Nathan Kauffman Economist Federal Reserve Bank of Kansas ... · * Commodities include: natural gas, gasoline, WTI crude oil, copper, gold, platinum, corn, wheat, live cattle, cocoa,

Nathan Kauffman Economist Federal Reserve Bank of Kansas City – Omaha Branch June 6, 2013

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.

Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division www.kansascityfed.org/omaha

-10

-8

-6

-4

-2

0

2

4

6

-10

-8

-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014

Change from previous quarterChange from year ago

Calculations based on BEA and Blue Chip Forecast April 2013

Percent change from year ago

U.S. Real GDP Growth

Blue Chip Forecast


2.0

4.0

6.0

8.0

10.0

12.0

2.0

4.0

6.0

8.0

10.0

12.0U.S.

Kansas

Missouri

Unemployment Rate Percent

Source: Bureau of Labor Statistics


Exports

Commodities

Manufacturing

Housing

Consumer Spending

Booming sectors plateau in 2012

A Rebound in Household Spending The Wildcards

Investment

Government


-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Personal Consumption Expenditures (left scale)Existing Home Sales (right scale)

Consumer Spending and Housing Percent change from a year ago

Source: Bureau of Economic Analysis and National Association of Realtors


Percent of GDP

Source: Congressional Budget Office

Federal Government Debt as a Percent of GDP

0102030405060708090

100Actual

Baseline Projection

-40

-30

-20

-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013

Equipment and SoftwareStructures

Percent (SAAR)

Business Investment

Source: Bureau of Economic Analysis

Potential changes in tax law sparked an increase in business investment at the end of 2012.

Businesses report that increased economic, fiscal policy, and regulatory uncertainty are weighing on investments.

Investment: uncertainty is a heavy burden.


-50-40-30-20-100102030405060

-25-20-15-10

-505

1015202530

2006 2007 2008 2009 2010 2011 2012 2013

Tenth District Manufacturing Composite Index (left scale)Net Exports (right scale)

Real U.S. Net Exports and Tenth District Manufacturing

Percent change from previous year

Source: Bureau of Economic Analysis and Federal Reserve Bank of Kansas City

Index


-50

-25

0

25

50

75

100

0

50

100

150

200

250

300

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

CRB Commodity Index (Left Scale)

Source: Commodity Research Bureau, Yahoo! Finance, and author’s calculations * Commodities include: natural gas, gasoline, WTI crude oil, copper, gold, platinum, corn, wheat, live cattle, cocoa, coffee, and sugar. Equities include the S&P 500 index.

Index (2003 = 100) Index (2003 = 0)

Commodity Prices and Performance vs. Equities


-3

-2

-1

0

1

2

3

1981 1986 1991 1996 2001 2006 2011

Percent

Calculations based on BEA data

Difference between Per Capita Income Growth in Tenth Federal Reserve District and U.S.


Are commodities driving a transition in U.S. agriculture?


Ending stocks-to-use ratio

Source: USDA, EIA Short-Term Energy Outlook, and EIA Annual Energy Outlook 2013

U.S. Corn Inventories and Crude Oil Production

0

1

2

3

4

0

5

10

15

20

2002 2006 2010 2014 2018 2022

Corn Inventories (Left Scale)Crude Oil Production (Right Scale)

Crude Oil Production (Billion Barrels)


5.00

5.50

6.00

6.50

7.00

5.00

5.50

6.00

6.50

7.00

Jun Sep Dec Mar Jun Sep Dec

Corn Futures Prices as of May 29, 2013

Corn Futures Prices as of May 29, 2012

2013 Crop Insurance Price

U.S. Corn Futures Prices

Sources: barchart.com, data as of May 29, 2012 and CBOT, data as of May 29, 2013

Dollars per bushel


Net Returns (Returns less variable costs)

Dollars per acre

Source: USDA Agricultural Baseline Projections, various years

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700CornSoybeans

2013 Projections


Feed Price Ratios Ratio

Source: USDA Agricultural Baseline Projections

8

10

12

14

16

18

20

16

20

24

28

32

36

40

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Beef cattle-corn (Left Scale)

Hog-corn (Right Scale)

2013 Projections


Could the transition in agriculture lead to a bust?


Farm Incomes Farmland Values

Agricultural Exports

Global Competition Energy Policy Farm Debt

Interest Rates


U.S. Real Net Farm Income

Source: USDA

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

USDA Projections

Billion Dollars (Constant 2012 Dollars)


-5

0

5

10

15

20

25

30

35

-5

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Nonirrigated CroplandIrrigated CroplandRanchland

Federal Reserve 10th District Farmland Value Gains

Source: FRB KC, Survey of Agricultural Credit Conditions

Percent change from a year ago


0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Iowa Cropland

Kansas Non-irrigated Cropland

Cropland Value-to-Cash Rent Ratios


Source: NASS, USDA and Iowa State University

Investors will spend $32 for every dollar of revenue. Implies a capitalization rate of 3.1%


020406080100120140160180

020406080

100120140160180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ChinaAll Other Countries

(9.5%)*

Source: USDA Note: 2013 agricultural exports forecast based on year-to-date 2013 annual growth rate. * China’s share of total U.S. agricultural exports in parentheses.

U.S. Agricultural Exports Billion Dollars

(18.4%)*


Billion dollars

Source: USDA

U.S. Agricultural Export Growth

020406080100120140160180200

020406080

100120140160180200

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

ExportsImports

USDA Baseline Projections


Acreage Index (2000 = 100)

* Black Sea Region includes Russia, Ukraine, and Kazakhstan Source: USDA

Global Corn, Soybean, and Wheat Expansion

16

17

18

19

20

0

40

80

120

160

U.S. Share of World Acreage(Right Scale)U.S. (Left Scale)

Brazil & Argentina (Left Scale)

China (Left Scale)

Black Sea Region* (Left Scale)

Percent


89101112131415161718

80 90

100 110 120 130 140 150 160 170 180

2006 2008 2010 2012 2014 2016

U.S. Gasoline Consumption (Left Scale)Ethanol Production (Right Scale)*2015 Mandate (Right Scale)

EIA Forecast

The Gap?

Source: Energy Information Administration. * Ethanol Production is net of trade

Billion Gallons Billion Gallons

U.S. Gasoline Consumption, Ethanol Production, and Mandates


0

5

10

15

20

25

0

10

20

30

40

50

60

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

Net Returns to Farm Operators(Left Scale)

Farm Capital Expenditures(Right Scale)

Thousand Dollars (2005 Dollars) Thousand Dollars (2005 Dollars)

Source: USDA

U.S. Farm Profits and Capital Investments per Farm


-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2006 2007 2008 2009 2010 2011 2012

Non-Real Estate

Real Estate


Source: FDIC, Call Report data

Farm Debt Outstanding at Commercial Banks


0%

5%

10%

15%

20%

25%

0 0-10 10-20 20-30 30-40 40-50 50-60 60-70 >70Debt-to-Asset Ratio Range (%)

1979 2010

KS Farm Management Farms: Average Debt-to-Asset Ratio 1979 – 24.6% 2010 – 26.8%

Debt-to-Asset Ratio >40% 1979 – 19.4% 2010 – 25.6%

Debt-to-Asset Ratio >70%

1979 – 1.3% 2010 – 5.9%

Source: Featherstone, A. “Who Leveraged the Farm,” 2012 Agricultural Symposium, Federal Reserve Bank of Kansas City.


Monetary Policy


-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Overall PCE Price IndexPCE Price Index - Excluding Food and Energy

Personal Consumption Expenditures Price Index


Source: Bureau of Economic Analysis


0

1

2

3

4

5Target Federal Funds Rate at Year-End

Source: Federal Reserve Board of Governors, Summary of Economic Projections, March 2013

2012 2015 2014 2013 Longer run


Federal Reserve Balance Sheet: Assets Billion Dollars

0

500

1000

1500

2000

2500

3000

3500Fed Agency Debt MBS PurchasesLiquidity to Key Credit MarketsLending to Financial InstitutionsLong Term Treasury PurchasesTraditional Security Holdings

Source: Federal Reserve Board of Governors


Modest economic recovery continues, but in transition.

Commodities drive a transition in U.S. agriculture. Softer crop sector profits Strengthening livestock profits

In the transition, there are risks to U.S. agriculture,

possibly beyond 2013. Farm incomes, farmland values, export markets, global

competition, ethanol, farm debt, and interest rates

Federal Reserve Bank of Kansas City 2013 Agricultural Symposium

For an invitation e-mail [email protected]

Documents

Nathan Kauffman Economist Federal Reserve Bank of Kansas ... · * Commodities include: natural gas, gasoline, WTI crude oil, copper, gold, platinum, corn, wheat, live cattle, cocoa,