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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.

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Presentation on theme: "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."— Presentation transcript:

1 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 Professor Dept of Agricultural Economics University of Missouri-Columbia

2 Change is inevitable….. Except from a vending machine.

3 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.

4 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).

5 Our Current Recession

6 U.S. Recessions,

7 Recessions are self-correcting, if the government doesnt screw up.

8 First, high energy prices created an economic slowdown, then subprime lending created a crisis Why a Recession Now?

9 Crude Oil Prices Annual Average Price, Illinois Source: Illinois Oil & Gas Association Recent U.S. recessions were preceded by a jump in energy prices

10 Subprime Lending? Greed Fraud Mortgage backed securities Good intentions Community Reinvestment Act Stupidity

11 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 accounting 2. Competitive markets can handle deregulation or even no regulation, but have trouble dealing with bad government regulation

12 Housing Units Completed New Privately Owned, Single Family Source: U.S. Census Bureau

13 Housing Units Completed New Privately Owned, Single Family Source: U.S. Census Bureau

14 Monthly Housing Starts Seasonally Adjusted Annual Rate, Privately Owned Source: U.S. Census Bureau 2009 should be lowest since before 1959

15 Housing Units Completed New Privately Owned, Single Family Source: U.S. Census Bureau During we built 1.8 million too many homes In 2008 we under built by 0.4 million In 2009 well under build by 0.6 million

16 Median House Price Index, Quarterly Data, ; 1980 Q1=100 Source: Federal Housing Finance Agency

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

18 U.S. Gross Domestic Product,

19 Growth in Real GDP Source: U.S. Commerce Department

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

21 U.S. Unemployment Rate, Seasonally Adjusted, Source: Bureau of Labor Statistics

22

23

24 Source: St Louis Federal Reserve Bank

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

26 Annual Rate of Consumer Inflation Source: U.S. Bureau of Labor Statistics

27 Falling Prices From 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%

28 Falling Prices From 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%

29 Consumer Price Index, =100, Seasonally Adjusted Source: U.S. Bureau of Labor Statistics

30 Change in CPI from Year Ago, Seasonally Adjusted, monthly, Source: U.S. Bureau of Labor Statistics

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

32 Federal Funds Rate, monthly average, Source: Board of Governors, Federal Reserve System

33 Federal Funds Rate, monthly average, Source: Board of Governors, Federal Reserve System 2001 recession

34 Federal Funds Rate,

35 Bank Prime Loan Rate, monthly average, Source: Board of Governors, Federal Reserve System

36 Bank Prime Loan Rate,

37 30 Year Mortgage Rate,

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

39 Dow Jones Industrial Average

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

41 Source: St Louis Federal Reserve Bank

42 Federal Surplus/Deficit, Source: White House, Office of Management and Budget

43

44 Average Adults Share of Tax Bill More than $21,000 per year

45 Average Household Debt $ 89,514 – mortgage $ 22,231 – consumer debt $ 10,208 – other $121,953 - total Source: USA Today 5/29/09

46 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

47 Debt & Unfunded Obligations What is needed to keep it from growing? Personal: Federal: State/local: Total:

48 Debt & Unfunded Obligations What is needed to eliminate in 30 years? Personal: Federal: State/local: Total:

49 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.

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

51 U.S. Dollar Exchange Rate Index

52 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

53 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?

54 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?

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

56 What does all this mean for agriculture?

57 World Crude Oil Production,

58 Spot Crude Oil Prices WTI, Monthly Average Price, Cushing, Oklahoma Source: U.S. Energy Information Administration

59 U.S. Retail Gasoline Prices, All Grades, All Formulations, Source: U.S. Energy Information Administration

60 Ethanol Production, Source: Renewable Fuels Association

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

62 Energy Sources

63 Corn Milled for Ethanol Forecast % corn for ethanol: : 6% : 14% : 20% : 23% : 30%

64 2007 Renewable Fuels Mandate

65 Ethanol Production, 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

66 Livestock Marketing Information Center Weekly Iowa Ethanol Prices,

67 Source: LMIC

68 Weekly Corn & Ethanol Prices,

69 Source: U.S. Energy Information Administration Weekly Gas & Corn Prices,

70 Source: LMIC

71 Weekly Corn & Soybean Meal Prices, Source: LMIC

72 Corn futures Crude oil futures

73 Northwest Iowa Prices, Source: LMIC

74 DDGS Price as % of Corn Price, Northwest Iowa, Source: LMIC

75 WDGS Price as % of DDGS Price, Northwest Iowa, Source: LMIC

76 U.S. Average Corn Price, Source: USDA/NASS

77 U.S. Average Corn Price, Source: USDA/NASS years Avg $ years Avg $ years Avg $2.37

78 U.S. Average Corn Price, years Avg $ years Avg $ 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 Whats the next level?

79 Impact on livestock

80 U.S. Corn Usage 2000 crop2007 crop Corn usage is up 30% since 2000

81 U.S. Feeding of Corn, Source: PRX ProExporter Network

82 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

83

84 Source: LMIC

85

86 Cost of Slaughter Hog Production Iowa State University Calculations, Source: John Lawrence, Iowa State University

87 Hog Price & Cost, hog prices were $2.60 above the 13 year average 2008 production cost was $13.85 above the 13 year average

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

89 U.S. Average Corn & Broiler Price, Source: USDA/NASS

90 U.S. Average Corn & Pork Price, Source: USDA/NASS

91 U.S. Average Corn & Beef Price, Source: USDA/NASS

92 U.S. Average Corn & Milk Price, Source: USDA/NASS

93 Meat Consumption

94 U.S. Per Capita Meat Consumption Retail Weight, In 2007, the average American consumed 60 pounds (34%) more meat than in 1960

95 U.S. Per Capita Meat Consumption Retail Weight, In 2007, the average American consumed 60 pounds (34%) more meat than in 1960

96 U.S. Average Corn Price, Source: USDA/NASS

97 U.S. Farmland Values, USDA/NASS

98 U.S. Farmland Values, * USDA/NASS

99 *Value of all farm land and buildings. Missouri Farmland Values, * USDA/NASS Up 7.5% from 2007

100 *Value of all farm land and buildings. Missouri Farmland Values, * USDA/NASS

101 *Value of all farm land and buildings. Missouri Farmland Values, * USDA/NASS At the start of 2008, Missouri land values were $571/acre above trend.

102 Changes in Farmland Values The two primary determinants of farmland value are: Current mortgage rates Expected earnings per acre

103 Real mortgage rates above 7% are associated with declining land values. Real Interest Rates & Land Values,

104 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

105 Questions?


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