U.S. Economy in High Gear, but Ag Stuck in Neutral Nate Kauffman, - PowerPoint PPT Presentation

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH U.S. Economy in High Gear, but Ag Stuck in Neutral Nate Kauffman, Federal Reserve Bank of Kansas City October 17, 2018

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Outlook Themes Bullet 1 • Momentum in the national economy has persisted, but the agricultural economy has remained in a prolonged downturn. Bullet 2 Bullet 3 • Agricultural credit conditions have continued to deteriorate gradually, although the value of farm real estate has remained a relative bright spot. • Signs of stabilization in agriculture earlier in the year have become more questionable with ongoing trade disputes. • Interest rates have continued to rise at a gradual pace, putting pressure on highly leveraged operations.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY The outlooks for agriculture and the U.S. economy have reversed since 2013. Indicators for Ag Economy and Broader U.S. Economy Change from 2007–2013 Change from 2013–2018 Percent Percentage Points Percent Percentage Points 80 5 80 5 4 4 60 60 3 3 40 40 2 2 20 20 1 1 0 0 0 0 -1 -1 -20 -20 -2 -2 -40 -40 -3 -3 -60 -4 -60 -4 -80 -5 -80 -5 Farm Wheat Price Consumer Fed Funds Farm Wheat Price Consumer Fed Funds Income (Left Scale) Sentiment Rate Internal FR Income (Left Scale) Sentiment Rate (Left Scale) (Left Scale) (Right Scale) (Left Scale) (Left Scale) (Right Scale) Source: U.S. Department of Agriculture (USDA), University of Michigan, Board of Governors of the Federal Reserve System, and Haver Analytics.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Residential real estate markets have also picked up while farmland markets have cooled. U.S. House Prices and Farmland Values Change from 2007–2013 Change from 2013–2018 Percent Percent Percent Percent 100 100 100 100 75 75 75 75 50 50 50 50 25 25 25 25 0 0 0 0 -25 -25 -25 -25 Internal FR Farmland Values House Prices Farmland Values House Prices Source: FHFA, USDA, and Haver Analytics.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY In Oklahoma, farmland values have continued to rise, but more gradually, and house prices have also gained strength. Oklahoma House Prices and Farmland Values Change from 2007–2013 Change from 2013–2018 Percent Percent Percent Percent 100 100 100 100 75 75 75 75 50 50 50 50 25 25 25 25 0 0 0 0 -25 -25 -25 -25 Internal FR Farmland Values House Prices Farmland Values House Prices Source: FHFA, Federal Reserve Bank of Kansas City, and Haver Analytics.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY In addition, job growth in metro areas has outpaced growth in rural areas the past several years. Employment Growth Percent change from previous year 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 US Non-Metro US Metro -2 Oklahoma Non Metro Oklahoma Metro -3 -3 -4 -4 Internal FR 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: BLS and Haver Analytics.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY And farm income has remained less than half of its recent peak. U.S. Net Farm Income Billion, 2018 $ Billion, 2018 $ 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 * 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Internal FR * 2018 Forecast Source: USDA

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY The forecast of lower farm income in 2018 was primarily driven by higher production expenses. Farm Income Forecast Change by Component Billion dollars Billion dollars 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Net farm Crop receipts Crop Livestock Livestock Production Government All other Net farm income 2017 inventory receipts inventory expenses payments changes income 2018 Internal FR Note: Farm income estimate for 2017; forecast for 2018. Source: USDA and staff calculations.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Lower commodity prices also have been a primary driver of the sustained weakness. U.S. Agricultural Prices Index, 2010 = 100 Index, 2010 = 100 180 180 160 160 140 140 120 120 100 100 Crops 80 80 Livestock Crops (Inflation-Adjusted) 60 60 Livestock (Inflation-Adjusted) 40 40 Internal FR 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: USDA and Haver Analytics.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Commodity prices in Oklahoma have generally remained flat for the past two years. Agricultural Price Indices Index, 2010 = 100 Index, 2010 = 100 200 200 Oklahoma Price Index 180 180 U.S. – All Farm Products 160 160 140 140 120 120 100 100 80 80 2010 Internal FR 2011 2012 2013 2014 2015 2016 2017 2018 Source: USDA, Haver Analytics, and author’s calculations.

Despite heightened trade risks, key sources of FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY demand for ag products have been relatively steady. U.S. Ag Exports and Ethanol Production Billion Dollars Billion Gallons 200 20 U.S. Ag Exports – Excluding China (Left Scale) U.S. Ag Exports to China (Left Scale) 150 15 Ethanol Production (Right Scale) 100 10 50 5 0 0 Internal FR 2005 2008 2011 2014 2017 Note: 2018 estimated based on changes year-to-date through June compared with the previous year. Source: USDA, U.S. EIA, and Renewable Fuels Association.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Demand has remained strong, but higher-than-expected crop production has weighed on prices. U.S. Corn and Soybean Yields Deviation from Trend Bu/Acre Bu/Acre 16 5 14 Corn (Left) 4 12 Soybeans (Right) 10 3 8 2 6 4 1 2 0 0 Internal FR 2014 2015 2016 2017 2018 Sept. Forecast Source: USDA and staff calculations.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY The sustained weakness in crop prices has limited profit opportunities. Soybean Profit Margins Corn Profit Margins $/bu $/bu 18 8 Price Range 16 7 Price Range November Futures Price December Futures Price 6 14 Production Costs Production Costs 5 12 4 10 3 8 2 6 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Internal FR Note: Production costs are calculated from USDA’s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. Source: USDA, Haver Analytics and CME.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Profitability for wheat and cotton producers, however, has improved somewhat after being weak the past few years. Wheat Profit Margins Cotton Profit Margins $/bu $/pound 2.00 12.00 Price Range 10.50 1.75 Price Range December Futures Price November Futures Price 9.00 1.50 Production Costs Production Costs 7.50 1.25 6.00 1.00 4.50 0.75 3.00 0.50 1.50 0.25 0.00 0.00 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Internal FR Note: Production costs are calculated from USDA’s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. Source: USDA, Haver Analytics and CME.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Production of other ag commodities has also increased notably. U.S. Commodity Production and Inventories Index, 2010 = 100 Index, 2010 = 100 120 120 Cattle Inventory (Million Head) 115 115 Hog Inventory (Million Head) 110 110 Milk Production (Million MT) 105 105 100 100 95 95 90 90 2011 2012 2013 2014 2015 2016 2017 2018 Internal FR Note: Annual milk production data available through 2017. Source: USDA.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Profitability in the livestock sector has fluctuated, but generally has been positive in the hog industry. Cattle Profit Margins Hog Profit Margins $/cwt $/cwt 125 225 Price Range Price Range 200 December Futures Price December Futures Price 100 Production Costs Production Costs 175 75 150 125 50 100 75 25 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Internal FR Note: Production costs are calculated from USDA’s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. Source: USDA, Haver Analytics and CME.

FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH FEDERAL RESERVE BANK OF KANSAS CITY Concluding Remarks Bullet 1 Bullet 2 Bullet 3 Farm Finances