U.S. Economy and Agriculture Where is This Train Headed? National Farm Business Management...

U.S. Economy and Agriculture Where is This Train Headed?National Farm Business Management Conference

June 15, 2009 St Louis

Ron Plain, Ph.D.D. Howard Doane ProfessorDept of Agricultural EconomicsUniversity of Missouri-Columbiahttp://web.missouri.edu/~rplain

Change is inevitable…..

Except from a vending machine.

The Big Picture

New technology and the fall of communism led to a prolonged period of economic growth, which led to a run-up in energy prices, which led to a weak dollar and biofuels, which led to high corn prices, which led to more crop acres and higher input prices (especially land) leaving livestock producers in a bind and crop farmers at risk.

The Big Picture II

High energy prices eventually led to a slow down in economic growth.

In the U.S. this slowdown was delayed by government spending and a real estate bubble sustained by asinine lending.

U.S. wealth has been disappearing at a fast rate (homes and equity investments).

Our Current Recession

U.S. Recessions, 1890-2009

U.S. Recessions, 1890-2009

Recessions are self-correcting, if the government doesn’t screw up.

First, high energy prices created an economic slowdown, then subprime lending created a crisis

Why a Recession Now?

Crude Oil Prices 1946-2008Annual Average Price, Illinois

0102030405060708090

100

1946

1948

1950

1952

1954

1956

1958

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

$/barr

el

Source: Illinois Oil & Gas Association

Recent U.S. recessions were preceded by a jump in energy prices

Subprime Lending?GreedFraud Mortgage backed securitiesGood intentions Community Reinvestment ActStupidity

The Two Key Lessons from Enron

1. You can build a huge business with high share values and lots of well paid employees through creative, opaque accounting2. Competitive markets can handle deregulation or even no regulation, but have trouble dealing with bad government regulation

Housing Units Completed 1968-2008New Privately Owned, Single Family

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.81968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

million u

nit

s

Source: U.S. Census Bureau

Monthly Housing Starts 2006-09Seasonally Adjusted Annual Rate, Privately Owned

0

500

1000

1500

2000

2500

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

sep

Oct

Nov

Dec

thousa

nd u

nit

s

2006200720082009

Source: U.S. Census Bureau 2009 should be lowest since before 1959

Housing Units Completed 1968-2008New Privately Owned, Single Family

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.81968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

million u

nit

s

Source: U.S. Census Bureau

During 1999-06 we built 1.8 million too many homes

In 2008 we under built by 0.4 million

In 2009 we’ll under build by 0.6 million

Median House Price Index, Quarterly Data, 1975-2008; 1980 Q1=100

0

50

100

150

200

250

300

350

400

450

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Federal Housing Finance Agency

Key Macro Economic Indicators GDP Unemployment Inflation Interest rates Stock market Federal budget deficit Exchange rates

U.S. Gross Domestic Product, 1947-2009

Growth in Real GDP

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0 0

5-1

05-

2

05-

3

05-

4

06-

1

06-

2

06-

3

06-

4

07-

1

07-

2

07-

3

07-

4

08-

1

08-

2

08-

3

08-

4

09-

1

Perc

ent

Chan

ge

Source: U.S. Commerce Department

U.S. Unemployment Rate, Seasonally Adjusted, 1996-2009

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.01996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Perc

ent

Source: Bureau of Labor Statistics

Source: St Louis Federal Reserve Bank

Annual Rate of Consumer Inflation

-15

-10

-5

0

5

10

15

201914

1926

1938

1950

1962

1974

1986

1998

Source: U.S. Bureau of Labor Statistics

Falling PricesFrom early July to late December…

Crude oil prices have declined 74%

Copper prices have declined 65%

Lumber prices have declined 38%

Corn prices have declined 55%

Soybean prices have declined 50%

Fed cattle prices have declined 22%

Hog prices have declined 30%

Gold prices have declined 10%

Falling PricesFrom September to October…

The CPI declined by 1%, the biggest drop in 60 years

The core CPI (ex food & energy) dropped for first time in 25 years

From October to November the CPI declined 1.9%

From November to December the CPI declined 1%

Consumer Price Index, 1982-84=100, Seasonally Adjusted

140

150

160

170

180

190

200

210

220

230

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009


Change in CPI from Year Ago, Seasonally Adjusted, monthly, 1996-2009

-2

-1

0

1

2

3

4

5

6

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Perc

ent


Federal Funds Rate, monthly average, 1996-2009

0

1

2

3

4

5

6

7

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Perc

ent

Source: Board of Governors, Federal Reserve System

Federal Funds Rate, monthly average, 1996-2009

0

1

2

3

4

5

6

7

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Perc

ent


2001 recession

Federal Funds Rate, 1955-2009

Bank Prime Loan Rate, monthly average, 1996-2009

3

4

5

6

7

8

9

10

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Perc

ent


Bank Prime Loan Rate, 1949-2009

30 Year Mortgage Rate, 1971-2009

Dow Jones Industrial Average

Source: St Louis Federal Reserve Bank

Federal Surplus/Deficit, 1960-2014

-2,000,000

-1,500,000

-1,000,000

-500,000

0

500,000

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

Mill

ion $

Actual Forecast

Source: White House, Office of Management and Budget

Average Adult’s Share of Tax Bill

More than $21,000 per year

Average Household Debt

$ 89,514 – mortgage $ 22,231 – consumer debt $ 10,208 – other $121,953 - total

Source: USA Today 5/29/09

Unfunded Federal Obligations

$ 6.36 trillion – public debt $18.69 trillion – Social Security $33.18 trillion - Medicare $ 3.47 trillion – military retirement $ 1.85 trillion – civil service retirement $ 0.25 trillion - other $63.8 trillion - total

Source: USA Today 5/29/09

Equals $546,668 per household

Debt & Unfunded ObligationsWhat is needed to keep it from growing?

Personal: $121,953@6%=$7,317 Federal: $546,668@3%=$16,400 State/local: $10,000@4%=$400 Total: $678,[email protected]%=$24,117

Debt & Unfunded ObligationsWhat is needed to eliminate in 30 years?

Personal: $121,953@6%=$8,860 Federal: $546,668@3%=$27,891 State/local: $10,000@4%=$578 Total: $678,[email protected]%=$37,329

In Democracy in America, Alexis de Tocqueville said, “Democracy in America is doomed when the people learn to vote themselves money from the public trough.”

U.S. Dollar Exchange Rate Index

Current Federal Policy

Low interest rates and expanding money supply to fight the recession

Huge budget deficits to offset impact of the recession and pay for new programs

Increasing regulations to fight climate change and injustice

Current Federal Policy

Low interest rates and expanding money supply to fight the recession

Huge budget deficits to offset impact of the recession and pay for new programs

Increasing regulations to fight climate change and injustice

What is the likely outcome?

Stagflation

A stagnant economy (slow growth and high unemployment) combined with high inflation, e.g. the U.S. economy in the 1970s

What does all this mean for agriculture?

World Crude Oil Production, 1970-2007

40

45

50

55

60

65

70

75

8019

70

1975

1980

1985

1990

1995

2000

2005

Mill

ion

Bar

rels

/Day

Spot Crude Oil Prices 1995-2009WTI, Monthly Average Price, Cushing, Oklahoma

0

20

40

60

80

100

120

140

1601995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

$/b

arr

el

Source: U.S. Energy Information Administration

U.S. Retail Gasoline Prices, All Grades, All Formulations, 1996-2009

0

50

100

150

200

250

300

350

400

4501996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

cents

/gallon


Ethanol Production, 1980-07

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Billio

n Gall

ons

Source: Renewable Fuels Association

Biofuels

The biofuels industry is a product of opportunistic farmers, wishful thinking environmentalists, and cowardly politicians.

Energy Sources

Corn Milled for Ethanol

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.090

-91

92-9

3

94-9

5

96-9

7

98-9

9

00-0

1

02-0

3

04-0

5

06-0

7

08-0

9

Billi

on B

ushe

ls

Forecast% corn for ethanol:

2000-01: 6%

2005-06: 14%

2006-07: 20%

2007-08: 23%

2008-09: 30%

2007 Renewable Fuels Mandate

05

10152025303540

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Bill

ion

Gal

lons

Corn ethanol Cellulosic Bio-diesel More non-grain

Ethanol Production, 1990-2016

02468

101214161820

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Bill

ion G

allo

ns

mandated use

actual production

Beginning in 2015, the U.S. will annually use more corn to make ethanol than the U.S. produced in any year before 1971

Livestock Marketing Information Center

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

Oct

Jan-

08 Apr Jul

Oct

Jan

09

$ Per Gallon

Weekly Iowa Ethanol Prices, 2007-09

Omaha Corn PricesWeekly Average, 2007-09

2

3

4

5

6

7

8

Oct0

7

Jan0

8

Apr

08

Jul08

Oct0

8

Jan0

9

$ Per Bu.

Source: LMIC

Source: LMIC

2

3

4

5

6

7

$/b

ush

el

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

$/g

allo

n

Corn Ethanol

Weekly Corn & Ethanol Prices, 2007-09


1.5

2

2.5

3

3.5

4

4.5

5

$/g

allo

n

2

3

4

5

6

7

8

$/b

ush

el

Gasoline Corn

Weekly Gas & Corn Prices, 2007-09

Soybean Meal PricesWeekly Average, Illinois, 2007-09

150

200

250

300

350

400

450

500

$ Per Bu.

Source: LMIC

1

2

3

4

5

6

7

8

$/b

us

he

l

100

150

200

250

300

350

400

450

500

$/t

on

Corn

SB Meal

Weekly Corn & Soybean Meal Prices, 2006-09

Source: LMIC

Corn futures

Crude oil

futures

Northwest Iowa Prices, 2006-09

0

50

100

150

200

250

300

10

/6/2

00

6

11

/3/2

00

6

12

/1/2

00

6

12

/29

/20

06

1/2

6/2

00

7

2/2

3/2

00

7

3/2

3/2

00

74

/20

/20

07

5/1

8/2

00

7

6/1

5/2

00

7

7/1

3/2

00

78

/10

/20

07

9/7

/20

07

10

/5/2

00

7

11

/2/2

00

71

1/3

0/2

00

7

12

/28

/20

07

1/2

5/2

00

8

2/2

2/2

00

83

/21

/20

08

4/1

8/2

00

8

5/1

6/2

00

86

/13

/20

08

7/1

1/2

00

8

8/8

/20

08

9/5

/20

08

10

/3/2

00

8

10

/31

/20

08

11

/28

/20

08

12

/26

/20

08

1/2

3/2

00

9

$ Per Ton

Corn DDGS WDGS

Source: LMIC

DDGS Price as % of Corn Price, Northwest Iowa, 2006-09

65707580859095

100105110115

10

/6/2

00

6

11

/3/2

00

6

12

/1/2

00

6

12

/29

/20

06

1/2

6/2

00

7

2/2

3/2

00

7

3/2

3/2

00

7

4/2

0/2

00

7

5/1

8/2

00

7

6/1

5/2

00

7

7/1

3/2

00

7

8/1

0/2

00

7

9/7

/20

07

10

/5/2

00

7

11

/2/2

00

7

11

/30

/20

07

12

/28

/20

07

1/2

5/2

00

8

2/2

2/2

00

8

3/2

1/2

00

8

4/1

8/2

00

8

5/1

6/2

00

8

6/1

3/2

00

8

7/1

1/2

00

8

8/8

/20

08

9/5

/20

08

10

/3/2

00

8

10

/31

/20

08

11

/28

/20

08

12

/26

/20

08

1/2

3/2

00

9

Percent

Source: LMIC

WDGS Price as % of DDGS Price, Northwest Iowa, 2006-08

20

25

30

35

40

45

10

/6/2

00

6

11

/3/2

00

6

12

/1/2

00

6

12

/29

/20

06

1/2

6/2

00

7

2/2

3/2

00

7

3/2

3/2

00

7

4/2

0/2

00

7

5/1

8/2

00

7

6/1

5/2

00

7

7/1

3/2

00

7

8/1

0/2

00

7

9/7

/20

07

10

/5/2

00

7

11

/2/2

00

7

11

/30

/20

07

12

/28

/20

07

1/2

5/2

00

8

2/2

2/2

00

8

3/2

1/2

00

8

4/1

8/2

00

8

5/1

6/2

00

8

6/1

3/2

00

8

7/1

1/2

00

8

8/8

/20

08

9/5

/20

08

10

/3/2

00

8

10

/31

/20

08

11

/28

/20

08

12

/26

/20

08

1/2

3/2

00

9

Percent

Source: LMIC

U.S. Average Corn Price, 1908-2007

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

$ Per Bushel

Source: USDA/NASS


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

$ Per Bushel

Source: USDA/NASS

1908-1942

35 years

Avg $0.78

1942-1972

30 years

Avg $1.26

1973-200634 years Avg $2.37


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

$ Per Bushel

1908-1942

35 years

Avg $0.78

1942-1972

30 years

Avg $1.26

1973-2006

34 years

Avg $2.37

The 1940s step raised corn price 62%; the 70s step 88%. A 75% step will take corn to $4.15/bu

What’s the next level?

Impact on livestock

U.S. Corn Usage

Feed

Exports

Ethanol

Other

Feed

Exports

Ethanol

Other

2000 crop 2007 crop

Corn usage is up 30% since 2000

U.S. Feeding of Corn, 2005-06

Beef

Poultry

Hogs

Dairy

Other

Source: PRX ProExporter Network

March 2008 Corn Futures

January 2008 Feeder Cattle Futures

A dime increase in the price of corn reduces the value of feeder cattle by $6-9 per head

Choice Steer Price & BreakevenS. Plains Cattle Feedlots, Monthly

75

80

85

90

95

100

105

110

115

2004 2005 2006 2007 2008 2009

$ Per Cwt

Breakeven Projected Breakeven

AVERAGE RETURNS TO CATTLE FEEDERSFeeding 725 Lb. Steers, S. Plains, Monthly

-250

-200

-150

-100

-50

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$ Per Head

Source: LMIC

Monthly Average Steer Prices, Oklahoma City, 1998-2007

70

80

90

100

110

120

130

140Ja

nFe

bM

ar Apr

May Ju

nJu

lA

ug Sep

Oct

Nov Dec

$/cw

t

300-400 lb

400-500 lb

500-600 lb

600-700 lb

700-800 lb

1100-1300

Cost of Slaughter Hog ProductionIowa State University Calculations, 1987-2009

35

40

45

50

55

60

65

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Marketing Month

$ Per Live Cwt

Source: John Lawrence, Iowa State University

Hog Price & Cost, 1996-2008

30

35

40

45

50

55

60

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

$/c

wt

live

hog $ cost

2008 hog prices were $2.60 above the 13 year average 2008 production cost was $13.85 above the 13 year average

Over time, the price of a commodity will equal the cost of production

U.S. Average Corn & Broiler Price, 1960-1985

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Co

rn $

20

30

40

50

60

70

80

90

Bro

iler

$

Corn Broilers

Source: USDA/NASS

U.S. Average Corn & Pork Price, 1960-1985

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Co

rn $

0

20

40

60

80

100

120

140

160

180

200

Po

rk $

Corn Pork

Source: USDA/NASS

U.S. Average Corn & Beef Price, 1960-1985

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Co

rn $

0

0.5

1

1.5

2

2.5

3

Be

ef

$

Corn Beef

Source: USDA/NASS

U.S. Average Corn & Milk Price, 1960-1985

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Co

rn $

0

2

4

6

8

10

12

14

16

Milk

$

Corn Milk

Source: USDA/NASS

Meat Consumption

U.S. Per Capita Meat ConsumptionRetail Weight, 1960-2008

150

160

170

180

190

200

210

220

230

24060 65 70 75 80 85 90 95 00 05

Pounds

In 2007, the average American consumed 60 pounds (34%) more meat than in 1960


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

$ Per Bushel

Source: USDA/NASS

0

100

200

300

400

500

600

700

800

90050

54

58

62

66

70

74

78

82

86

$/acre

U.S. Farmland Values, 1950-1987USDA/NASS

0

500

1000

1500

2000

250050

54

58

62

66

70

74

78

82

86

90

94

98

02

06

$/acre

U.S. Farmland Values, 1950-2008*USDA/NASS

0200400600800

100012001400160018002000220024002600

50 54 58 62 66 70 74 78 82 86 90 94 98 02 06

$/acre

*Value of all farm land and buildings.

Missouri Farmland Values, 1950-2008*USDA/NASS

Up 7.5% from 2007

0200400600800

100012001400160018002000220024002600

50 54 58 62 66 70 74 78 82 86 90 94 98 02 06

Year

$/acre

Actual

6% Trend



0200400600800

100012001400160018002000220024002600

50 54 58 62 66 70 74 78 82 86 90 94 98 02 06

Year

$/acre

Actual

6% Trend



At the start of 2008, Missouri land values were $571/acre above trend.

Changes in Farmland Values

The two primary determinants

of farmland value are:

Current mortgage rates

Expected earnings per acre

-4

-2

0

2

4

6

8

10

12

14

72 76 80 84 88 92 96 00 04 08

%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Real Interest

Land $

“Real” mortgage rates above 7% are associated with declining land values.

Real Interest Rates & Land Values, 1972 - 07

The New Ag Market?

The key force is energy prices Crude oil drives ethanol prices Ethanol drives corn prices Corn drives livestock production Livestock production drives meat

prices

Questions?

U.S. Economy and Agriculture Where is This Train Headed? National Farm Business Management...

Documents

Transcript of U.S. Economy and Agriculture Where is This Train Headed? National Farm Business Management...