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Bill CordingleyHead, Food & Agribusiness Research and AdvisoryAmericas
March 2010
Global Recession – the impact on Agriculture
Rabobank International
For the love of farming!
Rabobank International
Rabobank International3
• 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 worldGlobal Finance, September 2008
• AAA ratedStandard & Poor’s, Moody’s, since 1981Dominion Bond Rating Service, since 2001
• Best Investment Bank in the NetherlandsJuly 2008
• Total assets of EUR 570.5 billion Rabobank, December 2007
• Net profit of EUR 2.7 billion Rabobank, December 2007
Rabobank International
Utrecht (Global HQ)
Mumbai
Sydney
Mexico City
São Paulo
New York BeijingShanghai
Hong Kong
Singapore
New Delhi
Jakarta
ChristchurchMelbourne
The global Food and Agribusiness Research (FAR) group has 80 members in 13 countries
Kuala Lumpur
Buenos Aires
Santiago
Rabobank International
The GFC and global recession
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• 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!
What the crisis looked like
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The Credit Crunch
Rabobank International
Rabobank InternationalFood & Agribusiness Research and Advisory
CONFI DENCIAL
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
Source: Bloomberg, 10th 2009
Morgan Stanley
RBS
Deutsche Bank Credit
Agricole
Societe Generale
Barclays
BNP Paribas Unicredit
UBS
Goldman Sachs
Santander
Citigroup
JP Morgan
HSBC
Credit Suisse
49
120
7667
8091
10893
116
75100
116
255
165
215
16 4.6 10.317
267.4
32.5 26 35
27 35 64 19 85 97
Value Jan. 20, 2009
Value 2Q 2007
Change in market value (USD billion) of selected banks
Rabobank International
Income and population growth are key drivers of increased food consumption
GDP growth (2008)
CA
GR
pop
ulat
ion
(06-
11)
Income and population growth in selected countries
BRICcountries
…2009 retraction…
GDP growth (2009)
CA
GR
pop
ulat
ion
(06-
11)
Income and population growth in selected countries
Rabobank International
CHINDIA the savior in 2009
…2010 …a rebound – but risks to the downside!
GDP growth (2010)
CA
GR
pop
ulat
ion
(06-
11)
Income and population growth in selected countries
Source: UN, IMF, Rabobank, 2010Rabobank International
U.S. Growth still an important driver for global economy
US Economy 25% of global GDP
71% of GDP private consumption
5.7% for 4Q09 Boom in Q4 GDP driven by stimulus and inventory cycle
Growth expected to fall back in Q2-4
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!
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Worst unemployment since early 1980’s
• Over 7 million US jobs lost in this recession
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10.8% 9.7%
Consumer wealth battered!
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Income and population growth in selected countries
Very difficult busting of the credit bubble has seen mortgage debt growth flat line!
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• 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
There has been a significant change in consumer mindset!
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Major roadblock for consumption and thus demand through the value chain!
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• CPI -0.4% in 2009: first full-year decline since 1955
Foodservice Quarterly sales, Q3 09 v Q4 08
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Impact on global Agriculture
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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
• Softening demand
• Increasing FX volatility
• Trade finance availability tightened, especially for riskier destinations and counterparties
• First contraction in global trade since WWII
• Excess processing, shipping capacity
• Inventory deleveraging
• Fall in business confidence
• Tightening credit lines
• Running down inventories
• Hand to mouth
• Falling consumer confidence
- wealth effect
• Change in eating patterns
- trading out- trading down
Crisis felt throughout the agribusiness supply chain
Processing/ Trade
Retail/Food Service Consumers
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Aggregate impact in the US significant but far from catastrophic
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• 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
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
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Divergent fortunes for two big drivers – livestock and crops
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Market volatility has receded; but still remains historically elevated
CBOT Corn Volatility, 2000-2009 CBOT Soybean Volatility, 2000-2009
10
20
30
40
50
60
70
100
200
300
400
500
600
700
800
J an 00 J an 01 J an 02 J an 03 J an 04 J an 05 J an 06 J an 07 J an 08 J an 09
% V
ola
tili
ty
US
¢ /
bu
shel
CBOT Corn Price 30 Day Hist. Volatility Long-term Avg. Volatility
10
15
20
25
30
35
40
45
50
55
60
100
300
500
700
900
1100
1300
1500
1700
1900
J an 00 J an 01 J an 02 J an 03 J an 04 J an 05 J an 06 J an 07 J an 08 J an 09
% V
ola
tili
ty
US
¢ /
bu
sh
el
CBOT Soybean Price 60 Day Hist. Volatility Long-term Avg. Volatility
Rabobank International
Farmers on average have strong equity and are reasonably well positioned to weather the downturn
• 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
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The World’s Leading Specialist Food and Agribusiness Bank
Thank you
Rabobank International