agricultural, trade and macroeconomic ......agricultural, trade and macroeconomic policy outlook:...

AGRICULTURAL, TRADE AND MACROECONOMIC POLICY OUTLOOK:

2013 AND BEYOND

David Schweikhardt Department of Agricultural, Food & Resource Economics

Michigan State University

Presentation delivered at Michigan Agricultural Credit Conference

East Lansing, Michigan November 5, 2012

© 2012

OVERVIEW OF POLICY OUTLOOK FOR 2013 Outlook for farm programs

Outlook for trade policy

Outlook for macroeconomics, the general economy and credit issues

OVERVIEW OF POLICY OUTLOOK FOR 2013 Outlook for farm programs

•The purpose of farm programs •The quiet revolution in farm programs •Senate and House farm bills overview •Budget issues

FARM PROGRAMS AND THE EQUITY ISSUE: FARM VERSUS NONFARM HOUSEHOLDS

FARM PROGRAMS AND THE EQUITY ISSUE: VARIATIONS AMONG FARM HOUSEHOLDS

Idiosyncratic Risk Systemic Risk

Price Risk IR: Price variations faced by individual farmer/region

RT: Futures markets,

contracts RL/F: Low probability IRM: Somewhat

SR: Price variations faced by entire nation

RT: Futures markets,

contracts RL/F: High probability IRM: Somewhat, but

often no

Yield Risk IR: Yield variations faced by individual farmer/region

RT: Crop insurance RL/F: High probability IRM: Usually

SR: Yield variations faced by entire nation

RT: Futures market,

contracts (limited) RL/F: Moderate probability IRM: Somewhat

Provisions of 2012 Senate & House Farm Bills Repeal Direct and Countercyclical Payment

Program (2008 DCP program)

Repeal Acreage Crop Revenue Election Program (2008 ACRE program)

Retains Nonrecourse Marketing Loan Program – Corn: $1.95 – Soybeans: $5.00 – Wheat: $2.94

Provisions of 2012 Senate & House Farm Bills Both introduce Revenue-Based Payment Program

(think ACRE, but not ACRE in details)

Senate: Agricultural Risk Coverage (ARC) – One-time irrevocable producer decision – Payments made when benchmark guarantee (89%

of benchmark revenue) less than actual revenue – Producer chooses benchmark as either (a) farm

benchmark or (b) county benchmark

Provisions of 2012 Senate & House Farm Bills House: Price Loss Coverage (PLC) and Revenue

Loss Coverage (RLC) Programs PLC Program

– One-time irrevocable producer decision – PLC Payments made when National Midseason

Market Price less than Reference Price – Reference Prices

• Corn: $3.70 • Soybeans: $8.40 • Wheat: $5.50

– Payment yield: Existing DCP yield or 90% of 08-12 average yield

Provisions of 2012 Senate & House Farm Bills Both introduce Revenue-Based Payment Program

House: Price Loss Coverage (PLC) and Revenue

Loss Coverage (RLC) Programs RLC Program

– One-time irrevocable producer decision – Payments made when benchmark guarantee (85%

of benchmark revenue) less than actual revenue – No producer benchmark choice available – Reference Prices used as minimum prices in

revenue guarantee

Idiosyncratic Risk Systemic Risk

Price Risk IR: Price variations faced by individual farmer/region

RT: Futures markets,

contracts RL/F: Low probability IRM: Somewhat

SR: Price variations faced by entire nation

RT: Futures markets,

contracts RL/F: High probability IRM: Somewhat, but

often no

Yield Risk IR: Yield variations faced by individual farmer/region

RT: Crop insurance RL/F: High probability IRM: Usually

SR: Yield variations faced by entire nation

RT: Futures market,

contracts (limited) RL/F: Moderate probability IRM: Somewhat

OVERVIEW OF POLICY OUTLOOK FOR 2013 Outlook for farm programs

Outlook for trade policy •Returning slow growth trade •The likelihood of “exporting unemployment” •The threat of trade barriers

OVERVIEW OF POLICY OUTLOOK FOR 2013 Outlook for farm programs

Outlook for trade policy

Outlook for macroeconomics, the general economy and credit issues

•We are NOT in a recession and never have been

THE CREDIT CRISIS & THE OUTLOOK FOR RECOVERY: IS THE RECESSION OVER?

The technical definition of recession: A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.

THE CREDIT CRISIS & THE OUTLOOK FOR RECOVERY: IS THE RECESSION OVER? The key part of the definition: A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.

–Is it over yet?

• Peak of economic activity: 4Q of 2007. • Trough of economic activity: 3Q of 2009. • So is the recession over? Technically, yes. • But why doesn’t it feel like it?

THE VIEW OF CREDIT MARKETS: 2013 The condition of credit markets is likely to

continue to be shaky in many cases – The large bank problems not close to being fixed. – Small/medium banks are struggling with losses

on construction & commercial real estate loans.

Bank asset quality remains an issue – As housing prices fall, bank assets shrink and

must be offset by some other asset (cash holding, etc.) and their ability to lend is reduced.

– Many assets continue to be overvalued on bank balance sheets.

WHERE ARE WE NOW? UNDERSTANDING THE INFLATION / DEFLATION ISSUE

The fundamental equation of monetary economics M * V = P * Y, where: M = Monetary base V = Velocity of money P = Price level Y = Output of goods and services in the economy If V and Y are constant (Y at full employment), then

an increase in M will result in an increase in P (inflation).

WHERE ARE WE NOW? UNDERSTANDING THE INFLATION / DEFLATION ISSUE

The fundamental equation of monetary economics M * V = P * Y, where: M = Monetary base V = Velocity of money P = Price level Y = Output of goods and services in the economy But what if V is not constant (decreases)? Then P

will decrease if the M does not increase. What determines V? Two factors: (1)Firm/consumer

cash holding habits and (2) bank lending practices.

WHERE ARE WE NOW? UNDERSTANDING THE INFLATION / DEFLATION ISSUE

The fundamental equation of monetary economics M * V = P * Y, where: M = Monetary base V = Velocity of money P = Price level Y = Real output of good and services But if Y (output) is not at full capacity, then P will

not increase if the M increases. What is happening with Y relative to capacity? Look back at capacity utilization

THIS IS NOT YOUR FATHER’S RECESSION

Recession: A significant decline in economic activity… lasting more than a few months.

Banking crisis: A country’s corporate and financial sectors experience a large number of defaults… great difficulties repaying contracts… non-performing loans increase sharply and all or most of the aggregate banking system capital is exhausted. This situation may be accompanied by depressed asset prices… on the heels of run-ups before the crisis (see Laeven and Valencia).

THIS IS NOT YOUR FATHER’S RECESSION Recession:

– Bank stress/failures follow the beginning of the recession.

– Bank capital remains adequate to maintain banking system liquidity, does not pose systemic threat to banking system.

Banking crisis:

– Bank stress/failures and a credit crisis precede the recession.

– Bank capital is inadequate to maintain banking system liquidity, creating a systemic threat to banking system.

– Bank lending/economic growth are affected for a much longer period of time.

WEAKEST RECOVERIES SINCE 1970 EACH RESULTED FROM A BANKING CRISIS

POLICY OPTIONS FOR ADDRESSING A BANKING CRISIS

Monetary policy Increasingly ineffective as a policy tool to reduce

unemployment? Inflation/Deflation: Declining velocity, overhang of

excess capacity likely to keep inflation in check in short/medium term. Deflation an increased threat if recession anywhere worsens excess capacity.

Fiscal policy Effective, but short/long term balance needed.

BANKING CRISES: SOME IMPLICATIONS FOR AGRICULTURE

The possible duration of this event should not be underestimated. Tight credit episodes might not be over. Thus, liquidity/ cash management are likely to be important. “A strong balance sheet” is unlikely to be enough to satisfy lenders. Slow GDP growth/wage growth are likely to limit food demand growth. The next turn of the Rubik’s cube: International recession, increasing trade tensions and the threat of trade barriers.

References Federal Deposit Insurance Corporation. Quarterly Banking Profile. 12/31/11,

3/31/12, and 6/30/12 issues. Available at: http://www2.fdic.gov/qbp/ Mark Wynne. “The Sluggish Recovery from the Great Recession: Why There Is No

‘V’ Recovery This Time.” Federal Reserve Bank of Dallas. September 2011. Available at: http://www.dallasfed.org/pages/research/eclett/2011/el1109.cfm

Luc Laeven and Fabian Valencia. Systemic Bank Crises: A New Database.

International Monetary Fund, November 2008. Available at: http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf

Martin Brookes and Ziad Daoud. “Disastrous Bond Yields.” Fulcrum Asset

Management. Fulcrum Research Paper – July 2012. Available at: http://www.fulcrumasset.com/files/Fulcrum%20White%20Paper%20-%20Disastrous%20bond%20yields.pdf

Congressional Budget Office. Updated Budget Projections: Fiscal years 2012 to

2022. Available at: http://www.cbo.gov/publication/43119

Thank You

schweikh@msu.edu

Presentation supported by the Elton R. Smith Endowment

in Agricultural and Food Policy