photos courtesy of usda jason henderson branch executive federal reserve bank of kansas city omaha...

Photos courtesy of USDA

Jason Henderson Branch Executive

Federal Reserve Bank of Kansas City

Omaha Branch

May 14, 2008

U.S. AGRICULTURE: What Goes Up Must Come …

The views expressed are those of the author and do not necessarily reflect the positions of Federal Reserve Bank of Kansas City or the Federal Reserve System.

FEDERAL RESERVE BANK OF KANSAS CITY

Regional, Public, and Community AffairsPhotos courtesy of USDA

• Today’s Outline:

– A Booming Farm Economy– Land Values Surge– Is the Boom Sustainable?– Will Farm Debt Remain in Check?

U.S. Agriculture



0

20

40

60

80

100

120

140

1970 1975 1980 1985 1990 1995 2000 2005

0

20

40

60

80

100

120

140Billions of Dollars (2008=100)

Source: USDA

The Farm Economy is Booming.

U.S. Real Net Farm Income



0

2

4

6

8

10

12

14

16

Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08

02

468

101214

1618

Source: Wall Street Journal

Dollars per bushel

Crop Prices Surged With Strong Demand And Shorter Global Supplies

Soybeans

Wheat

Corn

U.S. Crop Prices



Tough Times in the Cattle Industry

30

40

50

60

70

80

90

100

110

Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08

30

40

50

60

70

80

90

100

110Dollars per hundredweight

Breakeven Costs

Hog Price

Source: USDA and Iowa State University

Cattle Price

Breakeven Costs

U.S. Livestock Prices and Breakeven Costs




– A Booming Farm Economy– Land Values Surge

The Agricultural Outlook



Kansas’ Farmland Values Surge

0

5

10

15

20

25

30

Non-irrigated Irrigated Ranchland

2007:Q1 2007:Q22007:Q3 2007:Q42008:Q1 2008:Q2

Percent change from year ago

Source: Federal Reserve Bank of Kansas City

Kansas Farmland Values



On a national basis, real farmland values have topped the 1980s highs.

0

500

1,000

1,500

2,000

2,500

1910 1920 1930 1940 1950 1960 1970 1980 1990 20000

500

1,000

1,500

2,000

2,500

Dollars

Source: USDA

U.S. Farmland Values

Real(Inflated to 2008 dollars)

Nominal



Kansas, however, has not topped 1980s highs.

Source: USDA

Real Farmland Value Gains(Percent change from 1980s highs to 2008)

Below 1980s highs

Up 0 to 20%

Up 20 to 70%

Up 100% or more




– A Booming Farm Economy– Land Values Surge– Is the Boom Sustainable?




0

10

20

30

40

50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

0

10

20

30

40

50

World Grain Inventories Have Fallen to Record Lows.

Percent of annual use

Source: USDA

World Grain Stocks to Use Ratio

Wheat

Corn



0

20

40

60

80

100

120

1960 1970 1980 1990 2000

0

20

40

60

80

100

120

Agricultural Exports Have Surged . . .

Billion dollars (2008=100)

Source: USDA

U.S. Agricultural Exports



0

1

2

3

4

5

6

7

8

1970 1975 1980 1985 1990 1995 2000 2005

0

1

2

3

4

5

6

7

8

With Stronger World Incomes . . .

Percent change

Source: International Monetary Fund

Average

World GDP Growth



70

80

90

100

110

120

130

Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05

70

80

90

100

110

120

130

And a Weak Dollar.

Index

Source: Federal Reserve Board of Governors

Value of U.S. Dollar



Has Ethanol Reached its Limit?

0

3

6

9

12

15

18

1980 1985 1990 1995 2000 2005 2010 2015

0

6

12

18

24

30

36Billion gallons

Source: USDA and Renewable Fuels Association

Percent of Corn Production

Ethanol Production (left scale)Ethanol Mandates (left scale)Ethanol Corn Use (right scale)

U.S. Ethanol Production, Mandates,and Corn Use



4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013

4

5

6

7

8

The Outlook for Crop Prices has Strengthened in 2008

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013

2

3

4

5

6Dollars per bushel

Source: FAPRI

Corn and Wheat Price Forecasts

March 2008 forecast

March 2008 forecast

September 2008 forecast

September 2008 forecast

Dollars per bushel

Corn Price Wheat Price



2008 Farm Input Costs

Farm input costs surged beyond expectations.

-10 0 10 20 30 40 50 60 70

Chemicals

Wages

Machinery

Rent

Interest

Seed

Fuels

Feed

Fertilizer

Percent change from year-ago

Source: USDA and FAPRI

USDA Projection (August 2008)

FAPRI Projection (March 2008)



0

100

200

300

400

500

600

700

1975 1980 1985 1990 1995 2000 2005

0

100

200

300

400

500

600

700

Wheat

Corn

Soybeans

Market returns have jumped sharply for corn and soybeans.

Market returns to Crop Production(less variable or operating costs)

Dollars per acre (2007=100)

Calculations based on USDA cost and returns data.



Net returns will vary with commodity prices and input costs.

Net Returns to Land from U.S. Corn Production(Dollars per acre – average 2009 to 2013)

Corn Price (Dollars per bushel)

2009 Production Cost Increase (Percent)

$4.00 $5.25 $7.00

5.5% (USDA baseline) $129 $328 $610

15% $83 $283 $564

30% (Actual 2008 increase) $10 $210 $491

Calculations based on USDA cost of production forecasts for 2007 through 2009 and FAPRI yield projections through 2013. Returns exclude government payments.



Net returns will vary with commodity prices and input costs.

Net Returns to Land from U.S. Wheat Production(Dollars per acre – average 2009 to 2013)

Wheat Price (Dollars per bushel)

2009 Production Cost Increase (Percent)

$6.00 $6.70 $8.00

4.5% (USDA baseline) $11 $42 $99

15% --- $16 $73

25% (Actual 2008 increase) --- --- $48

Calculations based on USDA cost of production forecasts for 2007 through 2009 and FAPRI yield projections through 2013. Returns exclude government payments.




– A Booming Farm Economy– Land Values Surge– Is the Boom Sustainable?– Will Farm Debt Remain in Check?




Debt ratios have reached record lows.

0

20

40

60

80

100

120

1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

0

20

40

60

80

100

120Percent

Source: USDA*Actual debt divided by debt that could be repaid from current income

Debt Repayment Capacity Utilization*



0

5

10

15

20

25

30

35

< 25 25-34 35-44 45-54 55-64 65-74 > 75

1982 1992 2002 2007

Farmland is increasingly owned by older people.

Percent

Source: Iowa State University

Distribution of Iowa Farmland by Age of Owner



• Land values boom with rising farm income. • Have farmland values peaked?

– Rising input costs trim margins.– Ethanol and exports present demand risks.– What is the global supply response to

high prices?

• Will debt levels remain low even with thinner margins?

• Agriculture is a boom and bust industry.

Conclusions

photos courtesy of usda jason henderson branch executive federal reserve bank of kansas city omaha...

Documents