Agricultural Economics

“Takes a Licking and Keeps on Ticking”Economic Outlook for Fall 2005

Craig Infanger and Larry Jones

Agricultural Economics

Modest Economic Growth Despite “Jolts”: Iraq War, Energy Prices, Katrina/Rita

Annual Change in Gross Domestic Product

00.5

11.5

22.5

33.5

44.5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Percent

Forecast: 3.5 - 4%

Agricultural Economics

Recession In The Rear View MirrorQuarterly Change in U.S. Gross Domestic Product

-2-1012345678

Percent

Agricultural Economics

Monthly Net Change is U.S. Employment, 2000-2005 (thousands of nonfarm jobs)

-400-300-200-100

0100200300400500600

Source: Dept of Labor

125 – 150,000

Agricultural Economics

Unemployment RatesU.S. and Kentucky Monthly Rates

Source: U.S. Dept. of Labor, Kentucky Workforce Cabinet

0.001.002.003.004.005.006.007.008.009.00

Kentucky U.S.

% Civilian Labor Force

Agricultural Economics

Consumer Price IndexAll Items and Energy

Source: BLS*projected

-15

-10

-5

0

5

10

15

20

25

30

CPI-All Items CPI-Energy September: CPI up 1.2% Energy up 12%

Agricultural Economics

Agricultural Economics

Crude Oil Prices Recede from $70

OPEC Price Band $22-$28

Agricultural Economics

Natural Gas Prices Will Remain High

Agricultural Economics

Natural Gas Prices Will Remain High

Wall Street Journal 10-17-05

Agricultural Economics

U.S. Annual Energy FlowQuadrillion Btu

Agricultural Economics

Era of Low Interest Rates EndsKey Interest Rates, 2000-2005

Percent

Wall Street Journal

10-13-050123456789

10

2000

2001

2002

2003

2004

2005

Bank Prime Fed Discount Rate 20Yr T-Bill

Agricultural Economics

Twin Deficit #1:U.S. International Trade Balance

Source: Dept of Commerce

-2000

-1500

-1000

-500

0

500

1000

15001992

1994

1996

1998

2000

2002

2004

Exports

Imports

Trade Balance

Billion$

September = - $60B

2005 projected = -$650B

Agricultural Economics

Source: Federal Reserve Bank

The Downward Slide of the Dollar Since 2002

20%

Agricultural Economics

Twin Deficit #2

Agricultural Economics

Components of the $2.6 Trillion FY06 Federal Budget

Source: OMB

Other 18%

Net Interest 7%

Medicare 12%

Defense 18%

Social Security 21%

Income Security 14%

Health 10%

Agricultural Economics

Actual and Projected Federal Budget Surplus and Deficits, FY95-08

Source: OMB and CBO

-500-400-300-200-100

0100200300

1995

1997

1999

2001

2003

2005

2007

Fiscal Year

OMB

CBO(July)

Billions $

FY05 Actual = $319B

Agricultural Economics

“Americans prefer to be deceived rather than face the hard choices of doing something about budget deficits… [We] dislike deficits but dislike them less than the alternatives – higher taxes or lower spending … pragmatic politicians respond with massive borrowing schemes that seem to promise something for nothing.”

Newsweek, 2/21/04

Agricultural Economics

The Economic Outlook for Agriculture

Dr. Keith Collins, USDA Chief Economist:

“While uncertainty remains over thesustainability of global recovery, risinginterest rates, the value of the dollar,…the budget deficit, trade negotiations,emerging competitors, animal diseases,and oil prices, U.S. agriculture appears strong enough to deal with the uncertainties ahead.”Congressional testimony, September 29, 2005

Agricultural Economics

                                                                                                                                                                                                 

Agricultural Economics

Record Cash Receipts & Cash Income in ‘042005 Second Highest on Record

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005*

Cash Receipts Gov't Payments Farm Related Income

Billions$

Source: USDA *forecast

1995-2004 average

$240+21-194

= $85B

Agricultural Economics

Kentucky Farm Cash Receipts Break $4B

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*

Net Farm Income Cash Receipts*estimated

Source: USDA, NASS

Billion$

Agricultural Economics

Government PaymentsDirect Payments to Kentucky Farmers

0

50

100

150

200

250

300

350

400

450

1998 1999 2000 2001 2002 2003 2004

Million $

12%

25%

27%

24%

34% 17%

% = gov’t payments as percent of net farm income

16%

Agricultural Economics

The Disappearing Agricultural Trade Surplus

-80

-60

-40

-20

0

20

40

60

80

'97 '98 '99 '00 '01 '02 '03 '04'05*'06*

ExportsImportsTrade Balance

Billion$

*projected

Source: USDA, ERS

All-time record ag exports?

Agricultural Economics

General Economic Outlook• Modest economic growth for U.S. and KY

despite “jolts”• New inflation concerns due to higher

energy costs and rising interest rates• The drag on economic growth = record

imports + high oil/gas prices + moderate consumer spending

• Twin deficits (Trade and Federal Budget) limit choices and ability to respond to new needs and emergencies

Agricultural Economics

Agricultural Outlook• Optimistic general market outlook despite rising

interest rates, higher energy & input costs, etc.• Steady ag exports but rising food imports =

disappearing trade surplus• Near record cash receipts + USDA payments +

Rising land values = Strong farm balance sheet (but risk of too much expansion?)

• In place: Farm safety net through 2007 (commodity programs, crop insurance, CRP)

• Not in place: Trade agreement/WTO, agreement with Brazil over cotton subsidies, reopening Asian livestock export markets after BsE