Dr. Jason Henderson
Senior Associate Dean and Director of Extension
Purdue University
July 10, 2019
Agriculture/Rural Economy
Purdue University is an equal access/equal opportunity institution
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140.0
Net Farm Income(Three-Year Moving Average)
Billions (2016 constant dollars)
The Past Decade was a Mixed Bag for Ag and Rural Economies
Calculations based on USDA data deflated with Consumer Price Index
The Farm Boom Fades
Rural Communities Struggle with Population, Employment, and Income Growth
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1960s 1970s 1980s 1990s 2000s 2010s
US Population Growth(Percent Change)
Urban
Rural
Source: US Census Bureau and Bureau of Economic Analysis
-5.0
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5.0
10.0
15.0
20.0
25.0
30.0
1970s 1980s 1990s 2000s 2010s
US Employment Growth(Percent Change)
Urban
Rural
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12.0
1970s 1980s 1990s 2000s 2010s
US Income Growth(Annual Percent Change)
Urban
Rural
Farmers are pessimistic.But, how bad is it if they buy steel and land?
Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME,
https://ag.purdue.edu/commercialag/ageconomybarometer/
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Combines 4 Wheel Drive Tractors
U.S. Tractor and Combine Sales
Thousands of Unit Sales
Source: Association of Equipment Manufacturers 2019 projection based on data through April 2019
Demand for Farmland, May 2019
The Big Picture of Agriculture
• Ag Booms …
• Then Ag Plateau’s.
• What’s the New Plateau?
Every Cycle Leads to a New Plateau
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1866 1876 1886 1896 1906 1916 1926 1936 1946 1956 1966 1976 1986 1996 2006 2016
U.S. Corn Price
Corn 7 per. Mov. Avg. (Corn)
Dollars per bushel
Source: National Agricultural Statistical Service, USDA
Corn Price – Dollars per Bushel
Pre-WWI: $0.46
WWI to WWII: $0.75
WWII to 1972: $1.25
1972 to mid-2000s: $2.36
Mid-2000s to Today: $4.24
It Happens in All Big 5 Commodity Crops
Index 1913=1
Source: National Agricultural Statistical Service, USDA
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92
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13
U.S. Crop Prices
Corn Rice Soybeans Wheat Cotton
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90
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08
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14
StrawberriesIndex 1918=1
Even Specialty Crops
Trade and Monetary Policy Drive Cycles and Plateaus
Commodity
Prices & Inflation
Agricultural
Trade
Interest RatesU.S. Dollar Value Farmland Values
Farm Profits
Trade and Monetary Policy Weak Price/Weak Profits/Low Land Values
Low Rates/High Land Values
In the 1980s, surpluses were the challenge.
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Corn Ending Stocks
US World
Is 10% Still the Magic Number?
Source: USDA
Is this a 1980s Scenario?
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1978 1983 1988 1993 1998 2003 2008 2013 2018
Earnings Multiples on 10-Year Treasury, Iowa Farmland, and U.S. Stocks
Inverse of 10-yr Treasury Stocks P/E Ratio Iowa Farmland P/E Ratio
Calculations based on data from CARD, Iowa State University and FRED, Federal Reserve Bank of St.
Louis.
Farmland
multiples
greater than
stocks and bonds
Farmland
multiples
between than
stocks and bonds
What are Bankers Seeing?Liquidity Disappears
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160
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Loan Demand and Repayment Rates(Tenth Federal Reserve District)
Operating Loan Demand Loan Repayment Rates
Index = 100
Source: Federal Reserve Bank of Kansas City
How Are Bankers Responding?Rolling Loans with Higher Collateral Requirements
Source: Federal Reserve Bank of Kansas City
80
90
100
110
120
130
140
150
160
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Collateral Requirement and Renewals and Extensions(Tenth Federal Reserve District)
Renewals and Extensions Collateral Requirements
Index = 100
It will take large shifts to get to the 1980s.
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1969 1979 1989 1999 2009 2019
US Farm Debt Ratios
Debt/Equity Ratio Debt/Asset Ratio
Percent
Source: USDA, Economic Research Service
What would it take
to reach 1980 levels?(Debt/Asset Ratio >18)
(Debt/Equity Ratio > 22)
Farmland Values Drop 30%
Or
Farm Debt Rises 30%
Time is Ripe for Agriculture and Rural Communities to Blaze a New Trail …
Based on a Traditional Concept —Productivity Growth.
Tomorrow’s economic battle is over productivity.
US Potential GDP(Average Annual Growth)
Source: Congressional Budget Office, “The Budget and Economic Outlook 2018-2028” April 2018
https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53651-outlook.pdf
1950
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1973
1974-
1981
1982-
1990
1991-
2001
2002-
2007
2008-
2017
2018-
2022
2023-
2027
Potential GDP 4.0 3.3 3.2 3.2 2.8 1.4 2.0 1.8
Potential
Labor Force1.6 2.5 1.6 1.3 0.9 0.5 0.6 0.4
Potential
Labor Force
Productivity
2.4 0.8 1.6 1.9 1.9 0.9 1.4 1.4
• Economic Potential
Shrinks from 3% to 2%
• Need Higher
Productivity to Offset
Slower Labor Force
Growth
Agriculture has two ways to increase productivity.
Efficiency: Producing the same products with less inputs
Value-added: Producing higher valued products
Supply-oriented vs Demand-oriented
Productivity
(Dollars per input)=
Efficiency
(Output per input)X
Value-added
(Dollar per Output)
Demand-Oriented AgricultureWho is a “Foodie”?
• International Food Information Council Foundation survey
• In 2017, 1 out of 7 people were identified as a “Foodie”
Demographic Characteristics
• Older
• Female
• Wealthy
3 Attributes of Healthy Food
• No artificial ingredients or additives
• High in healthy components
• Minimally processed
60% can name a food or nutrient associated with their most desired health benefit.
Value-Added: Why Now? Millennials: What do they eat?
Birth Year Generation Age Today
1928 – 1945 Silent Generation 73 to 90 years old
1946 – 1964 Baby Boomers 54 to 72 year old
1965 – 1980 Generation X 38 to 53 years old
1981 – 1995 Millennials 23 to 37 years old
1996 - Generation Z 22 and younger
Source: Pew Research Center
How are the Different Generation Perceived?
What Shaped their Formative Years?
https://www.purdue.edu/vpsl/resources/GenZ.html
U.S. Generations
How are Millennials Changing U.S. Food Consumption Patterns?
1. Truth from Food Manufacturers Transparency
2. Love customization Individual foods
3. Want easy Convenience vs Taste
4. Redefining “Healthy” Organic or Locally-Grown
5. Better baby food Gourmet baby food
6. Value the planet Sustainable
7. Love to snack Small, resealable packaging
8. Love the keto diet Animal protein is healthy
9. Will try anything Curious about different foods
Friends and family influence food choices
Sources: International Food Information Council and
Cara Rosenbloom, “9 ways millennials are changing the way we eat.” Washington Post, Feb. 2018.
US consumers live in urban areas.
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U.S. Urban and Rural Population(Percent of U.S. Population)
Urban Rural
Source: US Census Bureau
82.3%
17.7%
Who Receives the Value of Agriculture?
92% of the Food Dollar Reaches
Beyond the Farm Gate
Rural communities need to think regionally.
Flat farm incomes trigger the search for
value-added activity.
Urban consumers want to know
more about their food.
Consumers want
individualized products.
Tight labor markets will
lead to wage increases.
Shrinking rural populations
mean more urban labor for agriculture.
Agricultural Demand Agricultural Supply
Increased interdependence of rural and urban communities.
Workforce and Career DevelopmentTechnical, Professional, and Life Skills
• Urban farm
• Commercial kitchen
• Create space for youth and adults
Two Agricultures are Emerging, Does your region have the ecosystem prepared?
Commodity Agriculture
• Tight margins: low cost
• Consolidation and large scale
Value-Added Agriculture
• High margins: higher cost
• Small, medium scale
Supply or Demand Oriented?
Marketing: Commodity Prices or Business Marketing?
Risk Management: Price and Production Risk or Business Relationship/Contract Risk?
Lending: Credit Scoring or Relationship-based Lending?
Infrastructure: Transportation and/or Communications (Broadband)?
