Agriculture and the Economy:

A View from the Chicago Fed

March 3, 2016

Riverside, Iowa

David Oppedahl

Senior Business Economist

312-322-6122

david.oppedahl@chi.frb.org

Federal Reserve System

• Twelve District Banks

• Board of Governors

• Federal Open Market Committee (FOMC)

• Functions of the Fed

– Monetary policy

– Commercial bank regulator

– Provides banking services for U.S. government

– Electronic funds transfer

– Currency distribution

Federal Reserve System

Chicago Fed National Activity Index

shows hesitant growth since 2009

-5

-4

-3

-2

-1

0

1

2

1999 '01 '03 '05 '07 '09 '11 '13 '15

Above

Trend

Growth

Below

Trend

Growth

(standard deviation from trend growth,

3-month moving average)

In December 2016, the FOMC raised the

Fed Funds rate target to a range from 0.25% to 0.50%

0

1

2

3

4

5

6

7

1999 '01 '03 '05 '07 '09 '11 '13 '15

Federal Funds Rate (effective),

Yields in percent per annum

Quantitative easing was necessary

Recent Monetary Policy Actions

• Tapering of asset purchases began in December 2013

• No additional asset purchases after November 2014,

while continuing to reinvest assets as they mature

• Raised the range of Fed Funds Rate by 0.25% points

and indicated future increases would be gradual

• The FOMC will monitor economic conditions to tailor

future actions to meet objectives of maximum

employment and 2% inflation

Food price increases now below

core inflation (less food and energy)

(Consumer Price Index, percent change from year ago)

-2

0

2

4

6

8

1991 1996 2001 2006 2011 2016

CPI Less Food and Energy

CPI for Food

Oil prices plummeted and lower

gas prices boosted consumer saving/spending (2010 $/barrel)

0

50

100

150

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Natural gas prices are low too

Real Natural Gas Price{2010 $/mmbtu}

0

5

10

15

1996 2001 2006 2011 2016

The FOMC anticipates that PCE inflation

will reach two percent by 2018

Unemployment has fallen from its peak (civilian unemployment rate, percent SA)

3

4

5

6

7

8

9

10

11

1999 '01 '03 '05 '07 '09 '11 '13 '15

The FOMC forecasts that the unemployment rate

will be at the natural rate by the end of 2016

The FOMC expects GDP to grow

above its trend in 2016

Contributions to real GDP growth

of 1.0% in the 4th quarter of 2015

• Consumption 1.4%

• Residential Investment 0.3%

• Business Investment -0.2%

• Inventories -0.1%

• Government 0.0%

• Net Exports -0.3%

Housing market tanked and moving up from bottom

Housing starts (millions of units, 3-month moving average, SAAR)

0.5

1.0

1.5

2.0

2.5

1999 '01 '03 '05 '07 '09 '11 '13 '15

3

4

5

6

7

8

9

1999 '01 '03 '05 '07 '09 '11 '13 '15

Home mortgage rate (percent, effective rate for all loans closed)

Manufacturing is moving sideways;

orders for capital goods moving up again

Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average)

45

50

55

60

65

70

75

1999 '01 '03 '05 '07 '09 '11 '13 '15

30

35

40

45

50

55

60

65

1999 '01 '03 '05 '07 '09 '11 '13 '15

ISM purchasing managers index (net percent reporting increase)

The dollar’s exchange value peaked in 2002,

before falling below earlier range and rallying

(Real Broad Trade-Weighted Exchange Value of the US$){March 1973=100}

80

90

100

110

120

1991 1996 2001 2006 2011 2016

U.S. exports lower than in recent years

(billions of 2015$, SA)

0

100

200

300

1995 2000 2005 2010 2015

Exports Imports

Why is the Chicago Fed interested in Agriculture?

• Important portion of District economy – Wide geographic impact

– “Backbone” of economy

• Leading farm states

• Manufacturing of food and bioproducts – Jobs

– Income

• Impact on commercial banks

• Response to stakeholders

Value of agricultural exports expected to slide in 2016

0

20

40

60

80

100

120

140

160

FY1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

bil

lio

n $

Exports

Imports

Surplus

(*USDA projection)

2016*

Corn production forecast: 3rd highest on record

7.5

9.5

6.3

10.1

7.4

9.2 9.29.8

9.410.0

9.59.0

10.1

11.811.1

10.5

13.0

12.0

13.112.4 12.3

10.8

13.814.2

13.6

0

3

6

9

12

15

1991/92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*

bil

lio

n b

us

he

ls

0

2

4

6

8

1990/91 93/94 96/97 99/00 02/03 05/06 08/09 11/12 14/15

bil

lio

n b

ush

els

Residual & Feed

Food, Seed & Industrial

Exports

Growth in industrial demand (especially for ethanol

production) surpassed feed demand for corn

Corn prices expected to be down a bit

from 2014/15

14%

25%

11%

17%

5%

10%

15%

19%18%

20%

16%

12%

9%

20%

18%

12%13%

14%13%

9%8% 7%

9%

13%14%

$0

$3

$6

$9

1991/92 95/96 99/00 03/04 07/08 11/12 15/16*

Pri

ce p

er

bu

sh

el

0%

10%

20%

30%

Sto

cks/u

se r

ati

o

stks/use ratio price

Soybean production narrowly set a new record...

2.02.2

1.9

2.5

2.22.4

2.7 2.72.6

2.82.9

2.8

2.5

3.1 3.13.2

2.7

3.0

3.4 3.3

3.1 3.0

3.4

3.9 3.9

0

1

2

3

4

1991/92 94/95 97/98 00/01 03/04 06/07 09/10 12/13 15/16*

bil

lio

n b

ush

els

Crushings are rising again while

soybean exports eased recently

0.0

0.5

1.0

1.5

2.0

1990/91 95/96 00/01 05/06 10/11 15/16*

bil

lio

n b

ush

els

Crush

Exports

Soybean prices moving lower as

stocks are up more in 2015/16

14%13%

11%

14%

8%

5%

8%

13%

11%

9%

7%6%

4%

9%

16%

19%

7%

5%5%

7%

5%5%

3%

5%

12%

$0

$4

$8

$12

$16

1991/92 95/96 99/00 03/04 07/08 11/12 15/16*

Pri

ce p

er

bu

sh

el

0%

5%

10%

15%

20%

Sto

cks/u

se r

ati

o

stks/use ratio price

7th District Crop Yield Indexes

(1964=100)

100

150

200

250

1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

Corn

Soybeans

2015*

(*USDA projection)

Real Cash Crop Prices

($/bushel, adjusted by CPI-U for January 2010)

0

5

10

15

20

25

30

35

40

1976 1981 1986 1991 1996 2001 2006 2011 2016

Corn Soybeans

Real USDA Livestock Prices

($/hundredweight, adjusted by CPI-U for January 2010)

0

50

100

150

200

250

1976 1981 1986 1991 1996 2001 2006 2011 2016

Hogs Cattle

Hog and Dairy Profitability Measures

Hog-corn price ratio

5

10

15

20

25

30

1999 '01 '03 '05 '07 '09 '11 '13 '15

1

2

3

4

5

1999 '01 '03 '05 '07 '09 '11 '13 '15

Milk-feed price ratio

Real net farm income boosted by direct government

payments to farmers, but varies by farm and region

0

25

50

75

100

125

150

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

bil

lio

n 2

00

9$

gov't payments *USDA forecast

2016*

7G Share of Net Farm Income

(% of U.S. total)

0%

10%

20%

30%

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

2014

Commercial farms generate income,

while the median farm loses money

Participating Banks Banks in 7th District Land Value

and Credit Conditions Survey

Annual change in farmland values in

Seventh Federal Reserve District

-30

-20

-10

0

10

20

30

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Perc

en

t

Farmland Value Indexes

for Seventh District States (1981=100)

0

100

200

300

400

500

600

1980 1984 1988 1992 1996 2000 2004 2008 2012

Illinois Wisconsin

Iowa

Indiana

Index of Seventh District farmland values (1981=100)

0

100

200

300

400

500

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Nominal

Inflation

Adjusted

Farmland values in 2013 dollars for the U.S. and

for the Seventh Federal Reserve District

(weighted by acres from USDA data)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

U.S.

7th District

Index of Seventh District Cash Rents

Nominal vs. Inflation Adjusted (1981=100)

0

50

100

150

200

250

300

1980 1985 1990 1995 2000 2005 2010 2015

Inflation Adjusted

Nominal

Supporting factors for farmland values?

1. Stream of farm income lower (at least in short

term)

2. Productivity and yield trends

3. Mix of investors has broadened

(more diversifiers; recreational buyers returning)

4. Off-farm income growth is important

5. Government payments are up, but insurance

programs provide less protection

6. Relatively low interest rates for agriculture

7. Limited availability of farmland

8. Opportunism

Where do farmland values go next?

• Supply of farmland (limited)

• Demand for farmland (not as strong)

• Farmland values increased rapidly

• Uncertain future, but it’s not the 1980’s

• Fundamentals mixed on the direction of

farmland values, but remain positive for

the longer term

Real farm sector assets and equity

at levels above prior peak

0

500

1,000

1,500

2,000

2,500

3,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

billio

n 2

00

9$

Debt

Equity

Assets

2016*

*USDA forecast

Farm financial ratios improved following the ‘80s crisis

5

10

15

20

25

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

perc

en

t

Debt/asset ratio

*USDA forecast

2016*

Index of agricultural loan demand for the Seventh

Federal Reserve District (excluding real estate)

40

60

80

100

120

140

160

1980 1985 1990 1995 2000 2005 2010 2015

Index of agricultural loan repayment rates

for the Seventh Federal Reserve District

20

40

60

80

100

120

140

160

1980 1985 1990 1995 2000 2005 2010 2015

Interest rates charged on new farm loans in the

Seventh Federal Reserve District

0

5

10

15

20

1980 1985 1990 1995 2000 2005 2010 2015

perc

en

t

Farm operating

Farm real estate

•The outlook is for the U.S. economy to expand at a

pace somewhat above trend in 2016

Summary

•Employment is expected to rise moderately with the

unemployment rate edging lower

•Slackness in the economy will lead to a relatively

low inflation rate, rising toward 2%

•Growth in manufacturing output should resume

•Housing turned the corner, but still has far to go

•Net exports remain a wild card given world conditions

•Solid U.S. economic growth boosting demand at restaurants

and for animal products

Impacts on Agriculture

•Weak world economic growth and stronger value of the dollar

holding back U.S. agricultural exports

•Plentiful grain and oilseed supplies pushing down prices and

feed costs for animal agriculture, but livestock prices down too

•Stubborn input costs counter low interest rates

•Lower levels of farm income; farmland values adjusting

•Strong past decade for agriculture tempers downturn

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