U.S. Economy in High Gear, but Ag Stuck in Neutral Nate Kauffman, - - PowerPoint PPT Presentation

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U.S. Economy in High Gear, but Ag Stuck in Neutral Nate Kauffman, - - PowerPoint PPT Presentation

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FEDERAL RESERVE BANK OF KANSAS CITY OMAHA BRANCH U.S. Economy in High Gear, but Ag Stuck in Neutral Nate Kauffman, Federal Reserve Bank of Kansas City October 17, 2018 FEDERAL RESERVE BANK OF KANSAS CITY OMAHA BRANCH FEDERAL RESERVE

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FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

U.S. Economy in High Gear, but Ag Stuck in Neutral

Nate Kauffman, Federal Reserve Bank of Kansas City October 17, 2018

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Outlook Themes

Bullet 1 Bullet 2 Bullet 3

  • Momentum in the national economy has persisted, but the agricultural

economy has remained in a prolonged downturn.

  • Agricultural credit conditions have continued to deteriorate gradually,

although the value of farm real estate has remained a relative bright spot.

  • Signs of stabilization in agriculture earlier in the year have become more

questionable with ongoing trade disputes.

  • Interest rates have continued to rise at a gradual pace, putting pressure
  • n highly leveraged operations.
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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

The outlooks for agriculture and the U.S. economy have reversed since 2013.

Internal FR

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5

  • 80
  • 60
  • 40
  • 20

20 40 60 80

Farm Income (Left Scale) Wheat Price (Left Scale) Consumer Sentiment (Left Scale) Fed Funds Rate (Right Scale)

Percent Percentage Points

Indicators for Ag Economy and Broader U.S. Economy

Source: U.S. Department of Agriculture (USDA), University of Michigan, Board of Governors of the Federal Reserve System, and Haver Analytics.

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5

  • 80
  • 60
  • 40
  • 20

20 40 60 80

Farm Income (Left Scale) Wheat Price (Left Scale) Consumer Sentiment (Left Scale) Fed Funds Rate (Right Scale)

Change from 2007–2013 Change from 2013–2018

Percentage Points Percent

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Residential real estate markets have also picked up while farmland markets have cooled.

Internal FR

  • 25

25 50 75 100

  • 25

25 50 75 100

Farmland Values House Prices

Percent Percent

U.S. House Prices and Farmland Values

Source: FHFA, USDA, and Haver Analytics.

Change from 2007–2013 Change from 2013–2018

Percent Percent

  • 25

25 50 75 100

  • 25

25 50 75 100

Farmland Values House Prices

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

In Oklahoma, farmland values have continued to rise, but more gradually, and house prices have also gained strength.

Internal FR

  • 25

25 50 75 100

  • 25

25 50 75 100

Farmland Values House Prices

Percent Percent

Oklahoma House Prices and Farmland Values

Source: FHFA, Federal Reserve Bank of Kansas City, and Haver Analytics.

Change from 2007–2013 Change from 2013–2018

Percent Percent

  • 25

25 50 75 100

  • 25

25 50 75 100

Farmland Values House Prices

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

In addition, job growth in metro areas has outpaced growth in rural areas the past several years.

Internal FR

Employment Growth

Sources: BLS and Haver Analytics.

  • 4
  • 3
  • 2
  • 1

1 2 3 4

  • 4
  • 3
  • 2
  • 1

1 2 3 4 2010 2011 2012 2013 2014 2015 2016 2017 2018 US Non-Metro US Metro Oklahoma Non Metro Oklahoma Metro Percent change from previous year

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

And farm income has remained less than half of its recent peak.

Internal FR

U.S. Net Farm Income

* 2018 Forecast Source: USDA

20 40 60 80 100 120 140 160 20 40 60 80 100 120 140 160 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

*

Billion, 2018 $ Billion, 2018 $

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

The forecast of lower farm income in 2018 was primarily driven by higher production expenses.

Internal FR

Note: Farm income estimate for 2017; forecast for 2018. Source: USDA and staff calculations.

10 20 30 40 50 60 70 80 90 10 20 30 40 50 60 70 80 90

Net farm income 2017 Crop receipts Crop inventory Livestock receipts Livestock inventory Production expenses Government payments All other changes Net farm income 2018

Farm Income Forecast Change by Component

Billion dollars Billion dollars

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Lower commodity prices also have been a primary driver of the sustained weakness.

Internal FR

U.S. Agricultural Prices

Source: USDA and Haver Analytics.

Index, 2010 = 100 Index, 2010 = 100 40 60 80 100 120 140 160 180 40 60 80 100 120 140 160 180 2010 2011 2012 2013 2014 2015 2016 2017 2018

Crops Livestock Crops (Inflation-Adjusted) Livestock (Inflation-Adjusted)

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Commodity prices in Oklahoma have generally remained flat for the past two years.

Internal FR

Agricultural Price Indices

Source: USDA, Haver Analytics, and author’s calculations.

Index, 2010 = 100 Index, 2010 = 100 80 100 120 140 160 180 200 80 100 120 140 160 180 200 2010 2011 2012 2013 2014 2015 2016 2017 2018 Oklahoma Price Index U.S. – All Farm Products

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Despite heightened trade risks, key sources of demand for ag products have been relatively steady.

Internal FR

U.S. Ag Exports and Ethanol Production

Note: 2018 estimated based on changes year-to-date through June compared with the previous year. Source: USDA, U.S. EIA, and Renewable Fuels Association.

Billion Dollars Billion Gallons 5 10 15 20 50 100 150 200 2005 2008 2011 2014 2017

U.S. Ag Exports – Excluding China (Left Scale) U.S. Ag Exports to China (Left Scale) Ethanol Production (Right Scale)

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Demand has remained strong, but higher-than-expected crop production has weighed on prices.

Internal FR

U.S. Corn and Soybean Yields

Deviation from Trend

Source: USDA and staff calculations.

Bu/Acre Bu/Acre 1 2 3 4 5 2 4 6 8 10 12 14 16 2014 2015 2016 2017 2018 Corn (Left) Soybeans (Right)

  • Sept. Forecast
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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

The sustained weakness in crop prices has limited profit

  • pportunities.

Internal FR

Note: Production costs are calculated from USDA’s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. Source: USDA, Haver Analytics and CME.

2 3 4 5 6 7 8 2013 2014 2015 2016 2017 2018 Corn Profit Margins

Price Range December Futures Price Production Costs

$/bu 6 8 10 12 14 16 18 2013 2014 2015 2016 2017 2018 Soybean Profit Margins $/bu

Price Range November Futures Price Production Costs

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Profitability for wheat and cotton producers, however, has improved somewhat after being weak the past few years.

Internal FR

Note: Production costs are calculated from USDA’s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. Source: USDA, Haver Analytics and CME.

0.00 1.50 3.00 4.50 6.00 7.50 9.00 10.50 12.00 2013 2014 2015 2016 2017 2018

Wheat Profit Margins

Price Range December Futures Price Production Costs

$/bu 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2013 2014 2015 2016 2017 2018

Cotton Profit Margins

$/pound

Price Range November Futures Price Production Costs

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Production of other ag commodities has also increased notably.

Internal FR

U.S. Commodity Production and Inventories

Note: Annual milk production data available through 2017. Source: USDA.

Index, 2010 = 100 Index, 2010 = 100 90 95 100 105 110 115 120 90 95 100 105 110 115 120 2011 2012 2013 2014 2015 2016 2017 2018

Cattle Inventory (Million Head) Hog Inventory (Million Head) Milk Production (Million MT)

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Profitability in the livestock sector has fluctuated, but generally has been positive in the hog industry.

Internal FR

75 100 125 150 175 200 225 2013 2014 2015 2016 2017 2018

Cattle Profit Margins $/cwt

Price Range December Futures Price Production Costs

Note: Production costs are calculated from USDA’s Economic Research Service (Commodity Costs and Returns) and national yield averages for each year shown, but exclude the opportunity cost of unpaid labor from the calculation. Source: USDA, Haver Analytics and CME.

25 50 75 100 125 2013 2014 2015 2016 2017 2018 Hog Profit Margins $/cwt

Price Range December Futures Price Production Costs

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Concluding Remarks

Bullet 1 Bullet 2 Bullet 3

Farm Finances

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

With lower ag prices, liquidity has deteriorated, but measures of solvency have remained strong.

Internal FR

U.S. Farm Sector Solvency and Liquidity Metrics

Source: USDA.

Ratio Ratio 2 4 6 8 10 12 14 5 10 15 20 25 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Farm Debt to Farm Assets (Left) Farm Debt to Farm Income (Right)

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Although farmland values have declined in most states, the decreases have been quite modest.

Internal FR

KC Fed Region - Farmland Values

Non-irrigated Cropland

Source: Federal Reserve Bank of Kansas City.

Percent Change Percent Change

  • 20

20 40 60 80 100 NE KS OK MO

  • Mtn. States

2009–2013 2013–2018

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

And although repayment challenges have increased over the past few years, delinquencies remain low.

Internal FR

Commercial Bank Delinquencies

Source: Federal Reserve Bank of Kansas City.

Percent, Seasonally Adjusted 2 4 6 8 10 12 2 4 6 8 10 12 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Non-Real Estate Farm Loans Farm Real Estate Loans All Bank Loans

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Still, loan repayment problems in the farm sector have continued to build.

Internal FR

KC Fed District Loan Repayment Problems

Source: Federal Reserve Bank of Kansas City.

Percent of Responses

5 10 15 20 25 30 5 10 15 20 25 30 2010 2011 2012 2013 2014 2015 2016 2017 2018 Severe repayment problems Major repayment problems Minor repayment problems

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

And an increasing number of applications for farm

  • perating loans has been denied at agricultural banks.

Internal FR

Denials of Farm Operating Loan Applications

Source: Federal Reserve Bank of Kansas City.

Percent of Responses 10 20 30 40 50 60 10 20 30 40 50 60 2015 2016 2017 2018

Less Than 1% 1 - 3% 4 - 9% Greater Than 10%

Percent of Responses

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Concluding Remarks

Bullet 1 Bullet 2 Bullet 3

Agricultural Trade

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Trade disputes have elevated the risk for the agricultural sector in 2018.

Internal FR

Most-Favored Nation Tariff Rates: China

Source: WTO

Percent 20 40 60 80 100 20 40 60 80 100

Corn Soybeans Dairy Pork Wheat Fruits & Nuts Chicken Beef Vegetables Fish

2017 tariff range 2017 tariff applied to U.S. Announced retaliatory tariff

Percent

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Soybean exports were strong earlier in the year, but the strength has started to become more questionable.

Internal FR

U.S. Soybean Exports

Source: USDA

Million Metric Tons

1 2 3 1 2 3 4 8 12 16 20 24 28 32 36 40 44 48 52 Week of Year 2018 2017

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Earlier in the year, export strength was driven by demand from regions outside of China.

Internal FR

U.S. Soybean Exports, Q2

Source: USDA

Million Metric Tons Million Metric Tons

0.0 0.5 1.0 1.5 2.0 2.5 0.0 0.5 1.0 1.5 2.0 2.5

Other Asia and Oceania China EU-27 Mexico Africa Other W. Hemisphere (excl. Mexico) Japan Taiwan

2017 2018

China: -0.33 All Others: +2.82

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Recently, however, U.S. soybean exports to China have dropped sharply.

Internal FR

U.S. Soybean Exports, Q3

Source: USDA

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Other Asia and Oceania China EU-27 Mexico Africa Other W. Hemisphere (excl. Mexico) Japan Taiwan

2017 2018

China: -3.9 All Others: +4.1

Million Metric Tons Million Metric Tons

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

And the spread between soybean prices in the U.S. and South America has widened significantly.

U.S. and South America Soybean Prices

$ per Metric Ton

Source: USDA

250 300 350 400 450 U.S. Brazil Argentina

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Concluding Remarks

Bullet 1 Bullet 2 Bullet 3 Monetary Policy and

Interest Rates

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Monetary policy has continued to adjust.

Internal FR

Effective Federal Funds Rate

Source: Federal Reserve Board of Governors and Haver Analytics.

Percent Percent 1 2 3 4 1 2 3 4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Effective Fed Funds Rate Longer-run Projection Year-end 2019 Median Year-end 2020 Median

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Longer-term interest rates have also risen from recent years’ lows.

Internal FR

Yield on U.S. Treasury Securities

Source: Federal Reserve Board of Governors and Haver Analytics.

Percent Percent 1 2 3 4 5 1 2 3 4 5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

10-Year Treasury 30-Year Treasury

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Interest rates on ag loans have edged higher and average loan sizes have continued to increase.

4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 Operating Loans Machinery Loans Farm Real Estate Loans

2016 2017 2018

10 20 30 40 50 60 70 10 20 30 40 50 60 70 2002 2006 2010 2014 2018

Fixed Interest Rates Average Size of Farm Operating Loans

Percent Percent Thousand dollars Thousand dollars

Source: Federal Reserve Bank of Kansas City.

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Most agricultural lenders, however, highlight developments in commodity prices as the primary concern for rural areas.

Internal FR

Potential Barriers to Regional Economic Growth

Source: Federal Reserve Bank of Kansas City.

10 20 30 40 50 10 20 30 40 50

Commodity Prices Combination of Prices, Interest Rates and Trade Trade Uncertainty Interest Rates Rural Economic Issues General Ag Economy

Percent of Responses Percent of Responses

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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Concluding Remarks

Bullet 1 Bullet 2 Bullet 3

  • National economic indicators remain relatively strong, driven by growth in

metro areas, consumer spending, and the services sector.

  • The agricultural sector remains one of the weakest in the region as

commodity prices have dropped recently alongside trade disputes.

  • The near-term test for U.S. agriculture is beginning now, after the fall
  • harvest. Risks will mount if China maintains its reduced pace of soybean

imports from the U.S., and if planting in South America accelerates.

  • Uncertainty around the next Farm Bill also remains.
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FEDERAL RESERVE BANK OF KANSAS CITY FEDERAL RESERVE BANK OF KANSAS CITY – OMAHA BRANCH

Concluding Remarks

Bullet 1 Bullet 2 Bullet 3

Questions?

Nate Kauffman

Omaha Branch Executive and Economist Federal Reserve Bank of Kansas City – Omaha Branch