FEDERAL RESERVE BANK OF KANSAS CITY
Macroeconomic Outlook for U.S. Agriculture
May 18, 2016
Nathan 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
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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
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Of the 12 Fed Districts, the 10th 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
0 10 20 30 40 50 60
BostonPhiladelphia
New YorkRichmondCleveland
AtlantaSan Francisco
DallasSt. LouisChicago
MinneapolisKansas City
Share of U.S. Ag Banks
Farm Counties
Source: BEA, USDA, Ag Finance Databook and staff calculations
Percent
Proportion of “Farm Dependent” Counties and Agricultural Banks
Source: BEA.
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Outline
• A 3rd 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.
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Farm income has dropped sharply from recent highs, along with crop prices.
Billion dollars (constant 2015 dollars)
U.S. Real Net Farm Income
3
4
5
6
7
40
60
80
100
120
140
2013 2014 2015 2016*
Net Farm Income (Left Scale)
Average Corn Price (Right Scale)
Source: USDA.
$/bu
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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?
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Global economic growth has been sluggish the last few years.
-101234567891011
-10123456789
1011
Canada Euro Area Mexico Japan China
2013201420152016 *1996 - 2006 Average Annual Rate
* Forecast Source: IMF April 2016 Update
Global Real GDP Growth Annual percent change Annual percent change
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U.S. growth has been slightly better, driven by the strength of the consumer.
8
U.S. Real GDP Growth
Source: BEA and Haver Analytics.
-10-8-6-4-202468
-10-8-6-4-202468
2006 2008 2010 2012 2014
Percent change, saar
-1
0
1
2
3
2013 2014 2015
Contributions to GDP Growth
PCEInvestmentGovernmentNet Exports
Source: BEA and Haver Analytics.
Percent
FEDERAL RESERVE BANK OF KANSAS CITY
U.S. labor markets have steadily improved.
4
5
6
7
8
9
-
1
2
3
4
5
6
Jan-13 Jan-14 Jan-15 Jan-16
U.S. Labor Market
Number of U.S. Jobs added since Jan. 2013 (Left Scale)
U.S. Unemployment Rate (Right Scale)
Sources: Bureau of Labor Statistics and Haver Analytics.
Millions Percent
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Monetary policy has responded to U.S. economic improvement.
0
0.25
0.5
0
0.25
0.5
2013 2014 2015 2016
Federal Funds Target Rate
Sources: Federal Reserve Board and Haver Analytics
Percent Percent
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But policy remains very accommodative.
0
2
4
6
8
10
12
0
2
4
6
8
10
12
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Federal Funds Target Rate
Sources: Federal Reserve Board and Haver Analytics
Percent Percent
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Globally, central bank policies have shifted since 2013.
15
20
25
30
2013:Q1 Q3 2014:Q1 Q3 2015:Q1 Q3 2016:Q1
Central Bank Balance Sheet Assets as a Percent of GDP
U.S.
Euro Zone
Sources: Federal Reserve Board, BEA, ECB, and Haver Analytics.
Percent
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Inflation has been persistently low, both in the U.S. and abroad.
-1.0
0.0
1.0
2.0
3.0
4.0
Jan-13 Jan-14 Jan-15 Jan-16
Inflation Indexes
U.S.Euro ZoneJapan
Source: Haver Analytics.
Percent
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Sharp declines in energy prices have kept inflationary pressures subdued.
0
1
2
3
4
5
6
7
0
20
40
60
80
100
120
Jan-13 Jan-14 Jan-15 Jan-16
Crude Oil - WTI (Left Scale)
Natural Gas (Right Scale)
U.S. Energy Prices
$/barrel $/mmbtu
Sources: Wall Street Journal, EIA, CME Group, and Haver Analytics.
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Inflation in the U.S. has also been dampened by a stronger dollar.
90
100
110
120
130
140
150
Jan-13 Jan-14 Jan-15 Jan-16
Currency Exchange Rates
Euro ZoneJapanCanadaMexico
Sources: Federal Reserve Board and Haver Analytics.
Index (Jan. 2013 = 100)
Stronger Dollar
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The dollar has surged even more dramatically against regions competing for ag exports.
*Nominal broad trade-weighted exchange value of the U.S. dollar Sources: FRB, IMF and Haver Analytics.
Currency Exchange Rates
50
100
150
200
250
300
350
400
50
100
150
200
250
300
350
400
Jan-13 Jan-14 Jan-15 Jan-16
Argentina (Peso/US$)
Brazil (Real/US$)
Russia (Ruble/US$)
Broad Index*
Index (Jan. 2013=100)
Stronger Dollar
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Financial markets have also been marked by episodes of significant volatility.
50
100
150
200
Jan-13 Jan-14 Jan-15 Jan-16
Stock Market Indices
S&P 500
S&P Europe 350
SSE Composite
Sources: Standard & Poor’s, Yahoo Finance, WSJ, and Haver Analytics.
Index (Jan. 2013 = 100)
10
15
20
25
30
Jan-13 Jan-14 Jan-15 Jan-16
Market Volatility Index (VIX)
Index
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Last year’s developments in China renewed concerns about its growth prospects.
13151719212325
1234567
Jan-13 Jan-14 Jan-15 Jan-16
China Lending Rates and Reserve Requirements
1-Year Lending Rate (Left Scale)Reserve Requirement (Large Banks - Right Scale)Reserve Requirement Ratio (Small/Medium Dep. Institutions - Right Scale)
Sources: PBOC and Haver Analytics.
Percent Percent
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More recent developments underscore concerns about slowing in China.
0
50
100
150
200
250
2013 2014 2015 2016
Apple Inc. Sales and U.S. Ag Exports to China
Apple Inc. Sales in Greater China*
U.S. Ag Exports to China
* Greater China includes mainland China, Taiwan, and Hong Kong. Sources: Apple and USDA.
Index (2013:Q1 = 100)
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Debt in China has increased notably, but is still lower than in the U.S.
0%
50%
100%
150%
200%
250%
300%
350%
400%
Total Debt to GDP
U.S.
China
Sources: Federal Reserve Board, BIS and Haver Analytics.
0%
20%
40%
60%
80%
100%
120%
Government Debt to GDP
U.S.
China
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And other indicators point to momentum in the Chinese economy.
0
10
20
30
40
50
60
2002 2004 2006 2008 2010 2012 2014
Gross Savings
ChinaGermanyU.S.
Source: World Bank.
Percent of GDP
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015
China Consumer Spending
Expenditure on Outbound TravelChina Box Office RevenuePassenger Vehicle Sales in China
Sources: World Travel & Tourism Council, China Association of Automobile Manufacturers, Motion Picture Association of America, and Haver Analytics.
Index (2010 = 100)
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Some trends may also be hard to reverse.
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Understanding demographic trends will be key to understanding future global demand.
50
60
70
80
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090
Working Age Population
U.S.JapanGermanyChina
Sources: United Nations and Haver Analytics.
Percent of Total Population
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In agriculture, weather plays a crucial role in determining crop prices in the short-term.
01020304050607080
8090
100110120130140150160
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
U.S. Crop Prices and Drought
U.S. Crop Price Index (Left Scale)
U.S. Drought (Right Scale)*
Sources: USDA, University of Nebraska-Lincoln and NOAA. * Includes lower 48 states only.
Index (Jan. 2007 = 100)
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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
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But demand strength will be the key long-term driver.
-50-40-30-20-10
010203040
Jan-13 Jan-14 Jan-15 Jan-16
U.S. Ag Exports
World TotalChina
Source: USDA.
Percent change from previous year
-2
0
2
4
6
8
10
2013 2014 2015 2016*
U.S. Ethanol Production
* Year-to-date average through April. Source: EIA.
Percent change from previous year
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As it stands, crop price expectations are even slightly more bearish than last year.
0
5
10
15
20
1 2 3 4 5 6 7
December Corn Price Expectations:April, 2015December Corn Price Expectations:April, 2016
Probability (Percent)
$/bu Source: Calculations based on data from barchart.com
U.S. Corn Price Expectations
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An unexpected demand shock may be needed to envision a higher path of growth for crop prices.
2
3
4
5
6
7
7
8
9
10
11
12
2016* 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Soybeans (Left Scale)Corn (Right Scale)Wheat (Right Scale)
$/bushel
Sources: University of Missouri: FAPRI, Wall Street Journal and Haver Analytics
$/bushel
Long-term Crop Price Projections
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Livestock prices are also generally projected to remain below current levels.
50
55
60
65
70
75
80
100
110
120
130
140
150
160
2016* 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Cattle Price (Left Scale)Hog Price (Right Scale)
$/cwt $/cwt
Long-term Livestock Price Projections
Sources: University of Missouri: FAPRI, Wall Street Journal and Haver Analytics
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The downturn in the U.S. ag economy has persisted for 3 years.
Implications for credit markets?
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Financing needs began rising notably in 2013, and have remained high.
Total US Farm Debt
40
50
60
70
80
90
100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Real Estate Loans
Non-Real Estate Loans
Composition of Non-Real Estate Farm Debt
0
20
40
60
80
100
120
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Livestock Operating ExpensesMach. & Equip. Other
Billion Dollars (constant 2015 Dollars)
Source: Federal Reserve Bank of Kansas City, Ag Finance Database
Billion Dollars (constant 2015 Dollars)
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Credit conditions have gradually deteriorated.
5060708090100110120130140150160
5060708090
100110120130140150160
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Farm Loan DemandLoan Repayment RatesLoan Renewals or Extensions
Expected in three months
Expected in three months
Tenth District Credit Conditions 2015, Fourth Quarter
Diffusion Index Diffusion Index
Source: Federal Reserve Bank of Kansas City, Survey of Ag Credit Conditions
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Farmland values have also declined, but only at a modest pace.
-10-50510152025303540
-10-505
10152025303540
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
IllinoisNebraskaIowa
Changes in High Quality Farmland Values
Percent change from the previous year * Percent change from the previous year *
*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
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-15-10-50510152025
-15-10-505
10152025
2009 2010 2011 2012 2013 2014 2015
NonirrigatedIrrigatedRanchland
Percent change from the previous year
Cash rents have declined somewhat, but not as quickly as most producers have hoped for.
Source: Federal Reserve Bank of Kansas City
Percent change from the previous year
Changes in Tenth District Cash Rents
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In the short-term, liquidity may be a more significant concern than solvency.
0.0
0.5
1.0
1.5
2.0
2.5
20%
30%
40%
50%
60%
70%
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
U.S. Farm Sector Operating Loan Volume
(Commercial Banks)
Operating Loan Volume as a Share of Total Volume (Left Scale)
Ratio of operating debt to net farm income (Right Scale)
Source: Federal Reserve Bank of Kansas City
10
12
14
16
18
20
22
24
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
U.S. Farm Sector Debt-to-Asset Ratio
Source: USDA.
Percent
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How might a changing interest rate environment affect the ag economy?
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Farm interest rates have increased, but only slightly.
3.03.54.04.55.05.56.06.57.0
3.03.54.04.55.05.56.06.57.0
Feeder Livestock Other Livestock Current OperatingExpenses
Farm Machinery
2014 2015 2016Percent Percent
Source: Agricultural Finance Databook, Table A.5
Interest Rates on Non-Real Estate Farm Loans First Quarter
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Interest expenses, however, are small when compared to fluctuations in commodity prices.
U.S. Corn Producers - Interest Expenses and Price Fluctuations
Cents per Bushel
Sources: USDA, barchart.com and author’s calculations.
Cents per Bushel
01020304050607080
01020304050607080
1996 - 2002 2008 - 2014 2015
Average Annual Interest Payment
Average Daily Price Change
Average Monthly Price Change
2014
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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.
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Questions?
Nathan Kauffman Omaha Branch Executive and Economist
Federal Reserve Bank of Kansas City Email: [email protected]
Website: http://www.kansascityfed.org/omaha/