Transcript Real Gross Domestic Product

U.S. AGRICULTURE:
What Goes Up Must Come …
Jason Henderson
Branch Executive
Federal Reserve Bank of Kansas City
Omaha Branch
May 14, 2008
Photos courtesy of USDA
The views expressed are those of the author and do not necessarily
reflect the positions of Federal Reserve Bank of Kansas City or the Federal Reserve System.
U.S. Agriculture
• Today’s Outline:
–
–
–
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Photos courtesy of USDA
A Booming Farm Economy
Land Values Surge
Is the Boom Sustainable?
Will Farm Debt Remain in Check?
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
The Farm Economy is Booming.
U.S. Real Net Farm Income
Billions of Dollars (2008=100)
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
1970
1975
1980
1985
1990
1995
2000
2005
Source: USDA
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Crop Prices Surged With Strong
Demand And Shorter Global Supplies
U.S. Crop Prices
Dollars per bushel
16
14
12
10
8
Soybeans
6
4
Wheat
2
Corn
0
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
18
16
14
12
10
8
6
4
2
0
Sep-08
Source: Wall Street Journal
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Tough Times in the Cattle Industry
U.S. Livestock Prices and Breakeven Costs
Dollars per hundredweight
110
Breakeven Costs
110
100
100
90
90
Cattle Price
80
80
70
60
60
50
50
40
40
30
Aug-03
Hog Price
Aug-04
Aug-05
Source: USDA and Iowa State University
Photos courtesy of USDA
70
Breakeven Costs
Aug-06
Aug-07
30
Aug-08
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
The Agricultural Outlook
• Today’s Outline:
– A Booming Farm Economy
– Land Values Surge
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Kansas’ Farmland Values Surge
Kansas Farmland Values
Percent change from year ago
30
25
2007:Q1
2007:Q3
2008:Q1
2007:Q2
2007:Q4
2008:Q2
20
15
10
5
0
Non-irrigated
Irrigated
Ranchland
Source: Federal Reserve Bank of Kansas City
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
On a national basis, real farmland
values have topped the 1980s highs.
U.S. Farmland Values
Dollars
2,500
2,500
Real
(Inflated to 2008 dollars)
2,000
2,000
1,500
1,500
1,000
1,000
500
Nominal
0
500
0
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Source: USDA
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Kansas, however, has not topped
1980s highs.
Real Farmland Value Gains
(Percent change from 1980s highs to 2008)
Below 1980s highs
Up 0 to 20%
Up 20 to 70%
Up 100% or more
Source: USDA
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
The Agricultural Outlook
• Today’s Outline:
– A Booming Farm Economy
– Land Values Surge
– Is the Boom Sustainable?
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
World Grain Inventories Have
Fallen to Record Lows.
World Grain Stocks to Use Ratio
Percent of annual use
50
40
50
Wheat
30
20
30
Corn
10
Source: USDA
20
10
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Photos courtesy of USDA
40
0
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Agricultural Exports Have Surged . . .
U.S. Agricultural Exports
Billion dollars (2008=100)
120
120
100
100
80
80
60
60
40
40
20
20
0
1960
0
1970
1980
1990
2000
Source: USDA
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
With Stronger World Incomes . . .
World GDP Growth
Percent change
8
8
7
7
6
6
Average
5
5
4
4
3
3
2
2
1
1
0
0
1970
1975
1980
1985
1990
1995
2000
2005
Source: International Monetary Fund
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
And a Weak Dollar.
Value of U.S. Dollar
Index
130
130
120
120
110
110
100
100
90
90
80
80
70
Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
70
Source: Federal Reserve Board of Governors
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Has Ethanol Reached its Limit?
U.S. Ethanol Production, Mandates,
and Corn Use
Billion gallons
Percent of Corn Production
18
36
Ethanol Production (left scale)
Ethanol Mandates (left scale)
Ethanol Corn Use (right scale)
15
30
12
24
9
18
6
12
3
6
0
0
1980
1985
1990
1995
2000
2005
2010
2015
Source: USDA and Renewable Fuels Association
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
The Outlook for Crop Prices has
Strengthened in 2008
Corn and Wheat Price Forecasts
Corn Price
Wheat Price
Dollars per bushel
6
Dollars per bushel
6
8
5
5
7
4
4
6
3
3
5
2
2
4
September 2008 forecast
8
September 2008 forecast
7
6
March 2008 forecast
2006 2007 2008 2009 2010 2011 2012 2013
March 2008 forecast
5
4
2006 2007 2008 2009 2010 2011 2012 2013
Source: FAPRI
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Farm input costs surged beyond
expectations.
2008 Farm Input Costs
Fertilizer
Feed
Fuels
Seed
FAPRI Projection (March 2008)
Interest
USDA Projection (August 2008)
Rent
Machinery
Wages
Chemicals
-10
0
10
20
30
40
Percent change from year-ago
50
60
70
Source: USDA and FAPRI
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Market returns have jumped sharply for
corn and soybeans.
Market returns to Crop Production
(less variable or operating costs)
Dollars per acre (2007=100)
700
700
Wheat
600
600
Corn
500
500
Soybeans
400
400
300
300
200
200
100
100
0
0
1975
1980
1985
1990
1995
2000
2005
Calculations based on USDA cost and returns data.
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Net returns will vary with commodity
prices and input costs.
Net Returns to Land from U.S. Corn Production
(Dollars per acre – average 2009 to 2013)
Corn Price
(Dollars per bushel)
2009 Production Cost
Increase (Percent)
$4.00
$5.25
$7.00
5.5% (USDA baseline)
$129
$328
$610
15%
$83
$283
$564
30% (Actual 2008 increase)
$10
$210
$491
Calculations based on USDA cost of production forecasts for 2007 through 2009 and
FAPRI yield projections through 2013. Returns exclude government payments.
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Net returns will vary with commodity
prices and input costs.
Net Returns to Land from U.S. Wheat Production
(Dollars per acre – average 2009 to 2013)
Wheat Price
(Dollars per bushel)
2009 Production Cost
Increase (Percent)
$6.00
$6.70
$8.00
4.5% (USDA baseline)
$11
$42
$99
15%
---
$16
$73
25% (Actual 2008 increase)
---
---
$48
Calculations based on USDA cost of production forecasts for 2007 through 2009 and
FAPRI yield projections through 2013. Returns exclude government payments.
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
The Agricultural Outlook
• Today’s Outline:
–
–
–
–
Photos courtesy of USDA
A Booming Farm Economy
Land Values Surge
Is the Boom Sustainable?
Will Farm Debt Remain in Check?
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Debt ratios have reached record lows.
Debt Repayment Capacity Utilization*
Percent
120
120
100
100
80
80
60
60
40
40
20
20
0
0
1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: USDA
*Actual debt divided by debt that could be repaid from current income
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Farmland is increasingly owned by
older people.
Distribution of Iowa Farmland by Age of Owner
Percent
35
1982
30
1992
2002
2007
25
20
15
10
5
0
< 25
25-34
35-44
45-54
55-64
65-74
> 75
Source: Iowa State University
Photos courtesy of USDA
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs
Conclusions
•
•
Land values boom with rising farm income.
Have farmland values peaked?
–
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–
•
•
Photos courtesy of USDA
Rising input costs trim margins.
Ethanol and exports present demand risks.
What is the global supply response to
high prices?
Will debt levels remain low even with
thinner margins?
Agriculture is a boom and bust industry.
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community Affairs