Global Economic Outlook

Agricultural Risk

Michael Swanson Ph.D. Wells Fargo Ag Industries

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Everything is connected.

We just can’t see how.

Economic and Agricultural Risk

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Is Economic Risk Rising?  Yes

  Quantifiably   Emotionally

 Drivers   Interconnected global markets   Policies

  Domestic   Global

  Implications

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Not a physical constant Daily percent price volatility CME corn

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Everything is connected …

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Global factors – specific implications

 Growth drivers   Population – minor   Income – major   Policy – wildcard

 Suppliers   Interconnected markets   Opportunity costs

  Implications

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The most “predictable” factor

High

Low

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Dubious assumptions – doubtful outcome

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The income components – TBD

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Why Now?

How Much?

Dramatic growth – High Risk

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Follow the dollars

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Net Trade by Category

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Currency strength: Fundamentals v speculative

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Who is our biggest trade partner?

NAFTA

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Is the shoe on the other foot?

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Every product is unique story

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Can the Euro Zone still function?

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Polite Fiction

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Why the 10 year reprieve?

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What about the Euro?

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How about China?

More of the same: Uncertainty

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What if China stumbles?

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Talk about a murky relationship

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The Chinese Trade

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Net Trade Growth

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If China was stock, would you buy?

  Interactions with the global market   How much export growth could they get?   How much import growth can they allow?

  Would the global markets stand a “sudden” devaluation?

  What are their sustainable competitive advantages?

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US Economic Factors

Slow growth better than no growth

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US economic key policy distortions

 Fiscal spending  Monetary

  Low interest rates   High money supply growth

 Exchange rate   Weak dollar – strong exports?   Trade is a fickle source of demand

 Regulation/Biofuels

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What’s our real growth potential?

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Volatility is an important as the average

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Relative prices matter most

 Labor   Increasing cost   Quality?

 Capital   Falling cost   Increasing quality

  Automation   Information processing

 Add capital not labor

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Jobs …We’re missing a decade of them

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The investment is happening

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Why they love their automation

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Deliberate choices

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Limitless demand ≠ Limitless Income

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Taxes will go up as a percentage

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They don’t buy because they love us

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Bad economic policy

 Simple answers are simply wrong   Keynesian?   Supply side?   Monetarism?

 Complex systems   Structural change   Feedback loops   Random shocks

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Don’t predict – plan on scenarios

 Economic volatility will get worse   Price volatility will be extreme   Working capital per unit will need to increase   Margin management will be key

 Asset Pricing   Real interest cost will increase   Global market for assets and cash flow

 US agriculture needs to follow the links