Global Commodities Research

JPMorgan Chase Bank, NA

April 29, 2011

Agriculture
Agriculture Weekly
Weekly
The “hidden” cost of water adds to food inflation

Meat and grain production will be key drivers of global
demand for water over the next decade: We project the global water
footprint for poultry will rise to 389.5 billion liters/year by 2020 from 296.4
billion liters today (+31.4%) while water used to produce corn will require
844.9 billion liters by 2020 from 733.4 billion liters today (+15.2%).

Water resources are unevenly distributed: Only 2.5% of the
world’s water is freshwater and, of that, less than 31% is available for use
in agriculture, power generation, and other industrial uses, according to the
UN. The biggest imbalance is in Asia, which supports 60% of the world’s
population with only 36% of the world’s freshwater resources.

Weather volatility is increasing stress on water supplies:
Deviations from normal precipitation and temperature have been impacting
the availability and predictability of hydropower, water resources for crop
irrigation, and natural gas pricing. These uncertainties raise transaction
costs in food production and distribution channels.
Projected median temperature and precipitation changes for the western US
Temperature (left) in degrees Fahrenheit, precipitation (right) in percent
Forecast of median changes from 112 climate projections (2070-2099 relative to 1950-1979)

Colin P. Fenton
(212) 834-5648
colin.p.fenton@jpmorgan.com

Jonah D. Waxman, CFA

(212) 834-2203
jonah.d.waxman@jpmorgan.com

Elizabeth M. Volynsky
(212) 834-4021
elizabeth.m.volynsky@jpmorgan.com
Source: US Department of the Interior Bureau of Reclamation

See end pages for important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do business with companies covered in its research reports.
As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in
making their investment decision.
As
As global
global consumption
consumption of of grains
grains and
and meats
meats increases,
increases, so
so will
will the
the strain
strain on
on water
water resources.
resources. We We project
project that
that global
global demand
demand forfor water
water toto
meet
meet expected production of eight key agricultural commodities will increase to 6,091 billion liters per year by the end of this decade, from
expected production of eight key agricultural commodities will increase to 6,091 billion liters per year by the end of this decade, from
5,395
5,395 billion
billion liters
liters today.
today. Among
Among these
these commodities,
commodities, the
the fastest
fastest driver
driver of
of growing
growing global
global demand
demand forfor water
water over
over the
the next
next decade
decade will
will likely
likely
come from poultry, compounding at 3.1%/year, followed by beef (+1.8%/year) and corn (+1.6%/year). China’s
come from poultry, compounding at 3.1%/year, followed by beef (+1.8%/year) and corn (+1.6%/year). China’s annual demand for water annual demand for water
from
from poultry,
poultry, beef,
beef, and
and corn
corn will
will likely
likely compound
compound by by 2.6%,
2.6%, 2.3%,
2.3%, andand 1.8%,
1.8%, respectively,
respectively, over
over the
the next
next 10
10 years.
years. In
In the
the US,
US, poultry
poultry isis
again
again the largest agricultural contributor to freshwater use (+3.0%/year), followed by corn (+1.8%/year). To meet poultry growth, India,
the largest agricultural contributor to freshwater use (+3.0%/year), followed by corn (+1.8%/year). To meet poultry growth, India,
heavily
heavily reliant
reliant on
on the
the monsoon,
monsoon, will
will likely
likely consume
consume 22.3
22.3 billion
billion liters
liters of
of water
water per
per year
year by
by 2020
2020 (more
(more than
than double
double current
current levels).
levels).
Weather volatility is straining water resources: Earlier this week, the some form of conflict, according to the UN. One metric that can help
US Department of the Interior’s Bureau of Reclamation released a report identify stress points is the FAO’s water dependency ratio, which
entitled “Reclamation: Managing Water in the West” highlighting the examines a country’s reliance on water from external sources (i.e.,
risks to water resources in the western US from projected climatic rivers originating in another country) and renewable sources (i.e.,
variation over the balance of this century. The report's key conclusions: rainfall). Egypt, for example, has a water dependency ratio of nearly 97
(1) The western US may experience mean temperature increases of percent because only a portion of the Nile flow is accessible to Egypt
between 5-and-7 degrees Fahrenheit in the latter half of the 21st century, via treaty.
(2) precipitation is projected to increase in the northwest and north-
Implications for risk and valuation: Egypt’s rice crop relies on
central parts of the western US, accompanied by a decrease in precip in
irrigation, and rice has a far greater water consumption footprint than
the southwest and south-central regions; and (3) changes in temp and
soybeans, wheat, corn, and sorghum. Egypt decided to limit total rice
precip, should they follow the projection, would lead to a loss of
area harvested to 450 thousand hectares this year, a direct result of
snowpack in the western US.
concerns about water shortages, according to the USDA. This marks a
For California’s Sacramento and San Joaquin River basins, the 33% cut from prior acreage levels. By our calculations, this reduction in
Reclamation study estimates that mean annual temperature will increase crop area will save Egypt 3.96 billion liters of water this crop year.
by 1.3°F in the 2020s, by 3.1° in the 2050s, and by 4.3° in the 2070s, However, there is a meaningful cost in crop production. As Egypt
relative to 1990 levels. Over the same interval, annual average precip, grapples with ongoing food price inflation, the country’s rice stocks will
relative to the 1990 baseline, decreases in the model projection from – likely cover just 19 days of domestic consumption at the end of the
0.73 inches to –5.4 inches. Meanwhile, the mean snow water equivalent current crop year, the lowest level in nearly 15 years.
accumulation by April 1st falls by 40%-to-70% from 1990 levels. The
We lift our corn price forecast and roll our long position: Corn
projected warming trend, combined with the decrease in precip, would
prices have been even stronger than our bullish expectations, and the
also reduce runoff and deplete available water resources in California’s
May-11 CBOT contract has gained by more than 18% since our Feb 8,
agriculture belt. Major climate events—including drought, El Niño, or La
2011 recommendation to buy it. Delayed plantings and potential yield
Niña—will exacerbate these stresses. Moreover, this issue is global. Dow
stress for the new US crop have been tempered over the past few days
Jones reports that China’s National Bureau of Statistics estimates China’s
by weak export sales, but the key fundamental drivers remain in place:
water resources have fallen by 13% over the last decade.
(1) China will need more corn imports in the upcoming crop year to
Counting water as a strategic resource: As governments evaluate food feed its large hog population; (2) the US will struggle to rebuild stocks
security risks in light of foreign acquisitions of strategic resources, materially from currently low levels due to demand for exports, ethanol,
including farmland, water resources will likely take on an increasingly and feed; and (3) transportation costs will be a much bigger factor
focal role, especially for countries that have fewer water resources. There heading into 3Q2011. These factors lead us to raise our price forecasts
have been more than 1800 international interactions over water resources and use this opportunity to harvest gains on our long corn trading
during the past 50 years, with about one-third of these events entailing recommendation, rolling into the Jul-11 CBOT corn contract.

2
 Structural
Structural constraints
constraints in
in water
water will
will increase
increase food
food price
price volatility
volatility
Global
Global water
water consumption
consumption for
for agriculture
agriculture US
US water
water consumption
consumption for
for agriculture
agriculture Liters
Liters ofof water
water required
required to
to produce
produce one
one
Billions of liters
Billions of liters Billions of liters
Billions of liters liter of biofuel by source crop
liter of biofuel by source crop

7000 Corn Beef Pork Forecast 1200 Corn Beef Forecast 12,000 10,000
Pork Soy bean
6000 Soy bean Chicken Rice Chicken Rice 10,000
1000
Sorghum Wheat Sorghum Wheat 8,000
5000
800 6,000 3,330
4000 4,000 2,000 2,250 2,360
600 786 1,360
3000 2,000
400 0
2000

Sugar beet*

Palm oil
Sugarcane*

Maize*
Cassava

Soybean
Rapeseed
1000 200
0 0
1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019
Ethanol Biodiesel

Source: USDA, FAO, UN, The World Bank, J.P. Morgan Commodities Research Source: USDA, FAO, UN, The World Bank, J.P. Morgan Commodities Research Source: United Nations. *Can require an additional 500-1000 liters of irrigated water per liter of fuel

China
China water
water consumption
consumption for
for agriculture
agriculture India
India water
water consumption
consumption for
for agriculture
agriculture Global
Global breakdown
breakdown of
of freshwater
freshwater use
use by
by
Billions of liters
Billions of liters Billions of liters
Billions of liters sector, percent
sector, percent

1400 Corn Beef Forecast 600 Corn Soy bean Rice Forecast Power, 11%
Pork Soy bean
1200 Chicken Rice 500 Sorghum Wheat Chicken Agriculture,
Sorghum Wheat Domestic and
1000 67% other industrial,
400
800 19%
300
600
200
400 Evaporation,
200 100 3%
0 0
1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019
Power Domestic and other industrial Evaporation Agriculture

Source: USDA, FAO, UN, The World Bank, J.P. Morgan Commodities Research Source: USDA, FAO, UN, The World Bank, J.P. Morgan Commodities Research Source: World Bank

3
 Rising
Rising shipping
shipping and
and transport
transport costs
costs will
will drive
drive ag
ag prices
prices higher
higher
Shanghai
Shanghai port
port container
container throughput
throughput Baltic
Baltic Dry
Dry Index
Index US
US grain
grain transportation
transportation cost
cost indicator
indicator
Thousand TEUs
Thousand TEUs January
January 4,
4, 1985
1985 =
= 1000
1000 Index
Index base year 2000 = 100
base year 2000 = 100

3000 14000 1200 Truck Rail Barge Ocean

12000 1000
2500 10000 800
8000 600
2000
6000 400
1500 4000
200
2000
0
1000 0

Oct-09

Dec-09

Oct-10

Dec-10
Feb-10

Apr-10

Jun-10

Aug-10

Feb-11
2000

2002

2004

2006

2008

2010
2006 2007 2008 2009 2010 2011

Source: Bloomberg Source: Bloomberg Source: USDA

Singapore
Singapore port
port container
container throughput
throughput Hong
Hong Kong
Kong port
port container
container throughput
throughput Bunker
Bunker fuel
fuel prices
prices by
by location
location (IFO
(IFO 180)
180)
Thousand TEUs
Thousand TEUs Thousand TEUs
Thousand TEUs US$/metric tonne
US$/metric tonne

3000 2400 $1,000

Hong Kong Hamburg New York
2200
$800
2500 2000
1800 $600
2000
1600 $400
1500 1400
$200
1200
1000 1000 $0
2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Maritime and Port Authority of Singapore Source: Hong Kong Maritime Industry Council Source: Bloomberg

4
 Stronger-than-expected
Stronger-than-expected price
price momentum
momentum lifts
lifts our
our corn
corn forecast
forecast
Tracking
Tracking changes
changes in
in the
the CBT
CBT corn
corn Level
Level of
of ethanol
ethanol blending
blending in
in the
the US
US Rolling
Rolling prompt
prompt CBT
CBT corn
corn vs
vs JPM’s
JPM’s
forward
forward curve through time, US
curve through time, US cents/bu
cents/bu Percent
Percent 2Q2011
2Q2011 price forecast, US cents/bu
price forecast, US cents/bu

750 1000
9.4%
700 22-Apr-11
800
650 9.2% 8.9%
600 9.0% 600
550 8.8% 400
500
8.6% 200
450
400 8.4% 0
Dec-10

Dec-11

Dec-12

Dec-13

Oct-10

Dec-10
Apr-11

Aug-11

Apr-12

Aug-12

Apr-13

Aug-13

Apr-14

Sep-10

Jan-11

Feb-11

Mar-11

Apr-11
Nov-10
8.2%
8.0%

Jun-10

Jul-10

Oct-10

Nov-10

Dec-10

Jan-11
Aug-10

Sep-10

Feb-11

Mar-11

Apr-11
30-Sep-10 31-Dec-10 31-Mar-11 28-Apr-11 Prompt CBT corn JPM 2Q2011 Forecast

Source: CBT, J.P. Morgan Commodities Research Source: EIA, J.P. Morgan Commodities Research Source: CBT, J.P. Morgan Commodities Research

Corn
Corn plantings
plantings progress
progress in
in the
the US
US Ethanol
Ethanol blending
blending profitability
profitability in
in the
the US
US JPM
JPM monthly
monthly corn
corn price
price forecast
forecast
Percent planted
Percent planted US$ per gallon
US$ per gallon US cents per bushel
US cents per bushel

50 46 $0.20 28-Apr-11 800

$0.16
40 700
$0.15
600
30 23 $0.10 500
20
9 $0.05 400
10 300
$0.00
0 200
Oct-10

Dec-10
Apr-10

Jun-10

Aug-10

Feb-11

25-Apr-11 24-Apr-10 Fiv e-y ear av erage 2008 2009 2010 2011 2012

Source: USDA Source: DTN Energy, Bloomberg, J.P. Morgan Commodities Research Source: USDA, DOE, NOAA, Federal Reserve, IEA, Bloomberg, J.P. Morgan Commodities Research

5
 Forecasts
Forecasts and
and trading
trading recommendations
recommendations
J.P. Morgan Agricultural Commodity Price Forecasts
2010 2011E 2012F
2010 2011E 2012F
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Wheat (US$/bu) 4.96 4.67 6.53 7.07 5.82 7.93 8.70 8.85 9.20 8.65 9.40 9.85 10.20 10.30 9.95

Corn (US$/bu) 3.70 3.55 4.22 5.62 4.28 6.70 7.30 7.10 6.90 7.00 7.25 7.60 7.15 6.45 7.10

Soybeans (US$/bu) 9.55 9.57 10.35 12.45 10.49 13.83 14.95 14.85 15.45 14.80 15.45 14.75 14.50 14.90 14.90

Soybean Oil (US cents/lb) 38.59 38.12 40.25 50.96 42.03 56.98 57.05 62.40 63.95 60.10 65.50 61.30 59.00 59.35 61.30

Soybean Meal (US$/short ton) 278.0 280.8 304.9 338.1 300.8 367.2 365.4 373.8 368.7 368.8 379.9 382.0 378.6 343.2 370.9

S&P GSCI Agriculture Spot Price Index 326.7 299.6 365.2 458.7 363.0 531.2 558.9 586.4 567.6 561.0 567.5 586.9 591.3 583.6 582.3

Active Trading Recommendations

Change since
Marked as of: 28-Apr-11 Date of recommendation Cost* Last closing price recommendation
Long May-11 CBT Corn 8-Feb-2011 608.50 723.00 18.8%
Roll into Jul-11 CBT Corn 29-Apr-2011 729.25

Long Nov-11 CBT Soybean 8-Feb-2011 1366.00 1337.75 -2.1%

Long May-11 CBT Wheat 8-Feb-2011 890.50 743.00 -16.6%

Long Dec-11 CMX Gold 25-Feb-2011 1421.10 1534.70 8.0%
Long Jul-11 LME Copper 14-Jan-2011 9585.00 9321.00 -2.8%
Set stop at $8915/mt

Short Jul-11 LME Zinc 14-Jan-2011 2481.00 2245.50 10.5%

Long May-11 ICE Gasoil 11-Apr-2011 1048.25 1038.25 -1.0%
Long CY2013 Brent call options ($125) 23-Feb-2011 7.30 12.47 70.8%
Long S&P GSCI Total Return 30-Sep-2010 4303.80 5700.70 32.5%
Long S&P GSCI Enhanced TR 30-Sep-2010 621.52 832.99 34.0%
Long JPM Commodity Curve TR 30-Sep-2010 443.75 574.85 29.5%

Source: Exchanges, J.P. Morgan Commodities Research. *Unit cost is the official close on the day before the date of publication.

6
 Colin P. Fenton, Head of Global Commodities Research and Strategy
colin.p.fenton@jpmorgan.com
(1-212) 834-5648

Oil
Oil Metals
Metals
Lawrence E. Eagles Michael J. Jansen
(1-212) 834-8107 (44-20) 7325-5882
lawrence.e.eagles@jpmorgan.com michael.j.jansen@jpmorgan.com

David G. Martin
(44-20) 7777-0211
Power
Power
david.g.martin@jpmorgan.com
Peter K. Nance
Jeff G. Brown (1-713) 236-3337
(65) 6882-2215 peter.k.nance@jpmorgan.com
jeff.g.brown@jpmorgan.com
Agriculture
Agriculture and
and Strategy
Strategy
Ryan F. Sullivan
(1-212) 834-3935 Jonah D. Waxman, CFA
ryan.f.sullivan@jpmorgan.com (1-212) 834-2203
jonah.d.waxman@jpmorgan.com
Natural
Natural Gas
Gas Elizabeth M. Volynsky
Scott C. Speaker (1-212) 834-4021
(1-212) 834-3878 elizabeth.m.volynsky@jpmorgan.com
scott.c.speaker@jpmorgan.com

Shikha Chaturvedi
(1-212) 834-3245
shikha.x.chaturvedi@jpmorgan.com

7
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