Economic Health of Agriculture: A Macro Perspective

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Economic Health ofAgriculture A Macro
Perspective

• John B. Penson, Jr.
• Texas AM University
• November 4, 2004

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Change is Inevitable
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Change is inevitable

• In the 60s, for example, people took acid to
  make the world weird. Today the world is weird,
  and people take Prozac to make it normal.
• Lets begin by talking about emerging trends in
  the broader economy.
• I will then talk about how these trends affect
  agriculture and implications for risk management.
  
• Light travels faster than sound. This is why
  some people appear bright until you hear them
  speak.

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The 5 Rs Key Macro Trends for Agriculture

• Rate of interest
• Rate of growth in GDP
• Rate of inflation
• Rate of unemployment
• Rate of foreign currency exchange

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Fed Funds Rate 11/10/04 ??? 9/21/04 1.75
8/10/04 1.50 6/30/04 1.25 6/25/03 1.00
11/6/02 1.25 12/11/01 1.75 11/6/01 2.00
10/6/01 2.50 9/17/01 3.00 8/21/01
3.50 6/27/01 3.75 5/15/01 4.00 4/18/01
4.50 3/20/01 5.00 1/31/01 5.50
1/3/01 6.00 5/16/00 6.50 3/21/00 6.00
2/2/00 5.75
1 Interest Rates Percent
10-Year Treasury
3-Month Treasury
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2 Rate of Growth in Real GDP Compounded annual
rates of change
Average growth rate over the last 6 quarters is
above 4!
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Longer Term Perspective
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3 Core Rate of Inflation Compounded annual rates
of change
Excl. Food Energy
CPI (bar)
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1988
Manufacturing Capacity Utilization Rate Percent
86 84 82 80 78 76 74 72
1988 1989 1990 1991 1992 1993 1994 1995
1996 1997 1998 1999 2000 2001 2002 2003
2004
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4 Unemployment Rate Percent of labor force
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Stagnant Labor Market Percent

Index
Unemployment Rate (left scale)
90 Confidence
Help-Wanted (right scale)
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Effects of productivity, cheap imports and
outsourcing.
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5 Rate of Foreign Currency Exchange
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Troubling Trends
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1 Growing Federal Budget Deficit Relative
to GDP
Budget deficits not a major problem if real GDP
grows as expected and interest rates stay low.
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2 The Other Deficit
Trade deficit growth up sharply. Cheap imports
hold down inflation, but costs jobs. Buying more
than selling to others.
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3 Rising Energy Prices
/barrel
/million btu
Spot Oil (left scale)
Oil Futures (left scale)
Gas Futures (right scale)
Spot Gas (right scale)
Note Future prices as of 9/30/2004.
Rising oil and gas prices act like a tax on
consumers and producers. Slows GDP growth rate.
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Where Do You Live?
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October 19, 2004 48.91
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4 Declining Personal Saving Rate
Percent
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Stress on Savings
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5 Rising Household Debt Obligations
Household debt as a percent of after-tax income
rising, but still lower than late-70s and
mid-80s.
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Sector Perspective
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Macro Trends and Consequences for Ag
Likely trends and effects

• Interest rates impacts interest expenses,
  net farm income, and farmland values.
• 2. Unemployment rate impacts availability of
  non-farm employment for farm operator families.
• 3. Inflation impacts input costs and
  interest rates as Fed responds to inflation
  expectations.
• 4. GDP marginal impact on demand for food,
  greater impact on other product and input
  markets.
• 5. Value of dollar impacts demand for our
  agricultural products in client nations and trade
  imbalance as a whole.

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Other Sources of Uncertainty

• China a growing force in ag and non-ag markets.
• Actions of other global competitors and client
  nations.
• WTO rulings regarding subsidies to farmers.
• Terrorism (direct and indirect effects).
• Changing consumer preferences.
• Cost of energy and other oil-based products.

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Farm debt outstanding now exceeds level seen
during the early-80s.
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Debt lower relative to net farm income, however,
thanks in part to government payments.
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About 25 of all commercial farms under financial
stress.
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Sources of Operator Household Income
Thousand
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Times Have Changed!

• Financial management requires monitoring costs of
  production.
• Know the breakeven level for commodity prices.
• Risk management requires windshield stress
  testing of future plans.
• Utilize web-based tools available on the Internet
  to analyze key investment and financing
  decisions.

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Scope of Planning Horizon
Making future production, investment and
financing decisions requires forward information
on the likely profitability of specific
enterprises at the whole farm level. Stress
testing these decisions by examining the effects
of plausible alternative scenarios helps
visualize the risk and return associated with
major decisions.
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Looking Ahead

• 2005 will present increased uncertainty.
• Higher interest rates on the way.
• Higher input costs likely as well.
• Farm programs will compete with other federal
  programs for funding.
• Stay on top of emerging economic trends and what
  they mean for risk and returns!

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Stay Current With Developing Trends
Interest rates? Unemployment? Inflation?
GDP? Value of the dollar? Implications for ag?
See bi-weekly columns by David Kohl and John
Penson at
www.farm-credit.com
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A closing thought

• The 50-50-90 rule anytime you have a 50-50
  chance of being right, there is a 90 chance you
  will be wrong!
• Dont leave major decisions to chance. Stress
  test them over a period of years. Examining the
  sensitivity of major decisions to a changing
  economy will lead to more informed decisions.