Macro and Agricultural Economic Outlook FCL 2017 Annual Meeting Tanner Ehmke, Manager Knowledge Exchange Division
Today s presentation Macro Economy Agricultural Economy 2
The Market Cycle (we ve been here before ) 3
Commodity market realignment will continue to reflect the new realities of the global economy Indexes (2010=100) 175 150 125 100 75 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 2009-13 Policy Realignment 2014-18 50 New normal zone? 25 0 Old normal zone Agriculture (all commodities) 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: World Bank 4
Growing U.S. economy + rising interest rates = stronger U.S. dollar and weaker ag commodity values Agriculture Index 430 410 U.S. Dollar vs. Ag Commodities GSCI Ag Index DXY Index U.S. Dollar 105 100 390 370 350 330 310 290 270 Stronger world economy, slow inflation, doubts over Fed rate hikes and political gridlock in the U.S. have weakened the US$ 95 90 85 80 75 70 Source: Bloomberg 5
Global Economy: Optimism for growth in 2017-18 Percent change in annual world growt h ( purchasing- power parit y rat es) 6 Rising Middle Class 2004-08 Avg.=4.5% Economic Turmoil 2010-13 Avg.=3.9% Policy Realignment 2014-18??? 4 2 0-2 Advanced countr ies Rest of wor ld China India 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 6
U.S. Economy: Current business cycle is second longest but under-performing compared to previous cycles Percent change from previous business cycle peak 50% 1960-69 1969-73 1973-80 1980-81 1981-90 1990-2001 2001-07 2007-?? 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 0 5 10 15 20 25 30 35 40 45 7
Unemployment rates continue to fall Source: Federal Reserve Bank of Richmond 8
4 8 6 2 0 U.S. economy is expected to grow through 2017 Percent change in quarterly Gross Domestic Product (Chained 2005$)* Annual average= 2.5% 1.6% 2.2% 1.5% 2.4% 2.4% 1.6% 2.2% -2-4 -6-8 60-70% of U.S. economic growth comes from consumer spending: 1st qtr 0.7 % 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 * S e a s o n a l l y a d j u s t e d a t a n n u a l r a t e 9
The Federal Reserve is slowly raising rates with at least 1 more rate hike of 25 basis points expected in 2017 Appropriate pace of policy firming: midpoint of target range or target level estimates of FOMC participants for federal funds rate at end of respective year (March 2017) 2017 2018 2019 Longer run The FOMC consists of twelve members--seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The additional possible dots are for seven presidents not on FOMC. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10
Negative interest rates widen spreads with U.S. Treasury Yields, supporting the value of the US$ 2-year 10-year Spread Under/Over Country yields * yields* 2-year U.S. Treasury ---------- percent ---------- Basis points United States 1.343 2.249 ------- Germany -0.684 0.432-202.7 France -0.576 0.717-191.9 U. K. 0.221 1.106-112.2 Japan -0.113 0.058-145.6 Switzerland -0.807-0.122-215.0 Canada 1.239 1.907-10.4 *As of August 9, 2017
USDA expects US$ to remain relatively strong through 2017 Source: USDA-ERS 12
Agricultural Economic Outlook Sources: UC Davis, NY Times, CoBank 13
Relative strength in the U.S. dollar is expected to continue weighing on U.S. export competitiveness Billion $ U.S. Agricultural Exports, 2000-16 160 140 120 100 80 Sugar and tropical products Horticultural products Livestock products 60 40 20 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Cotton, tobacco, and seeds Oilseeds and oilseed products Grains and feeds Source: USDA-ERS 14
Supply abundance continues to dampen commodity prices Source: Reuters - Minburn, Iowa, March 11, 2017 15
Prices remain under pressure across the agriculture commodity sector $6 $4 $8 $2 $0 90 80 70 60 50 40 30 20 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 $0.00 7 0 7 2 7 4 7 6 7 8 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 $0.00 7 0 7 2 7 4 7 6 7 8 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 Dollars per bushel (monthly prices received b y farmers, USDA) Cents per pound (monthly prices received by farmers, USDA) $18 100 $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 $10 7 0 7 2 7 4 7 6 7 8 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 7 0 7 2 7 4 7 6 7 8 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6
Farm cash receipts have fallen sharply Billion $ 450 Farm Cash Receipts 400 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 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
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F Farm expenses (cash rents) have been resilient, resulting in a steeper decline in net farm income. Billion $ 600 500 Farm Income & Expenses -17% 400 300 200-1% -50% 100 0 Gross Farm Income Production Expenses Net Farm Income Source: USDA-ERS Long-Term Agricultural Projections, Feb. 2017 18
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 $0.0 2010 2011 2012 2013 2014 2015 2016 Source: CoBank ACB 19
Total ag machinery sales are improving Source: Association of Equipment Manufacturers 8/21/2017 20
Not all machinery sales, though, have improved June YTD- June Beginning Inventory 2017 2016 %Chg 2017 2016 %Chg Jun-17 2WD Farm Tractors < 40 HP 16,270 14,795 10.0 78,843 70,337 12.1 70.957 40 < 100 HP 5,842 5,891-0.8 27,556 27,882-1.2 33,474 100+ HP 1,335 1,608-17.0 8,394 9,764-14.0 8,146 Total 2WD Farm Tractors 23,447 22,294 5.2 114,793 107,983 6.3 112,577 4WD Farm Tractors 160 186-14.0 1,029 1,096-6.1 754 Total Farm Tractors 23,607 22,480 5.0 115,822 109,079 6.2 113,331 Self-Prop Combines 445 375 18.7 1,670 1,777-6.0 988 Source: Association of Equipment Manufacturers 8/21/2017 21
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Farmland values are driven by net farm income. Net Farm Income (Billion $) 140 120 Net Farm Income vs. Farmland Net Farm Income Farmland Farmland ($/Acre) 3,500 3,000 100 2,500 80 2,000 60 1,500 40 1,000 20 500 0 0 Source: USDA-ERS 22
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 6000 5000 4000 3000 2000 1000 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
Land values have not dropped significantly in the past year. 8/21/2017 24
Fed data show similar regional trends in land values Source: Federal Reserve District Agricultural Credit Surveys 25
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016F With farm incomes dropping, the growth of farm debt when adjusted for inflation has accelerated. Billions ($2009) 400 350 Farm Sector Debt 300 250 200 150 100 50 0 Total Farm Sector Debt Real Estate Debt Non-Real Estate Debt Source: USDA-ERS 26
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016F 2018F 2020F Farm debt-to-asset ratio is expected to grow. Rising interest rates will add further stress for borrowers. 25 22.2% U.S. Farm Debt-to-Asset Ratio 20 15 10 11.3% 13.9% 5 Historical Projection A Projection B 0 Source: USDA-ERS; Federal Reserve Bank of Kansas City 27
Interest rates on farm loans are creeping higher Source: Federal Reserve Bank of Kansas City 28
Farm Loans (non-real estate) in first half of 2017 Source: Federal Reserve Bank of Kansas City 29
Farm loan delinquency rates are rising Source: Federal Reserve Bank of Kansas City 30
Ag credit conditions vary by Federal Reserve districts Source: Federal Reserve Bank of Kansas City 31
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F Debt-to-income ratio is a leading economic indicator. Ratio 14 12 10 8 Farm Debt-to- Income Increased Ahead of the 1980 s Farm Crisis Farm Debt-to-Income 2017-18 Will Be a Critical Period 6 4 2 0 Source: USDA-ERS; CoBank Knowledge Exchange 32
Good news: Cash rents are falling faster Source: Federal Reserve Bank of Chicago 33
Growth of total farm debt outstanding is slowing Source: Federal Reserve Bank of Kansas City 34
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Global demand base for ag commodities continues growing Billion MTs 3.5 3.0 World Consumption of Major Ag Commodities Corn Fluid Milk Beef Pork Soybeans Chicken Wheat 2.5 2.0 1.5 1.0 0.5 0.0 Source: USDA-FAS 8/21/2017 35
Opportunities remain strong in emerging economies Beef, Pork & Poultry Production Source: USDA-ERS 36
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
Questions Presentation by: Tanner Ehmke, Manager, Knowledge Exchange Division, CoBank E-mail: tehmke@cobank.com Office: (303) 740-4182