global economics & its implication for agriculture by jason henderson
TRANSCRIPT
Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.
January 2015
Jason HendersonDirector of Purdue ExtensionAssociate Dean College of Agriculturewww.extension.purdue.edu
Global Economics and Its
Implications for Agriculture
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The U.S. Economy is Strengthening.
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U.S. Job Growth
Source: Bureau of Labor Statistics
Monthly change in jobs
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The Global Economy has Slowed.
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Implications for Agriculture
• Demand growth slowed.
– Exports plateau
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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
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Implications for Agriculture
• Demand growth slowed.
– Exports plateau
– Ethanol stalls
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U.S. Ethanol Production
Million barrels
Source: Department of Energy
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.
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U.S. Rest of the World
U.S. and World Corn Production
MMT
Source: Department of Energy
MMT
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Crop Profits are Expected to Fall in 2015
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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)
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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
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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
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Livestock Profits Rebound
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Hog-Corn Price Ratio (Left Scale)
Beef-Corn Price Ratio (Right Scale)
U.S. Livestock-Corn Price Ratios
Ratio
Source: USDA
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Profitability will depend on how producers respond.
• Will higher prices lead to demand destruction at the meat case?
• Will stronger profits drive additional production?
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Beef (Left Scale) Pork (Left Scale)
Broilers (Right Scale)
U.S. Meat Production
Billion pounds
Source: USDA
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In the end, farm incomes fall sharply.
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Nominal
U.S. Net Farm Income
Billion dollars
Source: USDA
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Implications for Agriculture
• Crop profits decline
• Livestock profits rebound
• U.S. farm incomes retreat
• What happens to farmland values?
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Is farmland over-valued as an asset?
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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)
Texas43.6
SoutheastRegion
44.2
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No relationship between land values and expected corn price.
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Farmland Value ($'s per Acre)
Current Farmland Values and Corn Price Expectations, Spring 2012
Source: Gloy (2013) Center for Commercial Agriculture, Purdue University
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Farmland Values Shaped by Multiple Factors
Farm Profits
UrbanExpansion
Wildlife Recreation
EnergyDevelopments
InterestRates
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Energy Markets and Mineral Rights Drive Land Values
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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
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U.S. crude oil production has changed energy markets.
Index (2008 = 100)
World Crude Oil Production
Source: Dept. of Energy, Energy Information Administration
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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
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OCEDEurope Germany France Japan U.S.
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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
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In rural (nonmetro) areas, home construction surges during farm booms.
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Year of Home Construction
Percent of homes in 2009
Calculations based on U.S. Census data
Urban sprawl
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Demographics play a major role in housing.
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U.S. Population Growth
25-44 year olds 45-64 year olds
Annual percent change
Calculations based on Census data
Boomers
Millennial
Boomers
Millennial
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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?
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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
Capitaliz
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(perc
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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.
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The Outlook:A Liquidity Challenge for Agriculture,
Especially Crops.
The Concern:When do Liquidity Problems
Turn into Solvency Problems?
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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?
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The Stages of Farm Investment
Land Investments
Equipment Investments
Lifestyle Investments
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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%
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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
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Family Living Expenses Have Increased Substantially
Source: Compiled from Kansas Farm Management Association Executive Summaries
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U.S. Agriculture is in Great Financial Health, but farm debt is rising.
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Farm Debt Outstanding at Commercial Banks
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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
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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
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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.
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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?