Global Economics & Its Implication for Agriculture by Jason Henderson
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Global Economics & Its Implication for Agriculture presented by Jason Henderson at the 2015 FCS Financial Commercial Farmer Symposium.
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Global Economics & Its Implication for Agriculture by Jason Henderson
- 1. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. January 2015 Jason Henderson Director of Purdue Extension Associate Dean College of Agriculture www.extension.purdue.edu Global Economics and Its Implications for Agriculture
- 2. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. The U.S. Economy is Strengthening. -1000 -800 -600 -400 -200 0 200 400 600 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 U.S. Job Growth Source: Bureau of Labor Statistics Monthly change in jobs
- 3. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. The Global Economy has Slowed.
- 4. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Implications for Agriculture • Demand growth slowed. – Exports plateau -10 0 10 20 30 40 50 2006 2007 2008 2009 2010 2011 2012 2013 2014* U.S. Ag Exports to China and Hong Kong Annual percent change Source: USDA * Year to date data through November
- 5. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Implications for Agriculture • Demand growth slowed. – Exports plateau – Ethanol stalls 0 50 100 150 200 250 300 350 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 U.S. Ethanol Production Million barrels Source: Department of Energy
- 6. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Implications for Agriculture • Demand growth slowed. – Exports plateau – Ethanol stalls • Prices fall with bin- busting supplies. 0 100 200 300 400 500 600 700 800 0 50 100 150 200 250 300 350 400 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 U.S. Rest of the World U.S. and World Corn Production MMT Source: Department of Energy MMT
- 7. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Crop Profits are Expected to Fall in 2015 0 150 300 450 600 750 900 0 100 200 300 400 500 600 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Corn (Left Scale) Soybeans (Left Scale) Rice (Right Scale) U.S. Crop Profits (Net Returns above Variable Costs) Dollars per acre Dollars per acre Source: USDA USDA Baseline Projections (Dec. 2014)
- 8. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Past Cycles Suggest a 5-Year Slump • Since 1975, the U.S. crop sector has experienced two downturns. – 1981-1996 – 1997-2002 • Multi-Year Slumps for Corn Profits • Similar Path for Other Crops -150 -100 -50 0 50 100 150 200 250 -150 -100 -50 0 50 100 150 200 250 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F* 2017F* 2018F* 2019F* 2020F* Actual 1980s Adjustment 1990s Adjustment U.S. Net Returns to Corn Production (Excluding Government Payments) Dollars per acre Calculations based on USDA Projected Prices and Yields and Costs of Production from Cost and Returns Data
- 9. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Livestock Profits Rebound 0.0 10.0 20.0 30.0 40.0 50.0 0.0 5.0 10.0 15.0 20.0 25.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Hog-Corn Price Ratio (Left Scale) Beef-Corn Price Ratio (Right Scale) U.S. Livestock-Corn Price Ratios Ratio Source: USDA
- 10. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Profitability will depend on how producers respond. • Will higher prices lead to demand destruction at the meat case? • Will stronger profits drive additional production? 30 31 32 33 34 35 36 37 38 39 40 20 21 22 23 24 25 26 27 28 29 30 2011 2012 2013 2014 2015 Beef (Left Scale) Pork (Left Scale) Broilers (Right Scale) U.S. Meat Production Billion pounds Source: USDA
- 11. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. In the end, farm incomes fall sharply. 0 20 40 60 80 100 120 140 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Nominal U.S. Net Farm Income Billion dollars Source: USDA
- 12. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Implications for Agriculture • Crop profits decline • Livestock profits rebound • U.S. farm incomes retreat • What happens to farmland values?
- 13. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Is farmland over-valued as an asset? 5 10 15 20 25 30 35 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Value-to-CashRentMultiple Value-to-Cash Rent Multiple for IA, IL, IN Cropland, 1967-2011 IL IA IN Sources: IL and IA compiled from NASS Reports, IN from Purdue Land Value Survey USDA Value to Cash Rent Ratio (2014) Texas 43.6 Southeast Region 44.2
- 14. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. No relationship between land values and expected corn price. $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 CornPrice($'sperBushel) Farmland Value ($'s per Acre) Current Farmland Values and Corn Price Expectations, Spring 2012 Source: Gloy (2013) Center for Commercial Agriculture, Purdue University
- 15. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Farmland Values Shaped by Multiple Factors Farm Profits Urban Expansion Wildlife Recreation Energy Developments Interest Rates
- 16. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Energy Markets and Mineral Rights Drive Land Values 0 2 4 6 8 10 12 14 16 0 20 40 60 80 100 120 140 160 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 West Texas Intermediate Crude Oil (Left Scale) Natural Gas Wellhead Price (Right Scale) Natural Gas - Export Price (Right Scale) Dollars per barrel Dollars per Thousand Cubic Feet U.S. Crude Oil and Natural Gas Prices Source: Dept. of Energy, Energy Information Administration
- 17. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. U.S. crude oil production has changed energy markets. Index (2008 = 100) World Crude Oil Production Source: Dept. of Energy, Energy Information Administration 60 80 100 120 140 160 180 60 80 100 120 140 160 180 US Rest of the World
- 18. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Simultaneously, world crude oil consumption has fallen. Percent change from 2013 to 2014 Developed Nation Crude Oil Demand Source: Dept. of Energy, Energy Information Administration -8 -7 -6 -5 -4 -3 -2 -1 0 OCED Europe Germany France Japan U.S.
- 19. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Fishing and Hunting is a Billion Dollar Segment of the Land Sector In the U.S. • $6 billion is spent on land ownership for hunting • $5.6 billion is spent on land ownership for wildlife watching • $3.1 billion is spent on land ownership for fishing • $1.1 billion is spent to lease land for hunting • $290 million is spent to lease land for fishing • $103 million is spent to lease land for wildlife watching
- 20. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. In rural (nonmetro) areas, home construction surges during farm booms. 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-04 2005-09 Metro Nonmetro Year of Home Construction Percent of homes in 2009 Calculations based on U.S. Census data Urban sprawl
- 21. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Demographics play a major role in housing. -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 U.S. Population Growth 25-44 year olds 45-64 year olds Annual percent change Calculations based on Census data Boomers Millennial Boomers Millennial
- 22. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. The Monetary Policy Environment is Shifting • The Federal Reserve indicates that rates could rise in 2015 • In the long run, normalization would add 3 basis points to interest rates? • Will interest rates simply rise to long run norms, or will they rise higher before settling back to long run norms? • How would a 3 to 4 percent increase in rates affect the financial health of your customers?
- 23. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Cash Rents (Dollars per Acre) $75 $100 $125 $150 $175 $200 3% 2500 3333 4167 5000 5833 6667 4% 1875 2500 3125 3750 4375 5000 5% 1500 2000 2500 3000 3500 4000 6% 1250 1667 2083 2500 2917 3333 7% 1071 1429 1786 2143 2500 2857 8% 938 1250 1563 1875 2188 2500 CapitalizationRate(percent) Assumption corn yields 160bushels per acre Capitalized Value Formula Expected Cash Rents Expected Capitalization Rate What are your expectations for cash rents and interest rates? Land values are based on expectations.
- 24. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. The Outlook: A Liquidity Challenge for Agriculture, Especially Crops. The Concern: When do Liquidity Problems Turn into Solvency Problems?
- 25. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. As Farm Incomes Fall, What Will Farmers Do? • What is the storyline? – Insatiable demand • Global population of 10 billion after 2050 • Rising incomes in developing nations (China) – Limited supply • Not growing anymore land • How will farm investments shift? • How will farmers finance investments?
- 26. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. The Stages of Farm Investment Land Investments Equipment Investments Lifestyle Investments
- 27. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Farmland Value Gains Slow • Chicago Federal Reserve Bank Dec. 2012: 16% year-over-year gain Dec. 2013: 5% year-over-year gain Oct. 2014: 0% year-over-year gain • Kansas City Federal Reserve Bank - Nonirrigated land Dec. 2012: 24.9% year-over-year gain Dec. 2013: 9.2% year-over-year gain Oct. 2014: 1.2% year-over-year gain - Pasture land is stronger at 4.7%
- 28. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Farm equipment sales begin to fall, but remain historically high Through August 2014, combine and tractor sales are 14.4% and 17.3% below 2013 levels U.S.Tractor and Combine Sales Unit Sales Source:Association of Equipment Manufacturers * Estimated based on sales through June 2014 0 2 4 6 8 10 12 0 2 4 6 8 10 12 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* Combines 4 Wheel Drive Tractors
- 29. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Family Living Expenses Have Increased Substantially Source: Compiled from Kansas Farm Management Association Executive Summaries
- 30. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. U.S. Agriculture is in Great Financial Health, but farm debt is rising. -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 2013 2014 Non-real-estate Real Estate Percent change from previous year Source: FDIC, Call Report data Farm Debt Outstanding at Commercial Banks
- 31. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Rising Debt Could Lead to Higher Debt Service • What does it take to get higher interest rates? • To get inflation, the global economy needs to strengthen to spur demand. • How do farmers finance investments amid stronger demand? INFLATION
- 32. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Agriculture Faces Interest Rate Risk, but Farmland is an Inflationary Hedge… • How does the demand for real assets and farmland values respond to inflation? • When do interest rates respond to inflationary pressures? • How does this affect the movements of farmland values? Inflation Rises Higher Interest Rates Weigh on Farmland Values Rising Demand for Real Assets Lifts Farmland Values
- 33. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. In Conclusion Softer Commodity Prices will Weigh on Land Values A Stronger Economy will Boost Housing and Recreational Spending. Persistent Inflation Leads to Higher Interest Rates, which Lifts Cap Rates, Slows Growth, and Boosts Debt Service.
- 34. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution. Conclusion • Low interest rates typically benefit debtors, not creditor. • Inflation tends to benefit debtors, not creditors. What are farmers? Asset rich, cash poor. • But … • Rising inflation will ultimately trigger higher interest rates and a new stage in agricultural cycles. • Is agriculture prepared for this stage of the ag cycle? • Will it have the liquidity it needs?
Editor's Notes
- Jason describes this chart Transition: Brent: Yes, without government support, profits will disappear for a while. But, there are is one thing that is a little different from much earlier period and that is the role of crop insurance. Crop insurance provides a lot better risk management than we had available in the 1980’s. The thing that appears to be similar is that we are lilkely to have some substantial government support – although keep in mind it won’t be as closely tied to actual production and prices as in the early 90’s.
- When you compare the age of existing homes in metro and nonmetro counties. You find that rural (nonmetro) counties have a higher share of homes built during two time frames. 1) during the 1970s farm boom 2) during the 1990s with urban sprawl.
- As background, interest rates are projected to rise starting in 2015. Or at least that is what the Federal Reserve, futures markets, and pundits are telling us. Unlike the 1980s, the Federal Reserve is clearly identifying its preferred path of future interest rates. According to the Federal Open Market Committee, which consists of the Federal Reserve Board of Governors (Chairman Yellen) and the Federal Reserve Bank Presidents, they expect interest rates to start rising in 2015. On average reaching 1 percent in 2015, 2 percent in 2016 and just under 4 percent in 2017. A gradual, controlled rise in interest rates. But, have monetary policy shifts ever been gradual and controlled to where soft landings emerge. Have interest rates ever rose above long term expectations even for a short period of time? More importantly, how does the financial health of your customers change if they have a 3 to 4 percent rise in interest rates?
- Jason: We are seeing the investments in steel starting to fall. Fewer man caves. Transition: Brent: But, the real challenges emerge when farmers have to cut household spending.
- Brent Describes the chart and leads discussion. Well this is never fun. Transition: Jason: So basically, what I am coming to a conclusion that cost adjustments typically do not emerge quickly. It seems that farmers will be looking to roll a lot of loans. And bankers always know that a “rolling loan collects no loss”, at least that is what they tell the bank regulators. So Brent, what’s the strategy going forward?
- land values in a short/medium term vs long-term short/medium terms flat and maybe even up if inflationary gains emerge But that is false growth. Land is like a bond. And neither does well in rising interest rate environments. Transition: Brent: so we have some time before interest rates rise and cut land values. The challenge is that people try to time the market.