The Outlook for the Swine Industry and Its Relationship with the Global Economy

Transcription

1 The Outlook for the Swine Industry and Its Relationship with the Global Economy Allen D. Leman Swine Conference September 19, 2011 Brian C. Briggeman Associate Professor and Director of the Arthur Capper Cooperative Center

2 How will agriculture and the swine industry fare in today s economic climate? Through the recession and financial crisis of , most of agriculture held up quite well. Rural economies benefited, but slumping demand curtailed livestock profits The U.S. and global economy are recovering from a steep contraction in growth. Still, there are plenty of questions surrounding the sustainability of future growth. To address the question above, ten opportunities and corresponding challenges are identified.

3 Opportunities and Challenges for Agriculture Opportunities Challenges 1) Economy is recovering 1) Recovery is anemic

4 Soft data has curbed growth and dampened forecasts Actual Advance Estimate Real GDP Growth Annualized percent change from previous quarter 2007:Q4 2008:Q2 2008:Q4 2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4 2012:Q2 Source: Bureau of Economic Analysis and Wall Street Journal July and August 2011 Forecast Survey (Average) WSJ Forecast (July) WSJ Forecast (August)

5 Consumption growth is key for the economic recovery in the U.S. Percent change from year ago Personal Consumption Expenditures -4 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Source: Bureau of Economic Analysis Recession (gray bar)

6 Opportunities and Challenges for Agriculture Opportunities 1) Economy is recovering 2) Food expenditures are rising Challenges 1) Recovery is anemic 2) Elevated unemployment rate

7 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 After slumping in , food sales have rebounded. Percent change from year ago 8 Food Retail Sales Source: U.S. Census Bureau Grocery Store Sales Restaurant Sales

8 An elevated unemployment rate weighs on consumption. Percent U.S. Unemployment Rate Recessions Indicated by gray bars Jan-69 Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Source: Bureau of Labor Statistics

9 Opportunities and Challenges for Agriculture Opportunities 1) Economy is recovering 2) Food expenditures are rising 3) Business and financial markets have improved Challenges 1) Recovery is anemic 2) Elevated unemployment rate 3) Uncertainty abounds

10 1999:Q1 1999:Q3 2000:Q1 2000:Q3 2001:Q1 2001:Q3 2002:Q1 2002:Q3 2003:Q1 2003:Q3 2004:Q1 2004:Q3 2005:Q1 2005:Q3 2006:Q1 2006:Q3 2007:Q1 2007:Q3 2008:Q1 2008:Q3 2009:Q1 2009:Q3 2010:Q1 2010:Q3 2011:Q1 Since 2008, business investment has improved, but will it continue? Percent change from year ago Nonresidential Private Fixed Investment Source: U.S. Census Bureau Private fixed investment in structures Private fixed investment in equipment and software

11 Jan-92 Sep-92 May-93 Jan-94 Sep-94 May-95 Jan-96 Sep-96 May-97 Jan-98 Sep-98 May-99 Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Since the financial crisis of 2008, financial stress has eased considerably. 6 Financial Stress Index (FRBKC) 4 2 Above zero: Financial market stress exceeds the long run average Below zero: Financial market stress is below the long run average Source: Federal Reserve Bank of Kansas City

12 1990:Q1 1990:Q4 1991:Q3 1992:Q2 1993:Q1 1993:Q4 1994:Q3 1995:Q2 1996:Q1 1996:Q4 1997:Q3 1998:Q2 1999:Q1 1999:Q4 2000:Q3 2001:Q2 2002:Q1 2002:Q4 2003:Q3 In general, uncertainty hinders household and business decision making. According to economic theory, uncertainty will cause households and firms to take a wait-and-see approach when making decisions. In a number of articles, Nicholas Bloom supports theory through empirical findings. Unemployment rate following 9/11/2001 U.S. Unemployment Rate Actual Unemployment Rate 9/11/2001 Event date Source: Bureau of Labor and Statistics, Survey of Professional Forecasters Forecasted Unemployment Rate on August 23, 2001

13 Opportunities and Challenges for Agriculture Opportunities 1) Economy is recovering 2) Food expenditures are rising 3) Business and financial markets have improved 4) Low cost of borrowing Challenges 1) Recovery is anemic 2) Elevated unemployment rate 3) Uncertainty abounds 4) Inflation risk

14 With interest rates at historically low levels, bank liquidity has surged. To stimulate the economy, the Federal Open Market Committee (FOMC) dropped the Fed funds rate to the zero bound and pumped liquidity into the market (QE and QE2). Percent 8 6 Fed Funds Rate and Excess Reserves Upper Bound of Intended Federal Funds Rate (Left Axis) Billion Dollars 2,000 1,500 With low interest rates, large amounts of liquidity and limited to no borrowing activity, excess reserves of depository institutions held at the Fed surged Excess Reserves of Depository Institutions (Right Axis) 1, Could this set the stage for a rapid rise in future inflation? Source: Federal Reserve Board of Governors

15 To understand the current environment for inflation, it is helpful to pull a page from Econ 101. A rapid rise in inflation occurs when too much money is chasing too few goods. Quantity Theory of Money Price = Money Velocity Quantity of Goods = M V Q So, for rapid price inflation: M V Q

16 Today, headline and core inflation remain well below levels experienced during the 1970s and 1980s. Personal Consumption Expenditures Price Index Percent change from previous year 14 PCE Price Index (Headline) 12 PCE Price Index excluding food and energy (Core) Jan-71 Feb-75 Mar-79 Jun-83 Source: Bureau of Economic Analysis Jul-87 Aug-91 Sep-95 Oct-99 Nov-03 Dec-07-2

17 Why is inflation low? Velocity has plummeted. One way to measure velocity is by calculating the ratio of gross domestic product (GDP) to money (M2). This ratio is essentially a turnover ratio of how quickly money is turned into output. Today, velocity is very low. So, what will it take to raise velocity, and when might this happen? U.S. Velocity of Money Recessions indicated by gray bars GDP/M2 (right axis) Source: BEA and Federal Reserve Board of Governors

18 Opportunities and Challenges for Agriculture Opportunities 1) Economy is recovering 2) Food expenditures are rising 3) Business and financial markets have improved 4) Low cost of borrowing 5) Farm income is very positive Challenges 1) Recovery is anemic 2) Elevated unemployment rate 3) Uncertainty abounds 4) Inflation risk 5) Will expected profits falter?

19 Net farm income is subject to booms and busts Constant Dollars (Billions) 140 World War II Real U.S. Net Farm Income Exports Jump Russian Grain Deal Protein Demand Surges with Atkins Diet Ethanol and Exports Source: USDA

20 Opportunities and Challenges for Agriculture Opportunities 6) Agricultural exports have surged Challenges 6) Risks facing global growth

21 Agricultural exports have surged led by Asia. Real U.S. Agricultural Exports 2010 Constant Dollars (Billions) 2010 Constant Dollars (Billions) World Total (Left Scale) Asia (Right Scale) 6 12 Linear (World Trend (World Total (Left Total) Scale)) Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0 Source: USDA

22 Will China s exponential income growth continue? 2000 Constant U.S. Dollars 3,000 2,500 China s Per Capita Gross Domestic Product 2,000 1,500 1, Source: World Bank

23 What happens if the Chinese economy slows? Since dipping into negative territory in 2009, China s inflation rate has surged to over 6%. To cool rising inflation and very rapid growth, China s central bank has: raised the one-year deposit interest rate from 2 to 3.5 percent raised reserve requirements for Chinese banks China s substantial growth has been led by a robust real estate sector. Some economists and investors fear this growth has led to a bubble.

24 Another risk to the global economy is the Eurozone sovereign debt crisis. Percent 25 Spread between Ten Year Government Bond and German Bund Greece Ireland Portugal Spain Italy United States Source: Thomson Reuters 2-Aug-10 2-Aug Sep-11

25 Opportunities and Challenges for Agriculture Opportunities 6) Agricultural exports have surged 7) Global food demand is changing Challenges 6) Risks facing global growth 7) Who will meet this changing food demand?

26 A growing world population boosts international food demand, but what will they eat? Percent Households Owning a Refrigerator Households Owning a Microwave Oven Percent Source: USDA, Euromonitor

27 Will consumer-oriented products continue to lead agricultural exports? Indexed (1990 = 100) Value of U.S. Agricultural Exports Bulk Products Intermediate Products Consumer-Oriented Products Source: USDA Foreign Agricultural Service

28 Opportunities and Challenges for Agriculture Opportunities 6) Agricultural exports have surged 7) Global food demand is changing 8) High commodity prices Challenges 6) Risks facing global growth 7) Who will meet this changing food demand? 8) High commodity prices

29 U.S. crop prices have surged, boosting crop incomes. Dollars per bushel U.S. Crop Prices Soybeans Wheat Corn Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0 Source: Commodity Research Bureau

30 Higher crop prices continue to pressure livestock profit margins. Dollars per hundredweight Cattle Breakeven Price Cattle Price Hog Breakeven Price Hog Price 30 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Source: USDA and Iowa State University

31 Rising commodity prices have pushed world food prices above 2008 highs. 1/2000 7/2000 1/2001 7/2001 1/2002 7/2002 1/2003 7/2003 1/2004 7/2004 1/2005 7/2005 1/2006 7/2006 1/2007 7/2007 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011 Index = World Food Price Index Source: Food and Agriculture Organization

32 Opportunities and Challenges for Agriculture Opportunities 6) Agricultural exports have surged 7) Global food demand is changing 8) High commodity prices 9) Farmland values boom Challenges 6) Risks facing global growth 7) Who will meet this changing food demand? 8) High commodity prices 9) Will they bust?

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34 Interest rates can affect farmland values through two avenues. Expected Farm Income Interest Rates = Farmland Values Capitalization Rates

35 Over time, real interest rates and capitalization rates tend to move together. Percent Percent Nebraska Cash Rent-to-Land Value Ratio -2.0 Yield on 10-year U.S. Treasury Security - adjusted for inflation Sources: USDA, Federal Reserve and BLS

36 Over time, real interest rates and real net farm income tend to move in opposite directions. Constant 2005 dollars (billions) Real Net Farm Incomes Less Government Payments (Left Scale) Real 1-year U.S. Treasury Securities Yield (Right Scale) Percent Sources: USDA, Federal Reserve, BLS -5.0

37 With low capitalization rates and elevated farm income, farmland values have surged. Non-irrigated Cropland Values (Percent change from 2010:Q1 to 2011:Q1) Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City

38 Historically low capitalization rates help support current cropland values. Dollars per acre 10,000 9,000 8,000 7,000 6,000 5,000 4,000 Eastern Nebraska Irrigated Cropland Value = $5,300 Historical average cap rate, Farmland values drop by 1/3 3,000 2, % 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% Farmland capitalization rate Authors calculations assuming 200 bushels per acre, a corn price of $5.35 per bushel, and 25% of gross revenues capitalized into land.

39 If capitalization rates return to their historical average, then record high corn prices could support current cropland values. Dollars per acre 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Eastern Nebraska Irrigated Cropland Value = $5, average corn price, Farmland values drop by 1/ Corn price (dollars per bushel) Authors calculations assuming 200 bushels per acre, the historical average capitalization rate of 7.5%, and 25% of gross revenues capitalized into land.

40 Opportunities and Challenges for Agriculture Opportunities 6) Agricultural exports have surged 7) Global food demand is changing 8) High commodity prices 9) Farmland values boom 10) Swine outlook: cautiously optimistic Challenges 6) Risks facing global growth 7) Who will meet this changing food demand? 8) High commodity prices 9) Will they bust? 10) Managing volatility and risk is critical

41 Thank you. Questions? Allen D. Leman Swine Conference September 19, 2011 Brian C. Briggeman Associate Professor and Director of the Arthur Capper Cooperative Center

42 Opportunities and Challenges for Agriculture Opportunities 1) Economy is recovering 2) Food expenditures are rising 3) Business and financial markets have improved 4) Low cost of borrowing 5) Farm income is very positive Challenges 1) Recovery is anemic 2) Elevated unemployment rate 3) Uncertainty abounds 4) Inflation risk 5) Will expected profits falter?

43 Opportunities and Challenges for Agriculture Opportunities 6) Agricultural exports have surged 7) Global food demand is changing 8) High commodity prices 9) Farmland values boom 10) Swine outlook: cautiously optimistic Challenges 6) Risks facing global growth 7) Who will meet this changing food demand? 8) High commodity prices 9) Will they bust? 10) Managing volatility and risk is critical