the great north american drought: industry impacts one year later

The Great North American Drought: Industry Impacts One Year Later

August 8, 2013

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Today’s Speakers

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Mr. Ryland Maltsbarger

Principal Economist, Agriculture

IHS Supply Chain Pricing & Purchasing

Ryland Maltsbarger is a principal economist of the IHS Pricing & Purchasing

Agriculture Service. He supervises the long-term Global Crops and Livestock

Services along with the monthly update of the quarterly price forecast. Ryland

is directly responsible for the global sugar and cotton forecasts. Other duties

include the publication and forecast of the Global Crops Cost of Production

Service.

Ryland joined IHS in 2008 as an economist. His service with the company has

included the creation of the global sugar partial-equilibrium model along with

the expansion of the global cotton model. He created the system behind the

quarterly price forecast as well as the format for the publication. Other projects

have included work on 2050 Global Crops service and expansion and

reformatting of the Global Crops Cost of Production Service.


Today’s Speakers

6

Mr. Brandon Kliethermes

Senior Economist, Agriculture

IHS Supply Chain Pricing & Purchasing

Brandon Kliethermes is an economist with IHS Agriculture Pricing &

Purchasing group. Brandon's key area of focus is the continued development,

maintenance, and forecasting of US crops. He also provides daily and weekly

commentary on current issues affecting agricultural markets worldwide.

Brandon created and maintains the Global Insight Softs Commodity Price

Index (GISCPI) to evaluate weekly prices changes for food components such

as feed grains, food grains, meals and oils, dairy, fiber, sugar, and meats and

products.

Brandon joined IHS Global Insight in April 2010 after completing an M.S. in

Agriculture Economics in December 2009 and a B.S. in Agriculture Economics

in 2008, both from the University of Missouri-Columbia. Brandon has held

positions as a licensed commodity broker for Allendale Inc. and worked under

the board members at the Kansas City Board of Trade. His agricultural

background and continued involvement with production agriculture gives him a

unique perspective for market/industry analysis.

US & Global Agriculture Market Outlook Great North American drought:

Industry impacts one year later

Ryland Maltsbarger & Brandon Kliethermes

IHS Agricultural Service

8 August 2013

Copyright © 2013 IHS Inc. All Rights Reserved

Outline

• Introduction

• US outlook

• Supply implications

• World grains

• World oilseeds

• US cattle

• Multi-client study


Large impacts of last half-decade: corn and

wheat

Once upon time Then came the four shocks

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13

• World grain prices increased modestly

• Grain prices began fluctuating markedly, corn

prices almost tripled, wheat prices more than

doubled

• Corn and wheat area harvested experienced very slight

increase

• While corn area grew almost 10 times faster,

wheat area did not change much

• Corn and wheat yield improved very marginally • Yields outpaced their trend growth for both

grains (growth was twice as fast)

Demand-driven shocks 1-US Biofuel mandate

2-Financial crises

Supply-driven shocks

3-Drought

(FSU-12, EU-27, CAN)

4-Drought

(US, ARG)


US drought and recovery: May

2012

2013

Abnormally Dry Drought – Moderate Drought – Severe

Drought – Extreme Drought - Exceptional


US drought and recovery: August

2012

2013

Abnormally Dry Drought – Moderate Drought – Severe

Drought – Extreme Drought - Exceptional


IHS GISCPI

The IHS Global Insight Soft Commodity Price Index (GISCPI) has pulled back from

its 2012 highs from the drought. The most recent break lower was in reaction to old

crop futures collapsing from net long liquidation from traders, which spilled over

into grains.

The IHS GISCPI falls to an index value of 1.8 by first-quarter

2014.


Where we are today

• The US weather forecast looks to keep pollination stress to a minimum this year.

• Weather in Russia and Ukraine has been conducive for an early start to the

harvest, but dry warm weather in late spring had cut production outlooks slightly.

• Brazil’s summer corn crop has sidestepped a major yield-reducing scenario.

• Weekly wheat imports from China have shocked the trade. As a result, the US

Department of Agriculture has increased 2013/14 Chinese wheat imports to 8.5

million metric tons.

• Bottom line: commodity prices are being pressured by the growing reality that

world grain balance sheets may actually loosen.


Quarterly price outlook

Downward trend for corn and soybean prices while wheat sees seasonal

price gains. Our lower price outlook is also conditional on average growing

weather in 2014.


Past corn area revisions—USDA

Given prior years of delayed plantings, corn area typically falls

in the October WASDE report.

Using 2009 as a proxy, revisions in abandonment might

actually offset planted area losses. Current USDA harvested

percentage is at 91.5%.


Past soybean area revisions—USDA

Unlike corn, soybean area is variable and a wet year such as

2008 showed producers moved to soybeans.

On a percentage basis, soybean abandonment changes very

minimally year to year. The current USDA harvested percentage

is at 99%.


Area scenario and price midpoints—corn

• Bearish: Planted area is adjusted

higher to 97.5 million acres with

harvested area at 89.2 million acres.

Yield is 156.5 bushels per acre.

• Bullish: Planted area is reduced to

96.7 million acres with harvested area

at 88.0 million acres. Yield is 155

bushels per acre.

• June acreage: Planted area is at 97.4

million acres and harvested area at

89.1 million acres. Yield is 156.5

bushels per acre.


Area scenario and price midpoints—

soybeans

• Bearish: Planted area is adjusted

higher to 79.2 million acres with

harvested area at 78.4 million acres.

Yield is 44 bushels per acre.

• Bullish: Planted area is reduced to

77.1 million acres with harvested area

at 75.5 million acres. Yield is 43.5

bushels per acre.

• June acreage: Planted area is at 77.7

million acres and harvested area at

76.9 million acres. Yield is 44.5

bushels per acre.


Increased area planted supply capacity

Potential implications of adding supply capacity without another supply downturn

• Area pulled from pasture and Conservation Reserve Program (CRP) remain in

row crop production for the next few years.

• Producers continue to hope for higher prices in the following 12 months.

• One factor to consider is as world production increases, supply disruptions in the

two hemispheres may offset supply gluts in each other.

• In this example IHS looks strictly at the price impact of three prolonged years of

higher-than-expected planted area for the United States only.


Implications of increased capacity—corn

Supply scenario 2014/15 2015/16 2016/17

Production (Million bushels)

14,216

14,181

14,123

Feed and residual 5,208 5,175 5,236

Exports 2,153 2,280 2,171

Ending stocks 1,632 1,496 1,390

Average farm price (Dollars per bushel) $3.83 $4.06 $4.22

May forecast

Production (Million bushels) 13,527

13,438 13,906

Feed and residual 5,042 5,018 5,165

Exports 1,968 1,789 1,901

Ending stocks 1,402 1,189 1,214

Average farm price (Dollars per bushel)

$4.41 $4.60 $4.50

Percentage change

Production (Million bushels) 5% 6% 2%

Feed and residual 3% 3% 1%

Exports 9% 27% 14%

Ending stocks 16% 26% 15%

Average farm price -13% -12% -6%

• Scenario: Corn planted area falls from

97.4 million acres in 2013/14 to 94.3

million acres in 2014/15, 91.8 million

acres in 2015/16, and 90.2 million

acres in 2016/17.

• Harvested percentage remains

constant at 91% and yields fall in line

with the May forecast.

• Corn for ethanol remains aligned with

the May forecast at 5 billion bushels,

but a lower farm price increases food

seed and industrial use by under 1%.

• Risk surrounding the robust export

path would pressure prices to a

greater extent .


Implications of increased capacity—soybeans

Supply scenario 2014/15 2015/16 2016/17

Production (Million bushels) 3,497 3,516 3,519

Crush 1,820 1,824 1,809

Exports 1,465 1,541 1,579

Ending stocks 264 249 225


May forecast

Production (Million bushels) 3,351 3,408 3,481

Crush 1,796 1,796 1,803

Exports 1,438 1,538 1,573

Ending stocks 246 214 212


Percentage change

Production 4% 3% 1%

Crush 1% 2% 0%

Exports 2% 0% 0%

Ending stocks 7% 16% 6%

Average farm price -9% -10% -3%

• Scenario: Soybean planted area is flat

with 2013/14 at 77.7 million acres in

2014/15, 77.1 million acres in

2015/16, and 76.3 million acres in

2016/17.

• Harvested percentage remains

constant at 99% and yields fall in line

with the May forecast.

• For soybeans, there is greater risk

surrounding crush estimates rather

than exports.

• US exports of soy products

increase, pulling crush higher.


Looking ahead

• Expect higher harvest price volatility this fall as a result of the delayed US crop. • The National Oceanic and Atmospheric Administration stated in its May Atlantic Hurricane Outlook

and Summary that “An above-normal season is most likely, with the possibility that the season

could be very active.” It will release an updated forecast in August.

• Frost concerns will begin to spill into headlines by the end of August, with the end of September

being a key point for northern states.

• Prices should continue to be pressured lower but should see some level of

support after the beginning of 2014.

• How strongly will South America react to lower prices? • IHS expects producers in Brazil and Argentina to switch to more soybeans at the expense of corn

as margins squeeze.

• The second corn crop area is forecast to pull back in Brazil.


USDA Reports

• 12 August WASDE report • Possible area revision for US soybean plantings as producers are resurveyed and possibly even

corn?

• Given the current weather outlook there is greater chance today for corn yields to be increased

while soybean yields are still up in the air.

• 12 September WASDE report • Fall harvested yields will be adjusted.

• 30 September Quarterly Grain Stocks report • The stocks in this report will represent the ending stock level for all September/August marketing

year crops, i.e., corn and soybeans.

• This report will also set the level of beginning stocks in the 2013/14 marketing year.

• This report will indicate whether wheat feedings during the summer months of 2013 fell within

expectations.

• 11 October WASDE report • This brings us one step closer to final production numbers for the 2013/14 marketing year.

• Planted and harvested area for all spring planted crops will be updated.


Global commodity market implications

• Corn exporters, Chinese demand

• Wheat exporters, China wheat

• World rice

• Oilseeds area


US and Brazil corn area harvested and

exports

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17

US-Exports Brazil-Exports US-Area Brazil-Area

Mil

lio

n h

ecta

res

Mil

lio

n m

etr

ic t

on

s


China’s corn

0

1

2

3

4

5

6

7

8

0

10

20

30

40

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17

Imports Exports Area Harvested

Mil

lio

n h

ecta

res

Mil

lio

n m

etr

ic t

on

s


US, EU-28, and Russia wheat area harvested

and exports

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

US-Exports EU-Exports Russia-Exports US-Area EU-Area Russia-Area

Mil

lio

n m

etr

ic t

on

s

Mil

lio

n h

ecta

res


China’s wheat

0

5

10

15

20

25

30

100

105

110

115

120

125

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17

Domestic Feed Imports Production

Mil

lio

n m

etr

ic t

on

s

Mil

lio

n m

etr

ic t

on

s


World rice

One of the only grains that have actually seen price pressure

from growing supplies since 2012

The major risk for rice is the continued fog surrounding

the Thai rice paddy program.


0

5

10

15

20

25

30

35

06/0

7

07/0

8

08/0

9

09/1

0

10/1

1

11/1

2

12/1

3

13/1

4

14/1

5

15/1

6

16/1

7

Mill

ion

hec

tare

s

US Argentina Brazil China

Soybean area

South American soybeans see modest expansion of area in

2013/14, although stronger inventories weaken price incentives

and keep expansion stagnant the following couple marketing

years, assuming no new negative weather events.

China continues its slow retreat from the 2004/05 high,

increasing reliance on imports to meet growing domestic

demand.


Canola/rapeseed area

0

1

2

3

4

5

6

7

8

9

10

06

/0

7

07

/0

8

08

/0

9

09

/1

0

10

/1

1

11

/1

2

12

/1

3

13

/1

4

14

/1

5

15

/1

6

16

/1

7

Mil

lio

n h

ecta

res

Canada EU Ukraine Australia

Even with better winter rapeseed planting and

growing conditions in several EU countries,

Canada, Ukraine, and Australia look to remain

the top exporters of canola/rapeseed globally.

Following disappointing yields in 2012/13 due to hot,

dry weather, Canada looks to return with record canola

production in 2013/14 as closer-to-average sowing and

growing conditions boost projected productivity,

overcoming the year-over-year decline in area.


Sunflower seed area

0

1

2

3

4

5

6

7

8

06

/07

07

/08

08

/09

09

/10

10

/11

11

/12

12

/13

13

/14

14

/15

15

/16

16

/17

Mil

lio

n h

ect

are

s

Argentina EU Russia Ukraine

Soybean and corn remain dominant crops in Argentina, limiting

sunflower seed expansion, but it sees a modest recovery in 2013/14.

Russia recovers much of the

record harvestable area in

2013/14 following hot and dry

conditions 2012/13.


US cattle supply issues

• Cattle inventory cycle

• Cattle supplies

• Beef production

• Price outlook


5,000

5,250

5,500

5,750

6,000

6,250

6,500

69,00071,00073,00075,00077,00079,00081,00083,00085,000

Lag

Jan

1st

No

n-M

ilk H

eife

rs R

etai

ned

Jan 1st Non-Milk Cattle Inventory

2012

1986

1996

1990

2004

2014

Cattle inventory cycle (Thousand head)

1990–96 Industry growth follows

higher exports to Asia and growing

domestic demand.

Inventory growth preceded

by run-up in heifer retention

and slowing inventory

decline.

Slowing inventory decline

and increased heifer

retention signal expansion.

Beef cattle inventories look

to be stalled in 2014 despite

higher heifer retention.

Which way will 2015 move?


Cattle supply

• Heifer slaughter slowed during the first half of 2013, allowing inventories to

improve slightly, but how many have moved into beef cow inventories?

• Cattle placements and cow slaughter suggest that it will not be enough. • Beef cow slaughter is up 2.3% during the first half of 2013 despite a 2.9% decline in 1 January

inventories.

• The number of cattle placed on feed during the first half of 2013 was nearly even with the first half

of 2012, despite a 2.1% reduction in non-milk cattle inventories.

• Placement weights trended higher during the second quarter, suggesting that

heifers are begin held for additional weight gain, not for breeding. • Placements of cattle weighing more than 700 pounds increased 16.8% year over year in the

second quarter, while placements of cattle weighing fewer than 700 pounds declined 16.9% during

the same period.


Cattle supply continued

• Total inventories to stall in 2014: • Strong start to 2013 not expected to turn into better 2014 inventories

• Smaller to even 2013 calf crop

• Even to slightly lower beef heifer and cow inventories

• Lower steer inventories, down by 1.5%

• Improved to even dairy heifer and cow inventories

• Beef production looks to suffer in 2014 and beyond: • Fewer steers available for placement and slaughter

• Herd building reduces availability of heifers and cows for slaughter

• Higher slaughter weights may help, but are not likely to be enough

• Production is not likely to recover fully until 2018


Beef production (Million pounds)

22,500

22,750

23,000

23,250

23,500

23,750

24,000

24,250

24,500

24,750

25,000

25,250

25,500

25,750

26,000

26,250

26,500

26,750

27,000

27,250

27,500

1985 1990 1995 2000 2005 2010 2015

2012

1986

1996

1990

2004 2014

Next year looks to have the

lowest beef production in 20

years…

…lower than the

2004 bovine

spongiform

encephalopathy

(BSE) level


5,000

5,100

5,200

5,300

5,400

5,500

5,600

5,700

5,800

5,900

69,00071,00073,00075,00077,00079,000

Lag

Jan

1st

No

n-M

ilk H

eife

rs R

etai

ned

Jan 1st Non-Milk Cattle Inventory

2012

2015

2014

Cattle inventory 2015 (Thousand head)

The first year of

expanded inventories in

eight years is expected to

be 2015.

Heifer inventories are likely to fall

in 2014 because of low cow-calf

returns in 2013 but they should

recover beyond 2014 as the

industry moves to expand.


$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

$170

2008 2009 2010 2011 2012 2013 2014 2015

Feeder Steer Price, OK City, 600-650 lb, $/CWT Fed Steer Price, NE Direct, 11-1300 lb, $/CWT

Ave Cost of Gain $/CWT Fed Steer Price - Feed Costs $/CWT

Cattle price and returns (US dollars per hundredweight)

Despite lower feed prices,

fed steer remain higher

on tight beef supplies.

Weaker spring demand causes

lower 2013 feeder steer price.

Tighter cattle supplies pull

prices back up in 2014.


Join IHS in an upcoming multi-client study

• Long-term increased variability weather impact study

• Increase frequency of yield variability across major producers and importers

• El Niño & La Niña patterns on Australia/Oceania and South America

• Increased rainfall shortages in North America, the European Union, and the Commonwealth of

Independent States

• Decreased monsoon in India

• Participants

• Agricultural input industries: chemicals, fertilizer, machinery, irrigation

• Food chain participants: grain handlers, processors, retailers, and restaurant chains

• Transportation industry players

• Banking and investment: global potential risks of capital investments

• All companies: global risks surrounding change in indirect costs

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