1. 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.

2. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos 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

3. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Billions of Dollars (2008=100) Source: USDA The Farm Economy is Booming. U.S. Real Net Farm Income

4. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Source: Wall Street Journal Dollars per bushel Crop Prices Surged With Strong Demand And Shorter Global Supplies Soybeans Wheat Corn U.S. Crop Prices

5. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Tough Times in the Cattle Industry Dollars per hundredweight Breakeven Costs Hog Price Source: USDA and Iowa State University Cattle Price Breakeven Costs U.S. Livestock Prices and Breakeven Costs

6. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline: –A Booming Farm Economy –Land Values Surge The Agricultural Outlook

7. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Kansas’ Farmland Values Surge Percent change from year ago Source: Federal Reserve Bank of Kansas City Kansas Farmland Values

8. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA On a national basis, real farmland values have topped the 1980s highs. Dollars Source: USDA U.S. Farmland Values Real (Inflated to 2008 dollars) Nominal

9. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA 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

10. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline: –A Booming Farm Economy –Land Values Surge –Is the Boom Sustainable? The Agricultural Outlook

11. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA World Grain Inventories Have Fallen to Record Lows. Percent of annual use Source: USDA World Grain Stocks to Use Ratio Wheat Corn

12. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Agricultural Exports Have Surged... Billion dollars (2008=100) Source: USDA U.S. Agricultural Exports

13. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA With Stronger World Incomes... Percent change Source: International Monetary Fund Average World GDP Growth

14. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA And a Weak Dollar. Index Source: Federal Reserve Board of Governors Value of U.S. Dollar

15. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Has Ethanol Reached its Limit? Billion 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

16. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA The Outlook for Crop Prices has Strengthened in 2008 Dollars per bushel Source: FAPRI Corn and Wheat Price Forecasts March 2008 forecast September 2008 forecast Dollars per bushel Corn Price Wheat Price

17. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA 2008 Farm Input Costs Farm input costs surged beyond expectations.

18. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA 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.

19. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA 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.

20. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA 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.

21. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline: –A Booming Farm Economy –Land Values Surge –Is the Boom Sustainable? –Will Farm Debt Remain in Check? The Agricultural Outlook

22. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Debt ratios have reached record lows. Percent Source: USDA *Actual debt divided by debt that could be repaid from current income Debt Repayment Capacity Utilization*

23. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Farmland is increasingly owned by older people. Percent Source: Iowa State University Distribution of Iowa Farmland by Age of Owner

24. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA 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