the big picture of agriculture - university of minnesota · 1918 1924 1930 1936 1942 1948 1954 1960...
Post on 13-Jul-2020
5 Views
Preview:
TRANSCRIPT
Dr. Jason Henderson
Senior Associate Dean and Director of Extension
Purdue University
September 2019
Squeezing Profits from Agriculture Productivity
Purdue University is an equal access/equal opportunity institution
The Big Picture of Agriculture
• Ag Booms …
• The Booms Fade …
• Then Ag Plateau’s.
• What’s the New Plateau?
Plateau’s occur in all types of crops.
Index 1913=1
Source: National Agricultural Statistical Service, USDA
0
2
4
6
8
10
12
0
2
4
6
8
10
12
1866
1873
1880
1887
1894
1901
1908
1915
1922
1929
1936
1943
1950
1957
1964
1971
1978
1985
1992
1999
2006
2013
U.S. Crop Prices
Corn Rice Soybeans Wheat Cotton
0
1
2
3
4
5
6
7
1918
1924
1930
1936
1942
1948
1954
1960
1966
1972
1978
1984
1990
1996
2002
2008
2014
StrawberriesIndex 1918=1
Even Specialty Crops
A Little History: The Cycles of Agriculture
0.0
50.0
100.0
150.0
200.0
250.0
0.0
50.0
100.0
150.0
200.0
250.0
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
U.S. Agriculture Value-Added and Net Farm Income(Three-Year Moving Average)
Value Added Net Farm Income
Billions (2016 constant dollars)
Russian Grain Deal
World War IIChina & Ethanol
Calculations based on USDA data deflated with Consumer Price Index
Will Crop Farmers Earn a Profit in 2019?
U.S. Corn Breakeven Price
If you rent or have land payment … $4.02 per bushel
If you do not rent or have a land payment … $3.12 per bushel
Dec contract on CME 7/29/2019 $4.17 per bushel
Dec contract on CME 8/16/2019 $3.81 per bushelSource: USDA Cost of Production
U.S. Soybean Breakeven Price
If you rent or have land payment … $9.39 per bushel
If you do not rent or have a land payment … $6.43 per bushel
Dec contract on CME 7/29/2019 $9.04 per bushel
Dec contract on CME 8/16/2019 $8.79 per bushelSource: USDA Cost of Production
Farmers with no land costs make the most money.
Will Farm Bankruptcies Soar?
Commercial bank regulatory data says …
• Farmers are struggling to repay loans.
• Farm loan delinquency rates and bankruptcies are edging up to historical averages.
Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City
Real Estate Non-Real-Estate
Recent (High) 2011:Q1 3.96% 2010:Q1 3.84%
Recent (Low) 2015:Q3 1.38% 0.90%
Current 2019:Q1 2.51% 2.45%
Will Bankers Role the Loan? Depends on the Collateral.
Source: Federal Reserve Bank of Kansas City
80
90
100
110
120
130
140
150
160
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Collateral Requirement and Renewals and Extensions(Tenth Federal Reserve District)
Renewals and Extensions Collateral Requirements
Index = 100
How Strong are Farmland Values?
86688206
5407 5413
7072 6976
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Indiana Farmland Values by Soil Quality
Top-Quality Poor Quality Average
Nominal dollars per acre
Source: Purdue Agricultural Economics Department
So, How Bad is It? It’s Challenging, but NOT the 1980s.
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
1969 1979 1989 1999 2009 2019
US Farm Debt Ratios
Debt/Equity Ratio Debt/Asset Ratio
Percent
Source: USDA, Economic Research Service
What would it taketo reach 1980 levels?
(Debt/Asset Ratio >18)(Debt/Equity Ratio > 22)
Farmland Values Drop 30%
Or
Farm Debt Rises 30%
Farmers are stressed.But, how bad is it if they are buying tractors and land?
Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME, https://ag.purdue.edu/commercialag/ageconomybarometer/
0
2
4
6
8
10
12
0
2
4
6
8
10
12
Combines 4 Wheel Drive Tractors
U.S. Tractor and Combine Sales
Thousands of Unit Sales
Source: Association of Equipment Manufacturers 2019 projection based on data through July 2019
Demand for Farmland, May 2019
Farm optimism is on a roller-coaster ride.
70
80
90
100
110
120
130
140
150
160
170
70
80
90
100
110
120
130
140
150
160
170
Purdue/CME Ag Barometer
Index of Future Expectations
Index of Current Conditions
Index
Source: Center for Commercial Agriculture, Purdue University
China and North American Trade Issues
China Trade Issues
Delayed Planting and Price Increase
Aug Crop Reportand
MFP Payment
What do farmers think about agricultural trade?
Will Exports Increase in the Next 5 Years?
60% say Yes
Will China’s Soybean Trade Dispute be Resolved Soon?
70% say Unlikely
What do farmers think about agricultural trade?
Will the Resolution to the Trade Dispute with China Benefit U.S. Agriculture?
70% say Yes
Does the MFP payment relieve tariff concerns on your farm income?
70% say at Least, Somewhat
Government Payments being Driven Higher by Ad Hoc Payments
Trade Policy and
Monetary Policy
Drive Ag Cycles
Trade and Monetary Policy Drive Cycles and Plateaus
Commodity Prices & Inflation
Agricultural Trade
Interest RatesU.S. Dollar Value
Trade and Monetary Policy
2) Weak trade trims inflation, which leads to lower interest rates
and a weaker dollar, which strengthens trade.
1) Strong trade boosts inflation, which leads to higher interest rates
and a strong dollar, which cuts trade.
Federal Reserve is now talking about LOWERING rates.
Source: Federal Reserve Board of Governors
Outcome
• Lower debt service
• Asset values rise
U.S. Interest Rates Relative to Foreign Rates are Important
• Higher US rates are attractive to investors.
• International money flows to the U.S.
• Dollar rises as investor demand grows.
Strong Dollar limits Agricultural Trade
10 Year Government Bond Yields
UK
GermanyJapan
US
Interest Rates, Exchange Rates, and International Money Flows
-12000-10000-8000-6000-4000-2000
02000
1979 1984 1989 1994 1999 2004 2009 2014 2019
U.S. Net International Investment Position (Asset Minus Liabilities)
Billions of 2016 Dollars
Source: U.S. Bureau of Economic Analysis
Assets: US purchasesLiabilities: Foreign purchases
US Trade-Weighted Dollar Index - Real
Money flows to highest rate of return. Higher U.S. interest rates attract money
and boost dollar demand and exchange rates.
Stronger Dollar Money flows to the
US
Tomorrow’s economic battle is over productivity.
US Potential GDP(Average Annual Growth)
Source: Congressional Budget Office, “The Budget and Economic Outlook 2018-2028” April 2018https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53651-outlook.pdf
1950 -
1973
1974-1981
1982-1990
1991-2001
2002-2007
2008-2017
2018-2022
2023-2027
Potential GDP 4.0 3.3 3.2 3.2 2.8 1.4 2.0 1.8
Potential Labor Force
1.6 2.5 1.6 1.3 0.9 0.5 0.6 0.4
PotentialLabor Force Productivity
2.4 0.8 1.6 1.9 1.9 0.9 1.4 1.4
• Economic Potential Shrinks from 3% to 2%
• Need Higher Productivity to Offset Slower Labor Force
Growth
Efficiency: Producing the same products with less inputs
Value-added: Producing higher valued products
Supply-oriented vs Demand-oriented(Farmer-oriented) (Consumer-oriented)
Productivity(Dollars per input)
=Efficiency
(Output per input)X
Value-added(Dollar per Output)
How will agriculture increase productivity to boost profits?
Value-Added: Why Now? Millennials: What do they eat?
Birth Year Generation Age Today1928 – 1945 Silent Generation 74 to 90 years old1946 – 1964 Baby Boomers 55 to 73 year old1965 – 1980 Generation X 39 to 54 years old1981 – 1995 Millennials 24 to 38 years old1996 - Generation Z 23 and youngerSource: Pew Research Center
How are the Different Generation Perceived?
What Shaped their Formative Years?
https://www.purdue.edu/vpsl/resources/GenZ.html
U.S. Generations
Two Agricultures are Emerging, Does your region have the ecosystem prepared?
Commodity Agriculture• Tight margins: low cost
• Consolidation and large scale
Value-Added Agriculture• High margins: higher cost
• Small, medium scale
Supply or Demand Oriented?
Marketing: Commodity Prices or Business Marketing?
Risk Management: Price and Production Risk or Business Relationship/Contract Risk?
Lending: Credit Scoring or Relationship-based Lending?
Infrastructure: Transportation and/or Communications (Broadband)?
Conclusion
• Farm incomes will be shaped by agricultural market factors (supply/demand) and macroeconomic factors (monetary/trade policy).
• How will global economies evolve?
• Will agriculture be more supply or demand-oriented in the future?
• How can you help rural communities get ready for two agricultures?
top related