Nathan Kauffman Economist Federal Reserve Bank of Kansas City Omaha Branch August 21, 2013

Transcription

1 Nathan Kauffman Economist August 21, 213 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.

2 6 4 2 Percent change from year ago U.S. Real GDP Growth Blue Chip Forecast Change from previous quarter Change from year ago Calculations based on BEA and Blue Chip Forecast August

3 12. Percent Unemployment Rate U.S. Illinois Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Jan Source: Bureau of Labor Statistics

4 Booming sectors plateau in 212 The Wildcards A Rebound in Household Spending Commodities Investment Housing Manufacturing Exports Government Consumer Spending

5 Consumer Spending and Housing Percent change from a year ago Personal Consumption Expenditures (left scale) Existing Home Sales (right scale) Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan Source: Bureau of Economic Analysis and National Association of Realtors

6 Federal Government Debt as a Percent of GDP Percent of GDP Actual Baseline Projection Source: Congressional Budget Office

7 Investment: uncertainty is a heavy burden. Potential changes in tax law sparked an increase in business investment at the end of 212. Businesses report that increased economic, fiscal policy, and regulatory uncertainty are weighing on investments Percent (SAAR) Business Investment Equipment and Software Structures Source: Bureau of Economic Analysis

8 Real U.S. Net Exports and Manufacturing Index Percent change from previous year ISM Manufacturing Composite Index (left scale) Net Exports (right scale) Source: Bureau of Economic Analysis and Institute for Supply Management

9 Commodity Prices and Performance vs. Equities Index (23 = 1) Index (23 = ) CRB Commodity Index (Left Scale) Performance of Commodities vs. Equities* (Right Scale) Sep-3 Mar-4 Sep-4 Mar-5 Sep-5 Mar-6 Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 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 5 index.

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

11 U.S. Corn Inventories and Crude Oil Production 2 Ending stocks-to-use ratio Corn Inventories (Left Scale) Crude Oil Production (Right Scale) Crude Oil Production (Billion Barrels) Source: USDA, EIA Short-Term Energy Outlook, and EIA Annual Energy Outlook 213

12 December Corn Futures Price Dollars per Bushel Crop Ins. Price Apr May Jun Jul Aug Sep Oct Nov Dec Source: barchart.com.

13 November Soybean Futures Price Dollars per Bushel Crop Ins. Price 2 Apr May Jun Jul Aug Sep Oct Nov Source: barchart.com.

14 December Corn Futures Price Distribution Based on Implied Volatility from Options Prices Probability in Percent May 29, 213 Aug. 15, 213 Probability of corn less than $4 May 29: 12% Aug. 15: 25% Probability of corn more than $7 May 29: 24% Aug. 15: 6% 5 Source: Author s calculations based on data obtained from barchart.com.

15 7 6 5 Dollars per acre Corn Soybeans Net Returns (Returns less variable costs) 213 Projections Source: USDA Agricultural Baseline Projections, various years

16 U.S. Livestock Prices and Breakeven Costs Dollars per hundredweight Breakeven Costs Cattle Price Breakeven Costs 7 5 Hog Price Jul-8 Jul-9 Jul-1 Jul-11 Jul-12 Jul-13 Source: USDA and Iowa State University

17 Ratio Feed Price Ratios Beef cattle-corn (Left Scale) Hog-corn (Right Scale) 213 Projections Source: USDA Agricultural Baseline Projections

18 Could the transition in agriculture lead to a bust?

19 Farm Incomes Farmland Values Agricultural Exports Global Competition Energy Policy Farm Debt Interest Rates

20 14 U.S. Real Net Farm Income Billion Dollars (Constant 212 Dollars) USDA Projections Source: USDA

21 Diffusion Index Tenth District Farm Income 6 4 Actual Farm Income Expected Farm Income Source: Federal Reserve Bank of Kansas City, Agricultural Credit Survey * Bankers responded to each item by indicating whether conditions during the current quarter were higher than, lower than, or the same as in the year-earlier period. The index numbers are computed by subtracting the percent of bankers that responded "lower" from the percent that responded "higher" and adding 1.

22 Federal Reserve 1 th District Farmland Value Gains Percent change from a year ago 35 3 Nonirrigated Cropland Irrigated Cropland 25 Ranchland Source: FRB KC, Survey of Agricultural Credit Conditions

23 Factors Contributing to the Value of Farmland Percent of Responses Interest rate environment Overall wealth level of farm sector Lack of alternative investment options Expectation of net farm income for Expectation of net farm income for 214 or later Ranked #1 Ranked #2 Ranked # Land-lease revenue from mineral rights Real estate tax policies Source: Federal Reserve Bank of Kansas City, Agricultural Credit Survey

24 Cropland Value-to-Cash Rent Ratios Percent change from previous year Iowa Cropland Kansas Non-irrigated Cropland Source: NASS, USDA and Iowa State University Investors will spend $32 for every dollar of revenue. Implies a capitalization rate of 3.1% 5

25 Billion Dollars China All Other Countries U.S. Agricultural Exports (9.5%)* Source: USDA Note: 213 agricultural exports forecast based on year-to-date 213 annual growth rate. * China s share of total U.S. agricultural exports in parentheses. (18.4%)*

26 Billion dollars Exports Imports U.S. Agricultural Export Growth USDA Baseline Projections Source: USDA

27 Global Corn, Soybean, and Wheat Expansion 16 Acreage Index (2 = 1) Percent U.S. Share of World Acreage (Right Scale) U.S. (Left Scale) Brazil & Argentina (Left Scale) China (Left Scale) Black Sea Region* (Left Scale) 16 * Black Sea Region includes Russia, Ukraine, and Kazakhstan Source: USDA

28 Billion Gallons U.S. Gasoline Consumption, Ethanol Production, and Mandates U.S. Gasoline Consumption (Left Scale) Ethanol Production (Right Scale)* 215 Mandate (Right Scale) Source: Energy Information Administration. * Ethanol Production is net of trade Billion Gallons The Gap? EIA Forecast

29 U.S. Farm Profits and Capital Investments per Farm 6 5 Thousand Dollars (25 Dollars) Net Returns to Farm Operators (Left Scale) Thousand Dollars (25 Dollars) Farm Capital Expenditures (Right Scale) Source: USDA

30 Farm Debt Outstanding at Commercial Banks Percent change from previous year Non-Real Estate Real Estate Source: FDIC, Call Report data

31 KS Farm Management Farms: Average Debt-to-Asset Ratio % % Debt-to-Asset Ratio >4% % % Debt-to-Asset Ratio >7% % % 25% 2% 15% 1% 5% % >7 Debt-to-Asset Ratio Range (%) Source: Featherstone, A. Who Leveraged the Farm, 212 Agricultural Symposium, Federal Reserve Bank of Kansas City.

32 Monetary Policy

33 Personal Consumption Expenditures Price Index Percent change from previous year Overall PCE Price Index -1 PCE Price Index - Excluding Food and Energy -2-2 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Source: Bureau of Economic Analysis

34 Percent Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End Longer Run Source: Federal Reserve Board, Summary of Economic Projections, June 213

35 Federal Reserve Balance Sheet: Assets Billion Dollars Fed Agency Debt MBS Purchases Liquidity to Key Credit Markets Lending to Financial Institutions Long Term Treasury Purchases Traditional Security Holdings Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Source: Federal Reserve Board of Governors

36 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 213. Farm incomes, farmland values, export markets, global competition, ethanol, farm debt, and interest rates

37 For More Information on The Midwestern Economy and Rural America