Outlook For Global Agricultural Markets Over the Next 10 Years Implications for commodity prices and profitability

1. Outlook For Global Agricultural Markets Over the Next 10 YearsImplications for commodity prices and profitability Mike Dwyer Director, Global Policy Analysis Office of Global Analysis Foreign Agricultural Service US Department of Agriculture Mike.Dwyer@fas.usda.gov

2. U.S. Agricultural Producers’ Income Statement and Balance Sheet • Despite drought and cost challenges, U.S. farmers doing very well

3. Crop Prices Expected to Remain High for Next 10 Years… Source: USDA Baseline

4. Same Story For Red Meat and Poultry Prices Source: USDA Baseline

5. … Which Helps Boost Long-Term Outlook for Farm Sector Profitability • Growing global demand projected to keep U.S. net farm income strong *1 billion=1,000 Million Source: USDA Baseline & ERS Farm Income Statistics

6. Factors Impacting U.S. and Global Food and Agricultural Markets Over the Next Decade • Global economic growth and the rise of the “middle class” in developing countries • Value of the U.S. dollar • Worldwide biofuels production • Role of trade and trade liberalization • Energy and agricultural input prices • Additional crop land • Biotech developments

7. #1: Economic Growth in Emerging Markets Will Remain Buoyant • Global economy emerged from worst recession in decades in 2010. Developing countries performed better and growing faster than developed countries. Same is happening now and is likely to continue for the next decade. • Consumer incomes are rising and middle class households are expanding rapidly, especially in large emerging markets. • Impact on global food demand will be significant due to higher income elasticities for food in developing countries.

8. Global “Middle Class” is Expected to Increase Sharply by 2022 – To 1 Billion Households Most of the increase will be in developing countries and the impact on worldwide food consumption will be significant Middle class in developing countries projected to increase 119% by 2022 vs. just 11% in developed countries Developing countries Developed countries Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

9. “Middle Class” in Developing Countries Could Reach 603 Million Households By 2022, Up 119% From 2012 Levels 25% of households in these countries are middle class. By 2022, this could increase to 56% and the impact on food consumption will be significant Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

10. Additional Dollar of Income: How Is It Spent? Lower income countries spend much of that additional income on food Source: USDA, Economic Research Service using International Comparison Program 2005 data.

11. Urbanization Also Drives Consumption Change Data source: World Bank

12. Meat Demand Growth Focused in Developing Countries Source: USDA Production, Supply & Distribution Database

13. … Which Leads to Rising Feed Demand In Developing Markets Source: USDA Production, Supply & Distribution Database

14. # 2: Value of the Dollar Expected to Ease Further … Keeping Upward Pressure on Commodity Prices Source: USDA, Economic Research Service; Foreign Agricultural Service

15. #3: Biofuels Production Continues to GrowBoosts feedstock demand, but recent rate of growth is expected to slow Products covered: ethanol & biodiesel for all countries, but omits biodiesel for the US. No cellulosic biofuels included. Source: FAS Annual Biofuel Reports and Washington staff analysis.

16. #4: Trade Will Increase and Trade Liberalization Will Continue • Global agricultural trade has grown sharply over the past decade -- should reach $1.1 trillion (1012) over next decade. • Most countries’ agricultural imports have increased substantially, esp. China and East/Southeast Asia. U.S. and EU imports growing, too. • Almost all major agricultural exporters have seen sharp gains in recent years – not just the U.S. • FTAs have proliferated worldwide, boosting trade. This will continue -- with or without the U.S.

17. Global Agricultural Trade Projected to Reach $1.1 Trillion (1012) Over Next Decade **1 billion=1,000 Million Source: Global Trade Atlas; USDA/FAS/OGA Projections

18. Global Agricultural Import Growth Focused in Developing Markets *1 billion=1,000 Million Source: GTIS data analyzed by OGA

19. #5: Energy and Agricultural Input Prices Likely To Remain High • Commercial scale agriculture is energy and input intensive – planting, growing, harvesting, transporting, processing, and packaging. • In recent years, input prices have risen in response to strong growth in global demand for energy and agproducts. Prices of diesel, fertilizer, seed, and agricultural chemicals have risen. • Rising production costs pressure farmers’ operating margins, mitigates supply response, and lead to higher long run agricultural commodity and food prices.

20. Higher Energy Prices Contribute to Higher Food and Agricultural Commodity Prices Source: International Monetary Fund: International Financial Statistics

21. U.S. Operating Margins Will Be Pressured By Rising Production Expenses • While commodity prices will remain fairly strong over next 10 years, they will lag rising production costs – land rental rates also affected by rising land prices *1 billion=1,000 Million Source: USDA/ERS

22. #6: Planted Acreage Will Increase • Where will the gains occur? Transportation/storage infrastructure and marketing costs will play a big role. • Land tenure issues, laws governing foreign investment, and the degree of price transmission will also be major issues. • South America will likely lead in land expansion (largely new frontier lands in Brazil) as will the Former Soviet Union (esp. Russia and Ukraine). • Africa has more uncultivated land but high marketing costs, poor infrastructure, and long distances from markets will be a constraint. • How aggressively will producers around the world respond to strong commodity prices?

23. Potential Availability of Uncultivated Land Globally 446 million hectares of uncultivated land (1.1 billion acres*) 52 million ha 14 million ha 123 million ha Share of Land With Travel Time to Market < 6 Hours 3 million ha Latin America & Car. 76% 202 million ha Sub-Saharan Africa 47% M. East & N. Africa 87% E. Europe & C. Asia 83% *1 acre = 0.4047 ha East & South Asia 23% Source: World Bank

24. Global Production Gains Since 1990 Due Largely to Yield Growth Source: USDA PSD Database

25. #7: Role of Biotechnology Will Grow

26. Technology Is Key to Meeting Future DemandBig drop in U.S. yields in 2012/13 is due to worst drought in decades Source: USDA PS&D Database

27. What Could Go Wrong To Affect Global Outlook? • USDA does not publish alternative baseline projections and only publishes once a year. The projections in this presentation were based on assumptions developed in fall of 2012 and published February 2013. • Fiscal and monetary actions in the coming months should pre-empt another global crisis but may not revive pre-crisis (2008/09) growth rates • However, if macroeconomic outlook worsens, it could: • Reduce the growth of the middle class in emerging markets • Increase the value of the U.S. dollar (safe haven response) • Reduce global trade (including agricultural trade) • Reduce almost all dollar-based commodity prices • Reduce farm income • Prolonged economic stagnation or new recession, crisis in Euro Zone, or a hard-landing in China pose risks to agriculture’s outlook

28. Summary -- The Bottom Line • The price and profit outlook looks more promising than it has in decades. New price/income floors for ag producers who receive world prices for their products. • Strong growth in global food, feed, (bio)fuel, and fiber demand and a relatively weak U.S. dollar will keep food and agricultural prices high over the next decade. • Much of this new demand will be centered in Asia -- agricultural trade will continue to grow with most of the new import demand coming from developing country markets, such as China, Southeast Asia, Middle East/North Africa, and Latin America. • High commodity prices and production gains should help the total profitability of agriculture (despite operating margins coming under pressure) – at least in those countries with high degrees of price transmission. If so, this should continue attracting new investment into the sector, i.e. land and new technologies. • However, beware of rising input costs and short-term exogenous shocks – they are a major element of risk in the profit outlook. • Have we entered a “golden era” for agriculture? That depends on your definition

29. Thank You!