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					                                   U.S. AGRICULTURE:
                                What Goes Up Must Come …

                                                   Jason Henderson
                                             Branch Executive
                                    Federal Reserve Bank of Kansas City
                                              Omaha Branch

                                                            May 14, 2008



                                       The views expressed are those of the author and do not necessarily
Photos courtesy of USDA   reflect the positions of Federal Reserve Bank of Kansas City or the Federal Reserve System.
                                       U.S. Agriculture

                          • Today’s Outline:
                            –   A Booming Farm Economy
                            –   Land Values Surge
                            –   Is the Boom Sustainable?
                            –   Will Farm Debt Remain in Check?




                                                           FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                    Regional, Public, and Community Affairs
                                The Farm Economy is Booming.

                                           U.S. Real Net Farm Income
                          Billions of Dollars (2008=100)
                          140                                                                                140

                          120                                                                                120

                          100                                                                                100

                           80                                                                                80

                           60                                                                                60

                           40                                                                                40

                           20                                                                                20

                            0                                                                                0
                                1970   1975   1980    1985   1990   1995   2000          2005
                            Source: USDA
                                                                             FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                      Regional, Public, and Community Affairs
                            Crop Prices Surged With Strong
                          Demand And Shorter Global Supplies

                                                        U.S. Crop Prices
                          Dollars per bushel
                          16                                                                                     18
                          14                                                                                     16
                          12                                                                                     14
                                                                                                                 12
                          10
                                                                                                                 10
                            8                                        Soybeans
                                                                                                                 8
                            6
                                                                                                                 6
                            4                                                                                    4
                                                                              Wheat
                            2                                                             Corn                   2
                            0                                                                                    0
                            Sep-01     Sep-02    Sep-03     Sep-04   Sep-05    Sep-06   Sep-07        Sep-08
                          Source: Wall Street Journal
                                                                                           FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                    Regional, Public, and Community Affairs
                           Tough Times in the Cattle Industry

                                     U.S. Livestock Prices and Breakeven Costs
                          Dollars per hundredweight
                          110                                                                                   110
                                                                            Breakeven Costs
                          100                                                                                   100

                           90                                                                                   90
                                                                                 Cattle Price
                           80                                                                                   80

                           70                                                                                   70
                                                                        Breakeven Costs
                           60                                                                                   60

                           50                                                                                   50

                           40                                                                                   40
                                                                                     Hog Price
                           30                                                                            30
                            Aug-03         Aug-04         Aug-05   Aug-06     Aug-07               Aug-08
                          Source: USDA and Iowa State University
                                                                                  FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                           Regional, Public, and Community Affairs
                                 The Agricultural Outlook

                          • Today’s Outline:
                            – A Booming Farm Economy
                            – Land Values Surge




                                                       FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                Regional, Public, and Community Affairs
                            Kansas’ Farmland Values Surge

                                                Kansas Farmland Values
                          Percent change from year ago

                          30
                                      2007:Q1           2007:Q2
                          25          2007:Q3           2007:Q4
                                      2008:Q1           2008:Q2

                          20

                          15

                          10

                           5

                           0
                                     Non-irrigated               Irrigated   Ranchland

                          Source: Federal Reserve Bank of Kansas City
                                                                              FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                       Regional, Public, and Community Affairs
                           On a national basis, real farmland
                          values have topped the 1980s highs.
                                                U.S. Farmland Values
                           Dollars

                           2,500                                                                      2,500
                                                                      Real
                                                             (Inflated to 2008 dollars)
                           2,000                                                                      2,000


                           1,500                                                                      1,500


                           1,000                                                                      1,000


                            500                                              Nominal                  500


                               0                                                                      0
                                   1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
                            Source: USDA

                                                                                     FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                              Regional, Public, and Community Affairs
                          Kansas, however, has not topped
                                   1980s highs.
                                       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
                          Source: USDA                              FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                             Regional, Public, and Community Affairs
                                 The Agricultural Outlook

                          • Today’s Outline:
                            – A Booming Farm Economy
                            – Land Values Surge
                            – Is the Boom Sustainable?




                                                         FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                  Regional, Public, and Community Affairs
                                 World Grain Inventories Have
                                   Fallen to Record Lows.

                                         World Grain Stocks to Use Ratio
                          Percent of annual use
                          50                                                                            50
                                                                      Wheat
                          40                                                                            40

                          30                                                                            30

                          20                                                                            20
                                                                       Corn

                          10                                                                            10

                           0                                                                            0
                            1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
                          Source: USDA
                                                                       FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                Regional, Public, and Community Affairs
                          Agricultural Exports Have Surged . . .

                                                   U.S. Agricultural Exports
                          Billion dollars (2008=100)
                          120                                                                                  120

                          100                                                                                  100

                          80                                                                                   80

                          60                                                                                   60

                          40                                                                                   40

                          20                                                                                   20

                            0                                                                                  0
                             1960           1970        1980      1990         2000
                             Source: USDA
                                                                                 FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                          Regional, Public, and Community Affairs
                                 With Stronger World Incomes . . .

                                                           World GDP Growth
                              Percent change
                          8                                                                                                 8
                          7                                                                                                 7
                          6                                                                                                 6
                                                                     Average
                          5                                                                                                 5
                          4                                                                                                 4
                          3                                                                                                 3
                          2                                                                                                 2
                          1                                                                                                 1
                          0                                                                                                 0
                              1970     1975       1980       1985   1990       1995   2000       2005
                              Source: International Monetary Fund

                                                                                         FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                  Regional, Public, and Community Affairs
                                               And a Weak Dollar.

                                                        Value of U.S. Dollar
                          Index
                          130                                                                                  130

                          120                                                                                  120

                          110                                                                                  110

                          100                                                                                  100

                          90                                                                                   90

                          80                                                                                   80

                          70                                                                                   70
                           Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
                           Source: Federal Reserve Board of Governors


                                                                               FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                        Regional, Public, and Community Affairs
                            Has Ethanol Reached its Limit?
                                      U.S. Ethanol Production, Mandates,
                                                and Corn Use
                          Billion gallons                                 Percent of Corn Production
                          18                                                                                36
                                      Ethanol Production (left scale)
                          15          Ethanol Mandates (left scale)                                         30
                                      Ethanol Corn Use (right scale)
                          12                                                                                24

                          9                                                                                 18

                          6                                                                                 12

                          3                                                                                 6

                          0                                                                                 0
                               1980    1985     1990     1995      2000    2005     2010          2015
                          Source: USDA and Renewable Fuels Association
                                                                                      FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                               Regional, Public, and Community Affairs
                                   The Outlook for Crop Prices has
                                        Strengthened in 2008
                                              Corn and Wheat Price Forecasts

                                          Corn Price                                       Wheat Price
                          Dollars per bushel                                 Dollars per bushel
                          6                                              6   8                                                            8
                                      September 2008 forecast

                          5                                              5   7        September 2008 forecast                             7


                          4                                              4   6                                                            6
                                        March 2008 forecast
                          3                                              3   5             March 2008 forecast                            5


                          2                                              2   4                                                            4
                               2006 2007 2008 2009 2010 2011 2012 2013           2006 2007 2008 2009 2010 2011 2012 2013
                              Source: FAPRI
                                                                                                    FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                             Regional, Public, and Community Affairs
                               Farm input costs surged beyond
                                        expectations.
                                                   2008 Farm Input Costs

                           Fertilizer

                               Feed

                              Fuels

                               Seed
                                                                         FAPRI Projection (March 2008)
                            Interest
                                                                         USDA Projection (August 2008)
                               Rent

                          Machinery

                             Wages

                          Chemicals

                                        -10   0      10     20       30       40     50              60              70
                                                      Percent change from year-ago
                          Source: USDA and FAPRI
                                                                                          FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                   Regional, Public, and Community Affairs
                          Market returns have jumped sharply for
                                    corn and soybeans.
                                        Market returns to Crop Production
                                                 (less variable or operating costs)
                             Dollars per acre (2007=100)
                             700                                                                                          700
                                                                       Wheat
                             600                                                                                          600
                                                                       Corn
                             500                                       Soybeans                                           500

                             400                                                                                          400

                             300                                                                                          300

                             200                                                                                          200

                             100                                                                                          100

                                0                                                                                         0
                                    1975     1980       1985       1990        1995   2000      2005
                           Calculations based on USDA cost and returns data.
                                                                                             FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                      Regional, Public, and Community Affairs
                          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                         $4.00          $5.25               $7.00
                               Increase (Percent)
                              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.


                                                                                                  FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                           Regional, Public, and Community Affairs
                          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                        $6.00          $6.70                $8.00
                               Increase (Percent)
                              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.


                                                                                                  FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                           Regional, Public, and Community Affairs
                                  The Agricultural Outlook

                          • Today’s Outline:
                            –   A Booming Farm Economy
                            –   Land Values Surge
                            –   Is the Boom Sustainable?
                            –   Will Farm Debt Remain in Check?




                                                           FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                    Regional, Public, and Community Affairs
                          Debt ratios have reached record lows.

                                   Debt Repayment Capacity Utilization*
                           Percent
                           120                                                                                         120

                           100                                                                                         100

                            80                                                                                         80

                            60                                                                                         60

                            40                                                                                         40

                            20                                                                                         20

                             0                                                                                         0
                                 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
                           Source: USDA
                           *Actual debt divided by debt that could be repaid from current income
                                                                                                   FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                            Regional, Public, and Community Affairs
                            Farmland is increasingly owned by
                                      older people.
                            Distribution of Iowa Farmland by Age of Owner
                          Percent
                          35
                                                          1982    1992   2002    2007
                          30

                          25

                          20

                          15

                          10

                           5

                           0
                                   < 25         25-34     35-44     45-54       55-64   65-74                  > 75
                          Source: Iowa State University
                                                                                        FEDERAL RESERVE BANK OF KANSAS CITY
Photos courtesy of USDA                                                                 Regional, Public, and Community Affairs
                                             Conclusions

                          •   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.



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

				
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