Econom ic Crisis: Linkages to Agriculture and Farm land Values Paul N. Ellinger pellinge@illinois.edu University of I llinois 2 0 0 9 I llinois Farm Econom ics Sum m it The Profitability of I llinois Agriculture: Profitability at a Crossroads
Where do w e start? 2 0 0 9 I llinois Farm Econom ics Sum m it
Economic Basics GDP = C + I + G - (X - M) US: 14,266 = 10,140 + 1,569 + 2,959 - 402 71% + 11% + 21% - 3% Source: BEA 3 rd Qtr 2009, estimate, current dollars China 36% + 42% + 13% + 9% 2 0 0 9 I llinois Farm Econom ics Sum m it
Financial Health of the Consumer Income Declines 15 million unemployed + 11.5 underemployed Average work week 33.2 hours Median unemployment 20.1 weeks (up 100% Nov 2008) Wealth declines $3.6 trillion off home price peak $8.3 trillion off financial asset peak values 23% of home mortgages have negative equity 9.24% mortgages past due (up 44%) 2 0 0 9 I llinois Farm Econom ics Sum m it
2 0 0 9 I llinois Farm Econom ics Sum m it U.S. Savings Rate 10 12 14 16 0 2 4 6 8 Jan-59 Feb-60 Mar-61 Apr-62 May-63 Jun-64 Jul-65 Aug-66 Sep-67 Oct-68 Nov-69 Nov-70 Nov-71 Nov-72 Nov-73 Nov-74 Nov-75 Nov-76 Nov-77 Nov-78 Nov-79 Nov-80 Nov-81 Nov-82 Nov-83 Nov-84 Nov-85 Nov-86 Nov-87 China: 30-40% Nov-88 Nov-89 Nov-90 Nov-91 Nov-92 Nov-93 Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 4.6
Employment 20 18 Underemployed 16 14 12 10 8 Unemployed 6 4 2 0 2 0 0 9 I llinois Farm Econom ics Sum m it
Commercial, Residential and Farm Real Estate Prices 250 200 150 100 50 0 1987 1990 1993 1996 1999 2002 2005 2008 Illinois Farmland Residential Housing Commercial Real Estate Base = 2000 2 0 0 9 I llinois Farm Econom ics Sum m it
U.S. Debt Markets Source: WSJ 12/8/2009 2 0 0 9 I llinois Farm Econom ics Sum m it
The Fed Has Expanded its Balance Sheet to Extend Credit to Banks Billions of Dollars Federal Reserve Balance Sheet 2,400 Short-term Lending to Financial Firms Rescue Operations 2,000 Operations Focused on Broader Credit Conditions 1,600 Other Assets Treasury Portfolio 1,200 800 400 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 2 0 0 9 I llinois Farm Econom ics Sum m it Source: Federal Reserve Board of Governors
U.S. Outlays & Receipts/GDP 30.0 28.0 26.0 24.0 22.0 6% 12% 20.0 18.0 16.0 14.0 12.0 10.0 Source: CBO Receipts Outlays 2 0 0 9 I llinois Farm Econom ics Sum m it
Sources of Tax Revenue 100% Other 90% Excise Taxes 80% Social Insurance and Retirement Receipts 70% 60% Corporate Income Taxes 50% 40% 30% Individual Income Taxes 20% 10% 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 estimate 2 0 0 9 I llinois Farm Econom ics Sum m it
Public Debt / GDP 100.0 Under current law, the federal budget is on an 90.0 unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long 80.0 run. Source: Congressional Budget Office June ‘09 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2 0 0 9 I llinois Farm Econom ics Sum m it
Delinquency Rates Commerical Banks 14 Commercial Real Estate, 12 12.06 Residential Mortgages, 9.81 10 Agr Loans, 9.08 Commercial Real Estate, 8.74 8 Credit Cards, 6.58 Business Loans, 6.42 6 Credit Cards, 5.24 Business Loans, 4.4 4 Residential Mortgages, 3.24 Agr Loans, 2.57 2 0 2 0 0 9 I llinois Farm Econom ics Sum m it
Price of Legacy/Toxic Securities 100 ABX-06-02-AAA 80 60 40 ABX-06-02-BBB 20 0 7/19/2006 9/19/2006 11/19/2006 1/19/2007 3/19/2007 5/19/2007 7/19/2007 9/19/2007 11/19/2007 1/19/2008 3/19/2008 5/19/2008 7/19/2008 9/19/2008 11/19/2008 1/19/2009 3/19/2009 2 0 0 9 I llinois Farm Econom ics Sum m it
W hat about Agriculture? 2 0 0 9 I llinois Farm Econom ics Sum m it The Profitability of I llinois Agriculture: Profitability at a Crossroads
Vulnerabilities Rural and Agricultural Financial Markets 148 Commercial bank failures since June 2008 Regional exposure to Commercial Development and Real Estate Loans Pork and dairy markets Exposure to interest rate changes Additional deposit insurance fees for banks 2 0 0 9 I llinois Farm Econom ics Sum m it
Current Economic Drivers Farmland Prices Net returns to land Level Volatility Energy prices Interest / inflation rates Housing crisis Scope & economic situation of buyers Demand for recreational land Capital gains tax rates 2 0 0 9 I llinois Farm Econom ics Sum m it
Farmland Price Headlines "...quarterly decrease of 6% (...in 2009) ... the largest quarterly decline since 1985" (Chicago Fed AgLetter). "It's Confirmed: Farmland Prices are Correcting". Continuing with an attribution to USDA, "...both Bloomberg and the WSJ are reporting the first annual drop in U.S. farmland prices in 20 years of an average of -3.2%". (www.seekingalpha.com) Various sources have cited declines in Iowa farmland values from last year ranging from about 5% to nearly 7.6% (HPJ Land Journal, ISU Ag Decision Maker, others). In its mid-2009 survey, the Illinois Society of Professional Farm Managers and Rural Appraisers found high quality land to be down 2.38%, lower quality land off 5.6%, and were among the first to note evidence of expectations of declining cash rents. USDA sources show farmland values in Illinois down .4% from the same period in 2008, with steeper declines in IN and IA, though surveyed cash rents paid were still up into 2009 from a year earlier. 2 0 0 9 I llinois Farm Econom ics Sum m it
Is the sky falling? Case-Shiller Chicago Illinois House Price House Price Farmland Dow Index Index/year Index Total return 1999-2008 1.10% 5.89% 3.00% 12.70% 2007 6.20% 16.20% -10.30% -4.70% 2008 -45.50% 18.90% -21.40% -15.40% 2009 to date 11.98% -0.50% 0.41% 1.01% 19 2 0 0 9 I llinois Farm Econom ics Sum m it
Estimated Returns to Land Returns/ Imputed Land Acre Price Northern Illinois 265 5,893 Central Illinois High Productivity 263 5,849 Central Illinois Low Productivity 226 5,018 Southern Illinois 154 3,427 Assumptions: Schnitkey budgets + $50 return to land $4.00 / bu. Corn : $10.00 / bu. Soybeans 4.5% Capitalization Rate 2 0 0 9 I llinois Farm Econom ics Sum m it
What have w e learned from the Crisis? Consumer has felt some pain Real estate prices can fall. Low documentation loans often don’t work. Credit spreads can widen quickly. In crisis, diversification does not work well. Pain can be severe. Lack of regulatory “sympathy” to smaller institutions. Total agricultural debt low relative to others. 2 0 0 9 I llinois Farm Econom ics Sum m it
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