Cordingley
March 2010 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 9,000,000
clients
• Ranked 4th safest bank in the world
Global Finance, September 2008
• AAA rated
Standard & Poor’s, Moody’s, since 1981
Dominion Bond Rating Service, since 2001
• Best Investment Bank in the Netherlands
July 2008
• Total assets of EUR 570.5 billion
Rabobank, December 2007
• Net profit of EUR 2.7 billion
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 Beijing
New Delhi Shanghai
Mexico City Hong Kong
Mumbai
Kuala Lumpur Singapore
Jakarta
Santiago São Paulo Sydney
Melbourne
Buenos Aires Christchurch
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The GFC and global
recession
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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
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CONFIDENCIAL
The financial market has been severely impacted:
credit write-downs are almost USD 1.1 trillion so far -
IMF predicts losses of USD 2.2 trillion
Change in market value (USD billion) of selected banks
Value Jan. 20, 2009
Value 2Q 2007
RBS BNP UBS
Paribas
Deutsche Societe Barclays Unicredit
Bank Credit Generale
Morgan 120 108 116
Agricole 93
Stanley 91
76 80
49 67
16 4.6 10.3 26 32.5 26 35
17 7.4
Citigroup
HSBC
255 JP Morgan
215
165
Goldman Santander
Sachs
Credit Suisse 116
100
75
27 35 64 19 85 97
Source: Bloomberg, 10th 2009
Food & Agribusiness Research and Advisory
Rabobank International
Income and population growth are key drivers of
increased food consumption
Income and population growth in selected countries
BRIC
countries
CAGR population (06-11)
GDP growth (2008) Rabobank International
…2009 retraction…
Income and population growth in selected countries
CHINDIA
the savior
in 2009
CAGR population (06-11)
GDP growth (2009)
Rabobank International
…2010 …a rebound – but risks to the downside!
Income and population growth in selected countries
CAGR population (06-11)
GDP growth (2010) Source: UN, IMF, Rabobank, 2010
Rabobank International
U.S. Growth still an important
driver for global economy
8%
U.S. GDP
6% US Economy 25% of global
4% GDP
2%
0% 71% of GDP private
-2%
2006 2007 2008 2009 2010 consumption
-4%
5.7% for 4Q09 Boom in Q4
-6%
GDP driven by stimulus and
-8% inventory cycle
21%
Components Growth expected to fall back
in Q2-4
-3% Personal Consumption
Private Investment
11% Net Exports
71%
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
12 U.S. Unemployment Rate
10.8% 9.7%
10
8
Percent
6
4
5%
4.4%
2
0
1979
1995
1948
1949
1951
1953
1955
1957
1959
1960
1962
1964
1966
1968
1970
1971
1973
1975
1977
1981
1982
1984
1986
1988
1990
1992
1993
1997
1999
2001
2003
2004
2006
2008
• Over 7 million US jobs lost in this recession
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Consumer wealth battered!
Income and population growth in selected countries
250
200
Indexed 100=2000
150
100
50
0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Home Prices DJIA
Rabobank International
Very difficult busting of the
credit bubble has seen mortgage
debt growth flat line!
$14,000
Household Debt Outstanding
$12,000
$10,000
(billions)
$8,000
$6,000 Credit
Mortgage
$4,000
+ $16
$2,000 trillion
$0
• 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
building industry Rabobank International
There has been a significant
change in consumer mindset!
Lower Net Worth and Increased Savings
Savings as Percent of Income
14% $70,000
22% drop
Net Worth ($USD Million)
Percent of Income Saved
12% $60,000
10% $50,000
8% $40,000
6% $30,000
4% $20,000
2% $10,000
1% to over
0% 5% $0
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
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
105
Total personal consumption
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
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Foodservice Quarterly sales, Q3
09 v Q4 08
-18.80% McCormic & Schmick
-16.80% Morton's
-24% Ruth's Chris
-5.30% Darden
-6% Brinker Q3 '09
Q4 '08
-2.80%
Cheesecake Factory
-6% Yum!
-2.80%
Burger King
McDonald's 2.50%
-30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
Rabobank International
Impact on global
Agriculture
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Crisis felt throughout the agribusiness supply
chain
Primary Processing Retail/Food
Consumers
Production / Trade Service
• Strong profits and • Softening demand • Fall in business • Falling consumer
land values confidence confidence
buffered the sector • Increasing FX volatility - wealth effect
initially • Tightening credit
• Trade finance lines • Change in eating
• Pressure on farm availability tightened, patterns
gate prices for especially for riskier • Running down - trading out
most commodities destinations and inventories - trading down
counterparties
• High input costs • Hand to mouth
made 2009 a write • First contraction in
off for many global trade since
producers WWII
• Credit from banks • Excess processing,
available but more shipping capacity
stringent
• Inventory
deleveraging Rabobank International
Aggregate impact in the US significant
but far from catastrophic
100
90
80
2000-2009
70 average
$US billion
60
50
40
30
20
10
0
2005 2006 2007 2008 2009P 2010F
• 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
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Lower production costs in 2010,
but still historically high
$350
Variable Production Costs
$300
$250
10-yr averages Corn
per planted acre
$200
Wheat
$150
Soy
$100
$50
$0
• 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
60
$US Expense (billions)
50
40 Fertilizer
Fuel
Pesticide
30
Seed
20
10
0
2006 2007 2008 2009P 2010F
Rabobank International
Divergent fortunes for two big
drivers – livestock and crops
Farm Cash Receipts
200
Crops Livestock
180
160
-3.6%
140
120 +9.7%
$US billion
100
80
60
40
20
0
2005 2006 2007 2008 2009P 2010F
Rabobank International
Market volatility has receded; but
still remains historically elevated
CBOT Corn Volatility, 2000-2009 CBOT Soybean Volatility, 2000-2009
800 70 1900 60
1700 55
700
60
50
1500
600 45
50 1300
% Volatility
US¢ / bushel
40
% Volatility
US¢ / bushel
500 1100
40 35
900
400 30
30 700
25
300
500
20
20
200 300 15
100 10
100 10
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09
CBOT Soybean Price 60 Day Hist. Volatility Long-term Avg. Volatility
CBOT Corn Price 30 Day Hist. Volatility Long-term Avg. Volatility
Rabobank International
Farmers on average have strong
equity and are reasonably well
positioned to weather the downturn
Total debt Equity DRCU
2500 100%
90%
2000 80%
70%
1500 60%
50%
1000 40%
30%
500 20%
10%
0 0%
1984
1985
1986
1987
1988
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1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009P
2010F
• 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 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
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