Agricultural Economics “Takes a Licking and Keeps on Ticking” Economic Outlook for Fall 2005 Craig Infanger and Larry Jones

Agricultural Economics Modest Economic Growth Despite “Jolts”: Iraq War, Energy Prices, Katrina/Rita Annual Change in Gross Domestic Product Percent Forecast: %

Agricultural Economics Recession In The Rear View Mirror Quarterly Change in U.S. Gross Domestic Product Percent

Agricultural Economics Monthly Net Change is U.S. Employment, (thousands of nonfarm jobs) Source: Dept of Labor 125 – 150,000

Agricultural Economics Unemployment Rates U.S. and Kentucky Monthly Rates Source: U.S. Dept. of Labor, Kentucky Workforce Cabinet % Civilian Labor Force

Agricultural Economics Consumer Price Index All Items and Energy Source: BLS *projected September: CPI up 1.2% Energy up 12%

Agricultural Economics

Crude Oil Prices Recede from $70 OPEC Price Band $22-$28

Agricultural Economics Natural Gas Prices Will Remain High

Agricultural Economics Natural Gas Prices Will Remain High Wall Street Journal

Agricultural Economics U.S. Annual Energy Flow Quadrillion Btu

Agricultural Economics Era of Low Interest Rates Ends Key Interest Rates, Percent Wall Street Journal

Agricultural Economics Twin Deficit #1: U.S. International Trade Balance Source: Dept of Commerce Billion$ September = - $60B 2005 projected = -$650B

Agricultural Economics Source: Federal Reserve Bank The Downward Slide of the Dollar Since %

Agricultural Economics Twin Deficit #2

Agricultural Economics Components of the $2.6 Trillion FY06 Federal Budget Source: OMB Other 18% Net Interest 7% Medicare 12% Defense 18% Social Security 21% Income Security 14% Health 10%

Agricultural Economics Actual and Projected Federal Budget Surplus and Deficits, FY95-08 Source: OMB and CBO Billions $ FY05 Actual = $319B

Agricultural Economics “Americans prefer to be deceived rather than face the hard choices of doing something about budget deficits… [We] dislike deficits but dislike them less than the alternatives – higher taxes or lower spending … pragmatic politicians respond with massive borrowing schemes that seem to promise something for nothing.” Newsweek, 2/21/04

Agricultural Economics The Economic Outlook for Agriculture Dr. Keith Collins, USDA Chief Economist: “While uncertainty remains over the sustainability of global recovery, rising interest rates, the value of the dollar, …the budget deficit, trade negotiations, emerging competitors, animal diseases, and oil prices, U.S. agriculture appears strong enough to deal with the uncertainties ahead.” Congressional testimony, September 29, 2005

Agricultural Economics

Agricultural Economics Record Cash Receipts & Cash Income in ‘ Second Highest on Record Billions$ Source: USDA *forecast average $ = $85B

Agricultural Economics Kentucky Farm Cash Receipts Break $4B *estimated Source: USDA, NASS Billion$

Agricultural Economics Government Payments Direct Payments to Kentucky Farmers Million $ 12% 25% 27% 24% 34% 17% % = gov’t payments as percent of net farm income 16%

Agricultural Economics The Disappearing Agricultural Trade Surplus Billion$ *projected Source: USDA, ERS All-time record ag exports?

Agricultural Economics General Economic Outlook Modest economic growth for U.S. and KY despite “jolts” New inflation concerns due to higher energy costs and rising interest rates The drag on economic growth = record imports + high oil/gas prices + moderate consumer spending Twin deficits (Trade and Federal Budget) limit choices and ability to respond to new needs and emergencies

Agricultural Economics Agricultural Outlook Optimistic general market outlook despite rising interest rates, higher energy & input costs, etc. Steady ag exports but rising food imports = disappearing trade surplus Near record cash receipts + USDA payments + Rising land values = Strong farm balance sheet (but risk of too much expansion?) In place: Farm safety net through 2007 (commodity programs, crop insurance, CRP) Not in place: Trade agreement/WTO, agreement with Brazil over cotton subsidies, reopening Asian livestock export markets after BsE