Macroeconomic Outlook for U.S. Agriculture Nathan Kauffman Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City May 18, 216 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
Overview of the Federal Reserve System The Fed is the Central Bank of the U.S. Board of Governors: 7 members, each appointed by U.S. President Federal Reserve Banks: 12 Banks, 24 Branches The Federal Open Market Committee (FOMC) has 19 members, 12 voting. Primary functions: Monetary Policy pursue maximum employment and stable prices Bank Regulation ensure safety and soundness of banks. Financial Services bank for banks, and bank for federal govt. Lender of Last Resort provide liquidity in times of crisis
Of the 12 Fed Districts, the 1 th District is the most concentrated in agriculture by some measures. Average Farm Income as a Share of Total Personal Income Average Across Counties by Fed District Proportion of Farm Dependent Counties and Agricultural Banks Kansas City Minneapolis Chicago St. Louis Dallas San Francisco Atlanta Cleveland Richmond New York Philadelphia Boston Percent Share of U.S. Ag Banks Farm Counties 1 2 3 4 5 6 Source: BEA. Source: BEA, USDA, Ag Finance Databook and staff calculations
Outline A 3 rd consecutive year of a downturn in the ag economy. Supply factors at play year-to-year, but demand strength likely the long term driver. Recent global and macroeconomic developments have shaped the set of concerns in the ag economy. Financial stress among ag borrowers and ag lenders could be more pronounced in the near future.
Farm income has dropped sharply from recent highs, along with crop prices. U.S. Real Net Farm Income 14 12 Billion dollars (constant 215 dollars) Net Farm Income (Left Scale) $/bu Average Corn Price (Right Scale) 7 6 1 8 5 6 4 4 213 214 215 216* 3 Source: USDA.
Outside of agriculture, the last three years have also been notable for the global economy. Fiscal challenges Monetary policy divergence Oil price collapse Exchange rate volatility Renewed China concerns Global financial market turmoil _rexit?
Global economic growth has been sluggish the last few years. 11 1 9 8 7 6 5 4 3 2 1-1 Annual percent change Global Real GDP Growth 213 214 215 216 * 1996-26 Average Annual Rate Annual percent change Canada Euro Area Mexico Japan China 11 1 9 8 7 6 5 4 3 2 1-1 * Forecast Source: IMF April 216 Update
U.S. growth has been slightly better, driven by the strength of the consumer. U.S. Real GDP Growth Percent change, saar 8 6 4 2-2 -4-6 -8-1 26 28 21 212 214 Source: BEA and Haver Analytics. 8 6 4 2-2 -4-6 -8-1 3 2 1-1 Contributions to GDP Growth Percent PCE Investment Government Net Exports 213 214 215 Source: BEA and Haver Analytics. 8
U.S. labor markets have steadily improved. U.S. Labor Market 6 5 Millions Number of U.S. Jobs added since Jan. 213 (Left Scale) U.S. Unemployment Rate (Right Scale) Percent 9 8 4 3 2 7 6 1 5 - Jan-13 Jan-14 Jan-15 Jan-16 4 Sources: Bureau of Labor Statistics and Haver Analytics.
Monetary policy has responded to U.S. economic improvement. Federal Funds Target Rate.5 Percent Percent.5.25.25 213 214 215 216 Sources: Federal Reserve Board and Haver Analytics
But policy remains very accommodative. Federal Funds Target Rate 12 Percent Percent 12 1 1 8 8 6 6 4 4 2 2 1983 1986 1989 1992 1995 1998 21 24 27 21 213 216 Sources: Federal Reserve Board and Haver Analytics
Globally, central bank policies have shifted since 213. 3 Percent Central Bank Balance Sheet Assets as a Percent of GDP 25 2 U.S. Euro Zone 15 213:Q1 Q3 214:Q1 Q3 215:Q1 Q3 216:Q1 Sources: Federal Reserve Board, BEA, ECB, and Haver Analytics.
Inflation has been persistently low, both in the U.S. and abroad. Inflation Indexes 4. 3. 2. 1.. Percent U.S. Euro Zone Japan -1. Jan-13 Jan-14 Jan-15 Jan-16 Source: Haver Analytics.
Sharp declines in energy prices have kept inflationary pressures subdued. U.S. Energy Prices 12 1 8 6 4 2 $/barrel $/mmbtu Crude Oil - WTI (Left Scale) Natural Gas (Right Scale) Jan-13 Jan-14 Jan-15 Jan-16 7 6 5 4 3 2 1 Sources: Wall Street Journal, EIA, CME Group, and Haver Analytics.
Inflation in the U.S. has also been dampened by a stronger dollar. Currency Exchange Rates 15 14 13 12 Index (Jan. 213 = 1) Euro Zone Japan Canada Mexico 11 1 Stronger Dollar 9 Jan-13 Jan-14 Jan-15 Jan-16 Sources: Federal Reserve Board and Haver Analytics.
The dollar has surged even more dramatically against regions competing for ag exports. Currency Exchange Rates 4 35 3 25 Index (Jan. 213=1) Argentina (Peso/US$) Brazil (Real/US$) Russia (Ruble/US$) Broad Index* Stronger Dollar 2 15 1 5 Jan-13 Jan-14 Jan-15 Jan-16 4 35 3 25 2 15 1 5 *Nominal broad trade-weighted exchange value of the U.S. dollar Sources: FRB, IMF and Haver Analytics.
Financial markets have also been marked by episodes of significant volatility. Stock Market Indices Market Volatility Index (VIX) 2 Index (Jan. 213 = 1) S&P 5 3 Index 15 S&P Europe 35 SSE Composite 25 2 1 15 5 Jan-13 Jan-14 Jan-15 Jan-16 1 Jan-13 Jan-14 Jan-15 Jan-16 Sources: Standard & Poor s, Yahoo Finance, WSJ, and Haver Analytics.
Last year s developments in China renewed concerns about its growth prospects. China Lending Rates and Reserve Requirements 7 Percent Percent 6 5 4 3 2 1 Jan-13 Jan-14 Jan-15 Jan-16 25 23 21 19 17 15 13 Sources: PBOC and Haver Analytics. 1-Year Lending Rate (Left Scale) Reserve Requirement (Large Banks - Right Scale) Reserve Requirement Ratio (Small/Medium Dep. Institutions - Right Scale)
More recent developments underscore concerns about slowing in China. Apple Inc. Sales and U.S. Ag Exports to China 25 2 Index (213:Q1 = 1) Apple Inc. Sales in Greater China* U.S. Ag Exports to China 15 1 5 213 214 215 216 * Greater China includes mainland China, Taiwan, and Hong Kong. Sources: Apple and USDA.
Debt in China has increased notably, but is still lower than in the U.S. Total Debt to GDP Government Debt to GDP 4% 12% 35% 3% 25% 2% 1% 8% 6% 15% 1% 5% % U.S. China 4% 2% % U.S. China Sources: Federal Reserve Board, BIS and Haver Analytics.
And other indicators point to momentum in the Chinese economy. Gross Savings China Consumer Spending 6 Percent of GDP 6 Index (21 = 1) 5 5 Expenditure on Outbound Travel China Box Office Revenue 4 4 Passenger Vehicle Sales in China 3 3 2 2 1 China Germany U.S. 22 24 26 28 21 212 214 1 21 211 212 213 214 215 Source: World Bank. Sources: World Travel & Tourism Council, China Association of Automobile Manufacturers, Motion Picture Association of America, and Haver Analytics.
Some trends may also be hard to reverse.
Understanding demographic trends will be key to understanding future global demand. Working Age Population 8 7 Percent of Total Population U.S. Japan Germany China 6 5 195 196 197 198 199 2 21 22 23 24 25 26 27 28 29 Sources: United Nations and Haver Analytics.
In agriculture, weather plays a crucial role in determining crop prices in the short-term. U.S. Crop Prices and Drought Index (Jan. 27 = 1) 16 15 U.S. Crop Price Index (Left Scale) 14 U.S. Drought (Right Scale)* 13 12 11 1 9 8 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 8 7 6 5 4 3 2 1 Sources: USDA, University of Nebraska-Lincoln and NOAA. * Includes lower 48 states only.
Expectations of expanded crop acreage in the Corn Belt could play a significant role this year. Projected Change in Corn and Soybean Acres Planted Source: USDA
But demand strength will be the key long-term driver. U.S. Ag Exports 4 Percent change from previous year 3 World Total 2 China 1-1 -2-3 -4-5 Jan-13 Jan-14 Jan-15 Jan-16 Source: USDA. 1 8 6 4 2-2 U.S. Ethanol Production Percent change from previous year 213 214 215 216* * Year-to-date average through April. Source: EIA.
As it stands, crop price expectations are even slightly more bearish than last year. U.S. Corn Price Expectations 2 15 1 Probability (Percent) December Corn Price Expectations: April, 215 December Corn Price Expectations: April, 216 5 1 2 3 4 5 6 7 Source: Calculations based on data from barchart.com $/bu
An unexpected demand shock may be needed to envision a higher path of growth for crop prices. Long-term Crop Price Projections 12 $/bushel Soybeans (Left Scale) $/bushel 7 11 Corn (Right Scale) Wheat (Right Scale) 6 1 5 9 4 8 3 7 216* 217 218 219 22 221 222 223 224 225 226 2 Sources: University of Missouri: FAPRI, Wall Street Journal and Haver Analytics
Livestock prices are also generally projected to remain below current levels. Long-term Livestock Price Projections 16 15 $/cwt Cattle Price (Left Scale) Hog Price (Right Scale) $/cwt 8 75 14 7 13 65 12 6 11 55 1 216* 217 218 219 22 221 222 223 224 225 226 5 Sources: University of Missouri: FAPRI, Wall Street Journal and Haver Analytics
The downturn in the U.S. ag economy has persisted for 3 years. Implications for credit markets?
Financing needs began rising notably in 213, and have remained high. Total US Farm Debt Composition of Non-Real Estate Farm Debt 1 9 Billion Dollars (constant 215 Dollars) Real Estate Loans Non-Real Estate Loans 12 1 Billion Dollars (constant 215 Dollars) Livestock Mach. & Equip. Operating Expenses Other 8 8 7 6 6 4 5 2 4 25 26 27 28 29 21 211 212 213 214 215 25 26 27 28 29 21 211 212 213 214 215 216 Source: Federal Reserve Bank of Kansas City, Ag Finance Database
Credit conditions have gradually deteriorated. 16 15 14 13 12 11 1 9 8 7 6 5 Diffusion Index Tenth District Credit Conditions 215, Fourth Quarter Farm Loan Demand Loan Repayment Rates Loan Renewals or Extensions Expected in three months Expected in three months Diffusion Index 24 25 26 27 28 29 21 211 212 213 214 215 16 15 14 13 12 11 1 9 8 7 6 5 Source: Federal Reserve Bank of Kansas City, Survey of Ag Credit Conditions
Farmland values have also declined, but only at a modest pace. Changes in High Quality Farmland Values 4 35 3 25 2 15 1 5-5 -1 Percent change from the previous year * Percent change from the previous year * Illinois Nebraska Iowa 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 *Percent changes are calculated using responses only from those banks reporting in both the past and the current quarters. Source: Federal Reserve Bank of Kansas City 4 35 3 25 2 15 1 5-5 -1
Cash rents have declined somewhat, but not as quickly as most producers have hoped for. Changes in Tenth District Cash Rents 25 2 15 1 5-5 -1-15 Percent change from the previous year Nonirrigated Irrigated Ranchland Percent change from the previous year 29 21 211 212 213 214 215 25 2 15 1 5-5 -1-15 Source: Federal Reserve Bank of Kansas City
In the short-term, liquidity may be a more significant concern than solvency. U.S. Farm Sector Operating Loan Volume (Commercial Banks) Operating Loan Volume as a Share of Total Volume (Left Scale) 24 Percent U.S. Farm Sector Debt-to-Asset Ratio 7% 6% Ratio of operating debt to net farm income (Right Scale) 2.5 2. 22 2 18 5% 1.5 16 4% 1. 14 3%.5 12 2% 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213 216. 1 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213 216 Source: Federal Reserve Bank of Kansas City Source: USDA.
How might a changing interest rate environment affect the ag economy?
Farm interest rates have increased, but only slightly. Interest Rates on Non-Real Estate Farm Loans First Quarter 7. 6.5 6. 5.5 5. 4.5 4. 3.5 3. Percent 214 215 216 Feeder Livestock Other Livestock Current Operating Expenses Percent Farm Machinery 7. 6.5 6. 5.5 5. 4.5 4. 3.5 3. Source: Agricultural Finance Databook, Table A.5
Interest expenses, however, are small when compared to fluctuations in commodity prices. 8 7 6 5 4 3 2 1 Cents per Bushel U.S. Corn Producers - Interest Expenses and Price Fluctuations Average Annual Interest Payment Average Daily Price Change Average Monthly Price Change 214 1996-22 28-214 215 Cents per Bushel 8 7 6 5 4 3 2 1 Sources: USDA, barchart.com and author s calculations.
Concluding Points Farm income has continued to weaken with low commodity prices. Supply-side headwinds: strong U.S. and global production. Demand-side headwinds: ethanol blend wall, export markets and China. Biofuel exports may be a longer-term boost. Effects of the downturn in the farm economy: Tightening credit conditions. Pressure on cash rents and farmland values. Consolidation (opportunities for some). Accelerating decline in rural, agricultural areas.
Questions? Nathan Kauffman Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City Email: nathan.kauffman@kc.frb.org Website: http://www.kansascityfed.org/omaha/