ROOTS OF PROSPERITY OUTLOOK FOR 2018 Robert Johansson Chief - - PowerPoint PPT Presentation

Office of the Chief Economist

Robert Johansson Chief Economist, USDA February 2018

ROOTS OF PROSPERITY OUTLOOK FOR 2018

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

60 80 100 120 140 60 70 80 90 100 110 120 130 140

Michigan Creighton Fed Reserve Corn price NAHB Purdue 2017 = 100

Farmers’ sentiment is low compared to others, following corn prices down

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

2

2017 = 100

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Real prices trend down, as ag productivity outstrips population growth

100 200 300 400 500 600 700 800 1960 1970 1980 1990 2000 2010 2020

Real Commodity Prices

Corn Soybeans Rice Wheat

50 100 150 200 1960 1970 1980 1990 2000 2010 2020

World Production

Corn Soybeans Rice Wheat

Data: USDA, BLS.

2005=100 2005=100

Corn price down 61%, soybeans by 47%, rice by 65%, and wheat by 68%. Corn supply risen up 420%, soybeans by 1,116%, rice by 219%, and wheat by 222%.

3

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

20 40 60 80 100 120 140 20 40 60 80 100 120 140 Billion dollars Billion dollars

Nominal net farm income 4

Real net farm income falling

Data: USDA Real net farm income

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

What might improve income?

• Demand change:
• Global GDP growth boosts demand
• Dollar weakness boosts trade
• Improved market access abroad
• Supply change:
• Weather events
• Less distorting int’l farm policy
• US Farm Policy
• Current economic conditions
• New farm bill—when?

5

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

IMF growth forecasts more optimistic

3.00 3.50 4.00 4.50 5.00 5.50 2014 2015 2016 2017 2018 2019 2020 2021 April 2017 forecast October 2017 forecast January 2018 update

Percent change

World

3.00 3.50 4.00 4.50 5.00 5.50 2014 2015 2016 2017 2018 2019 2020 2021 April 2017 forecast October 2017 forecast January 2018 update

Percent change

Emerging markets and developing countries Data: IMF. 6

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Income growth will drive increased global demand

1 42 1 7 6 2 5 7 6 6 7 28 150 151 100 200 300 400

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

Households w/ Real PPP incomes greater than $20,000 (millions)

2016

• Proj. gains by 2026

Million Households Data: Global Insight’s Global Consumer Markets data. 7

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Dollar depreciating so far in 2018 versus customer currencies

• 10
• 5

5 10 15 20 25 2015 2016 2017 2018 to date

Canadian dollar Korea won Japan yen Mexico peso Taiwan dollar China yuan

% change Y-O-Y

Data: Thomson Reuters Datastream 8

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Down versus most competitor currencies too

• 20
• 10

10 20 30 40 50 60 70 2015 2016 2017 2018 to date

Argentina peso Australia dollar Brazil real Canadian dollar Eurozone euro Russia ruble

% change Y-O-Y

Data: Thomson Reuters Datastream 9

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

That should help maintain FY2018 ag exports

Data: USDA.

50 100 150 200 Billion dollars Trade Surplus U.S. Agricultural Exports U.S. Agricultural imports

10

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

FTA’s account for large share of total U.S. ag exports

0% 10% 20% 30% 40% 50% 20 40 60 80 100 120 140 160 FTA Partner Non-FTA Partner FTA Share

Data: USDA.

Billion dollars Shares

11

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

U.S. crop forecast

Photo source: www.farmanddairy.com/438028.html

12

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Global ending stocks to continue relatively high, moderating price volatility

40 80 120 160 2000 2002 2004 2006 2008 2010 2012 2014 2016 Wheat Corn Rice Soybeans Ending stocks days of use

Data: USDA. 13

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Some prices expected to edge up into 2018/19

2014 2015 2016 2017 2018F

• Wheat ($/bu)

5.99 4.89 3.89 4.60 4.70 2.2 Corn ($/bu) 3.70 3.61 3.36 3.30 3.40 3.0 Soybeans ($/bu) 10.10 8.95 9.47 9.30 9.25

• 0.5

Cotton (cents/lb) 61.30 61.20 68.00 69.00 63.00

• 8.7

All Rice ($/cwt) 13.40 12.20 10.40 12.50 11.90

• 4.8

Data: USDA.

Crop

14

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Corn prices rise slowly over next 10 years

1 2 3 4 5 6 7 8 Dollars per bushel

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Actual

Data: USDA 15

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Prices +/- will depend on weather and economy

Projections for 2020 Low Corn Price High Corn Price Corn price ($/bu) 2.02 5.56 Yield (bu/acre) 196 158 Ending stocks (mils bu) 4,477 1,699 Soybean price ($/bu) 5.49 10.89

Data: USDA & FAPRI.

1 2 3 4 5 6 Dollars per bushel

Corn Price Simulations

95%

16

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 US DDG Exports to other US DDG Exports To China DDG/Corn Price (t-1) Biotech rejections AD/CVDs

…and on other countries farm and trade policies

17

Data: USDA.

DDG/corn price ratio DDG exports mmt

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80 3-Sep 3-Oct 3-Nov 3-Dec 3-Jan 3-Feb 3-Mar 3-Apr 3-May 3-Jun

Evolution of New Crop U.S. Soybean to Corn Price Ratio for Selected Years

2014 2016 2017 2018

… but farmers plant based on what they expect

18

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Crop (mil. acres) 2014 2015 2016 2017 2018F

• Corn

90.6 88.0 94.0 90.2 90.0

• 0.2%

Soybeans 83.3 82.7 83.4 90.1 90.0

• 0.1%

Wheat 56.8 55.0 50.1 46.0 46.5 1.1% All cotton 11.0 8.6 10.1 12.6 13.3 5.6% Other feedgrains 12.9 15.2 12.6 10.7 12.6 17.8% Rice 3.0 2.6 3.2 2.5 2.9 16% Total 8 crops 257.6 252.0 253.4 252.1 255.3 1.3%

Corn and bean area at parity, wheat holding

Data: USDA. 19

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Who’s buying now?

Global Import Share (2017/18)

Data: USDA

Mexico 9% China 8% N. Afr/Mid

• East

22% Japan 9% EU 9% Rest of World 43%

Coarse Grains

China 65% EU 9% Mexico 3% Japan 2% Rest of World 21%

Soybeans

Sub- Saharan Afr 13% N. Afr/Mid- East 29% SE Asia 14% FSU 4% Brazil 4% Rest of World 36%

Wheat

20

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Data: USDA

Mexico 10% China 10% N. Afr/Mid

• East

24% Japan 7% EU 6% Rest of World 43%

Coarse Grains

China 70% EU 7% Mexico 2% Japan 2% Rest of World 19%

Soybeans

Sub-Saharan Afr 16% N. Afr/Mid- East 29% SE Asia 14% FSU 4% Brazil 4% Rest of World 33%

Wheat

Who will be buying?

Global Import Share (2027/28)

21

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

U.S. export share of global trade flattens

Data: USDA

0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Corn Soybean Wheat

22

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Outlook for Livestock and Dairy

23

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Meat and milk production to be record high in 2018

Data in red denote record levels. 1 Total red meat and poultry

Item 2014 2015 2016 2017 2018F

• Billion Pounds

Beef 24.3 23.7 25.2 26.2 27.7 5.9 Pork 22.8 24.5 24.9 25.6 26.9 5.1 Broilers 38.6 40.0 40.7 41.6 42.6 2.3 Total1 92.2 94.6 97.6 100.1 103.9 3.8 Milk 206.1 208.6 212.4 215.4 218.7 1.5

Data: USDA-OCE. 24

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Beef production is projected to continue to rise

20 22 24 26 28 30 Billion pounds

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Actual

Data: USDA 25

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

September 13, 2011

Released Thursday, Sep. 15, 2011) Valid 7 a.m. EST Author Mark Svoboda National Drought Mitigation Center

February 13, 2018

(Released Thursday, Feb. 15, 2018) Valid 7 a.m. EST Author Eric Luebehusen U.S. Department of Agriculture

Percent of Southern Plains* In D3-D4 Drought

* Kansas, Oklahoma, and Texas September 13, 2011: February 13, 2018: 83.3% 16.5%

U.S. Drought Monitor, Sept 2013 and Feb 2018

26

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Livestock, poultry, and milk prices were higher in 2017, but will decline in 2018

Prices in red denote record levels.

Item 2014 2015 2016 2017 2018F

• Dollars per cwt

Steers 154.56 148.12 120.86 121.52 119.25

• 1.9

Hogs 76.03 50.23 46.16 50.48 48.00

• 4.9

Broilers 104.9 90.5 84.3 93.5 90.8

• 2.9

Milk 23.97 17.13 16.30 17.63 16.05

• 9.0

Data: USDA. 27

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Export volumes rise over time

Data: USDA.

2 4 6 8 10

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027

Billion pounds Beef Pork Chicken 10 20 30 40 50 60 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 Billion pounds Dairy, Fat-Basis Dairy, Skim Solids-Basis

28

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Status of the Farm Economy

29

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Data: USDA.

Working capital falling

$0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 2012 2013 2014 2015 2016 2017F 2018F Assets (left axis) Working Capital (right axis) Debt (left axis) Million dollars Million dollars

30

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Debt-to-asset ratios vary by sector

Data: USDA.

0% 5% 10% 15% 20% 25% 30% 35%

Cotton Wheat Corn Soybeans All other crops Cattle and calves Hogs Poultry Dairy Other livestock

Highly leveraged (0.41< dta > 0.70) Very highly leveraged (dta > 0.71) % of farm businesses

31

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

50 100 150 200 250 300 350 400 450 50 100 150 200 250 300 350 400 450 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018F

Borrowing continuing to rise

Data: USDA.

Total debt Real estate debt Non-real estate debt Billion dollars (2018$) Billion dollars (2018$)

32

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Debt-to-assets remain low, but interest payments rising

Data: USDA.

0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% 60% 70% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017F Int/(NFI+Int) Debt-To-Asset Ratio

33

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

The share of non-performing loans is rising

0.25 0.5 0.75 1 1.25 1.5 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Mar-00 Sep-01 Mar-03 Sep-04 Mar-06 Sep-07 Mar-09 Sep-10 Mar-12 Sep-13 Mar-15 Sep-16

Non-real estate loans

Percent (lhs) Billion dollars (rhs)

0.5 1 1.5 2 2.5 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

Mar-00 Sep-01 Mar-03 Sep-04 Mar-06 Sep-07 Mar-09 Sep-10 Mar-12 Sep-13 Mar-15 Sep-16

Real estate loans

Billion dollars (rhs) Percent (lhs)

Data: Federal Reserve Board of Governors 34

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Farm bankruptcy remains low

5 10 15 20 25 1 2 3 4 5 6 7 8 Bankruptcies / 10,000 farms Millions of farms, excluding shaarecroppers Total farms

Bankruptcy Rate Source: USDA-ERS. 35

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Farm programs and changes

https://fm.cnbc.com/applications/cnbc.com/resources/img/editorial/2017/09/11/104702221-GettyImages- 56058522.530x298.jpg?v=1505137319 36

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Crop insurance increasing in importance

5 10 15 20 25 30 35 40

1985 1987 1989 1991 1993 1665 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Billion dollars

Crop insurance Conservation Emergency Decoupled Partially decoupled Coupled

$15 billion per year $5.7 billion from crop ins 37 Source: USDA.

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

• 2017
• Crop

insurance indemnities reflects location of 2017 natural disasters

Source: USDA-RMA. 38

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Source: CBO.

Projected Farm Bill spending by commodity

Billion dollars 0.0 1.0 2.0 3.0 4.0 5.0

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Corn Soybeans Wheat Upland cotton Rice Peanuts Dairy net outlays

39

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

80 percent generic base acres > 2009-2012 average for upland cotton planted acres

Data: USDA. 40

5 10 15 20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F Upland cotton, planted acres 80% Generic base, enrolled (2017) Upland cotton, 2009-2012 average planted acres Million acres

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

0.00 0.50 1.00 1.50 2.00 2.50 $0 $2 $4 $6 $8 $10 $12

Milk/feed margin (lhs) BBA payments at $8 margin (rhs) MPP payments at $8 margin (rhs)

Increased MPP payments to dairy producers

Note: Payments at $8 are annual payments/cwt to producers with margin coverage at $8. Data: USDA. 41

$US/cwt $US/cwt

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

Conclusion

1.

Total meat and milk production reach record highs in 2018.

2.

Strong global GDP and weak dollar maintains exports this year.

3.

Parity between soybean and corn acreage in 2018.

4.

Net farm income is forecast down and projected to fall in real terms.

5.

The 2018 Bipartisan Budget Act will extend farm safety net programs for cotton and dairy and provide additional assistance to producers facing losses from 2017 disasters.

42

Office of the Chief Economist Office of the Chief Economist Office of the Chief Economist

43

Thank you!