monetary policy and food policy
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Monetary Policy and Food PricesJason Henderson
Omaha Branch ExecutiveFederal Reserve Bank of Kansas City
The opinions expressed are those of the author and do not necessarily reflect theviews of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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The most asked question of a Fedeconomist:
• What will interest rates do in the next six months?
• The answer:
– FOMC Statement, November 2, 2011
The Committee also decided to keep the target range for the
federal funds rate at 0 to 1/4 percent and currently anticipates that
economic conditions--including low rates of resource utilization and
a subdued outlook for inflation over the medium run--are likely towarrant exceptionally low levels for the federal funds rate at least
through mid-2013.
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The Balancing Act ofMonetary Policy
SustainableEconomic Growth
(Unemployment)
Price
Stability
(Inflation)
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Market fundamentals drive ag prices.Monetary policy is an amplifier.
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30.0
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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
U.S. Stocks-to-Use Ratio (Left Scale)
Average Annual Farm Price (Right Scale)
Percent of annual use Dollars per bushel
Source: USDA
U.S. Corn Inventory and Farm Price
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What are the Implications forAgriculture?
Agriculture’s “Golden Eras” emerged during low interest rate environments.
• Through a weak dollar, farm incomes surge in low interest
rates environments.• Farmland values boom as low interest rates boost the
capitalization of farm incomes.
• The “Golden Eras” of agriculture –
1910s: low rates used to finance WWI – 1970s: low rates to stimulate growth – 2000s: low rates used to combat “Jobless Recoveries”
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High farm incomes inlow interest rate environments.
-5.0
-2.5
0.0
2.5
5.0
7.5
0.0
25.0
50.0
75.0
100.0
125.0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Constant 2005 dollars (billions) Percent
Source: Henderson and Briggeman (2011), “What are the Risks in Today’s Farmland Market?” Main Street Economist , Issue 1.
Farm Incomes and Interest Rates
Yield on 1 Year Treasury
adjusted for inflation
(Right Scale)
Real Net Farm Incomes
Less Government Payments
(Left Scale)
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In 1900, only a few counties had landvalues with more than $1000 per acre.
$3,000 or more
$2,000 to $3,000
$1,000 to $2,000
$500 to $1,000
$500 or less
Real Farmland Values in 1900
Source: USDA
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By the end of WWI,$2000 to $3000 per acre was common.
$3,000 or more
$2,000 to $3,000
$1,000 to $2,000
$500 to $1,000
$500 or less
Real Farmland Values in 1920
Source: USDA
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By the end of the Great Depression,land values were back to 1900 values.
Real Farmland Values in 1940
$3,000 or more
$2,000 to $3,000
$1,000 to $2,000
$500 to $1,000
$500 or less
Source: USDA
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By 1970s, productivity gains hadboosted farmland values.
$3,000 or more
$2,000 to $3,000$1,000 to $2,000
$500 to $1,000
$500 or less
Real Farmland Values in 1969
Source: USDA
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Farmland values surged in the 1970s.
$3,000 or more
$2,000 to $3,000$1,000 to $2,000
$500 to $1,000
$500 or less
Real Farmland Values in 1982
Source: USDA
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Within 5 years, farmland valuesdropped back to 1969 levels.
Real Farmland Values in 1987
$3,000 or more
$2,000 to $3,000$1,000 to $2,000
$500 to $1,000
$500 or less
Source: USDA
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Today, robust energy and agricultural pricesspur cropland value gains.
Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City
Non-irrigated Cropland Values(Percent change 2010:Q2 to 2011:Q2)
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What are the Implications forAgriculture?
• The Benefits – Farm incomes are high
– Farmland values boom
• The Costs – Food prices escalate, especially for the poor.
– Depending on your perspective, food vs. fuel.
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Soaring global food prices start to ease
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J F M A M J J A S O N D
World Food Prices
Source: FAO of the United Nations
2011
2008
2010
2009
Index
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Yet, U.S. food prices continue to rise,especially for food consumed at home.
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Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Food Away From Home
Food at Home
Overall Food Prices
Percent change from previous year
U.S. Food Price Inflation
Source: Bureau of Labor Statistics
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Why is there a difference betweenworld and U.S. food price inflation?
Source: USDA
Commodities account for a smaller share of processed foods.
Farm share of U.S. food dollar
Beef products 45 cents
Milk products 30 cents
Fruits andvegetables 25 to 28 cents
Bread 4 cents
Corn flakes 4 centsCorn syrup 3 cents
The U.S. Food Marketing Bill
2008
1) Labor 40%
2) Farm value 16%
1960s to 1970s
1) Farm value 33%
2) Labor 29.5%
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Rising food prices stress householdbudgets, especially the poor.
6.89.8
11.0
14.8
22.3
24.8
27.7
38.0
40.6
41.9
43.7
0 10 20 30 40 50
U.S.Canada
Germany
Japan
China
Brazil
India
Egypt
Jordan
Pakistan
Algeria
Source: USDAPercent
Food Share of Household Expenditure by Country, 2010
Poorest 20% in the U.S. spend 35%
of household income on food.
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Food price inflation is projected to slow.
Commodity 2011 2012
Overall Food 3.5 to 4.5 2.5 to 3.5
Food away from home 3.0 to 4.0 2.0 to 3.0
Food at home 4.0 to 5.0 3.0 to 4.0
Meats 6.5 to 7.5 3.5 to 4.5
Dairy products 5.0 to 6.0 3.5 to 4.5
Fruits and vegetables 3.5 to 4.5 3.0 to 4.0
Sugars 2.5 to 3.5 2.0 to 3.0
Cereals 4.0 to 5.0 4.5 to 5.5
Source: USDA
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Food vs. Fuel
What we know: Ethanol is based on
mandates, tariffs, and subsidies.
•What are the public benefits?
•Can we afford it?
•Is ethanol environmentally sustainable?
•What is the impact on global food prices?
•How long before advanced ethanol is viable?
Ethanol policy is being scrutinized again.Will the answers be different?
•Does it reduce our dependence on foreign oil?
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What are the Risks forAgriculture?
• Future inflation – Inflation rose in 2011
• Headline CPI inflation: 3.9% over the past year.
•Core CPI inflation: 2.0% over the past year.
• Yet, forecasts suggest slower inflation in 2012.
• Inflation expectations remain stable.
Ultimately, velocity is the key to inflation.
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M oney * V elocityP rice =
Quantity
Definition of Inflation:
Too much money
chasingtoo few goods
M
V Q
Quantity Theory of Money
Inflation is based on money and velocity.
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The monetary base is not money supply.
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Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
M2
Monetary Base
Source: Federal Reserve Board of Governors
Growth in Monetary Aggregates
Index (Jan 2000=100)
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Banks are holding monetary basein excess reserves.
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Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10Source: Federal Reserve Board of Governors
Excess Reserves in Depository Institutions
Trillion dollars
When will inflation start?Banks start lending
Consumers start spending
Businesses start investing
In short, if excess reserves fall
before the Fed balance sheet.
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Conclusions
• Market fundamentals drive market prices, monetarypolicy is an amplifier.
• Agriculture’s “Golden Eras” emerged in low interest rate
environments.
• Agriculture enjoys booming farm incomes and landvalues, but …
• Urban consumers bear the burden of higher food prices.
• Velocity will shape inflation in the future.
The key is bank lending, consumer spending,
and business investment.