Macroeconomic Outlook for U.S. Agriculture€¦ · 2015. China Consumer Spending . Expenditure on Outbound Travel. China Box Office Revenue. Passenger Vehicle Sales in China. Sources:

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


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 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.


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.


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


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.

-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


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


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


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


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


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


Inflation has been persistently low, both in the U.S. and abroad.

-1.0

0.0

1.0

2.0

3.0

4.0


Inflation Indexes

U.S.Euro ZoneJapan

Source: Haver Analytics.

Percent


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


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.


Inflation in the U.S. has also been dampened by a stronger dollar.

90

100

110

120

130

140

150


Currency Exchange Rates

Euro ZoneJapanCanadaMexico

Sources: Federal Reserve Board and Haver Analytics.

Index (Jan. 2013 = 100)

Stronger Dollar


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


Argentina (Peso/US$)

Brazil (Real/US$)

Russia (Ruble/US$)

Broad Index*

Index (Jan. 2013=100)

Stronger Dollar


Financial markets have also been marked by episodes of significant volatility.

50

100

150

200


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


Market Volatility Index (VIX)

Index


Last year’s developments in China renewed concerns about its growth prospects.

13151719212325

1234567


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


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)


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


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)


Some trends may also be hard to reverse.


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


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)


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.

-50-40-30-20-10

010203040


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


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


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


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


The downturn in the U.S. ag economy has persisted for 3 years.

Implications for credit markets?


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)


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


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


-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


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


How might a changing interest rate environment affect the ag economy?


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


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


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: [email protected]

Website: http://www.kansascityfed.org/omaha/

mailto:[email protected]

http://www.kansascityfed.org/omaha/

Documents

Macroeconomic Outlook for U.S. Agriculture€¦ · 2015. China Consumer Spending . Expenditure on Outbound Travel. China Box Office Revenue. Passenger Vehicle Sales in China. Sources: