Slide 1: Bull or Bear? The Great Debate Rahm vs. Jung
1 Bull or Bear? The Great Debate Rahm vs. Jung Mosaic AgCollege Orlando, FL January 12, 2016 Dr. Michael R. Rahm Vice President Market and Strategic Analysis Andy Jung Director Market and Strategic Analysis
Slide 2: Safe Harbor Statement
2 Safe Harbor Statement This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the Wa’ad Al Shamal Phosphate Company (also known as the Ma’aden joint venture), the
Slide 3: Course Description
3 Course Description Bull or Bear? The Great Debate Rahm vs. Jung This course pits Mosaic’s two veteran analysts in three informal and somewhat irreverent debates about the agricultural commodity, phosphate and potash outlooks. Based on a coin toss, one analyst will argue the bull case while the oth
Slide 4: Results from last year
4 Results from last year Bullish 37% Bearish 63% Agriculture Sentiment Bullish 35% Bearish 65% Potash Sentiment Bullish 55% Bearish 45% Phosphate Sentiment 225 250 275 300 325 350 375 400 425 450 Jan-15 Apr-15 Jul-15 Oct-15 $ ST P-K Prices fob NOLA Barge DAP Potash Source: Argus FMB8.00 8.25 8.50 8.
Slide 5: Debate: Agricultural Commodity Outlook
5 Debate 1 Agricultural Commodity Outlook
Slide 6: The Bull Case: Agricultural commodities are not iron ore
6 The Bull Case: Agricultural commodities are not iron ore (Six Minutes)
Slide 7: Agricultural commodities are not iron ore
7 Agricultural commodities are not iron ore 1. No structural imbalance – just weather driven volatility 2. Mother Nature may not be as kind 3. A great demand story: global use now matches the step-up in production 4. Minimal demand impact from current macroeconomic/political headwinds 5. The funds a
Slide 8: No structural imbalance – just weather driven volatility
8 No structural imbalance – just weather driven volatility Grain and oilseed prices have declined since 2014 Q1, but by much less than energy and metals prices. Fundamentals remain solid for most agricultural commodities. For example, the world excluding China will consume more grains and oilsee
Slide 9: Mother Nature may not be as kind
9 Mother Nature may not be as kind A wide range of outcomes are possible in 2016/17 depending on Mother Nature. A trend yield and 2% demand growth results in no stock change. 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 800 820 840 860 880 900 920 940 960 00 01 02 03 04 05 06 07 08 09 10 11 12 1314E15F MT/
Slide 10: Global use now matches the step-up in production
10 Global use now matches the step-up in production We expect a minimal demand impact from current economic headwinds and political uncertainties. Grain and oilseed demand increases at a fairly consistent rate. The rate typically slows only as a result of a smaller-than-expected harvest and run-
Slide 11: The funds are short
11 The funds are short -300 -200 -100 0 100 200 300 400 500 Jan '11 Jan '12 Jan '13 Jan '14 Jan '15 000's Contracts Source: CFTC Net Position of Managed Funds (Data through December 29, 2015) Corn Soybeans
Slide 12: The Bear Case: Still several worrisome developments
12 The Bear Case: Still several worrisome developments (Six Minutes)
Slide 13: Still several worrisome developments
13 Still several worrisome developments 1. Large stocks and prospects for another bumper crop in 2016 2. The strong dollar will continue to weigh on agricultural commodity prices 3. The new Argentine government has unlocked its large inventories 4. Policy changes are curbing China’s import appetite
Slide 14: Large stocks and prospects for another bumper crop
14 Large stocks and prospects for another bumper crop Global grain and oilseed inventories climbed to highest level ever recorded at the end of 2014/15. And stocks are projected to nudge higher in 2015/16. Oilseed inventories are at high levels. Upcoming crop prospects continue to look positive.
Slide 15: A strong dollar will continue to weigh on agricultural commodity prices
15 A strong dollar will continue to weigh on agricultural commodity prices There is a negative correlation between the value of the dollar and commodity prices. For highly traded commodities, a strong dollar increases export supply from non-U.S. producers and decreases import demand from non- U.
Slide 16: Argentina and China pose significant risks
16 Argentina and China pose significant risks China has built large corn inventories as a result of high domestic support prices. High domestic corn prices have caused record imports of corn substitutes such as DDGs and sorghum. China reduced its domestic corn price support 10% on September 18,
Slide 17: Continued fallout from energy and metals markets
17 Continued fallout from energy and metals markets Agricultural commodity prices are expected to continue to be negatively impacted by fallout from energy and metals markets. For example, corn and oil prices are positively correlated due to biofuels and other linkages. While there is significan
Slide 18: Your Vote: Agricultural Commodity Price Outlook
18 Your Vote Agricultural Commodity Price Outlook
Slide 19: Are you Bearish, Neutral or Bullish from current levels?
19 Are you Bearish, Neutral or Bullish from current levels? 1. Bearish 2. Neutral 3. Bullish
Slide 20: Debate: Phosphate Outlook
20 Debate 2 Phosphate Outlook
Slide 21: The Bull Case: Just seasonality not cyclicality
21 The Bull Case: Just seasonality not cyclicality (Six Minutes)
Slide 22: Just seasonality, not cyclicality
22 Just seasonality, not cyclicality 1. Profitable farm economics and affordability underpin solid demand prospects 2. Indian demand appears back on track 3. Supply outages at key facilities are expected to continue this year 4. Large Chinese tonnage will find homes again this year 5. Raw materials
Slide 23: Farmers understand the value of proper crop nutrition
23 Farmers understand the value of proper crop nutrition Our fertilizer affordability index shows phosphate fertilizers (relative to grain and oilseed prices) are in line with historical norms Farm economics for high-yield operations also appeared poised for improvement with lower input costs th
Slide 24: Indian demand appears back on track
24 Indian demand appears back on track, as long as government doesn’t drastically change subsidies Indian imports have surged thus far in 2015/16 - expected to finish the fertilizer year at circa 6 million tonnes… - …despite a second consecutive poor monsoon We anticipate that the distribution an
Slide 25: We expect a number of production outages around the world to persist in 2016
25 We expect a number of production outages around the world to persist in 2016 Map of world with highlighted countries describing facility restart GCT (Tunisia) rock production disruptions (~250k) Syrian war causes rock, and thus TSP disruptions (~150k) ICL (Israel) fire on superphos. production
Slide 26: Don't expect another increase in Chinese availability
26 Don’t expect another increase in Chinese availability Chinese commodity export volumes can go down as well as up - A recent (and related) example is Chinese phosphate rock exports - Peaked at nearly 5 million tonnes in 2001, but now are just ~300,000 tonnes per annum (a drop of over 90%) Lowe
Slide 27: Raw material costs could be at/near the bottom
27 100 150 200 250 300 350 400 09 10 11 12 13 14 15 $ ST Weekly DAP Stripping Margin Calculated from Published Spot Prices for a Central Florida Plant Source: Fertecon, Green Markets and Mosaic Raw material costs could be at/near the bottom, and stripping margins are exhibiting typical seasonal low
Slide 28: The Bear Case: Supply is inching ahead of demand
28 The Bear Case: Supply is inching ahead of demand (Six Minutes)
Slide 29: Supply is inching ahead of demand
29 Supply is inching ahead of demand 1. Less-profitable farm economics will constrain demand growth this year 2. Prospects in Brazil remain uncertain due to the economic/political situation 3. Record-shattering Chinese exports likely will continue in 2016 4. Fewer supply disruptions are expected thi
Slide 30: Farm economics are under strain
30 Farm economics are under strain US net cash farm income shows a precipitous 28% drop in 2015, to lowest level since 2009. US net farm income (which includes items such as depreciation) showed an even more substantial drop of 36% y- o-y, to the lowest level since 2006. Unsurprisingly, farm l
Slide 31: Brazil's uncertainties will continue to impede demand growth
31 Brazil’s macroeconomic and political uncertainties will continue to impede demand growth Corruption and macro issues persist - President Dilma impeachment saga continues - Corporate/government scandals continue - Exchange rate weakness, volatility and credit availability issues continue Throu
Slide 32: Chinese exports exceeded expectations once again in 2015
32 Chinese exports exceeded expectations once again in 2015 and could keep global supplies loose in 2016 Step-changes in Chinese high- analysis phosphate exports the past two years: - +52% in 2014 - +25% in 2015 (aided by removal of high-tax windows, replaced by a lower, year-round flat tax) Imp
Slide 33: Continued weakness in raw material costs could hold down phosphate prices
33 Continued weakness in raw material costs could continue to hold down phosphate prices Global ammonia prices continue to trade lower - Driven by lower oil/gas prices… - …as well as weaker supply/demand fundamentals - January ammonia (c&f Tampa) at $350/tonne is at a six-year low - With several n
Slide 34: Your Vote: Phosphate Price Outlook
34 Your Vote Phosphate Price Outlook
Slide 35: Are you Bearish, Neutral or Bullish from current levels?
35 Are you Bearish, Neutral or Bullish from current levels? 1. Bearish 2. Neutral 3. Bullish
Slide 36: Debate: Potash Outlook
36 Debate 3 Potash Outlook
Slide 37: The Bull Case: Fundamentals are stronger than current sentiment
37 The Bull Case Fundamentals are stronger than current sentiment (Six Minutes)
Slide 38: Fundamentals are stronger than current sentiment
38 Fundamentals are stronger than current sentiment 1. Less price pressure from the collapse of key potash currencies 2. Positive demand drivers and outlook 3. Supply and demand not grossly out of line 4. No major capacity additions in 2016 (including the K+S Legacy project) 5. No disruptive Canpote
Slide 39: Less price pressure from the collapse of currencies
39 Less price pressure from the collapse of currencies Two root causes of 2015 price decline First, the collapse of key potash currencies sharply reduced the cost of production for major exporters and significantly increased the price for key importers. This put strong downward pressure on the dol
Slide 40: Less price pressure from the collapse of currencies
40 Less price pressure from the collapse of currencies At the same time, the rate of inflation has picked up in several of these countries. In the case of Russia, inflation spiked to 11.4% in 2014 and to 13.5% in 2015. Inflation is expected to boost local costs and eventually offset some of the
Slide 41: Less price pressure from the collapse of currencies
41 Less price pressure from the collapse of currencies The combination of a slowdown in the rate of decline of the ruble and the steady decline in potash prices in 2015 has caused the ruble price to drop from its extraordinary peaks in late 2014. Higher ruble costs of production also will squeez
Slide 42: Positive demand drivers and outlook
42 Positive demand drivers and outlook Not the 2000s boom nor the 1980s farm crisis! 2016 new crop corn/soybean/HRW wheat prices continue to trade in a fairly narrow channel around $4/$9/$5 per bushel. Moderate crop prices plus lower energy and plant nutrient costs equals continued strong inpu
Slide 43: Positive demand drivers and outlook
43 Positive demand drivers and outlook The current soybean price is 35 reais per bushel, greater than the 2007/08 and 2012/13 Everest-like peaks! Despite credit issues and other uncertainties, we expect continued expansion of planted area and input use because the increase in real revenue from e
Slide 44: Positive demand drivers and outlook
44 Positive demand drivers and outlook Global MOP shipments surged 9 mmt to 63 mmt in 2014 for several reasons. We estimate that shipments dropped about 4 mmt to 59 mmt in 2015 due to a drawdown of channel inventories and less-than-expected demand in some countries. If on target, estimated shi
Slide 45: Supply and demand not grossly out of line
45 Supply and demand not grossly out of line We estimate that global operational capacity totals about 69 mmt this year and that shipments will rebound to 62 mmt or 90% of true capacity. Producers are optimizing operations to meet demand (e.g. Mosaic). No major capacity additions in 2016 (incl
Slide 46: The Bear Case: Still the same concerns
46 The Bear Case Still the same concerns (Six Minutes)
Slide 47: Still the same concerns
47 Still the same concerns 1. Continued price pressure from weak potash currencies 2. Still above-average inventories throughout the supply chain 3. Uncertain demand outlook due to the prospect of another step down in crop prices, lower farm income, and lack of credit 4. Chinese contract negotiation
Slide 48: Continued price pressure from weak potash currencies
48 Continued price pressure from weak potash currencies The local currency price of potash remains at near record levels in many key importing countries despite the large drop in the prices last year. Continued weak currencies coupled with other issues such as a lack of credit is expected to con
Slide 49: Uncertain demand outlook
49 Uncertain demand outlook Although global MOP shipments dropped last year, statistics and anecdotal evidence indicate that inventories likely are at above-average levels throughout the supply chain. In particular, visible Chinese inventories look well above-average due to a spurt of imports in
Slide 50: The perception of large excess capacity
50 The perception of large excess capacity Nearly all consultants show large excess potash capacity for the remainder of this decade. For example, CRU projects that MOP capacity will top 100 million tonnes by 2020 and demand will grow to a bit more than 72 million tonnes during the same period.
Slide 51: Your Vote: Potash Price Outlook
51 Your Vote Potash Price Outlook
Slide 52: Are you Bearish, Neutral or Bullish from current levels?
52 Are you Bearish, Neutral or Bullish from current levels? 1. Bearish 2. Neutral 3. Bullish
Slide 53: Three Market Questions
53 Three Market Questions
Slide 54: Question #1: Last fall's P&K application season in NA
54 Question #1 How would you rate last fall’s P&K application season in NA? 1. Far below average 2. Below average 3. Average 4. Above average 5. Far above average
Slide 55: Question #2: NA potash distribution channel stocks
55 Question #2 How well stocked is the NA potash distribution channel? 1. Far below average 2. Below average 3. Average 4. Above average 5. Far above average
Slide 56: Question #3: NA phosphate distribution channel stocks
56 Question #3 How well stocked is the NA phosphate distribution channel? 1. Far below average 2. Below average 3. Average 4. Above average 5. Far above average
Slide 57: Question #4: Concern about logistics this winter/spring
57 Question #4 Are you concerned about logistics this winter/spring? 1. No concern 2. Slightly concerned 3. Very concerned
Slide 58: Bull or Bear? The Great Debate – Thank You
58 Bull or Bear? The Great Debate Rahm vs. Jung Mosaic AgCollege Orlando, FL January 12, 2016 Dr. Michael R. Rahm Vice President Market and Strategic Analysis Andy Jung Director Market and Strategic Analysis Thank You for Your Business!