21 st Century Global Agricultural Challenges

1. 21st Century Global Agricultural Challenges 21st Century Beef Club Moline, IL J.B. Penn Chief Economist Deere & Company August 13, 2008 21st Century Beef Club

2. 21st Century Global Agricultural Challenges 21st Century Beef Club

3. The Global Food and Agriculture System The 21st Century Challenges: • Feed a growing, more prosperous world – and hopefully better than we have in the past • Increase food output 50% by 2025 • More than double by 2050 • Contribute to national energy security in many countries • Preserve/enhance the environment • Maintain the rural cultural heritage With these constraints: • While using the same or fewer resources • And, do this against t he backdrop of global climate change! 21st Century Beef Club

4. Global population growth 9.2 8.0 Billions 21st Century Beef Club Source: United Nations, 2006

5. Population growth by 2025 Distribution by region -1% 4% 56% 32% 8% 21st Century Beef Club Source: UN, 2005

6. Population growth by 2050 Distribution by region -2% 4% 50% 40% 8% 21st Century Beef Club Source: UN, 2005

7. Unprecedented global prosperity World GDP growth Annual % Change 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

8. Growth most rapid in developing countries World GDP growth Annual % Change 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

9. Africa finally emerges GDP growth Annual % Change Greater political stability and commodities boom contributing 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

10. Brazil finally emerges GDP growth Annual % Change Performing well recently although still below expectations 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

11. Russia now stable, growing steadily GDP growth Annual % Change Strong sustained growth – boosted by commodities boom 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

12. India’s growth continues GDP growth Annual % Change Policy reforms of early 1990’s now yielding results 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

13. Indonesia steady and stable GDP growth Annual % Change After tumultuous period, now growing steadily 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

14. China’s economic miracle continues GDP growth Annual % Change Concerted efforts to slow growth a bit 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

15. EU mixed performance continues GDP growth Annual % Change Growth slowing after strong period 21st Century Beef Club Source: International Monetary Fund (IMF), World Economic Report, Apr. 2008

16. U.S. Economy GDP growth Quarterly % Change How low, for how long? 21st Century Beef Club Source: Global Insight, 31July2008

17. Additional GDP growth by 2025 Distribution by Region 17% 27% 44% 4% 9% 21st Century Beef Club Source: Global Insights (GDP forecast) and Internal Calculations, April 2008

18. Dynamics of food demand >$10 per day Services $2-10 per day Processed Products $1-2 per day 27% of world’s population (Most hunger problems solved at $2 threshold) Livestock products 20% of world’s population (2/3rds experience hunger & malnutrition) < $1 per day Commodities 21st Century Beef Club

19. New Zealand US Spain Canada Argentina Germany Brazil UK Switzerland China Mexico Russia Japan South Africa Philippines Thailand India Diets change with rising incomes Income and meat consumption Per Capita Income (000 US$) 21st Century Beef Club Source: FAO

20. Renewable fuel • Many national governments are adding a new task for the agriculture system: help increase energy security • Driven by varied objectives: • Reduced foreign energy dependence • Environmental enhancement • Rural development – farm support • Directed by public policy (subsidies, mandates, R&D investment, tariffs) 21st Century Beef Club

21. The global biofuels industry • US, Brazil and EU account for 90% of production • Global production has tripled since 2000 • Capacity & demand projected to double by 2015 • Thirty (30) countries have programs – Intensifying competition for resources 2007 Production = 10.4 Billion Gallons 21st Century Beef Club Source: USDA, IFP (Innovation, Energy, Environment), RFA

22. U.S. Ethanol industry Current capacity and future growth • By end of 2008, US capacity = 13.6 BGY • 147 plants in operation • 55 plants under construction • 6 plant expansions • New Congressional mandate provides stimulus for advanced ethanol 1.4 BGY more capacity required 36 BGY total ethanol capacity by 2022 21 BGY Advanced Mandated by 2022 15 BGY total starch capacity by 2015 13.6 BGY 21st Century Beef Club Source: RFA,

23. U.S. Corn Used for Ethanol 15 Billion Gallons of Corn Ethanol will require 5.6 Bushels of Corn 21st Century Beef Club Source: USDA WASDE, Apr. 2008 *Estimates

24. The environmental challenge • Protect the natural resource base • Prevent degradation of the land • Improve air quality • Develop more efficient water use, improve quality • Improve wildlife habitat • Avoid biodiversity loss • Cultural protection aspect (viewscapes, farm structure, practices) • Post-Industrial Challenge: increase productivity - reduce intrusion 21st Century Beef Club

25. Growing resource constraints Produce more with less…Land| Water | Labor • Much of world’s total arable area already in use – the most fertile requiring least investment • Most remaining land has serious soil and terrain constraints • Some covered in forests, in protected areas • Characteristics difficult for agriculture – low soil fertility, high toxicity, hilly and other difficult terrain – human and animal disease, poor infrastructure • Most located in Africa and Latin America (70% suffers soil and terrain constraints) • Further expansion is controversial – could jeopardize fragile lands • Will require considerable capital investment 21st Century Beef Club Source: FAO

26. Growing resource constraints Produce more with less…Land| Water | Labor Most populous countries have least room to expand Arable Land (ha) per person Hectare of Arable Land 21st Century Beef Club Source: UN and FAO, 2005

27. Growing resource constraints Produce more with less…Land| Water | Labor • 70% of world’s freshwater is used by agriculture • 90% in India and China • 30 developing countries already facing growing water shortages • Water and population unevenly distributed – by 2025: • 1.8 bil. people will live in areas with absolute water scarcity • 2/3rds of world population will live in ‘water-stressed’ areas • Rainfed agriculture practiced on 80% of cultivated land – accounts for 60% of world’s food • Irrigation can increase yields of most crops two-to-four fold • New irrigation technologies can reduce water use 30% to 60% over surface irrigation 21st Century Beef Club Source: UN-Water and FAO

28. Growing resource constraints Produce more with less…Land| Water | Labor Amount of water required for: 10X more water needed to raise 1 pound of beef than 1 pound of wheat One pound of beef 1800 gallons One pound of wheat 180 gallons 0.25 – 0.6 gallons Daily drinking requirements 21st Century Beef Club Source: UN-Water and FAO

29. Growing resource constraints Produce more with less…Land| Water | Labor • Farm demographics (aging) and migration to cities importantly influence agricultural labor availability • High-tech machines, complex production processes and strict production regulations require skilled labor • Tighter restraint on immigration encourages mechanization, innovation – affects capital requirements 21st Century Beef Club Source: UN-Water and FAO

30. Growing resource constraints Produce more with less…Land| Water | Labor Labor shortage looms in most developed regions Worldwide labor supply (millions), Forecast for 2020 21st Century Beef Club Source: BCG Analysis, US Census Bureau

31. The backdrop of climate change • Expected effects of climate change amplify the agricultural challenges – and create some opportunities • Agriculture accounts for 20-30% of GHG emissions – will be affected by mitigation and adaptation strategies • Emission reductions, energy use efficiency, land inundation, changed practices, carbon sequestration… 21st Century Beef Club Source: Intergovernmental Panel on Climate Change (IPCC), World Bank

32. The backdrop of climate change • Effects on the food supply • Drier parts of the world get drier, wetter parts get wetter • Sea level rises (0.3 to 2.8 feet) by 2100, more cyclones, more frequent hot days • Tropical food crop yields decline – temperate crop yields rise at first, then decline • Pests increase, reducing output, raising costs • Equity Issues • Disproportionate effect on agricultural productivity in lower latitudes – where most of the world’s poor live 21st Century Beef Club Source: Intergovernmental Panel on Climate Change (IPCC), World Bank

33. The backdrop of climate change • Wide variety of policies and instruments available to governments to create incentives for mitigation action • Current stage: determining how best to deal with this pervasive market failure – the appropriate role of government (multilateral and national) • Agriculture progress possible through technologies now available or expected in coming years • Afforestation of pastureland, cropland and forest management • Conservation tillage (no-till), winter cover crops • New crops – heat, salt resistant, survive droughts and floods • Improved fertilizer management (manure management) • Possible opportunities for Ag in carbon markets – create offsets 21st Century Beef Club

34. Increased importance of innovation/productivity growth • Proved Malthus wrong for over 200 years – with new technological advancements – can we continue to do it? • Long-term productivity growth trend is 2.7% (US) - will need much faster rate in future • Developing country growth trend has been far slower – must accelerate worldwide to double output on same land base 21st Century Beef Club Source: FAO and USDA

35. The global agricultural plant - today Consumption outpaced production in six of last eight years. Coarse Grains Million Metric Tons 21st Century Beef Club Source: USDA, July 11 2008

36. Global agricultural plant – production strained Physical stocks at “pipeline” level 59 days of supply in the pipeline (%) Million Metric Tons Coarse Grains 21st Century Beef Club Source: USDA, July 11, 2008

37. Brings together visionary companies and organizations committed to sustainably and responsibly improving diets and reducing dependence on fossil fuels through agricultural productivity advances worldwide • Can meet growing demand for food, fuel and fiber. Reject falsity of “either/or” choices • Confidence in ability to increase productivity in farming and across the value chain to meet future needs in a sustainable manner • Inform the discussion through credible fact- and science-based education, information and advocacy • Improve understanding of agriculture’s ability to fulfill the promise of improved diets and better fuels in the future 21st Century Beef Club

38. Policy drivers • Global Trade increasingly important – disparity between food production and consumption • Multilateral – regional - bilateral • Doha – What follows? • New issues • Export controls • Non-economic barriers • Farm Policies (US / EU / elsewhere) • Evolution – subsidies not sustainable • Shifting focus (revenue insurance, etc.) • Immigration • Response to demographic shifts • Affects competitiveness balance/capital requirements 21st Century Beef Club

39. Policy drivers • Climate Policy • National/Multinational action coming – approach? • Impact on customer base/competitiveness • Carbon markets – Ag & Forestry? • Energy Policy • Renewables – sustainable? • Advanced renewables • Petroleum prices 21st Century Beef Club

40. Policy drivers • Financial Services industry • Interest Rate environment • Credit crunch • Regulation • National Politics • U.S. Politics • Elections – Congress, White House • Economic Policy directions • Indian/Brazilian Elections • Chinese Transition • Other 21st Century Beef Club

41. Final comments • Longer term business backdrop likely to be much different • Pace of global economic growth is key • Growing global emphasis on agriculture/infrastructure • System struggling for awhile – market volatility • Productivity growth (technology) critical • Presents opportunities • Growing globalization (despite current sentiments) • Production facilities location • Customer base expanding • Product trade (food, fuel, forestry) expanding • Technology dissemination emphasis • Growing importance of policy drivers • Premium on greater agility/flexibility • Plus hangover effect of past bad policies (energy, food) 21st Century Beef Club

42. 21st Century Global Agricultural Challenges 21st Century Beef Club Moline, IL J.B. Penn Chief Economist Deere & Company August 13, 2008 21st Century Beef Club