Agriculture and the Economy: A View from the Chicago Fed May 12, 2016 Detroit, MI David Oppedahl Senior Business Economist

Why is the Chicago Fed interested in Agriculture? Important portion of District economy –Wide geographic impact –“Backbone” of economy Leading farm states Manufacturing of food and bioproducts –Jobs –Income Impact on commercial banks Response to stakeholders

7th District Agriculture Products (as % of U.S. total, 2015)

Farm employment for the U.S. and the 7 th District (in million jobs) District U.S.

Employment declining for manufacturing too Manufacturing share of employment U.S. employment in manufacturing (millions) U.S. District

7th District Crop Yield Indexes (1964=100) Corn Soybeans 2015* (*USDA projection)

U.S. and District output shares from farming, food manufacturing and food services

Personal consumption shares

Total farm share of 17.2%

Global Trade in Action 8.5% of U.S. Exports in 2015 were Food and Agricultural Products, and 13% of District Exports

The dollar’s exchange value peaked in 2002, before falling below earlier range and rallying

Value of agricultural exports expected to slide in 2016 Exports Imports Surplus (*USDA projection) 2016*

Real net farm income boosted by direct government payments to farmers, but varies by farm and region *USDA forecast 2016*

Commercial farms generate income, while the median farm loses money

Participating Banks Banks in 7th District Land Value and Credit Conditions Survey

Annual change in farmland values in Seventh Federal Reserve District

Year over year changes by quarter in farmland values in the Seventh Federal Reserve District

USDA Farmland Values for Michigan and Wisconsin (2010 dollars) Michigan Wisconsin U.S.

USDA Land Values for Illinois, Indiana, and Iowa (2010 dollars) Illinois Iowa Indiana

Indexes of Seventh District Farmland Values vs. Cash Rents (Inflation Adjusted, 1981=100) Cash rents Land values

7th District Earnings to Price Ratio (left axis, 1981=1) vs. Real Return on 10 Year Treasury Bonds E/P Ratio 10 year bond rate Percent

Real farm sector assets and equity at levels above prior peak Debt Equity Assets 2016* *USDA forecast

Index of agricultural loan demand for the Seventh Federal Reserve District (excluding real estate)

Index of agricultural loan repayment rates for the Seventh Federal Reserve District

Interest rates charged on new farm loans in the Seventh Federal Reserve District Farm operating Farm real estate

Corn production forecast: New record in 2016/17

Growth in industrial demand (especially for ethanol production) surpassed feed demand for corn

Corn prices expected to be down again in 2016/17

Soybean production may drop a bit from last year’s record

Crushings are rising again while soybean exports bounce back

Soybean prices moving higher as stocks should be down some in 2016/17

Real Cash Crop Prices

Real USDA Livestock Prices

Real USDA Milk Prices

Food price increases now below core inflation (less food and energy)

Oil prices plummeted and lower gas prices boosted consumer saving/spending (2010 $/barrel)

Butanol production from corn Commercial plants produced butanol from corn in the 1920’s

Corn ethanol production has hit the “blend” wall Source: Renewable Fuels Association

Solid U.S. economic growth boosting demand at restaurants and for animal products Impacts on Agriculture Weak world economic growth and stronger value of the dollar holding back U.S. agricultural exports Plentiful grain and oilseed supplies pushing down prices and feed costs for animal agriculture, but livestock prices down too Stubborn input costs counter low interest rates Lower levels of farm income; farmland values adjusting Strong past decade for agriculture tempers downturn

In December 2016, the FOMC raised the Fed Funds rate target to a range from 0.25% to 0.50% Federal Funds Rate (effective), Yields in percent per annum

Housing market tanked and moving up from bottom Housing starts (millions of units, 3-month moving average, SAAR) Home mortgage rate (percent, effective rate for all loans closed)

House Price Indexes for Seventh District States (1980=100) Illinois Michigan Iowa Indiana Wisconsin