Macroeconomic Outlook: Implications for Agriculture John B. Penson, Jr. Regents Professor and Stiles Professor of Agriculture Texas A&M University Our Recession History September 1902 August1904 23 May 1907 June 1908 13 January 1910 January 1912 24 January 1913 December 1914 23 August 1918 March 1919 7 January 1920 July 1921 18 May 1923 July 1924 14 October 1926 November 1927 13 August 1929 March 1933 43 May 1937 June 1938 13 February 1945 October 1945 8 November 1948 October 1949 11 July 1953 May 1954 10 August 1957 April 1958 8 April 1960 February 1961 10 December 1969 November 1970 11 November 1973 March 1975 16 January 1980 July 1980 6 July 1981 November 1982 16 July 1990 March 1991 8 March 2001 November 2001 8 Length of expressed in months Recent significant s Source: Nation Bureau of Economic Research It has been 26 years since we have experienced a significant Our Recession History September 1902 August1904 23 May 1907 June 1908 13 January 1910 January 1912 24 January 1913 December 1914 23 August 1918 March 1919 7 January 1920 July 1921 18 May 1923 July 1924 14 October 1926 November 1927 13 August 1929 March 1933 43 May 1937 June 1938 13 February 1945 October 1945 8 November 1948 October 1949 11 July 1953 May 1954 10 August 1957 April 1958 8 April 1960 February 1961 10 December 1969 November 1970 11 November 1973 March 1975 16 January 1980 July 1980 6 July 1981 November 1982 16 July 1990 March 1991 8 March 2001 November 2001 8 Length of expressed in months Great Depression Recent significant s Source: Nation Bureau of Economic Research And this is radically different! Characteristics of the Great Depression 1. An over-indebtedness caused by easy money in the 1920s fueled speculation and asset bubbles. 2. Large scale lack of confidence by consumers. 3. Firms expanded output into 1930s but consumers did not buy.. Rural areas suffered as farm commodity prices fell by 60%. 4. Businesses could not get new loans, some old loans not renewed,, investment grounded to a halt and asset values declined.
Policy mistakes made at that time 1. Monetary policy Fed did not add liquidity. The money supply shrunk by 33% during 1929-33 period. 2. Fiscal policy tax rates were raised rather than lowered. 3. Tariff wars were particularly hard on ag. 4. As economy improved, government spending was cut,, including the WPA programs. This led to a in 1937-38. Employment did not recover until 1940. Let s s compare the current economy with recent s Today s s Manufacturing activity In recent s The The key key question today is is how how long long and and An An index index below below 50 50 represents represents contraction contraction in in business business activity. activity. ly ly approaching approaching levels levels and and falling. falling. Today s s Unemployment rate In recent s The The key key question today is is how how long long and and how how deep the the will will be. be. We We reached reached 10.5 10.5 percent percent in in the the.. We We may may well well equal equal or or exceed exceed that that level level in in the the current current..
Consumer sentiment in recent s Prime interest rate in recent s Consumers Consumers are are concerned concerned about about health health of of the the economy, economy, more more so so than than the the,, as as job job losses losses mount mount and and wealth wealth declines. declines. The The resulting resulting prime prime rate rate is is also also much much lower. lower. Yet Yet this this fact fact alone alone has has not not led led to to increased increased borrowing. borrowing. A concern concern exists exists over over interest interest rates rates over over the the longer longer run run from from current current monetary monetary and and fiscal fiscal stimulus. stimulus. Price of crude oil in recent s Rate of inflation in recent s One One factor factor initiating initiating the the was was high high energy energy prices prices and and what what this this meant meant for for budgets budgets of of highly highly indebted indebted consumers consumers living living paycheck paycheck to to paycheck. paycheck. Closed Closed up up at at $52 $52 last last Friday Friday after after falling falling to to $36 $36 in in recent recent months. months. The The rate rate of of inflation inflation is is also also much much lower lower than than the the previous previous two two s, s, with with some some concern concern about about deflation. deflation. Inflation Inflation a a concern concern going going forward, forward, however, however, given given the the amount amount of of stimulus stimulus being being injected injected into into the the economy. economy. Federal funds rates in recent s Consumer credit use in recent s Unlike Unlike the the last last two two s, s, the the Fed s Fed s short short term term target target interest interest rate rate is is about about as as low low as as it it can can go. go. Thus, Thus, the the Fed Fed cannot cannot stimulate stimulate growth growth using using this this monetary monetary policy policy tool. tool. Consumer Consumer credit credit (excluding (excluding real real estate) estate) has has grown grown tremendously tremendously since since the the..
Consumer credit use in recent s Total Consumer Credit Per Dollar of Disposable Income 30% 25% 20% 15% 10% 5% 0% Oct-69 Oct-70 Oct-71 Oct-72 Oct-73 Oct-74 Oct-75 Oct-76 Oct-77 Oct-78 Oct-79 Oct-80 Oct-81 Oct-82 Oct-83 Oct-84 Oct-85 Oct-86 Oct-87 Oct-88 Oct-89 Oct-90 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Today Today consumer consumer credit credit outstanding outstanding represents represents almost almost 25 25 cents centsper per dollar dollar of of disposable disposable income income as as compared compared to to 16 16 cents centsduring the the.. Declining Declining disposable disposable income income leading leading to to repayment repayment problems. problems. 2009 Macroeconomic Outlook 1. Over-indebtedness, weak consumer confidence and further job losses will keep consumer spending down despite low interest rates. 2. The broadest global since 1948 will keep export demand down. 3. As a result, the outlook for 2009 is bleak,, likely the worst in duration at least since the 1930s. Where is the U.S. headed in 2009? 2009 Macroeconomic Outlook 4. Inflation in check and interest rates are low for now, but 5. Housing market and construction sector have not bottomed out. 6. Moderate increases in crude oil prices likely on the horizon. 7. Traditional monetary policy approach of eliminating through lower nominal interest rates is off the table. Some Observations The The last lasted 16 months. We are already in the 16 th month. Consumer spending shrank 4.3% in the 4 th quarter, first time since 1947 that spending shrank more than 3% in back-to to-back quarters. Real Real GDP, excluding inventories, shrank by 6.2% in the 4th quarter. The The civilian unemployment rate today is 8.5% and rising. 2009 Macroeconomic Outlook 8. Calls for buying American surfacing in Washington implying we can eliminate the through protectionism is bothersome. 9. The bottom line: the economy will not turn around until consumer spending rebounds.. And that will not occur until consumer confidence about the job market and housing values returns.
Features of the Proposed Stimulus Plan 65% of bill involves government spending. Slow phase in; estimated that only two-thirds will be in effect by the end of 2010. Temporary tax cuts; not permanent.. A means tested tax cut over 2 years. Unlikely to alter consumer behavior (Friedman). Will it stabilize housing prices and bring about more bank lending? Will it lead to higher interest rates from public sector borrowing now and from the Federal Reserve dealing with inflation as economy begins to recover? Things are bad elsewhere too Other major economies were in a in 2008, including: UK EU countries Japan Emerging economies are also stressed. Things are so bad in the UK that the Queen had to take a second job. US Credit Market Concerns Going Forward Large mortgage lenders facing weakening debt repayment capacity and rising loan to value. Tighter standards and increased fees at many mortgage lenders. Will small banks be spared? A concern over commercial real estate loans made to small local/regional businesses with increasing debt repayment stress as the continues in 2009 and into 2010. Will public sector borrowing affect cost and availability of credit to private sector? Global Recession A broad based global. Remember this occurred during the Great Depression as well. China China and India economies remain relatively robust, but they are too small to pull up the US and EU economies. IMF IMF projects the global economy will experience a gradual recovery in 2010. Two Two factors that may slow the speed and depth of this projected recovery are higher oil prices and higher interest rates. Projected Global GDP Growth Rate Global Economic Conditions Source: International Monetary Fund Updated Outlook.. Advanced countries include the U.S., the EU, Japan, the U.K. and Canada. Emerging and a developing economies include China, India, the CIS (including Russia), Brazil and Mexico among others.
Projected Global Rate of Inflation (CPI) Projected real real GDP growth rate rate negative in in 2009 for for advanced economies, with with US US less less negative than than most other advanced economies. Source: IMF IMF Updated Outlook Source: International Monetary Fund Updated Outlook. Advanced countries include the U.S., the EU, Japan, the U.K. and Canada. Emerging and developing economies include China, India, the CIS (including Russia), Brazil and Mexico among others. Projected real real growth growth rate rate is is positive in in emerging and and developed economies, but but half half of of recent recent growth growth rates. rates. Source: IMF IMF Updated Outlook Let s s Look at U.S. Agriculture Projected Global Real Price Trends Recent Monthly Crop Price Trends 300.0 January 2007 = 100 250.0 200.0 150.0 100.0 50.0 0.0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Corn All wheat Soybeans Fuel Fertilizer All inputs Source: International Monetary Fund Updated Outlook.. Advanced countries include the U.S., the EU, Japan, the U.K. and Canada. Emerging and a developing economies include China, India, the CIS (including Russia), Brazil and Mexico among others. The index is 1995 = 100. Source: National Agricultural Statistics Service, USDA. Profit Profit margins have have narrowed considerably and and are are at at further further risk risk if if crude crude oil oil prices prices increase.
0.0 Recent Monthly Crop Price Trends Livestock Price Declines From Peak 2008 Levels January 2007 = 100 300.0 250.0 200.0 150.0 100.0 50.0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Corn All wheat Soybeans Fuel Fertilizer All inputs Source: National Agricultural Statistics Service, USDA. Price/cost ratios ratios for for major major crops crops are are much much different than than they they were were at at this this time time last last year, year, particularly for for wheat. wheat. Feb-09 All milk All hogs Feed All livestock inputs Poultry and eggs -45.00% -40.00% -35.00% -30.00% -25.00% -20.00% -15.00% -10.00% -5.00% 0.00% Source: Agricultural Prices, National Agricultural Statistics, USDA Beef cattle 37.18%- 53.52%- 16.65%- 28.22%- 40.72%- 8.18%- 10.44%- 17.22%- 6 5 4 3 2 1 Crop Price Declines From Peak 2008 Levels Fuel Fertilizer Soybeans All wheat Corn 10.29%- All crop inputs 24.50%- 27.97%- 45.43%- -60.00% -50.00% -40.00% -30.00% -20.00% -10.00% 0.00% Source: Agricultural Prices, National Agricultural Statistics, USDA 6 5 4 3 2 1 Macroeconomic Linkages to Ag in 2008: Weak dollar (good for Ag!) High crude prices (bad for Ag!) Low inflation (good for Ag!) Low interest rates (good for Ag!) Low unemployment rate (good for Ag!) High consumer income (relatively minor positive impact on Ag!) Recently Monthly Livestock Price Trends January 2007 = 100 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Beef Cattle All Hogs All Milk Poultry and Eggs Feed All livestock inputs Source: National Agricultural Statistics Service, USDA. Poultry Poultry is is the the only only commodity experiencing a positive price/cost ratio. ratio. Of Of particular concern is is the the free-fall in in milk milk prices. prices. A Potential 2009 Macro Scenario for Ag: Weakened client nations (bad for Ag!) Modest rise in oil prices (bad for Ag except biofuel feedstock!) Inflation in check (good for Ag!) Interest rates low (good for Ag!) High unemployment rate (bad for Ag!) Falling consumer income (relatively minor negative effect on Ag!)
2009 Farm Price and Income Prospects 1. Crop prices down from 2008 levels and unlikely to gain much traction in 2009. An increase in biofuel feedstock like corn is an exception if crude oil prices rise. 2. Input costs for fuel, fertilizer and other selected inputs have declined but can rise if crude prices rise. 3. Assuming lower feed prices would still leave livestock producers stressed. Dollars per Acre $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Land Values Can Fall Historical Trend in Illinois Crop Land Values 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 Source: National Agricultural Statistics, USDA. Farm Farm financial crisis crisis Biofuels boom boom 2009 Farm Price and Income Prospects 4. Lower net farm income in 2009. USDA projects 18.1% decline. 5. Lower crop land appreciation, with likely declines particularly outside the Corn Belt and Northern Plains regions. 6. Increased debt repayment stress expected, particularly for highly leveraged livestock borrowers. A Look at Farm Lending Picture in 2009 In In ag, total farm term debt is owed by a relatively small number of borrowers. This counters the USDA s s rosy debt statements. Concern Concern over loans based heavily on off- farm repayment capacity. Debt Debt repayment capacity for livestock borrowers will be stressed. Will Will land values soften? YES. Smaller gains/declines in Corn Belt and Northern Plains regions; larger declines are likely in other regions. Components of Debt Burden Ratio Billion Dollars $250 $200 $150 $100 $50 $0 Net Farm Income and Total Farm Debt Farm Farm financial crisis crisis 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 Net Farm Income Total Farm Debt Source: Economic Research Service. 2009 value is USDA forecast. Problem of of fixity fixity in in debt debt outstanding during during volatile volatile periods of of net net farm farm income. Recent Survey Results 2,300 agricultural professionals (including lenders) were recently surveyed. 84% believe farmers will experience financial stress in the next 3 years. When lender responses were sorted out, 54% felt the chance of financial stress is high and 26% felt this would be very high. The cost of inputs and volatile prices are the top 2 reasons for financial stress given by all respondents, followed loss of off- farm income. The lowest ranked reason was declining land values.interesting.
Recent Survey Results Many farmers responded saying they faced stricter requirements (e.g., more documentation). 56% said requirements changed slightly while 17% reported substantial increases. Farmers responding assessed their financial management skills as follows: only 8% of farmers participating in this survey felt they were well equipped with financial management skills. 74% said they were moderately equipped. 18% said they were poorly equipped! Some signs are hard to read so Borrowers should retain sufficient liquidity in this troubled economy. Lenders Lenders should be stress testing applications and portfolios for potential risk exposures. The The 50-50 50-90 rule: anytime you have a 50-50 chance of being right, there is a 90% chance you will be wrong. Issues Along the Farm Credit System Supply Chain Building debt repayment capacity stress? Adequate loan application assessment and risk pricing? Portfolio stress testing? Adequacy of loan loss reserves? Potential for higher cost of funds over the longer run? Global loss of wealth and perceived risk in US securities affect demand? My Bottom Line The economy will not turn around until consumers start spending again. Not at 72% of GDP like 2008, but in the 67-70% range where it normally occurs. I will want to see 3 consecutive months of increasing consumer confidence before I think a recovery is underway. The Conference Board index slid to 25 last month, lowest in its 40 year history. Expect growing stress in specific segments of farm loan portfolios over the next 2-3 years, particularly where livestock is the primary source of debt repayment capacity. Considerable Uncertainty Going Forward 2009 2009 will present the greatest economic stress in the U.S. economy since the 1930s.. It may last into 2010. Continued price/cost squeeze a concern for those with low liquidity and relatively high debt. Many Many crop producers have strong carryover positions which helps.