Econom ic Crisis: Linkages to Agriculture and Farm land Values - - PowerPoint PPT Presentation

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Econom ic Crisis: Linkages to Agriculture and Farm land Values - - PowerPoint PPT Presentation

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Econom ic Crisis: Linkages to Agriculture and Farm land Values Paul N. Ellinger pellinge@illinois.edu University of I llinois 2 0 0 9 I llinois Farm Econom ics Sum m it The Profitability of I llinois Agriculture: Profitability at a

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2 0 0 9 I llinois Farm Econom ics Sum m it

The Profitability of I llinois Agriculture: Profitability at a Crossroads

Econom ic Crisis: Linkages to Agriculture and Farm land Values

Paul N. Ellinger pellinge@illinois.edu University of I llinois

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2 0 0 9 I llinois Farm Econom ics Sum m it

Where do w e start?

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Economic Basics GDP = C + I + G - (X - M) US: 14,266 = 10,140 + 1,569 + 2,959 - 402 71% + 11% + 21% - 3%

Source: BEA 3rd Qtr 2009, estimate, current dollars

China 36% + 42% + 13% + 9%

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2 0 0 9 I llinois Farm Econom ics Sum m it

Financial Health

  • f the Consumer
  • Income Declines
  • 15 million unemployed + 11.5 underemployed
  • Average work week 33.2 hours
  • Median unemployment 20.1 weeks (up 100% Nov 2008)
  • Wealth declines
  • $3.6 trillion off home price peak
  • $8.3 trillion off financial asset peak values
  • 23% of home mortgages have negative equity
  • 9.24% mortgages past due (up 44%)
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2 0 0 9 I llinois Farm Econom ics Sum m it

U.S. Savings Rate

4.6

2 4 6 8 10 12 14 16 Jan-59 Feb-60 Mar-61 Apr-62 May-63 Jun-64 Jul-65 Aug-66 Sep-67 Oct-68 Nov-69 Nov-70 Nov-71 Nov-72 Nov-73 Nov-74 Nov-75 Nov-76 Nov-77 Nov-78 Nov-79 Nov-80 Nov-81 Nov-82 Nov-83 Nov-84 Nov-85 Nov-86 Nov-87 Nov-88 Nov-89 Nov-90 Nov-91 Nov-92 Nov-93 Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05

China: 30-40%

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2 0 0 9 I llinois Farm Econom ics Sum m it

2 4 6 8 10 12 14 16 18 20

Underemployed

Employment

Unemployed

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Commercial, Residential and Farm Real Estate Prices

Base = 2000 50 100 150 200 250 1987 1990 1993 1996 1999 2002 2005 2008

Illinois Farmland Residential Housing Commercial Real Estate

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U.S. Debt Markets

Source: WSJ 12/8/2009

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The Fed Has Expanded its Balance Sheet to Extend Credit to Banks

400 800 1,200 1,600 2,000 2,400 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Short-term Lending to Financial Firms Rescue Operations Operations Focused on Broader Credit Conditions Other Assets Treasury Portfolio

Billions of Dollars

Source: Federal Reserve Board of Governors

Federal Reserve Balance Sheet

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2 0 0 9 I llinois Farm Econom ics Sum m it 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 30.0 Receipts Outlays

U.S. Outlays & Receipts/GDP

Source: CBO 12% 6%

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2 0 0 9 I llinois Farm Econom ics Sum m it

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 estimate

Individual Income Taxes Corporate Income Taxes

Sources of Tax Revenue

Social Insurance and Retirement Receipts Excise Taxes Other

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2 0 0 9 I llinois Farm Econom ics Sum m it

Public Debt / GDP

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long

  • run. Source: Congressional Budget Office June ‘09
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Delinquency Rates Commerical Banks

Agr Loans, 9.08 Agr Loans, 2.57 Business Loans, 6.42 Business Loans, 4.4 Residential Mortgages, 3.24 Residential Mortgages, 9.81 Credit Cards, 5.24 Credit Cards, 6.58 Commercial Real Estate, 12.06 Commercial Real Estate, 8.74

2 4 6 8 10 12 14

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Price of Legacy/Toxic Securities

20 40 60 80 100 7/19/2006 9/19/2006 11/19/2006 1/19/2007 3/19/2007 5/19/2007 7/19/2007 9/19/2007 11/19/2007 1/19/2008 3/19/2008 5/19/2008 7/19/2008 9/19/2008 11/19/2008 1/19/2009 3/19/2009

ABX-06-02-AAA ABX-06-02-BBB

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The Profitability of I llinois Agriculture: Profitability at a Crossroads

W hat about Agriculture?

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Vulnerabilities Rural and Agricultural Financial Markets

  • 148 Commercial bank failures since June 2008
  • Regional exposure to

Commercial Development and Real Estate Loans

  • Pork and dairy markets
  • Exposure to interest rate changes
  • Additional deposit insurance fees for banks
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Current Economic Drivers Farmland Prices

  • Net returns to land
  • Level
  • Volatility
  • Energy prices
  • Interest / inflation rates
  • Housing crisis
  • Scope & economic situation of buyers
  • Demand for recreational land
  • Capital gains tax rates
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Farmland Price Headlines

  • "...quarterly decrease of 6% (...in 2009) ... the largest quarterly decline since 1985"

(Chicago Fed AgLetter).

  • "It's Confirmed: Farmland Prices are Correcting". Continuing with an attribution to

USDA, "...both Bloomberg and the WSJ are reporting the first annual drop in U.S. farmland prices in 20 years of an average of -3.2%". (www.seekingalpha.com)

  • Various sources have cited declines in Iowa farmland values from last year ranging

from about 5% to nearly 7.6% (HPJ Land Journal, ISU Ag Decision Maker, others).

  • In its mid-2009 survey, the Illinois Society of Professional Farm Managers and

Rural Appraisers found high quality land to be down 2.38%, lower quality land off 5.6%, and were among the first to note evidence of expectations of declining cash rents.

  • USDA sources show farmland values in Illinois down .4% from the same period in

2008, with steeper declines in IN and IA, though surveyed cash rents paid were still up into 2009 from a year earlier.

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Is the sky falling?

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Dow Index Case-Shiller House Price Index/year Chicago House Price Index Illinois Farmland Total return 1999-2008 1.10% 5.89% 3.00% 12.70% 2007 6.20%

  • 10.30%
  • 4.70%

16.20% 2008

  • 45.50%
  • 21.40%
  • 15.40%

18.90% 2009 to date 11.98% 0.41% 1.01%

  • 0.50%
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Estimated Returns to Land

Assumptions: Schnitkey budgets + $50 return to land $4.00 / bu. Corn : $10.00 / bu. Soybeans 4.5% Capitalization Rate

Returns/ Acre Imputed Land Price Northern Illinois 265 5,893 Central Illinois High Productivity 263 5,849 Central Illinois Low Productivity 226 5,018 Southern Illinois 154 3,427

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What have w e learned from the Crisis?

  • Consumer has felt some pain
  • Real estate prices can fall.
  • Low documentation loans often don’t work.
  • Credit spreads can widen quickly.
  • In crisis, diversification does not work well.
  • Pain can be severe.
  • Lack of regulatory “sympathy” to smaller

institutions.

  • Total agricultural debt low relative to others.