RISK ECONOMICS CAS

Structural Shocks and Changing Dynamics Related to Emergent Risks, Evolving Health

Trends, Demographic Shifts and Labor MarketsCAS May 2011

Risk Economics, Inc.Samantha KappagodaDavid K.A. Mordecai

Risk Economics, Inc.www.risk-econ.com

• Risk Economics, Inc. (RiskEcon) provides advisory services and testimonial expertise on complex issues related to financial instrument valuation models and frameworks, including market and industry standards and practices for the financing, risk management, and active trading, and hedging of OTC derivatives and structured products.

• RiskEcon provides consulting services by applying rigorous analytics to large‐scale real world geopolitical and socio‐economic issues relating to demographics and macroeconomics, including areas within labor, housing, consumption and consumer behavior, global population, immigration, environment, health and aging.

• RiskEcon’s computational economics activities focus on the proprietary development and scalable implementation of robust modeling and data analytic frameworks, including the application of computational tools and methods derived from machine learning, data‐mining, and text‐mining to applied systemic real world issues.

• RiskEcon’s client roster and affiliations are diverse, and include diversified multinational corporations (with interests in natural resources commodities and energy), global insurance and reinsurance firms, multilateral and government agencies, as well as leading law firms and global banking institutions.

© 2011 Risk Economics, Inc. 2

The Industrial Agricultural System


4

0

5,000

10,000

15,000

20,000

25,00019

6019

6219

6419

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

08

Potash (K2O)

Phosphate (P2O5)

Nitrogen (N)

U.S. Consumption of Fertilizer: Nitrogen, Phosphate and Potash, 1960 to 2008

1,000 nutrient tons

Source: USDA© 2011 Risk Economics, Inc.

Fertilizer usage has increased

5

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,00019

6419

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

08

Wheat

Soybeans

Cotton

Corn

U.S. Fertilizer Use by Selected Crop 1960 to 20081,000 nutrient tons

Source: USDA© 2011 Risk Economics, Inc.

Fertilizer is predominantly petroleum based

6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Maize Wheat Rice Soybeans

1900-19501950-19901990-2008

Global Yield Growth of Selected Cropsannual averages (%),1900 to 2008

Source: Alston, Beddow and Pardey

%


But crop yields are still declining

Global Distribution of Genetically Modified Crops

7Source: Economist EIU © 2011 Risk Economics, Inc.

Hog Farming: Fewer Farms Now

8Source: USDA

0

50,000

100,000

150,000

200,000

250,000

USA: Total Number of Hog Farms, 1993-2010

© 2011 Risk Economics, Inc.

The number of farms have fallen

9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1-99100-499500-9991,000-1,9992,000-4,9995,000+

Hog Farms: Heads per Farm Increase 1993 to 2010, % Inventory

Heads per farm

Source: USDA © 2011 Risk Economics, Inc.

But farm size (ie headcount) has increased

Industrial Chicken Farming

10Source: National Geographic, (University of Arkansas Division of Agriculture, Cooperative Extension Service)

Industrial chickens take 48 days to reach market weight. If a human grew as fast , he/she would weigh 349 pounds at age two.

Prior to the current farming techniques, chickens took 70+ days to reach market weight


Factory Farm Map, USA 2007

11Source: www.factoryfarmmap.org, 2007 Census © 2011 Risk Economics, Inc.

Emergent Risks

12© 2011 Risk Economics, Inc.

Emerging Infectious Diseases During the past 20 years, at

least 30 new diseases have emerged, for many of which there is no treatment, cure or vaccine, or the possibility of effective prevention or control.

In addition, the uncontrolled and inappropriate use of antibiotics has resulted in increased antimicrobial resistance and is seriously threatening drug control strategies against such common diseases as tuberculosis, malaria, cholera, dysentery and pneumonia.

13Source: Scientific American


Food Contamination

14

E.coli Risk: A hamburger created from ground beef from the industrial food system contains meat originating from approx.1,000 cows

Feb 2011 USDA report: FSIS estimates the national prevalence of E. coli O157:H7 in beef trim for use in the manufacture of raw ground beef was 0.39 percent, with a 95 percent confidence interval from 0.05 to 0.73 percent.

Source: Michael Pollan, USDA© 2011 Risk Economics, Inc.

Environmental Hazard from Factory Farms


Pathogens and pharmaceutically activecompounds in manure, bio‐solids, and otherbyproducts can be transmitted to animals andhumans through food supplies, water, andpossibly air. Animals on farms can also be re‐infected not only via water and air, but alsofrom other vectors such as birds, rodents, andinsects that can directly infect the animal orcontaminate animal feeds or water.

According to USDA estimates:‐ Animal production in the U.S. is valued at

over $100 billion annually. ‐ The amount of manure generated in the

U.S. at CAFOs and AFOs is estimated to exceed 335 million tons of dry matter per year.

Evolving Health Trends


Age-adjusted percentage of U.S. Adults who are obese or who have been diagnosed with diabetes

17

1994

1994

2000

2000

2008

2008

Obesity (BMI ≥30 kg/m2)

Diabetes

Source: CDC’s Division of Diabetes Translation. National Diabetes Surveillance System

<4.5% 4.5-5.9% 6.0-7.4% 7.5-8.9% >9.0%

<14.0% 14.0-17.9% 18.0-21.9% 22.0-25.9% >26.0%


Global BMI Snapshots: 1960 to 2009

18

1960 1990

2000 2009

Source: WHO Global Database on BMI © 2011 Risk Economics, Inc.

Exercise and correlation with temperature?

19Source: Economist EIU © 2011 Risk Economics, Inc.

Medical Cost Escalation


Medical Spending and Weight

21

Distribution of Adults and Health Care Spending, by Body Weight1987 and 2007

Percentage ChangesShare of the Adult Spending per Adult 1987-2007

Population (%) (2009 dollars) Share Adult SpendingWeight Category 1987 2007 1987 2007 Population per Adult

Underweight 4% 2% $3,230 $4,970 -50% 54%Normal 52% 35% $2,440 $4,030 -33% 65%Overweight 31% 35% $2,650 $4,260 13% 61%Obese 13% 28% $2,630 $5,560 115% 111%

- Obese but not morbidly obese 12% 24% $2,640 $5,330 100% 102%- Morbidly Obese 1% 4% $2,530 $7,010 300% 177%

All Categories 100% 100% $2,560 $4,550 n.a 78%

Source: Congressional Budget Office based on the 1987 National Medical Expenditure Survey and the 2007 Medical Expenditure Panel Survey.

Weight categories are defined using the body-mass index (BMI)—a measure of weight standardized for height that applies to adult men and women—as follows: underweight (BMI is less than 18.5); normal (greater than or equal to 18.5 and less than 25); overweight (greater than or equal to 25 and less than 30); obese but not morbidly obese (greater than or equal to 30 and less than 40); and morbidly obese (greater than or equal to 40).


22

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.019

6019

6519

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7519

8019

8519

9019

9520

0020

0520

1020

1520

2020

2520

3020

3520

4020

4520

5020

5520

6020

6520

7020

7520

80

All Other

Medicaid

Medicare

Total Healthcare Spending as a Percentage of GDP, 1960-2008, and Projections%

Source: CBO

Actual CBO Projections


23

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Canada France Germany Italy Japan U.K. U.S.A.

Total Healthcare Expenditure as a Percentage of GDP for G7 Countries, 2009

Source: OECD

%


Wealth and Income Distribution


25

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000 U

nder

$5,

000

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to $

9,99

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9,99

9

Income distribution of bottom 96% (<$200k), 2009

Source: CPS: BLS and Census Bureau, Risk Economics Calculations

Households (000s)

25 % of households make $0-$25,000

25 % of households make $25,000-$49,929

25 % of households make $50,000-$84,899


26Source: CPS: BLS and Census Bureau, Risk Economics Calculations

18% of Income

11% of Income

18% of Income

53% of Income

>200k (4% households)

150-200k (3% households)

100-150k (12% households)

The rest (0-100K 80% households)

U.S. Income Distribution, 2009

20% of Households made 47% of Annual Income in 2009


Median Household Income, 2008US Median: $52,029

27Source: Department of Commerce Economic and Statistics Administration © 2011 Risk Economics, Inc.

Global Income Distribution

28Source: CIA World Factbook, Mint.com

Values are Based on the Gini Coefficient, a measure of dispersion for each country. It is a calculation that represents the relative mean difference of personal income between citizens. A value of 1 represents absolute equality and 100 represents absolute inequality.


Gap between Poor and Rich has increased because of the recession

29Source: Economist © 2011 Risk Economics, Inc.

30

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1998 2001 2004 2007

25th50th75th90th

U.S. Wealth Distribution: 1998 to 2007

Source: Federal Reserve

Percentile$


America’s Poor: A Regional Look at Poverty

31Source: CIA World Factbook, Mint.com


Effects on Labor Markets and the Dependency Ratio


Unemployment Rate by Level of Education

33Source: http://www.calculatedriskblog.com © 2011 Risk Economics, Inc.

34

0

10

20

30

40

50

60

70

80

90

2010 2020 Est 2030 Est 2040 Est

45 46 48 48

2228

35 37

Old-AgeDependencyRatio

YouthDependencyRatio

Dependency Ratios for the United States2010 to 2040 (Does not account for health changes)

Source: US Department of Commerce

%

6774

83 85


Accessibility of Food and Water


Food Distribution Maps

36

% Population that is undernourished Daily grams of protein per person

Daily calories per person Daily grams of fat per person

Source:UNDP


Food Prices Continue to Rise

37Source: FAO

70.0

90.0

110.0

130.0

150.0

170.0

190.0

210.0

230.0

250.0

1/19

901/

1991

1/19

921/

1993

1/19

941/

1995

1/19

961/

1997

1/19

981/

1999

1/20

001/

2001

1/20

021/

2003

1/20

041/

2005

1/20

061/

2007

1/20

081/

2009

1/20

101/

2011

FAO Food Price Index: 1990 - 2011

Nominal

Real

2011

2010

2009

2008

2007

120140160180200220240260

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

FAO Food Price Index: Last 5 Yrs

MeatsDairy

Cereals

OilsSugar

100150200250300350400

1/20

102/

2010

3/20

104/

2010

5/20

106/

2010

7/20

108/

2010

9/20

1010

/201

011

/201

012

/201

01/

2011

2/20

11

FAO Food Price Components


Population Without Access to Safe Drinking Water (%)

38Source: UNWWDR © 2011 Risk Economics, Inc.

Civil Unrest: 20 Countries Susceptible to Food Price Inflation

39

Rank Country GDP per Capita

Food as a % of Total

Consumption

Net exports of Food (as % of

GDP)

1 Bangladesh $497 53.8% -3.3%2 Morocco $2,769 63.0% -2.1%3 Algeria $4,845 53.0% -2.8%4 Nigeria $1,370 73.0% -0.9%5 Lebanon $6,978 34.0% -3.9%6 Egypt $1,991 48.1% -2.1%7 Sri Lanka $2,013 39.6% -2.7%8 Sudan $1,353 52.9% -1.3%9 Hong Kong $30,863 25.8% -4.4%

10 Azerbaijan $5,315 60.2% -0.6%11 Angola $4,714 46.1% -1.4%12 Romania $9,300 49.4% -1.1%13 Philippines $1,847 45.6% -1.0%14 Kenya $783 45.8% -0.8%15 Pakistan $991 47.6% -0.4%16 Libya $14,802 37.2% -1.7%17 Dominican Republic $4,576 38.3% -1.1%18 Tunisia $3,903 36.0% -1.1%19 Bulgaria $6,546 49.5% -0.1%20 Ukraine $3,899 61.0% +0.9%

United States $45,989 8%

Source: Nomura © 2011 Risk Economics, Inc.

World Life Expectancy in Years

40Source: UNDP © 2011 Risk Economics, Inc.

Risk Economics, Inc.David K.A. Mordecai

Samantha Kappagodawww.risk-econ.com


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RISK ECONOMICS CAS