the global battle for commodities - milken...

The Global Battle for CommoditiesPanel Detail:Tuesday, April 28, 20092:30 PM -

3:45 PM

Speakers:

Mark Cutis, Chief Investment Officer, Special Situations, Abu Dhabi Investment CouncilJosh Eastright, Product Manager, Energy and Commodities Markets, Bloomberg LPMari Kooi,

CEO and Founder, Wolf Asset Management International LLC Mark McLornan, Founding Partner, Agro Terra Ltd.Neal Shear, Managing Partner, Apollo Commodities Partners

Moderator:William Marcus, Head of Sales, Americas, Newedge Group

Commodity price volatility was high in 2008Six-month change Standard deviation

Largest six-

month decline in 2008

Largest six-month decline during 1970-2007

2008

Highest during 1970-2007

Average during

1970-2007(year) (year)Crude oil -76.8 -60.1 (1986) 18.4 16.1 (1999) 8.5Aluminum -52.9 -33.4 (1991) 12.1 8.9 (1994) 5.6Copper -54.8 -52.6 (1974) 12.2 13.0 (1974) 6.7Nickel -68 -49.0 (1990) 23.6 17.7 (2006) 9.2Corn -52.4 -51.8 (1997) 13.9 13.6 (1988) 7.6Wheat -45.2 -38.0 (1996) 16.0 12.9 (2007) 6.4Soybeans -44.1 -51.3 (2004) 12.8 15.5 (2004) 6.3Gold -25.4 -30.1 (1981) 8.7 13.3 (1979) 5.1

Sources:

Datastream, IMF, Milken Institute.

Spot and future price volatility of commodities

Standard deviations of daily price changes, percent of average price

Spot

Future prices

Spot

Future pricesThree-

monthOne-

yearTwo-

yearFive-

yearThree-

monthOne-

yearTwo-

yearFive-

year

Crude oil Copper

1998–2008 8.6 7.9 6 5.1 4.7 1998–2008 7 6.9 6.3 6 6.8

1998–2003 8.4 7.5 4.3 2.9 2.5 1998–2003 4.2 4.2 3.6 3.3 2.7

2004–08 8.8 8.4 7.5 6.8 6.5 2004–08 9.4 9.3 8.6 8.1 7.5

Aluminum Wheat

1998–2008 4.6 4.4 3.7 3.2 3.3 1998–2008 8.1 21.6 5.1 4 -

1998–2003 3.5 3.2 2.4 1.8 0.5 1998–2003 5.9 21.3 3.6 2.2 -

2004–08 5.7 5.5 4.8 4.2 3.7 2004–08 10.2 22.1 6.5 5.1 -Sources:

Bloomberg, IMF, Milken Institute.

Trends and cycles in real commodity prices

Sources: Grilli

and Yang (1988), Pfaffenzeller, Newbold, and Rayner

(2007), Bloomberg, IMF.

Price performance of major bond, equity and commodity indices

Sources: Bloomberg, Milken Institute.

S&P GSCI Commodity Index

S&P 500 Index

Lehman Bond Composite Index

0

50

100

150

200

250

300

350

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Index, January 30, 2000 = 100

Crude oil outperformed other commodities

Monthly, January 1988 –

March 2009


0500

10001500200025003000350040004500

1988 1991 1994 1997 2000 2003 2006 2009

CommodityEnergyCrude oilGold

Total return index, December 31, 1987=100

Total return of commodities

Annualized total return, as of March 31, 2009

20 year 10 year 5 year 1 yearEmerging markets 28.1% 9.7% 7.4% -36.5%Mortgage 7.7% 6.3% 5.6% 8.0%U.S. Treasuries 7.6% 6.2% 5.3% 7.2%S&P 500 7.4% -3.0% -4.8% -38.1%Corporate

bonds 7.0% 4.4% 0.9% -8.1%High Yield 6.7% 2.4% -0.3% -20.3%Gold 4.4% 12.6% 16.6% -1.7%Commodity 4.3% 5.0% -6.3% -56.5%

Sources: Bloomberg, Datastream, Milken Institute.

Total return of commodities

Annualized total return, as of March 31, 2009

20 year 10 year 5 year 1 year

Commodity 4.3% 5.0% -6.3% -56.5%

Energy 6.0% 8.2% -8.6% -63.4%

Crude oil 9.8% 10.8% -8.1% -67.1%

Corn -5.8% -9.5% -11.7% -38.0%


Peak oil: Are we there yet?

0

15

30

45

60

75

90

1965 1970 1975 1980 1985 1990 1995 2000 2005

Oil production, million barrels per day

OECD countries

Non-OECD, Non-OPEC countries

OPEC countries

Sources: BP Amoco, Milken Institute.

Oil price dropped 77 percent in the second half of 2008

Daily, January 1, 2000–March 31, 2009

$0

$20

$40

$60

$80

$100

$120

$140

$160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

US$ per barrel

July 3, 2008: $145.3

December 19, 2008: $33.9


China’s growing Strategic Petroleum Reserve

United States China

Year of establishment 1976 2006

Current level (million barrels) 715 102

Increase

since 2006 26 140

Equivalent days of oil consumption at 2008 rate 37 13

Capacity 727 104*

* To be expanded to 430 million barrelsSources: EIA, BP Amocos, Xinhua News Agency, Milken Institute.

China completed major deals with oil exporters in recent monthsDate Deal Deal value

January 2009 China National Petroleum Company

signed a deal to develop north part of the Azadegan oil field

in Iran.

$1.76 billion

February 2009 China and Saudi Arabia signed a protocol of cooperation on oil, natural gas and metals.

n.a.

February 2009 China National Petroleum Company agreed to loan $25 billion to Russia for $1.2 billion barrels of oil.

$25 billion

February 2009 Petrobras (Brazil) gets $10 billion loan from China in exchange for 100,000 barrels per day contract in 2009 and 2010.

$10 billion

Oil reserves concentrate in politically unstable regions

Middle East62%Former Soviet

Union10%

Africa9%

Latin America9%

Asian Pacific3%North

America6%

Rest of World1%

Proved Reserves, 2007Total=1.2 billion barrels

Sources: BP Amocos, Milken Institute.

Rest of world

Population growth outpaced arable land expansion, but higher productivity made up the difference

1961-2007

100

120

140

160

180

200

220

1961 1971 1981 1991 2001

World population1961: 3.1 trillion2007: 6.5 trillion

Index, 1961=100

100

120

140

160

180

200

220

1961 1971 1981 1991 2001

Arable land (sq. km)1961: 12.5 million2007: 14.2 million

Index, 1961=100

Sources: WDI, FAO, Milken Institute.

100

120

140

160

180

200

220

1961 1971 1981 1991 2001

Index, 1961=100

Food production per capita

Global Battle for Commodities –

Neal Shear

Neal Shear slides

Commodities are more correlated to inflation than other assets

Sources: Bloomberg, Banc of America Securities-Merrill Lynch Commodity Research.*Based on YoY

returns since January 1990

Inflation linked bonds are an inferior protection against inflation

Sources: Bloomberg, Banc of America Securities-Merrill Lynch Commodity Research.

World monthly money supply growth (YOY)

World crude oil supply (thousand barrels per day)

Sources: IEA, Bank of America Securities-Merrill Lynch Commodity Research.

The growth in oil supply could not keep pace with money supply or oil prices

EM economies are gaining GDP share; another positive sign for commodities

Sources: IMF, Bank of America Securities-Merrill Lynch Commodity Research.

The Global response is likely to be inflationary

Sources: The Economist, Bank of America Securities-Merrill Lynch Commodity Research.

Break–even inflation rates move higher


In spite of the commodity bubble,

capacity utilization in commodity sector remains high …. Bullish in economic recovery


The cancellation of oil projects is positive for the price

Number of Project Delays/Cancellation

Sources: Company data, Morgan Stanley Commodity Research.

Investors dominate the Gold sector

Sources: Bloomberg, Morgan Stanley Commodity Research.

Global dynamics bullish for corn and beans

Sources: IMF, USDA, Morgan Stanley Commodity Research.

Growing incomes bullish for corn prices China soybean production shortfall satiated with imports

Million bushels

Sources: IMF, USDA, Morgan Stanley Commodity Research.

The scramble for resources already in play

Sources: FAO, Morgan Stanley Commodity Research.

Land is scarceHectares/person arable land

The growth in Fed assets will lead to inflation


0.0

0.5

1.0

1.5

2.0

2.5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total assets of Federal Reserve banks, US$ trillions

Josh Eastright

slides

US

China

India

Crude Oil Consumption –

1969-2007

China

India

US

Growth in Crude Oil Consumption –

1969-2007

Why Commodities?

A secular shift in demand strength –

Emerging Asia and the “next billion”

Source: Bloomberg.

Global OilCo

reserve replacement and reserve life

Sources: MEG, Company data, UBS estimates

02468

1 01 21 41 6

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

E

01 , 0 0 02 , 0 0 03 , 0 0 04 , 0 0 05 , 0 0 06 , 0 0 07 , 0 0 08 , 0 0 0

M a j o r d e p o s i t d i s c o v e r i e s ( L H S ) W o r l d c l a s s d e p o s i t d i s c o v e r i e s ( L H S )

E x p l o r a t i o n s p e n d U S $ m ( R H S )

T o o l a t e ?N o . o f d i s c o v e r i e s

U S $ m

Global Mining discovery rates and exploration spend

0%20%40%60%80%

100%120%140%160%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 200510.210.410.610.811.011.211.411.611.812.012.2

Reserve repl. (organic) Reserve repl. (Acqns) Reserve life

Why Commodities?

Significant challenges in supply response

Global portfolio efficient frontiers, January 2003 –

March 2008

January 2003-August 2007Please note that the data above is based on CMCI Total Return Indices

Why Commodities?

Asset allocation advantages are also important

Source: UBS.

Chinese Crude Oil Imports: Jan ’04 -

Feb ‘09

Chinese Copper Imports: Jan ’04 -

Feb ‘09

Why commodities? Conflicting signals out of emerging economies

Source: Bloomberg.

April 13, 2007

WTI = 63.63

April 13, 2008WTI = 110.11 April 13, 2009

WTI = 50.05

NYMEX CurveHigh AnalystLow AnalystAvg. Analyst

Why avoid commodities? “Experts”

have all but thrown their hands up

Source: Bloomberg.

By Linda Sandler, Yuriy

Humber and Christopher ScintaApril 14 (Bloomberg) --

Lehman Brothers Holdings Inc. issitting on enough uranium cake to make a nuclear bomb as itwaits for prices of the commodity to rebound, according totraders and nuclear experts.

Why avoid commodities? Speculation has changed the nature of some markets

Source: Bloomberg.

Investing in Commodities: Curve AsymmetriesPercentages of time in backwardation vs. contango

over past 10 years

Sources: UBS, Bloomberg.

Investing in commodities: Index weightingsComposite Indices -

Target Weights Per Sector as of February 2009


Investing in commodities: Weights/selection impact return

Oil in Contango

= indices with a heavy front month crude

investment lose

Oil in backwardation or heavy focus on a strong performer =

strong performanceSource:Bloomberg.

Investing in commodities: Most investors only use spot

Fixed Income Investors

Invest across

the yield curve Not just 1-month T bills

Commodity Index Investors

Generally limited to “1-month T-bills”

(i.e. short dated futures)

Partially responsible for disappointing returns

(negative roll yield)

Commodities have a forward curve just like bonds –

yet most investors ignore this

Source: Bloomberg.

Investing in commodities: Average tenorsInvesting across the curve enhances returns and lowers volatility

Source: Bloomberg.

Roll mechanism in detail


Mark Cutis slides

Abu Dhabi Investment CouncilMarch 22, 2009

Update on agricultural commodities:

The Time is now

Investing in agriculture: Why now?Agricultural complex: downward price correction almost over

there has been a brutal deleveraging since mid 2008

Soft commodities and grains will soon rebound- grain stocks are at historic lows

Quantitative easing will spill over to all commodities

If you believe that inflation could become a concern, then invest in commodities.

Pricing of commodities close to or below production costs so favorable entry level

EM world continues to improve their diet hence eating more protein;

EM world contributing more to global growth.

However if you believe that we are in the long ‘great depression’ world, then do not invest in commodities.

but of course, no sense in investing in stocks either; stick to government bonds!)

Defensive posture argues for allocation to commodities: in particular agriculture.

The ” how to” for Special Situations

More importantly an allocation should be made at strategy level

Do you really expect deflation in a fiat currency environment?

Shift to fiat currency system practically eliminated the recurrent episodes of deflation of the prior two centuries.

Sources: Historical Statistics of the United States, Earliest Times to the Present: Millennial Edition, Cambridge University Press, Banc of America Securities-Merrill Lynch Commodity Research.

Agricultural commodity prices

Correction from mid-2008 highs has been severe

MLCX Merrill Lynch Agriculture index

S&P GSCI Agriculture indexSchroders

Agriculture index

Agriculture prices: big slide was over by Dec 2008

S&P GSCI Agriculture TR Index

46

Correlation to energy has been increasing over time

… due to biofuels

and demand substitution (for example polyester and cotton)

47

• Correlation between oil markets and agricultural markets has been increasing in last decade• So agricultural demand recovery cannot be far from recovery of global energy demand

Sources: Bloomberg, Merrill Lynch Commodity Research.

Commodities are primed for a rally

and capacity is far scarcer in commodities than other sectors

48

Capacity utilization was relatively high across all sectors in last business cycle

Even today with low prices there is little spare capacity. Danger if demand spikes

Source: Bloomberg, ML Commodity Research Source: Bloomberg, ML Commodity Research

Commodities will be the first to benefit from overall consumption recovery

And…

the growing energy component means agricultural demand less price elastic than before.

49

Biofuels

demand constituted 29% of last 2 years’

incremental demand for corn, wheat, sugar and vegetable oils

Linkages to biofuels

and energy have contributed to making corn demand less sensitive to price changes

Source: Bloomberg, ML Commodity Research Source: Bloomberg, ML Commodity Research

… So price rally once it starts can be sustained.

Fundamental drivers of a future price increaseIn addition to the case for a rally of all commodities, agriculture has its own solid fundamentals:

1.

Stocks of agricultural products at historic lows2.

Demand growth in Emerging Markets3.

Dietary changes in Emerging Markets4.

Limited agricultural land5.

Crops produced at a loss, given projected prices at harvest6.

Economic downturn and tighter lending to farmers driving the next shortage7.

Mismatch between planting decisions and crop prices8.

Bio-fuel mandates will continue to boost demand9.

Changing weather patterns10.

Flattening of yields11.

Credit crunch…

lack of financing available to farmers

50

Fundamental drivers of future price increase

1. Stocks of agricultural products at historic lows

51

Delay in supply response to increase in demand has pushed stock levels to historical lows

Source: Bloomberg, Merrill Lynch Commodity Research

1. Stocks of agricultural products at historic lows Low demand coverage will usher in a quick price rebound

Corn inventories and prices

100

300

500

700

900

1100

1300

1500

63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08

40

60

80

100

120

140

160

180

Real prices (lhs) Beginning stocks in forward coverage (rhs)

Cents/bushel Days of demand coverage(reverse axis)

Wheat inventories and prices

100

600

1100

1600

2100

2600

63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08

60

70

80

90

100

110

120

130

140

150



Soybean inventories and prices

0

500

1000

1500

2000

2500

3000

3500

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

1015202530354045505560



Sources: Bloomberg, Merrill Lynch Commodity Research

•

Despite the severe price correction, inventories are at historic lows

•

This means that prices will rebound quickly in response to demand recovery

Fundamental drivers of future price increase:

2. Demand growth in Emerging Markets

53

Higher percentage of global economic growth comes from developing nations which have a higher income elasticity of demand for food products

If disposable income in emerging markets continues to grow, agricultural demand growth will follow



3. Dietary changes in Emerging Markets

•

Population growth decreasing, but calorie intake increasing among emerging markets

•

Rise in GDP increases calorie intake at a higher rate in EM than OECD.

•

Since EM is responsible for a higher share of income growth, global calorie intake and demand for agriculture will increase at higher rate, going forward.

Sources: National Census Survey; USDA; and ALTIMA analysis.


4. Limited agricultural landArable land could still increase further in Africa and South America, but political and infrastructure costs will be high

Global agricultural acreage expanded rapidly in the 1960s and 1970s, but current increase has been limited despite extended period of high prices

Source: Bloomberg, Merrill Lynch Commodity Research Sources: Bloomberg, Merrill Lynch Commodity Research

P.S: Potential equivalent increase does not include land that has government restrictions on its cultivation


5. Crops produced at a loss, given projected prices at harvest

2009/10E crop break-even costs:Prediction of losses for wheat growers

Fertilizer price declines are expected, but not enough to offset lower crop prices

More important than spot grain prices are grain prices at time of harvest. Forward grain prices now are:

Corn Z9:

$3.96Soy X9: $8.17 This means that not just wheat farming is in the red but perhaps

also soybean!Wheat

N9: $5.20 Source: GS Global ECS Research.


5. Crops produced at a loss, given projected prices at harvest

• Wheat farming in the red; soybeans might be there too!

• Corn prices close to break-even prices

•Farming was lucrative in 2007, but not anymore

Marginal cost of wheat production

0123456789

2005 2006 2007 2008 2009F 2010FSeed FertilizerChemicals Fuel, lube, and electricityOther operating costs LaborMachinery and equipment LandOther allocated costs Price, marketing year

$/bushel

Marginal cost of soybean production, US

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2005 2006 2007F 2008F 2009F 2010F Seed Fertilizer Chemicals Fuel, lube, and electricity Interest on operating capital Other operating costsLabor Machinery and equipmentLand Other allocated costsPrice, marketing year

$/bushelMarginal cost of corn production, US by planting year

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2005 2006 2007F 2008F 2009F 2010FLand Machinery and equipmentFertilizer Fuel, lube, and electricityChemicals LaborOther operating costs Other allocated costsPrice, marketing year

$/bushel



6. Economic downturn and tighter lending to farmers driving the next shortage

Overall favorable 2008 weather drives global yield above trend; difficult to duplicate in 2009

Economic difficulties and tight financing will decrease agricultural land in 2009

Credit crunch and economic downturn depress agricultural land:… Will lead to the shortage in the medium term

Source: GS Global ECS Research.

yield acreage


7. Mismatch between planting decisions and crop prices

Total World grain and oilseeds Stocks and Stock-to-use

Demand destruction due to lower prices leads to drop of acreage (supply destruction) which ushers in future higher prices…In seven out of last

10 years, production has lagged demand.

Source: FAO.


8. Biofuel

mandates will continue to boost demand

United States:RFS program in the US requires 13.2 billion gallons of renewable fuel to be blended into vehicle fuel by 2012

European Union:EU-03 directives ‘target’

5.75% of total transport fuel use to be derived from biofuels

by 2010 and a ‘mandate’

of 10% by 2020

Sources: EBB, RFA, Merrill Lynch Commodity Research.


9. Changing weather patterns• Increase in anomalies in global climate • Severe weather patterns in US corn belt

• The US corn belt is a recipient of severe weather patterns•

Unpredictability and surge of severe weather rates will continue to put downward pressure on supply and upward pressure on prices.•

If increase in agricultural land comes from Africa and Latin America, then expect more unpredictability in demand due to lack of readiness of EM farmers for severe natural

conditions

Source: FAO Source: FAO


10. Flattening of yields

0

1

2

3

4

5

6

7

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Rice Yield in China

Corn Yield in China

Wheat yield in India

Tons

per

hec

tare

Corn and wheat yields 1961-

2007

Source: FAO

,

Sources: FAO, Merrill Lynch Commodity Research.

• There has been a decline in yield increases

•

By the 1990’s “Hectare Per Tractor”

growth has become small. The gains in productivity have been had.

•Now, marginal farmers are adding to their machinery use, but at the slowest pace ever recorded.

•In Africa and Latin America, yield growth faces political and infrastructure problems


11. Credit crunch…

lack of financing available to farmers

•

Shortage of farming credit is less an issue in OECD, due to gov’t-backed agricultural credit markets. •

In contrast, the scarcity of credit is a real risk in Emerging Markets.–

Access to high input costs is cramped by non-functioning credit markets in developing countries.

–

This is more of a risk to yields than acreage, since farming land will still be utilized while less seeds, fertilizers and pesticides should be applied.

–

This will particularly hit fertilizer intensive crops, such as corn or coffee. –

Even in Brazil, a country with relatively well developed credit markets for agriculture, farming financing is drying up. Large agricultural companies, such as Bunge, Archer Daniels Midland, and Cargill, are scaling back their system of funding farmers in

return for future crops as payment.

–

The credit crunch has halted the development of food supply channels. In many African and Asian countries, 25 % of food cereals are discarded each year.

–

Also at risk are diversified, resilient ecosystems (rainfall management, inter-cropping) that sustain and increase yields longer term.

Going forward

A changing supply and demand profile •

Limitations to the amount of new cultivated land. •

Supply response from the least developed nations not enough: needed investment in education, training and extension services.

•

The epicenter of global agriculture: shift from the OECD to developing countries. •

By 2017, developing countries are expected to dominate production and consumption of most commodities, with the exception of coarse grains, cheese, and skimmed milk powder⇒ changing profile of the marginal supplier. ⇒more vulnerability to severe weather fluctuations: new producers less able to deal with these changes

•

The technology (increasing yields) argument: Q: increasing yields in EM putting downward pressure on prices?A: Productivity gains in manufacturing (which increases food demand) outweighing productivity gains in agriculture (which increases food supply)…

Agriculture: Preparing for a price recovery•

Despite a comprehensive slowdown, and increased correlation to energy, agricultural prices are less vulnerable compared to other parts of the commodity complex.

•

And the commodities overall are

at utilization levels that will usher in a swift price recovery

as demand recovers.

•

In addition, there are financial and economic challenges to acreage expansion. Farmers are having a hard time getting banks to lend

to

them.•

Long-

term fundamentals mean that demand will rise due to changing demographics, economic growth in emerging markets, and urbanization.

•

In the medium term, upward pressure on prices due to economic recovery, biofuel

mandates, supply destruction, unpredictable weather patterns, and historically low stocks.

•

Despite correlation and substitution between crops, there are some ‘defensive’

members , including wheat that are less affected by the global slowdown. (wheat is less exposed to slowdown when compared to soybeans for example)

•

A protracted slower growth in emerging markets may still push prices a bit lower in the very short term;

–

Don’t bet against demographics•

The persistent fundamental drivers of demand, supply destruction, and low stocks will mean that agriculture is expected to have an early and sustained price recovery.

Crops have different income elasticity and demand drivers

Wheat long term bullish due to historic demand elasticity

Income elasticity varies by crop; wheat relatively inelastic (1976-2006)

Cheaper wheat might mean an opportunity for a price rally in medium term

Source: ML Commodity Research.

High crop price volatility partly due to substitution between crops

Substitution by both consumers and farmers

• Crop prices move together in large part due to substitution on both demand and supply sides.• Therefore ‘selecting crops’

strategy has its limits in the medium term:

Source: ML Commodity Research.

US farmland

5000

6000

7000

8000

9000

10000

11000

2004 2005 2006 2007 2008

$/ha

Land pricesUK Farmland price

6000

7000

8000

9000

10000

11000

12000

13000

14000

2004

Q3

2004

Q4

2005

Q1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

2H

2007

1H

2007

2H

2008

1H

2008

2H

£/ha

US

agricultural land prices

UK agricultural land prices

0 2,500 5,000 7,500 10,000 12,500 15,000

Russia

Bulgaria

Estonia

Romania

Hungary

Argentina

Canada

USA (East)

Finland (South)

England

N. Ireland

Denmark

Netherlands

In USD/ha:

Global agricultural land price comparison

Agriculture will continue to track energy prices

Economic slowdown and de-leveraging meant low agriculture pricesGiven the increase in correlations: corn, soybeans, wheat, and sugar prices will remain weak in very near term if you believe oil prices will stay

below $50/bbl in 1H 2009


Mark McLornan

slides

Population growth

80

100120

140160

180

200220

240

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Yield Percap production

2.1%

1.1%

Index, 1970=100Exponential trend growth rates:

1970-90 90-07 2009-17Production 2.2 1.3 1.1Yields 2.0 1.1 0.7Area 0.15 0.14 0.48

Population 1.7 1.4 1.1Per Capita 0.56 0.11 0.07Production

Source: Compiled from USDA’s PS&D Database & Baseline Projections.

1 Total oilseeds = soybeans + rapeseed + sunflowers

Total global grain & oilseeds1

Production, yield, area, population and

per capita production

Source: FAO.

Declining farmland per capitaArable land, hectares per person, 1950-2020

Global grain and

oilseed stocks-to-use

Sources: USDA, Economic Research Service using USDA, Foreign Agricultural Service, Production Supply, and Distribution Database.

World grain and oilseed stocks decline, setting the stage for price spikes

Sources: USDA; Datastream.

Global wheat and

corn stocks-to-use vs

real price

0

10

20

30

40

50

60

1994 1996 1998 2000 2002 2004 2006 20080

10

20

30

40

50

60

70

80

ImportsProductionImport Dependence

Million Tons PercentPercentMillion tons60

50

40

30

20

10

0

80

70

60

50

40

30

20

10

01994 1996 1998 2000 2002 2004 2006 2008

Imports ProductionImport dependence

Chinese soybean imports

Source: USDA.

Corn: Major imports –

exports 2009•

Global production 711mt•

Global trade 94mt

•

Japan imports 16.5mt•

Mexico imports 9.0mt•

South Korea imports 8.5mt•

Saudi Arabia imports 8.0mt

•

USA exports 54mt•

Argentina exports 15mt•

Brazil exports 11mt

•

1,000,000ha = 3,800 sq mile = 8mtSource: USDA.

Recent sovereign farmland grab

Sources: GA IA and www.grain.com.

Source: USDA.

Global farmland quality

FAO world hunger map

Source: Foreign Policy Magazine & Fund for Peace.

Rank Country Total1 Somalia 114.22 Sudan 1133 Zimbabwe 112.54 Chad 110.95 Iraq 110.66 D. R. Congo 106.77 Afghanistan 105.48 Cote d'Ivoire 104.69 Pakistan 103.8

16 Uganda 96.140 Laos 88.759 Philippines 83.460 Indonesia 83.386 Madagascar 76.7

117 Brazil 67.6151 Argentina 41.4158 France 34.8161 United States 32.8

Failed State Index 2008

http://fundforpeace.org/web/content/fsi/fsiindex2008.php



Sources: USDA, Datastream.

Trade Value ($Billion)

$0$10

$20$30

$40$50

$60$70

$80$90

$100$110

$120

'87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09f

Exports

Imports

Trade Surplus

115.5

83.5

95.5

12.0

59.8

49.1

27.3

Trade value (US$ billions)

U.S. agricultural trade

Sources: USDA

agricultural projection to 2018, February 2009, USDA, Economic Research Service.

U.S. share of global corn trade

http://www.ers.usda.gov/Briefing/corn/Gallery/gallery2009/WorldandUScorntrade.gif

Emerging markets

Sources: Merrill Lynch, BP, CIA World Factbook, Factset, IMF World Economic Outlook, Datastream, Bloomberg.

Winston Churchill speech to The Commons

on May 2, 1935

Air Parity Lost•

“When the situation was manageable it was neglected, and now that

it is thoroughly out of hand we apply too late the remedies which then might have effected a cure.

•

There is nothing new in the story. It is as old as the Sibylline

books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability

of mankind. •

Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong, these are the features which constitute the endless repetition of history."

Mari Kooi

slides

The monetary environment

Monetary policy

•

Monetary Base is exploding but it is mainly excess bank reserves. •

Offset by collapse in lending and velocity•

The gas pedal is on the floor but the question is whether the pedal is pulled back in time before we go over the inflation cliff

•

Depends upon whether central banks know which way to turn and when

M2 money multiplier and excess reserves

Source: Federal Reserve. M2 multiplier through March 30, 2009. Excess reserves through April 8.

4

5

6

7

8

9

10

01/2008 03/2008 05/2008 07/2008 09/2008 11/2008 01/2009 03/20090

150

300

450

600

750

900Ratio of M2 to monetary base US$ billions

M2 money multiplier(left axis)

Excessive reserves(right axis)

Excess reserves

Predictions are a linear extrapolation of now

•

What are the key future variables not seen?•

Commodities are traded in dollars including gold•

Dollar direction depends upon US and China•

US and China want growth and have a mandate to create it (not stability)

•

Their banks will debase both currencies and win the competitive

devaluation contest•

Gas will stay on floor too long igniting inflation

the global battle for commodities - milken...

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