Agriculture and the Economy: A View from the Chicago Fed March 3, 2016 Riverside, Iowa David Oppedahl Senior Business Economist 312-322-6122 david.oppedahl@chi.frb.org
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
Federal Reserve System
Chicago Fed National Activity Index shows hesitant growth since 2009 2 1 (standard deviation from trend growth, 3-month moving average) Above Trend Growth 0-1 -2 Below Trend Growth -3-4 -5 1999 '01 '03 '05 '07 '09 '11 '13 '15
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 5 4 3 2 1 0 1999 '01 '03 '05 '07 '09 '11 '13 '15
Quantitative easing was necessary
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
Food price increases now below core inflation (less food and energy) 8 (Consumer Price Index, percent change from year ago) 6 4 2 0-2 1991 1996 2001 2006 2011 2016 CPI Less Food and Energy CPI for Food
Oil prices plummeted and lower gas prices boosted consumer saving/spending (2010 $/barrel) 150 100 50 0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Natural gas prices are low too 15 Real Natural Gas Price {2010 $/mmbtu} 10 5 0 1996 2001 2006 2011 2016
The FOMC anticipates that PCE inflation will reach two percent by 2018
Unemployment has fallen from its peak (civilian unemployment rate, percent SA) 11 10 9 8 7 6 5 4 3 1999 '01 '03 '05 '07 '09 '11 '13 '15
The FOMC forecasts that the unemployment rate will be at the natural rate by the end of 2016
The FOMC expects GDP to grow above its trend in 2016
Contributions to real GDP growth of 1.0% in the 4th quarter of 2015 Consumption 1.4% Residential Investment 0.3% Business Investment -0.2% Inventories -0.1% Government 0.0% Net Exports -0.3%
Housing market tanked and moving up from bottom Housing starts (millions of units, 3-month moving average, SAAR) 2.5 Home mortgage rate (percent, effective rate for all loans closed) 9 8 2.0 7 1.5 6 5 1.0 4 0.5 1999 '01 '03 '05 '07 '09 '11 '13 '15 3 1999 '01 '03 '05 '07 '09 '11 '13 '15
Manufacturing is moving sideways; orders for capital goods moving up again ISM purchasing managers index (net percent reporting increase) 65 Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average) 75 60 70 55 65 50 45 40 60 55 35 50 30 1999 '01 '03 '05 '07 '09 '11 '13 '15 45 1999 '01 '03 '05 '07 '09 '11 '13 '15
The dollar s exchange value peaked in 2002, before falling below earlier range and rallying 120 (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100} 110 100 90 80 1991 1996 2001 2006 2011 2016
U.S. exports lower than in recent years (billions of 2015$, SA) 300 200 100 0 1995 2000 2005 2010 2015 Exports Imports
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
billion $ Value of agricultural exports expected to slide in 2016 160 140 120 100 80 60 40 20 0 Exports Imports Surplus FY1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2016* (*USDA projection)
billion bushels Corn production forecast: 3 rd highest on record 15 12 9 7.5 9.5 10.1 7.4 9.2 9.2 9.8 9.4 10.0 9.5 9.0 10.1 11.8 11.1 10.5 13.0 13.1 12.4 12.0 12.3 10.8 13.8 14.2 13.6 6 6.3 3 0 1991/92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*
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 0 1990/91 93/94 96/97 99/00 02/03 05/06 08/09 11/12 14/15
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
billion bushels Soybean production narrowly set a new record... 4 3.9 3.9 3 2 2.0 2.2 1.9 2.5 2.2 2.4 2.7 2.7 2.6 2.8 2.9 2.8 2.5 3.1 3.1 3.2 2.7 3.0 3.4 3.3 3.1 3.0 3.4 1 0 1991/92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*
billion bushels Crushings are rising again while soybean exports eased recently 2.0 Crush 1.5 1.0 Exports 0.5 0.0 1990/91 95/96 00/01 05/06 10/11 15/16*
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% $0 0% 1991/92 95/96 99/00 03/04 07/08 11/12 15/16* stks/use ratio price
7th District Crop Yield Indexes (1964=100) 250 200 Corn 2015* 150 Soybeans 100 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 (*USDA projection)
Real Cash Crop Prices ($/bushel, adjusted by CPI-U for January 2010) 40 35 30 25 20 15 10 5 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Corn Soybeans
Real USDA Livestock Prices 250 ($/hundredweight, adjusted by CPI-U for January 2010) 200 150 100 50 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Hogs Cattle
Hog and Dairy Profitability Measures Hog-corn price ratio Milk-feed price ratio 30 5 25 4 20 3 15 10 2 5 1999 '01 '03 '05 '07 '09 '11 '13 '15 1 1999 '01 '03 '05 '07 '09 '11 '13 '15
billion 2009$ Real net farm income boosted by direct government payments to farmers, but varies by farm and region 150 125 100 75 50 2016* 25 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 gov't payments *USDA forecast
7G Share of Net Farm Income (% of U.S. total) 30% 20% 10% 0% 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Commercial farms generate income, while the median farm loses money
Participating Banks Banks in 7th District Land Value and Credit Conditions Survey
Percent Annual change in farmland values in Seventh Federal Reserve District 30 20 10 0-10 -20-30 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Farmland Value Indexes for Seventh District States (1981=100) 600 500 400 300 200 100 Wisconsin Iowa Indiana Illinois 0 1980 1984 1988 1992 1996 2000 2004 2008 2012
Index of Seventh District farmland values (1981=100) 500 400 300 Nominal 200 100 0 Inflation Adjusted 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
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. 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100) 300 250 200 Nominal 150 100 50 Inflation Adjusted 0 1980 1985 1990 1995 2000 2005 2010 2015
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
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
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 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 *USDA forecast
percent Farm financial ratios improved following the 80s crisis 25 20 15 10 Debt/asset ratio 2016* 5 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 *USDA forecast
Index of agricultural loan demand for the Seventh Federal Reserve District (excluding real estate) 160 140 120 100 80 60 40 1980 1985 1990 1995 2000 2005 2010 2015
Index of agricultural loan repayment rates for the Seventh Federal Reserve District 160 140 120 100 80 60 40 20 1980 1985 1990 1995 2000 2005 2010 2015
percent Interest rates charged on new farm loans in the Seventh Federal Reserve District 20 15 10 Farm operating 5 Farm real estate 0 1980 1985 1990 1995 2000 2005 2010 2015
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
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
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