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Agriculture and the Economy:
A View from the Chicago Fed
March 3, 2016
Riverside, Iowa
David Oppedahl
Senior Business Economist
312-322-6122
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
-5
-4
-3
-2
-1
0
1
2
1999 '01 '03 '05 '07 '09 '11 '13 '15
Above
Trend
Growth
Below
Trend
Growth
(standard deviation from trend growth,
3-month moving average)
In December 2016, the FOMC raised the
Fed Funds rate target to a range from 0.25% to 0.50%
0
1
2
3
4
5
6
7
1999 '01 '03 '05 '07 '09 '11 '13 '15
Federal Funds Rate (effective),
Yields in percent per annum
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)
(Consumer Price Index, percent change from year ago)
-2
0
2
4
6
8
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)
0
50
100
150
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Natural gas prices are low too
Real Natural Gas Price{2010 $/mmbtu}
0
5
10
15
1996 2001 2006 2011 2016
The FOMC anticipates that PCE inflation
will reach two percent by 2018
Unemployment has fallen from its peak (civilian unemployment rate, percent SA)
3
4
5
6
7
8
9
10
11
1999 '01 '03 '05 '07 '09 '11 '13 '15
The FOMC forecasts that the unemployment rate
will be at the natural rate by the end of 2016
The FOMC expects GDP to grow
above its trend in 2016
Contributions to real GDP growth
of 1.0% in the 4th quarter of 2015
• Consumption 1.4%
• Residential Investment 0.3%
• Business Investment -0.2%
• Inventories -0.1%
• Government 0.0%
• Net Exports -0.3%
Housing market tanked and moving up from bottom
Housing starts (millions of units, 3-month moving average, SAAR)
0.5
1.0
1.5
2.0
2.5
1999 '01 '03 '05 '07 '09 '11 '13 '15
3
4
5
6
7
8
9
1999 '01 '03 '05 '07 '09 '11 '13 '15
Home mortgage rate (percent, effective rate for all loans closed)
Manufacturing is moving sideways;
orders for capital goods moving up again
Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average)
45
50
55
60
65
70
75
1999 '01 '03 '05 '07 '09 '11 '13 '15
30
35
40
45
50
55
60
65
1999 '01 '03 '05 '07 '09 '11 '13 '15
ISM purchasing managers index (net percent reporting increase)
The dollar’s exchange value peaked in 2002,
before falling below earlier range and rallying
(Real Broad Trade-Weighted Exchange Value of the US$){March 1973=100}
80
90
100
110
120
1991 1996 2001 2006 2011 2016
U.S. exports lower than in recent years
(billions of 2015$, SA)
0
100
200
300
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
Value of agricultural exports expected to slide in 2016
0
20
40
60
80
100
120
140
160
FY1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
bil
lio
n $
Exports
Imports
Surplus
(*USDA projection)
2016*
Corn production forecast: 3rd highest on record
7.5
9.5
6.3
10.1
7.4
9.2 9.29.8
9.410.0
9.59.0
10.1
11.811.1
10.5
13.0
12.0
13.112.4 12.3
10.8
13.814.2
13.6
0
3
6
9
12
15
1991/92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*
bil
lio
n b
us
he
ls
0
2
4
6
8
1990/91 93/94 96/97 99/00 02/03 05/06 08/09 11/12 14/15
bil
lio
n b
ush
els
Residual & Feed
Food, Seed & Industrial
Exports
Growth in industrial demand (especially for ethanol
production) surpassed feed demand for corn
Corn prices expected to be down a bit
from 2014/15
14%
25%
11%
17%
5%
10%
15%
19%18%
20%
16%
12%
9%
20%
18%
12%13%
14%13%
9%8% 7%
9%
13%14%
$0
$3
$6
$9
1991/92 95/96 99/00 03/04 07/08 11/12 15/16*
Pri
ce p
er
bu
sh
el
0%
10%
20%
30%
Sto
cks/u
se r
ati
o
stks/use ratio price
Soybean production narrowly set a new record...
2.02.2
1.9
2.5
2.22.4
2.7 2.72.6
2.82.9
2.8
2.5
3.1 3.13.2
2.7
3.0
3.4 3.3
3.1 3.0
3.4
3.9 3.9
0
1
2
3
4
1991/92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*
bil
lio
n b
ush
els
Crushings are rising again while
soybean exports eased recently
0.0
0.5
1.0
1.5
2.0
1990/91 95/96 00/01 05/06 10/11 15/16*
bil
lio
n b
ush
els
Crush
Exports
Soybean prices moving lower as
stocks are up more in 2015/16
14%13%
11%
14%
8%
5%
8%
13%
11%
9%
7%6%
4%
9%
16%
19%
7%
5%5%
7%
5%5%
3%
5%
12%
$0
$4
$8
$12
$16
1991/92 95/96 99/00 03/04 07/08 11/12 15/16*
Pri
ce p
er
bu
sh
el
0%
5%
10%
15%
20%
Sto
cks/u
se r
ati
o
stks/use ratio price
7th District Crop Yield Indexes
(1964=100)
100
150
200
250
1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Corn
Soybeans
2015*
(*USDA projection)
Real Cash Crop Prices
($/bushel, adjusted by CPI-U for January 2010)
0
5
10
15
20
25
30
35
40
1976 1981 1986 1991 1996 2001 2006 2011 2016
Corn Soybeans
Real USDA Livestock Prices
($/hundredweight, adjusted by CPI-U for January 2010)
0
50
100
150
200
250
1976 1981 1986 1991 1996 2001 2006 2011 2016
Hogs Cattle
Hog and Dairy Profitability Measures
Hog-corn price ratio
5
10
15
20
25
30
1999 '01 '03 '05 '07 '09 '11 '13 '15
1
2
3
4
5
1999 '01 '03 '05 '07 '09 '11 '13 '15
Milk-feed price ratio
Real net farm income boosted by direct government
payments to farmers, but varies by farm and region
0
25
50
75
100
125
150
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
bil
lio
n 2
00
9$
gov't payments *USDA forecast
2016*
7G Share of Net Farm Income
(% of U.S. total)
0%
10%
20%
30%
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
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
Perc
en
t
Farmland Value Indexes
for Seventh District States (1981=100)
0
100
200
300
400
500
600
1980 1984 1988 1992 1996 2000 2004 2008 2012
Illinois Wisconsin
Iowa
Indiana
Index of Seventh District farmland values (1981=100)
0
100
200
300
400
500
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Nominal
Inflation
Adjusted
Farmland values in 2013 dollars for the U.S. and
for the Seventh Federal Reserve District
(weighted by acres from USDA data)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
U.S.
7th District
Index of Seventh District Cash Rents
Nominal vs. Inflation Adjusted (1981=100)
0
50
100
150
200
250
300
1980 1985 1990 1995 2000 2005 2010 2015
Inflation Adjusted
Nominal
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
Real farm sector assets and equity
at levels above prior peak
0
500
1,000
1,500
2,000
2,500
3,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
billio
n 2
00
9$
Debt
Equity
Assets
2016*
*USDA forecast
Farm financial ratios improved following the ‘80s crisis
5
10
15
20
25
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
perc
en
t
Debt/asset ratio
*USDA forecast
2016*
Index of agricultural loan demand for the Seventh
Federal Reserve District (excluding real estate)
40
60
80
100
120
140
160
1980 1985 1990 1995 2000 2005 2010 2015
Index of agricultural loan repayment rates
for the Seventh Federal Reserve District
20
40
60
80
100
120
140
160
1980 1985 1990 1995 2000 2005 2010 2015
Interest rates charged on new farm loans in the
Seventh Federal Reserve District
0
5
10
15
20
1980 1985 1990 1995 2000 2005 2010 2015
perc
en
t
Farm operating
Farm real estate
•The outlook is for the U.S. economy to expand at a
pace somewhat above trend in 2016
Summary
•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
•Solid U.S. economic growth boosting demand at restaurants
and for animal products
Impacts on Agriculture
•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
www.chicagofed.org