Agriculture and the Economy: A View from the Chicago Fed

Size: px

Start display at page:

Download "Agriculture and the Economy: A View from the Chicago Fed"

Alexander Hardy
5 years ago
Views:

1 Agriculture and the Economy: A View from the Chicago Fed March 3, 2016 Riverside, Iowa David Oppedahl Senior Business Economist david.oppedahl@chi.frb.org

2 Federal Reserve System Twelve District Banks Board of Governors Federal Open Market Committee (FOMC) Functions of the Fed Monetary policy Commercial bank regulator Provides banking services for U.S. government Electronic funds transfer Currency distribution

3 Federal Reserve System

4 Chicago Fed National Activity Index shows hesitant growth since (standard deviation from trend growth, 3-month moving average) Above Trend Growth Below Trend Growth '01 '03 '05 '07 '09 '11 '13 '15

5 In December 2016, the FOMC raised the Fed Funds rate target to a range from 0.25% to 0.50% 7 6 Federal Funds Rate (effective), Yields in percent per annum '01 '03 '05 '07 '09 '11 '13 '15

6 Quantitative easing was necessary

7 Recent Monetary Policy Actions Tapering of asset purchases began in December 2013 No additional asset purchases after November 2014, while continuing to reinvest assets as they mature Raised the range of Fed Funds Rate by 0.25% points and indicated future increases would be gradual The FOMC will monitor economic conditions to tailor future actions to meet objectives of maximum employment and 2% inflation

8 Food price increases now below core inflation (less food and energy) 8 (Consumer Price Index, percent change from year ago) CPI Less Food and Energy CPI for Food

9 Oil prices plummeted and lower gas prices boosted consumer saving/spending (2010 $/barrel)

10 Natural gas prices are low too 15 Real Natural Gas Price {2010 $/mmbtu}

11 The FOMC anticipates that PCE inflation will reach two percent by 2018

12 Unemployment has fallen from its peak (civilian unemployment rate, percent SA) '01 '03 '05 '07 '09 '11 '13 '15

13 The FOMC forecasts that the unemployment rate will be at the natural rate by the end of 2016

14 The FOMC expects GDP to grow above its trend in 2016

15 Contributions to real GDP growth of 1.0% in the 4th quarter of 2015 Consumption 1.4% Residential Investment 0.3% Business Investment -0.2% Inventories -0.1% Government 0.0% Net Exports -0.3%

16 Housing market tanked and moving up from bottom Housing starts (millions of units, 3-month moving average, SAAR) 2.5 Home mortgage rate (percent, effective rate for all loans closed) '01 '03 '05 '07 '09 '11 '13 ' '01 '03 '05 '07 '09 '11 '13 '15

17 Manufacturing is moving sideways; orders for capital goods moving up again ISM purchasing managers index (net percent reporting increase) 65 Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average) '01 '03 '05 '07 '09 '11 '13 ' '01 '03 '05 '07 '09 '11 '13 '15

18 The dollar s exchange value peaked in 2002, before falling below earlier range and rallying 120 (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100}

19 U.S. exports lower than in recent years (billions of 2015$, SA) Exports Imports

20 Why is the Chicago Fed interested in Agriculture? Important portion of District economy Wide geographic impact Backbone of economy Leading farm states Manufacturing of food and bioproducts Jobs Income Impact on commercial banks Response to stakeholders

21 billion $ Value of agricultural exports expected to slide in Exports Imports Surplus FY * (*USDA projection)

22 billion bushels Corn production forecast: 3 rd highest on record /92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*

23 billion bushels Growth in industrial demand (especially for ethanol production) surpassed feed demand for corn 8 Food, Seed & Industrial 6 4 Residual & Feed 2 Exports /91 93/94 96/97 99/00 02/03 05/06 08/09 11/12 14/15

24 Price per bushel Stocks/use ratio Corn prices expected to be down a bit from 2014/15 $9 30% 25% $6 $3 14% 11% 17% 19% 20% 20% 18% 18% 16% 15% 12% 12% 13%14% 13% 13% 14% 10% 9% 9% 9% 8% 7% 20% 10% 5% $0 1991/92 95/96 99/00 03/04 07/08 11/12 15/16* 0% stks/use ratio price

25 billion bushels Soybean production narrowly set a new record /92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*

26 billion bushels Crushings are rising again while soybean exports eased recently 2.0 Crush Exports /91 95/96 00/01 05/06 10/11 15/16*

27 Price per bushel Stocks/use ratio Soybean prices moving lower as stocks are up more in 2015/16 $16 19% 20% $12 14%13% 14% 13% 16% 12% 15% $8 $4 11% 8% 8% 5% 11% 9% 9% 7% 6% 4% 7% 7% 5% 5%5% 5% 3% 5% 10% 5% $0 0% 1991/92 95/96 99/00 03/04 07/08 11/12 15/16* stks/use ratio price

28 7th District Crop Yield Indexes (1964=100) Corn 2015* 150 Soybeans (*USDA projection)

29 Real Cash Crop Prices ($/bushel, adjusted by CPI-U for January 2010) Corn Soybeans

30 Real USDA Livestock Prices 250 ($/hundredweight, adjusted by CPI-U for January 2010) Hogs Cattle

31 Hog and Dairy Profitability Measures Hog-corn price ratio Milk-feed price ratio '01 '03 '05 '07 '09 '11 '13 ' '01 '03 '05 '07 '09 '11 '13 '15

32 billion 2009$ Real net farm income boosted by direct government payments to farmers, but varies by farm and region * gov't payments *USDA forecast

33 7G Share of Net Farm Income (% of U.S. total) 30% 20% 10% 0%

34 Commercial farms generate income, while the median farm loses money

35 Participating Banks Banks in 7th District Land Value and Credit Conditions Survey

36 Percent Annual change in farmland values in Seventh Federal Reserve District

37 Farmland Value Indexes for Seventh District States (1981=100) Wisconsin Iowa Indiana Illinois

38 Index of Seventh District farmland values (1981=100) Nominal Inflation Adjusted

39 Farmland values in 2013 dollars for the U.S. and for the Seventh Federal Reserve District (weighted by acres from USDA data) 7,000 6,000 5,000 4,000 7 th District 3,000 2,000 1,000 U.S

40 Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100) Nominal Inflation Adjusted

41 Supporting factors for farmland values? 1. Stream of farm income lower (at least in short term) 2. Productivity and yield trends 3. Mix of investors has broadened (more diversifiers; recreational buyers returning) 4. Off-farm income growth is important 5. Government payments are up, but insurance programs provide less protection 6. Relatively low interest rates for agriculture 7. Limited availability of farmland 8. Opportunism

42 Where do farmland values go next? Supply of farmland (limited) Demand for farmland (not as strong) Farmland values increased rapidly Uncertain future, but it s not the 1980 s Fundamentals mixed on the direction of farmland values, but remain positive for the longer term

43 billion 2009$ Real farm sector assets and equity at levels above prior peak 3,000 2,500 2,000 Assets 2016* 1,500 1,000 Equity 500 Debt *USDA forecast

44 percent Farm financial ratios improved following the 80s crisis Debt/asset ratio 2016* *USDA forecast

45 Index of agricultural loan demand for the Seventh Federal Reserve District (excluding real estate)

46 Index of agricultural loan repayment rates for the Seventh Federal Reserve District

47 percent Interest rates charged on new farm loans in the Seventh Federal Reserve District Farm operating 5 Farm real estate

48 Summary The outlook is for the U.S. economy to expand at a pace somewhat above trend in 2016 Employment is expected to rise moderately with the unemployment rate edging lower Slackness in the economy will lead to a relatively low inflation rate, rising toward 2% Growth in manufacturing output should resume Housing turned the corner, but still has far to go Net exports remain a wild card given world conditions

49 Impacts on Agriculture Solid U.S. economic growth boosting demand at restaurants and for animal products Weak world economic growth and stronger value of the dollar holding back U.S. agricultural exports Plentiful grain and oilseed supplies pushing down prices and feed costs for animal agriculture, but livestock prices down too Stubborn input costs counter low interest rates Lower levels of farm income; farmland values adjusting Strong past decade for agriculture tempers downturn

A Primer on Factors Affecting Farmland Values

A Primer on Factors Affecting Farmland Values Federal Reserve Bank of Chicago David Oppedahl Business Economist 312-322-6122 david.oppedahl@chi.frb.org The economy hit bottom in June 2009, with hesitant