Agricultural Economic Update March 2, 217 Nate Kauffman Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System
Regional Federal Reserve Banks are important to the structure of U.S. monetary policy.
Commercial banks connected to agriculture are concentrated in the region. Agricultural Banks in the U.S. Source: Federal Reserve Board of Governors.
Outlook Themes U.S. economic growth has generally been steady, providing support for a modest increase in interest rates. Export-oriented, commodity-dependent regions and industries continue to face headwinds. The downturn in agriculture is in a 4 th consecutive year.
The U.S. economy continues to grow at a modest, yet somewhat sluggish pace. U.S. Real GDP Growth 6 5 4 3 2 1-1 -2 Percent, annualized Percent, annualized 21 211 212 213 214 215 216 217 6 5 4 3 2 1-1 -2 Note: 217 Q1 is a forecast from Macroeconomic Advsiors as of March 1. Sources: Bureau of Economic Analysis, Macroeconomic Advisors and Haver Analytics.
Globally, economic growth has been positive, but also somewhat sluggish. Global Real GDP Growth 6 Annual Percent Change Annual Percent Change 1 5 4 Real GDP 1996-26 Average Annual Rate 9 8 3 7 2 6 1 5 4-1 3 216 217 218 219 22 221 216 217 218 219 22 221 216 217 218 219 22 221 216 217 218 219 22 221 216 217 218 219 22 221 Canada (Left Scale) Sources: IMF and Haver Analytics. Euro Zone (Left Scale) Mexico (Left Scale) Japan (Left Scale) China (Right Scale)
Exports have weighed on U.S. GDP growth, but consumers have driven further gains. U.S. Real GDP Growth by Component 8 6 Percent, annualized Personal Consumption Domestic Investment Real GDP Growth Percent, annualized Net Exports Government 8 6 4 4 2 2-2 -2-4 214 215 216-4 Sources: Bureau of Economic Analysis and Haver Analytics.
Improved consumer confidence has continued to boost personal consumption. U.S. Consumer Sentiment and Vehicle Sales 15 Index Consumer Sentiment (Left Scale) Million Vehicles 25 13 Lightweight Vehicle Sales (Right Scale) 2 11 15 9 1 7 5 5 25 26 27 28 29 21 211 212 213 214 215 216 217 Source: University of Michigan, U.S. Census Bureau and Haver Analytics.
Equity prices and expectations for future corporate dividends have increased since November. S&P 5 Dividend Index Futures 6 Dollars 58 56 54 52 217 Contract 218 Contract 219 Contract 5 48 46 44 42 4 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 U.S. Election Dollars 6 58 56 54 52 5 48 46 44 42 4 Source: Bloomberg.
Unemployment is near its long-run level and inflation is close to the FOMC target. U.S. Unemployment Rate U.S. Inflation 2 16 Percent Headline Rate U6 Rate 5 4 3 Percent Headline PCE Core PCE 12 2 8 1 4-1 27 29 211 213 215 217-2 27 29 211 213 215 217 Sources: BLS, Federal Reserve Bank of San Francisco and Haver Analytics.
Interest rates have been projected to rise gradually. U.S. Interest Rates 7 Percent Percent 7 6 5 4 3 2 1 Fed Funds Rate 3-Year Treasury 6 5 4 3 2 1 2 22 24 26 28 21 212 214 216 Sources: Federal Reserve Bank Board of Governors and Haver Analytics.
Per capita incomes are still rising, but have slowed in the central U.S., a commodity-dependent region. Per Capita Personal Income Change from 28 to 214 Change from 214 to 216 Source: BEA.
Commodity prices, not just in agriculture, have fallen sharply since 213. Change in Commodity Prices since 213 1 % change from 213 to Mar. 17* 1 % change from 213 to Mar. 17* -1-1 -2-2 -3-3 -4-4 -5-5 -6-6 * Through 3/13/217 Sources: The Wall Street Journal and Haver Analytics.
Farm income has dropped from recent highs and future projections have become more pessimistic. U.S. Farm Income 16 14 12 1 8 6 Billion Dollars (216 $) Billion Dollars (216 $) 4 213 Projections 2 217 Projections 197 1975 198 1985 199 1995 2 25 21 215 22 225 16 14 12 1 8 6 4 2 Source: USDA. Note: Future years assume a deflator of 2% to match projections made in nominal terms with the inflation-adjusted historical data.
A strengthening dollar has been a headwind for U.S. exporters. Currency Exchange Rates 17 16 15 14 13 12 11 1 9 8 Index (Jan. 214 = 1) Mexico (Peso/US$) Euro (Euro/US$) Broad Index* Canada (C$/US$) China (Yuan/US$) Japan (Yen/US$) Stronger Dollar Index (Jan. 214 = 1) 213 214 215 216 217 17 16 15 14 13 12 11 1 9 8 *Nominal broad trade-weighted exchange value of the U.S. dollar. Sources: Federal Reserve Board and Haver Analytics.
The dollar has also strengthened significantly against the currencies of other key agricultural producers. Currency Exchange Rates 35 3 25 2 Index (Jan. 214 = 1) Ukraine (Hryvnias/US$) Argentina (Peso/US$) Russia (Ruble/US$) Brazil (Real/US$) Index (Jan. 214 = 1) 35 3 25 2 15 Stronger Dollar 15 1 1 5 213 214 215 216 217 Sources: FRB, IMF and Haver Analytics. 5
Last year s crop production boosted cash flow for some producers, but has weighed on prices. Crop Yields: Deviation from Trend 3 Percent Percent 3 2 2 1 1-1 -2-3 -4 Corn Soybeans Wheat Total Deviation 2 22 24 26 28 21 212 214 216-1 -2-3 -4 Source: USDA and staff calculations.
Multiple years of record production, and the drop in commodity prices, have cut farm income. Net Farm Income and Production 16 14 12 1 8 6 4 2 Billion Dollars, (216 $) Record Global or U.S. Production U.S. Farm Income (Left Scale) U.S. Corn Price (Right Scale) $/bu 1965 197 1975 198 1985 199 1995 2 25 21 215 8 7 6 5 4 3 2 1 Note: The shaded areas represent years when either U.S. or global production of corn, soybeans and wheat set a new record. Sources: USDA.
1 8 6 4 2 The decline in revenue has spanned across many different industries. Farm Sector Cash Receipts Billion Dollars, (216 $) Billion Dollars, (216 $) 213 214 215 216 217 1 8 6 4 2 Corn Soybeans Wheat Cattle Hogs Dairy Broilers Veg, Fruits, Nuts Source: USDA.
Some input costs have declined modestly. 14 12 1 8 6 4 2 Feed, Seed, Livestock Other Intermed. Expenses Farm Sector Input Costs Billion Dollars, (216 $) Billion Dollars, (216 $) 213 214 215 216 217 Mfg. Inputs Capital Exp. Labor Rent Interest Property Taxes 14 12 1 8 6 4 2 Sources: USDA, Haver Analytics, EIA, and Federal Reserve Bank of Kansas City.
But profit margins have generally remained low in both the livestock and crop sectors. U.S. Livestock Sector Profit Margins Cattle Cow / Calf 225 2 $/cwt Price Range December Futures Price Production Costs 4 35 $/cwt Price Range November Futures Price Production Costs 175 3 15 25 125 2 1 15 75 213 214 215 216 217 1 Sources: USDA, Haver Analytics and CME. Note: Production costs are calculated from USDA s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. 213 214 215 216 217
But profit margins have generally remained low in both the livestock and crop sectors. U.S. Crop Sector Profit Margins Corn Soybeans 8 7 6 5 4 $/bu Price Range December Futures Price Production Costs 16 14 12 1 $/bu Price Range November Futures Price Production Costs 3 8 2 213 214 215 216 217 6 213 214 215 216 217 Sources: USDA, Haver Analytics and CME. Note: Production costs are calculated from USDA s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation.
Reduced income has spurred demand for financing, and loan repayment rates have softened. Agricultural Credit Conditions KC Fed District 16 Diffusion Index Diffusion Index 16 14 Expected in three months 14 12 12 1 1 8 Farm Loan Demand 6 Loan Repayment Rates Loan Renewals or Extensions 4 Expected in three months 24 25 26 27 28 29 21 211 212 213 214 215 216 217 8 6 4 Source: Federal Reserve Bank of Kansas City.
Collateral requirements have risen steadily and fund availability has declined somewhat. 15 14 13 12 11 1 Diffusion Index Collateral Requirements Available Funds Agricultural Credit Conditions KC Fed District Expected in three months Diffusion Index 15 14 13 12 11 1 9 Expected in three months 9 8 8 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Source: Federal Reserve Bank of Kansas City.
Interest rates have edged up, particularly for variable rate loans. Variable Interest Rates Fixed Interest Rates 5.75 Percent 212 6.25 Percent 212 5.5 5.25 213 214 215 216 6. 5.75 213 214 215 216 5. 5.5 4.75 Operating Loans Machinery Loans Farm Real Estate Loans 5.25 Operating Loans Machinery Loans Farm Real Estate Loans Source: Federal Reserve Bank of Kansas City.
Farmland values have continued to decline from their peaks in 213-214, but gradually. High Quality Farmland Values 216:Q4 Percent change from previous year Change in U.S. Farmland Values, Peak to 216:Q4 State Peak Quarter Percent Change from Peak Mountain States* 216:Q2-27 Kansas 213:Q4-21 Minnesota 213:Q1-21 N. Dakota 215:Q3-19 S. Dakota 214:Q3-17 Iowa 213:Q2-17 Nebraska 213:Q3-11 N. Illinois 214:Q2-1 Missouri 213:Q3-9 N. Indiana 213:Q4-9 S. Wisconsin 215:Q1-9 Texas 216:Q4 No Decline Oklahoma 216:Q4 No Decline Source: Federal Reserve Bank of Kansas City.
Farmland values are still expected to trend lower. Expected Change in Nonirrigated Cropland Values 5 45 4 35 3 25 2 15 1 5 Percent change expected over next 12 months Avg. = -6.7 Avg. = -5.7 Avg. = -4.4 214 215 216 > 2% Decline 11-2% Decline 6-1% Decline 1-5% Decline No Change 1-5% Increase 6-1% Increase 11-2% Increase Source: Federal Reserve Bank of Kansas City.
If debt continues to grow and land values continue to fall, significant problems may still arise, but slowly. 25 Farm Sector Debt-to-Asset Ratio Percent Number of Years to Reach Debt-to-Asset Ratio of 2% Annual Change in Farm Debt 2 15 1 Annual Change in Farmland Values % 2% 4% 6% 8% 1% % -- 18.2 9.2 6.2 4.7 3.8-2% 21.9 9.9 6.5 4.8 3.9 3.2-4% 11. 6.8 5. 3.9 3.3 2.8-6% 7.3 5.1 4. 3.3 2.8 2.5-8% 5.4 4.1 3.4 2.9 2.5 2.2-1% 4.3 3.4 2.9 2.5 2.2 2. Source: USDA and author s calculations.
45 4 35 3 25 2 15 1 Ag and rural consolidation is a potential implication of a prolonged downturn. Number of Farms by Economic Class Index, 2 = 1 Index, 2 = 1 45 12 More than $1m Northern Plains $5k to $1m 4 115 Southern Plains $25k to $5k 35 11 Heartland $1k to $25k 3 Less than $1k 15 25 1 2 95 15 1 9 Total Number of Farms 12 115 11 15 1 95 9 5 2 25 21 215 5 85 2 25 21 215 85 Source: USDA. Source: USDA.
Concluding Remarks Economic growth in the U.S. continues, driven largely by urban areas concentrated in service-based industries. The recent downturn in the rural/ag economy would have been more severe if farmland values dropped more significantly. Although the outlook for ag is not a crisis, there is potential for further consolidation.
Questions? Nate Kauffman Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City Email: nathan.kauffman@kc.frb.org Website: http://www.kansascityfed.org/omaha/