Macroeconomic Risks for Farmer Cooperatives

Transcription

1 Macroeconomic Risks for Farmer Cooperatives KFSA Directors & Management Meeting Hutchinson, KS November 21 st, 2011 Brian C. Briggeman Associate Professor and Director of the Arthur Capper Cooperative Center

2 While there are many macro and global factors that can affect your farmer cooperative, I m going to focus on four that could build on each other: 1. Interest Rates The Good (low), The Bad (low) and The Ugly (surging) 2. Inflation 3. Crop prices 4. Farmland Values Macroeconomic Risks

3 Growth improved in the 3 rd quarter of 2011, but is it sustainable as forecasters project? Actual Advance Estimate Real GDP Growth Annualized percent change from previous quarter 2007:Q4 2008:Q2 2008:Q4 2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4 2012:Q2 Source: Bureau of Economic Analysis and Wall Street Journal November 2011 Forecast Survey (Average) WSJ Forecast (November)

4 Jan-59 Jan-62 Jan-65 Jan-68 Jan-71 Jan-74 Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Recent growth, however, came at the expense of savings U.S. Personal Savings Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Federal Reserve Bank of St. Louis

5 but when interest rates are at or near zero, what incentive do consumers have to save? Percent 6 Fed Funds Rate (Upper Bound) Percent Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 0 Source: Federal Reserve Board of Governors

6 INTEREST RATES THE GOOD, THE BAD AND THE UGLY

7 Interest Rates The Good (low) Low interest rates have pushed down the cost of borrowing. 5% Yield on U.S. Treasury Securities 4% 3% 2% 1% 0% 3-month 1-year 5-year 20-year Source: Federal Reserve Board of Governors

8 When the Fed is at the zero bound, can the long-end of the yield curve move? 2/10/2006 5/5/2006 Interest Rates The Bad (low) 7/28/ /20/2006 1/12/2007 4/6/2007 6/29/2007 9/21/ /14/2007 3/7/2008 5/30/2008 8/22/ /14/2008 2/6/2009 5/1/2009 7/24/ /16/2009 1/8/2010 4/2/2010 6/25/2010 9/17/ /10/2010 3/4/2011 5/27/2011 8/19/ month 3-month 6-month 1-year 2-year 3-year 5-year 10-year 20-year 30-year 6% 5% 4% Yield 3% 2% 1% 0% Date Treasury Maturity 0%-1% 1%-2% 2%-3% 3%-4% 4%-5% 5%-6%

9 9/5/ /5/2007 1/5/2008 Interest Rates The Bad (low) 3/5/2008 5/5/2008 7/5/2008 9/5/ /5/2008 1/5/2009 3/5/2009 5/5/2009 7/5/2009 9/5/ /5/2009 1/5/2010 3/5/2010 5/5/2010 7/5/2010 9/5/ /5/2010 1/5/2011 3/5/2011 5/5/2011 7/5/2011 9/5/2011 How does the Fed return to a more normal balance sheet? Billion Dollars 3,500 3,000 2,500 Fed Agency Debt Mortgage-Backed Securities Purchases Liquidity to Key Credit Markets Lending to Financial Institutions Long Term Treasury Purchases Traditional Security Holdings 2,000 1,500 1, Source: Federal Reserve Bank of Cleveland

10 Today, inflation remains well below the levels experienced during the 1970s and 1980s. Interest Rates The Ugly (surging) to combat inflation Personal Consumption Expenditures Price Index Percent change from previous year PCE Price Index (Headline) Jan-71 Feb-75 Mar-79 Jun-83 Jul-87 Aug-91 Sep-95 Oct-99 Nov-03 Dec-07 Source: Bureau of Economic Analysis

11 Inflation To understand the current environment for inflation, it is helpful to pull a page from Econ 101. A rapid rise in inflation occurs when too much money is chasing too few goods. Quantity Theory of Money So, for rapid price inflation:

12 Inflation Why is inflation low? Velocity has plummeted. One way to measure velocity is by calculating the ratio of gross domestic product (GDP) to money (M2). This ratio is essentially a turnover ratio of how quickly money is turned into output. Today, velocity is very low. So, what will it take to raise velocity, and when might this happen? U.S. Velocity of Money Recessions indicated by gray bars GDP/M2 (right axis) Source: BEA and Federal Reserve Board of Governors

13 POTENTIAL IMPACT OF THE UGLY

14 Crop prices and inflation Historically, crop prices tend to move with inflation. Personal Consumption Expenditures Price Index Percent change from previous year 14 Constant 2005 Dollars per Bushel PCE Price Index (Left Axis) Real Corn Prices (Right Axis) Jan-71 Feb-75 Mar-79 Jun-83 Jul-87 Aug-91 Sep-95 Oct-99 Nov-03 Dec-07 Source: Bureau of Economic Analysis and Chicago Board of Trade -2

15 Crop prices and inflation How might crop prices respond to a pick up in velocity? Based on some of my working research: Steep rise, possibly like the real prices experienced in 1970s doubling Then, prices would likely plummet as the market searches for equilibrium Bottom line, there would likely be more volatility with potentially bigger swings in crop prices. The Federal Reserve s exit strategy is key

16 FARMLAND VALUES ARE A BELLWETHER FOR THE FINANCIAL HEALTH OF AGRICULTURE

17 Farmland Values After World War II, farmland values started to heat up as new technology was adopted. Data is inflation adjusted farmland values from U.S. Agricultural Census. Farmland values are in constant 2011 dollars.

18 Farmland Values New export markets and easy credit lit a fire under the farmland value market, especially in the corn belt. Data is inflation adjusted farmland values from U.S. Agricultural Census. Farmland values are in constant 2011 dollars.

19 Farmland Values By 1978, Iowa farmland values were on fire and it was spreading throughout the region. Data is inflation adjusted farmland values from U.S. Agricultural Census. Farmland values are in constant 2011 dollars.

20 Farmland Values The start of the 1980s farm debt crisis began to cool the flame surrounding farmland values. Data is inflation adjusted farmland values from U.S. Agricultural Census. Farmland values are in constant 2011 dollars.

21 Farmland Values By 1987, the fire was out. Data is inflation adjusted farmland values from U.S. Agricultural Census. Farmland values are in constant 2011 dollars.

22 Farmland Values While debt is not fueling the recent surge in farmland values today, ultra low interest rates are playing a significant role. Expected Farm Income Interest Rates = Farmland Values Capitalization Rates

23 Percent Capitalization rates and real interest rates tend to move together Kansas Capitalization Rate and Real Interest Rate Kansas Cash Rent-to-Land Value Ratio Yield on 10-year U.S. Treasury Security - adjusted for inflation Sources: USDA, Federal Reserve and BLS Farmland Values

24 Dollars per Acre Historically low capitalization rates help support current Kansas cropland values. 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 South Central Kansas Irrigated Cropland Value = $3, % 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% Cropland capitalization rate Authors calculations based on KSU Corn Cost-return Budget in South Central Kansas. Assumed 200 bushels per acre, a corn price of $4.75 per bushel, and 20% of gross revenues capitalized into land. Farmland Values Kansas Capitalized Irrigated Cropland Values Historical average cap rate, Farmland values drop by 25 percent

25 Dollars per Acre At a historical average cap rate and today s corn prices, current Kansas cropland values are reasonable. 5,500 Kansas Capitalized Irrigated Cropland Values 5,000 4,500 South Central Kansas Irrigated Cropland Value = $3,800 4,000 3,500 3, average corn price, Farmland values drop by 35 percent 2,500 2,000 1, Corn price (dollars per bushel) Authors calculations based on KSU Corn Cost-return Budget in South Central Kansas. Assumed 200 bushels per acre, a corn price of $4.75 per bushel, 20% of gross revenues capitalized into land, and cap rate of 6.5%. Farmland Values

26 What are the implications of the economic outlook for farmer cooperatives? Expectations of the economic outlook are already reflected in current prices and yields Make sure your revenue and asset growth outlook is reasonable Difficult in today s volatile climate Manage volatility to the best of your ability Lock in margins, fix interest rates, hold working capital, help your members mitigate their risk Seize opportunities when they are available New employee talent pool for agriculture is big right now

27 Thank you. Questions? KFSA Directors & Management Meeting Hutchinson, KS November 21 st, 2011 Brian C. Briggeman Associate Professor and Director of the Arthur Capper Cooperative Center