Macro and Agricultural Economic Outlook FCL 2017 Annual Meeting. Tanner Ehmke, Manager Knowledge Exchange Division

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1 Macro and Agricultural Economic Outlook FCL 2017 Annual Meeting Tanner Ehmke, Manager Knowledge Exchange Division

2 Today s presentation Macro Economy Agricultural Economy 2

3 The Market Cycle (we ve been here before ) 3

4 Commodity market realignment will continue to reflect the new realities of the global economy Indexes (2010=100) Factors that drove the previous decade have reversed: Slow and volatile growth in China Value of U.S. dollar remains historically strong despite weakening in 2017 Advanced economies facing subdued growth potential Aging population; Rising debt loads Emerging market growth slowed by market turmoil Global terrorism and geopolitical risks increasing Global commodity supplies are growing larger Unless Mother Nature intervenes we will remain in bottoming phase of commodity cycle! Rising Global Middle class Economic Turmoil Policy Realignment New normal zone? 25 0 Old normal zone Agriculture (all commodities) Source: World Bank 4

5 Growing U.S. economy + rising interest rates = stronger U.S. dollar and weaker ag commodity values Agriculture Index U.S. Dollar vs. Ag Commodities GSCI Ag Index DXY Index U.S. Dollar Stronger world economy, slow inflation, doubts over Fed rate hikes and political gridlock in the U.S. have weakened the US$ Source: Bloomberg 5

6 Global Economy: Optimism for growth in Percent change in annual world growt h ( purchasing- power parit y rat es) 6 Rising Middle Class Avg.=4.5% Economic Turmoil Avg.=3.9% Policy Realignment ??? Advanced countr ies Rest of wor ld China India

7 U.S. Economy: Current business cycle is second longest but under-performing compared to previous cycles Percent change from previous business cycle peak 50% ?? 38 qtrs (+52%) 40% 30% 36 qtrs (+35%) 42 qtrs (+41%) 20% 10% 0% 27 qtrs (+19%) 38 qtrs (+13%) -10% Number of quarters from previous peak and real growth during each business cycle

8 Unemployment rates continue to fall Source: Federal Reserve Bank of Richmond 8

9 U.S. economy is expected to grow through 2017 Percent change in quarterly Gross Domestic Product (Chained 2005$)* Annual average= 2.5% 1.6% 2.2% 1.5% 2.4% 2.4% 1.6% 2.2% % of U.S. economic growth comes from consumer spending: 1st qtr 0.7 % * S e a s o n a l l y a d j u s t e d a t a n n u a l r a t e 9

10 The Federal Reserve is slowly raising rates with at least 1 more rate hike of 25 basis points expected in 2017 Appropriate pace of policy firming: midpoint of target range or target level estimates of FOMC participants for federal funds rate at end of respective year (March 2017) Longer run The FOMC consists of twelve members--seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The additional possible dots are for seven presidents not on FOMC

11 Negative interest rates widen spreads with U.S. Treasury Yields, supporting the value of the US$ 2-year 10-year Spread Under/Over Country yields * yields* 2-year U.S. Treasury percent Basis points United States Germany France U. K Japan Switzerland Canada *As of August 9, 2017

12 USDA expects US$ to remain relatively strong through 2017 Source: USDA-ERS 12

13 Agricultural Economic Outlook Sources: UC Davis, NY Times, CoBank 13

14 Relative strength in the U.S. dollar is expected to continue weighing on U.S. export competitiveness Billion $ U.S. Agricultural Exports, Sugar and tropical products Horticultural products Livestock products Cotton, tobacco, and seeds Oilseeds and oilseed products Grains and feeds Source: USDA-ERS 14

15 Supply abundance continues to dampen commodity prices Source: Reuters - Minburn, Iowa, March 11,

16 Prices remain under pressure across the agriculture commodity sector $6 $4 $8 $2 $ Dollars per bushel (monthly prices received b y farmers, USDA) Dollars per bushel (monthly prices received b y farmers, USDA) $8.00 $10.00 $7.00 $6.00 $5.00 C o r n p r i c e $8.00 $6.00 W h e a t p r i c e $4.00 $3.00 $4.00 $2.00 $2.00 $1.00 $ $ Dollars per bushel (monthly prices received b y farmers, USDA) Cents per pound (monthly prices received by farmers, USDA) $ $16 $14 S o y b e a n p r i c e U p l a n d c o t t o n p r i c e $12 $

17 Farm cash receipts have fallen sharply Billion $ 450 Farm Cash Receipts F 2017F Meat Animals Feed Crops Oil Crops Poultry & Eggs Dairy Products & Milk Cotton, Tobacco, Other Crops Fruits & Nuts Vegetables & Melons Food Grains Source: USDA-ERS 17

18 F 2017F 2018F 2019F 2020F 2021F Farm expenses (cash rents) have been resilient, resulting in a steeper decline in net farm income. Billion $ Farm Income & Expenses -17% % -50% Gross Farm Income Production Expenses Net Farm Income Source: USDA-ERS Long-Term Agricultural Projections, Feb

19 Farm financial stress ripples through the supply chain Million $1.6 Net Operating Profit CoBank s Farm Supply Customers (Average) $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $ Source: CoBank ACB 19

20 Total ag machinery sales are improving Source: Association of Equipment Manufacturers 8/21/

21 Not all machinery sales, though, have improved June YTD- June Beginning Inventory %Chg %Chg Jun-17 2WD Farm Tractors < 40 HP 16,270 14, ,843 70, < 100 HP 5,842 5, ,556 27, , HP 1,335 1, ,394 9, ,146 Total 2WD Farm Tractors 23,447 22, , , ,577 4WD Farm Tractors ,029 1, Total Farm Tractors 23,607 22, , , ,331 Self-Prop Combines ,670 1, Source: Association of Equipment Manufacturers 8/21/

22 Farmland values are driven by net farm income. Net Farm Income (Billion $) Net Farm Income vs. Farmland Net Farm Income Farmland Farmland ($/Acre) 3,500 3, , , , , Source: USDA-ERS 22

23 Land values are lower in the Corn Belt and Northern Plains. $/Acre 7000 Cropland Values By Region 0 Appalachian Corn Belt Delta Lake Mountain Northeast Northern Plains Pacific Southeast Southern Plains Source: USDA-ERS 23

24 Land values have not dropped significantly in the past year. 8/21/

25 Fed data show similar regional trends in land values Source: Federal Reserve District Agricultural Credit Surveys 25

26 F With farm incomes dropping, the growth of farm debt when adjusted for inflation has accelerated. Billions ($2009) Farm Sector Debt Total Farm Sector Debt Real Estate Debt Non-Real Estate Debt Source: USDA-ERS 26

27 F 2018F 2020F Farm debt-to-asset ratio is expected to grow. Rising interest rates will add further stress for borrowers % U.S. Farm Debt-to-Asset Ratio % 13.9% 5 Historical Projection A Projection B 0 Source: USDA-ERS; Federal Reserve Bank of Kansas City 27

28 Interest rates on farm loans are creeping higher Source: Federal Reserve Bank of Kansas City 28

29 Farm Loans (non-real estate) in first half of 2017 Source: Federal Reserve Bank of Kansas City 29

30 Farm loan delinquency rates are rising Source: Federal Reserve Bank of Kansas City 30

31 Ag credit conditions vary by Federal Reserve districts Source: Federal Reserve Bank of Kansas City 31

32 F 2017F Debt-to-income ratio is a leading economic indicator. Ratio Farm Debt-to- Income Increased Ahead of the 1980 s Farm Crisis Farm Debt-to-Income Will Be a Critical Period Source: USDA-ERS; CoBank Knowledge Exchange 32

33 Good news: Cash rents are falling faster Source: Federal Reserve Bank of Chicago 33

34 Growth of total farm debt outstanding is slowing Source: Federal Reserve Bank of Kansas City 34

35 2000/ / / / / / / / / / / / / / / / / /18 Global demand base for ag commodities continues growing Billion MTs World Consumption of Major Ag Commodities Corn Fluid Milk Beef Pork Soybeans Chicken Wheat Source: USDA-FAS 8/21/

36 Opportunities remain strong in emerging economies Beef, Pork & Poultry Production Source: USDA-ERS 36

37 Summary Global commodity oversupply and a historically strong dollar have weighed on commodity prices The agricultural economy and rural communities are under stress Rising interest rates will add further stress to borrowers. Higher debt levels in agriculture will become a bigger concern Long-term trends are in agriculture s favor Discipline with cost, productivity and marketing is essential for survival Survivors of the cyclical downturn will profit long term 37

38 Questions Presentation by: Tanner Ehmke, Manager, Knowledge Exchange Division, CoBank Office: (303)

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