OUTLOOK FOR 2017 Robert Johansson Chief Economist US Department of - - PowerPoint PPT Presentation

Office of the Chief Economist

Robert Johansson Chief Economist US Department of Agriculture February 2017

http://www.reuters.com/article/us-usda-crops-idUSKBN134316

OUTLOOK FOR 2017

Office of the Chief Economist Office of the Chief Economist

Sentiment diverges compared to 2016

Data: USDA, UofMich, Purdue, Fed Reserve, NAHB, Creighton.

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• 40%
• 20%

0% 20% 40% 60% 80%

• 40%
• 20%

0% 20% 40% 60% 80% Purdue Creighton Fed Reserve Corn price NAHB Michigan

Office of the Chief Economist Office of the Chief Economist

2017 ISSUES

1.

Current situation

• Flat farm income, but debt-to-asset remains low
• Increasingly tight credit situation
• Land price adjustments
• Farm programs working with mixed results

2.

Outlook

• Prices flat
• Production up
• Trade up
• Food prices down

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Office of the Chief Economist Office of the Chief Economist

Real farm income down almost 30% since 2013

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Data: USDA-ERS.

• 50%
• 25%

0% 25% 50% 75% 100%

• 50%
• 25%

0% 25% 50% 75% 100% 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017F 4-yr % change in real farm income

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Net farm income expected to remain flat

Data: USDA.

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$20 $40 $60 $80 $100 $120 $140 $20 $40 $60 $80 $100 $120 $140

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Actual

Billion dollars Billion dollars

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Debt-to-asset ratio remains low vs. 22% in 1985

Data: USDA-ERS. 10% 12% 14% 16% 18% 20% 22% 24% 10% 12% 14% 16% 18% 20% 22% 24% 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017F Percent Percent

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About 1 in 5 wheat, cotton, hog, poultry businesses more vulnerable to low prices

Data: USDA-ERS. Debt-to-Asset

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0% 5% 10% 15% 20% Very highly leveraged (dta > 0.71) Highly leveraged (0.41< dta > 0.70)

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0% 5% 10% 15% 20% 25% Less than 35 35-54 55-64 65 and over

More than one-third of young farmers are highly or very highly leveraged

Data: USDA-ERS. Debt-to-Asset

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Very highly leveraged (dta > 0.71) Highly leveraged (0.41< dta > 0.70)

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Debt approaching early 80’s peak

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$50 $100 $150 $200 $250 $300 $350 $400 $50 $100 $150 $200 $250 $300 $350 $400 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017F Billion dollars ($2009) Billion dollars ($2009) Total debt Real estate debt Non-real estate debt Data: USDA-ERS.

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…but interest payments remain low

Data: USDA-ERS. 0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% 60% 70% 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017F Int:(NFI+Int) Int:(NFI+Int)

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0.00 0.50 1.00 1.50 2.00 2.50 3.00 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50

Dec-00 Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16

Percent $Billion

% real estate loans non-performing $ of real estate loans non- performing

Loan repayment problems have begun to rise

Data: Federal Reserve Board of Governors.

11 0.00 0.50 1.00 1.50 2.00 2.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Dec-00 Jun-02 Dec-03 Jun-05 Dec-06 Jun-08 Dec-09 Jun-11 Dec-12 Jun-14 Dec-15 Percent $Billion

% non-real estate loans non-performing $ non-real estate loans non- performing

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… but farm bankruptcy rates remain very low

5 10 15 20 25 1 2 3 4 5 6 7 8 Bankruptcy Rate / 10,000 farms Millions of farms, excluiding sharecroppers Total Bankruptcy rate Source: USDA-ERS.

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$/acre Cash Rent $/acre Land Value

Falling rents ahead of land values

50 100 150 200 250 300 1990 2000 2010 2020

Appalachian Corn Belt Delta States Lake States Mountain Northeast Northern Plains Pacific Southeast Southern Plains

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 1990 2000 2010 2020 Data: USDA-NASS.

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Capitalized cash rent value < land value in 1980

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 1965 1970 1975 1980 1985 1990 1995 2000 $/acre $/acre Capitalized value (IL, IA) Land Value (7th District) Data: USDA-NASS, Federal Reserve Board of Governors.

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$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 1995 2000 2005 2010 2015 2020 Land value (Iowa) Capitalized value (Iowa) $/acre

Today, capitalized values > observed land values

Data: USDA-NASS. 2017 Assume Rent falls by 5% Values fall by 5% 10-yr rate = 2.5%

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Farm Bill programs are working with mixed results

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50 100 150 200 250 300 350 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Yield Revenue Group Index Other Million Acres Insured

Revenue insurance now > 70% of liabilities

Source: USDA-ERS using RMA data.

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Rev guarantee Yield bu/acre Price $/bu Actual rev $/acre Payment $/acre Piatt $769 221 $3.61 $798 $0 McLean $787 199 $3.61 $718 $69

2015 example: Central Illinois farmer with corn base enrolled in ARC

Data: USDA-FSA.

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Premiums for the dairy margin program > payments

Office of the Chief Economist

• 2.00

4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 $US/cwt

$11 mill in payments ($20 mill in premiums)

Data: USDA.

• estim. $878 mill in payments
• estim. $577 mill in payments

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Outlook for Crops

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300 400 500 600 700 800

MMT

Production Consumption

Wheat

300 400 500 600 700 800 900 1,000 1,100

MMT

Corn

50 100 150 200 250 300 350

MMT

Soybeans

Global 2016/17 production and consumption at record highs

Data: USDA-OCE, USDA-FAS, *FAPRI data used for 2017/18 global consumption.

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Global ending stocks remain above 2002/03, moderating price volatility

Data: USDA-OCE, USDA-FAS, *FAPRI data used for 2017/18 global consumption.

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40 60 80 100 120 140 160 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017* Wheat Corn Rice Soybeans Days of use

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Prices expected to edge up into 2017/18

2012 2013 2014 2015 2016 2017F % Wheat ($/bu) 7.77 6.87 5.99 4.89 3.85 4.30 11.7 Corn ($/bu) 6.89 4.46 3.70 3.61 3.40 3.50 2.9 Soybeans ($/bu) 14.40 13.00 10.10 8.95 9.50 9.60 1.1 Cotton (cents/lb) 72.50 77.90 61.30 61.20 69.00 65.00

• 5.8

All Rice ($/cwt) 15.10 16.30 13.40 12.20 10.50 10.70 1.9 Data: USDA-OCE.

Red denotes record high. Crop

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8-Crop Planting and Lagged Prices

235 240 245 250 255 260 265 270 25 50 75 100 125 150 175 200 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Million acres Planted Lagged Real Price Index , 2004 = 100 Baseline February AOF

Lagged Prices 8-Crop Area Data: USDA-OCE.

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New Crop Soybean-to-Corn Ratio During February

Data: USDA-OCE.

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Crop (mil. acres) 2012 2013 2014 2015 2016 2017F % Corn 97.3 95.4 90.6 88.0 94.0 90.0

• 4.3%

Soybeans 77.2 76.8 83.3 82.7 83.4 88.0 5.5% Wheat 55.3 56.2 56.8 55.0 50.2 46.0

• 8.3%

All cotton 12.3 10.4 11.0 8.6 10.1 11.5 14.2% Other feedgrains 12.6 14.6 12.9 15.2 12.6 11.7

• 7.1%

Rice 2.7 2.5 3.0 2.6 3.2 2.6

• 17.4%

Total 8 crops 257.4 255.9 257.6 252.1 253.4 249.8

• 1.4%

CRP 29.5 26.8 25.5 24.2 23.8 23.5

• 1.3%

8 crops + CRP 286.9 282.7 283.1 276.3 277.2 273.3

• 1.7%

Cropland area down again from last year

Source: USDA-OCE. All cotton, includes both upland and ELS cotton. 28

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Outlook for Livestock and Dairy

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Office of the Chief Economist Office of the Chief Economist

Beef, pork, poultry, and milk production higher in 2016 and 2017

Data in red denote record levels.

1 Total red meat and poultry

Item 2012 2013 2014 2015 2016 2017F % Billion pounds Beef 25.9 25.7 24.3 23.7 25.2 26.0 3.1 Pork 23.3 23.2 22.8 24.5 24.9 26.2 4.9 Broilers 37.0 37.8 38.6 40.0 40.7 41.5 2.1 Total1 93.0 93.3 92.2 94.6 97.6 100.6 3.1 Billion pounds Milk 200.6 201.2 206.1 208.6 212.5 217.4 2.3 Source: USDA-OCE.

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Office of the Chief Economist Office of the Chief Economist

Cattle and hog prices to come down in 2016 and 2017, but broilers and dairy turn up in 2017

Prices in red denote record levels.

Item 2012 2013 2014 2015 2016 2017F % Dollars per cwt Steers 122.86 125.89 154.56 148.12 120.86 112.00

• 7.3

Hogs 60.88 64.05 76.03 50.23 46.16 43.50

• 5.8

Broilers 86.6 99.7 104.9 90.5 84.3 84.8 0.5 Milk 18.52 20.05 23.97 17.12 16.24 18.05 11.1 Source: USDA-OCE.

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Marketing

http://www.chinadaily.com.cn/business/2015- 09/26/content_21987498.htm

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U.S. Agricultural exports dominated by top three

20 40 60 80 100 120 140 160 2001 2003 2005 2007 2009 2011 2013 2015 2017F

Everyone else Mexico Canada China

Data: USDA.

Billion dollars 33

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20 40 60 80 100 120 140 160 1990/91 1995/96 2000/01 2005/06 2010/11 2015/16 2020/21 2025/26

2015 projection Million metric tons

Data: USDA-OCE.

2016 projection 2017 projection

China imports to rise boosted by soybeans

Combined imports of grains, soybeans, and cotton.

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Continued growth in China soybean imports expected

20 40 60 80 100 120 140 160 180 200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

China Other South America Japan Mexico

Million Metric Tons

Global Soybean Imports

Data: USDA.

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1 1 2 2 3 3 3 5 5 5 7 7 27 149 154 50 100 150 200 250

Taiwan Colombia Malayasia South Korea Thailand Vietnam Russia Turkey Philippines Mexico Brazil Egypt Indonesia India China

Million Households w/ Real PPP incomes > than $20,000

2014

• Proj. gains by 2024

Source: Global Insight’s Global Consumer Markets data as analyzed by USDA-FAS.

“Middle Class” grows 119% From 2014 Levels

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2001 2003 2005 2007 2009 2011 2013 2015 2017F 4 8 12 16 20 24 28 China India Fiscal year

U.S. Ag Exports to China and India

Data Source: USDA GATS, CY basis

Source: USDA-FAS. Billion dollars

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Corn trade driven by growth in North Africa, Middle East and Southeast Asia

Data: USDA.

20 40 60 80 100 120 140 160 180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 North Africa+Middle East Southeast Asia South America Mexico China Japan+South Korea Other

Million Metric Tons

Global Corn Imports

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Office of the Chief Economist Office of the Chief Economist

U.S. remains #1 corn exporter

Data: USDA.

20 40 60 80 100 120 140 160 180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 United States Brazil Argentina Ukraine Other

Million Metric Tons

Global Corn Exports

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Office of the Chief Economist Office of the Chief Economist

50 100 150 200 250 300 Total Red Meat and Poulty Dairy, Fat-Basis Dairy, Skim Solids-Basis Billion Pounds

2008

Exports share of use grows over time

14.5% of supply 4.3% of supply 12.2% of supply 50 100 150 200 250 300 Total Red Meat and Poulty Dairy, Fat-Basis Dairy, Skim Solids-Basis Billion Pounds

2026

Domestic Use Exports

15.9% of supply 4.6% of supply 19.5% of supply

50 100 150 200 250 300 Total Red Meat and Poulty Dairy, Fat-Basis Dairy, Skim Solids-Basis Billion Pounds

2017

16.9% of supply 3.5% of supply 14.8% of supply

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Outlook for Food Prices

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Data: BLS.

Longest sustained fall in food prices in 60 years

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• 10%
• 5%

0% 5% 10% 15% 20% 25% 50 100 150 200 250 300 Jan-47 Apr-50 Jul-53 Oct-56 Jan-60 Apr-63 Jul-66 Oct-69 Jan-73 Apr-76 Jul-79 Oct-82 Jan-86 Apr-89 Jul-92 Oct-95 Jan-99 Apr-02 Jul-05 Oct-08 Jan-12 Apr-15 CPI (1982-84 = 100) Percent Change (Y-O-Y)

Annual change in CPI CPI

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Low income household spending 35% on food

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0% 10% 20% 30% 40% 50% 60% $0 $2 $4 $6 $8 $10 $12 $14

1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 Real disposable personal income

Lowest 20% of household incomes Median household incomes Highest 20% of household incomes

Billion dollars ($2014) Percent of household income spent on food

Data: USDA-ERS, BLS.

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Top 40 percent of households purchase nearly 60 % of food sold

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$- $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 Lowest 20% Second 20% Middle 20% Fourth 20% Highest 20% Million dollars Data: BLS.

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Conclusion

1.

Net farm income is flat and likely to remain flat until stocks-to-use starts to fall.

2.

Premium of cash rents to land values likely to close with lower rents and values.

3.

The soybean:corn ratio suggests more acres of soybeans and fewer to

• corn. Overall planted area is likely down by 3.6 million acres.

4.

Record meat, poultry and dairy production will look to export markets.

5.

China demand grows, while opportunities in other developing countries beckon.

6.

Food inflation likely to be very low in aggregate:

• continued marketing opportunities available to higher income households.
• Low food prices remain important for millions of households.

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