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Jason Henderson Vice President and Branch Executive Federal Reserve Bank of Kansas City Omaha Branch www.kansascityfed.org/omaha May 17, 2011 The views expressed are those of the author and do not necessarily reflect the opinions of the

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Jason Henderson Vice President and Branch Executive Federal Reserve Bank of Kansas City – Omaha Branch www.kansascityfed.org/omaha May 17, 2011

The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Index (2007:Q4 = 100)

U.S. Employment by Metropolitan Status

Source: USDA

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Source: USDA and Association of Equipment Manufacturers Note: 2011 Agricultural Equipment Sales are YTD through March

Percent change from year ago

U.S. Real Net Farm Income and Agricultural Equipment Sales

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Source: Federal Reserve District Surveys (Chicago, Minneapolis, Kansas City, Dallas)

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Does Everyone Win With Higher Commodity Prices?

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Source: USDA

Percent

Food Share of Household Expenditure by Country, 2009

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Source: USDA

Net Returns to Milk Production

Dollars per hundredweight

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Delinquent Farm Loans Held by Insured Commercial Banks

Percent of outstanding loans

Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Economic Gains Strengthen

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

U.S. Monthly Retail and Food Sales

Billion dollars

Source: U.S. Census Bureau

2008 2009 2010 2011

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Percent change from previous year (3 month moving average)

Source: Census Bureau

U.S. Existing Home Sales and Single-Family Housing Starts

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Percent change from year ago

U.S. Non-residential Investment

Source: Census Bureau

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Billion dollars (Constant 2005 dollars) Price Adjusted Index

U.S. Net Exports and Value of the Dollar

Source: Bureau of Economic Analysis and Federal Reserve

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Federal Reserve (FOMC) Economic Projections Central Tendency

U.S. Real GDP Growth

Percent change from fourth quarter of previous year to fourth quarter of year indicated

Source: Bureau of Economic Analysis and Federal Reserve Board of Governors

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Have Inflation Risks Changed?

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Federal Reserve Balance Sheet: Assets

Billion Dollars

Source: Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Money * Velocity Price = Quantity

Definition of Inflation: Too much money chasing too few goods

M V Q

Quantity Theory of Money

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Bank Lending Consumer Spending Business Investment

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Billion dollars

Source: Federal Reserve Board of Governors

Excess Reserves of Depository Institutions

Lend Money into the Economy Hold Money in Excess Reserves at the Federal Reserve Commercial Banks

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Personal Consumption Expenditures Price Index

Percent change from previous year

Source: Bureau of Economic Analysis

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Nonfarm Employment Change and Unemployment Rate

Thousands

Source: Bureau of Labor Statistics

Percent

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

The Lesson of the “Great Recession”: Rising Demand Lifts All Boats

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Source: USDA

U.S. Dairy Exports

Million dollars Million dollars

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Source: USDA

Retail Sales at Grocery Stores and Restaurants

Percent change from previous year

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

What are the Risks for Agriculture?

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

2011: U.S. Acres Planted to Corn Up 4.3%
2020: U.S. Corn Yields Up 17 Percent
2013: Average Annual Corn Price is $4.10

Farmers Always Produce Themselves Out of Prosperity

2013: Net returns above variable costs for corn

fall 40% below today’s levels.

How Quickly Could Farm Incomes Fall?

Source: USDA

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Index (2002 to 2004 average = 100)

World Food Prices and U.S. Gasoline Prices

Source: Food and Agricultural Organization of the United Nations and Energy Information Administration

Dollars per gallon

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Percent

China’s Inflation and Interest Rates

Percent change from year ago

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Capitalized Land Values = Expected Incomes Expected Discount Rates

Farm Incomes Rise with Lower Interest Rates Discount Rates Fall with Lower Interest Rates

What Happens to Farmland Values Under Higher Interest Rates?

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Dollars per bushel

Dollars per acre

Capitalized Revenues from Corn Production

29% 43% 57%

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Percent change from previous year

Growth in Farm Real Estate and Non-Real Estate Debt (2009 to 2010)

Source: USDA, Agricultural Finance Databook, Federal Farm Credit Banks

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

Thousands

Source: Federal Reserve Bank of Kansas City

Tenth District Rural Counties

Age

Today’s 40 year olds were teenagers in the 1980s. What is their memory of rural America?

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Federal Reserve Bank of Kansas City – Omaha Branch Regional, Public, Community Affairs Division

www.kansascityfed.org/omaha

 Rural America fared better during the recession and recovery.  Crop incomes are booming and farmers are buying tractors,

land, and more.

 Economic growth and inflations have risen recently.  Despite a stronger recovery, headwinds remains.  New opportunities are emerging with stronger demand.  Agriculture continues to face volatile markets.

Low leverage ratios and strong working capital are the best way to manage through volatile times.

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Jason Henderson Vice President and Branch Executive Federal Reserve Bank of Kansas City – Omaha Branch www.kansascityfed.org/omaha May 17, 2011

U.S. Employment by Metropolitan Status

U.S. Real Net Farm Income and Agricultural Equipment Sales

Does Everyone Win With Higher Commodity Prices?

Food Share of Household Expenditure by Country, 2009

Net Returns to Milk Production

Delinquent Farm Loans Held by Insured Commercial Banks

Economic Gains Strengthen

U.S. Monthly Retail and Food Sales

2008 2009 2010 2011

U.S. Existing Home Sales and Single-Family Housing Starts

U.S. Non-residential Investment

U.S. Net Exports and Value of the Dollar

U.S. Real GDP Growth

Have Inflation Risks Changed?

Federal Reserve Balance Sheet: Assets

Money * Velocity Price = Quantity

Definition of Inflation: Too much money chasing too few goods

M V Q

Quantity Theory of Money

Bank Lending Consumer Spending Business Investment

Excess Reserves of Depository Institutions

Personal Consumption Expenditures Price Index

Nonfarm Employment Change and Unemployment Rate

The Lesson of the “Great Recession”: Rising Demand Lifts All Boats

U.S. Dairy Exports

Retail Sales at Grocery Stores and Restaurants

What are the Risks for Agriculture?

Farmers Always Produce Themselves Out of Prosperity

fall 40% below today’s levels.

How Quickly Could Farm Incomes Fall?

World Food Prices and U.S. Gasoline Prices

China’s Inflation and Interest Rates

Capitalized Land Values = Expected Incomes Expected Discount Rates

Farm Incomes Rise with Lower Interest Rates Discount Rates Fall with Lower Interest Rates

What Happens to Farmland Values Under Higher Interest Rates?

Capitalized Revenues from Corn Production

Growth in Farm Real Estate and Non-Real Estate Debt (2009 to 2010)

Tenth District Rural Counties

Today’s 40 year olds were teenagers in the 1980s. What is their memory of rural America?

 Rural America fared better during the recession and recovery.  Crop incomes are booming and farmers are buying tractors,

land, and more.

 Economic growth and inflations have risen recently.  Despite a stronger recovery, headwinds remains.  New opportunities are emerging with stronger demand.  Agriculture continues to face volatile markets.

Low leverage ratios and strong working capital are the best way to manage through volatile times.

For More Information

Agricultural and Rural Economies www.kansascityfed.org