Monetary Policy and Food Policy

8/3/2019 Monetary Policy and Food Policy

http://slidepdf.com/reader/full/monetary-policy-and-food-policy 1/27



Monetary Policy and Food PricesJason Henderson

Omaha Branch ExecutiveFederal Reserve Bank of Kansas City

The opinions expressed are those of the author and do not necessarily reflect theviews of the Federal Reserve Bank of Kansas City or the Federal Reserve System.



The most asked question of a Fedeconomist:

• What will interest rates do in the next six months?

• The answer:

– FOMC Statement, November 2, 2011

The Committee also decided to keep the target range for the

federal funds rate at 0 to 1/4 percent and currently anticipates that

economic conditions--including low rates of resource utilization and

a subdued outlook for inflation over the medium run--are likely towarrant exceptionally low levels for the federal funds rate at least

through mid-2013.



The Balancing Act ofMonetary Policy

SustainableEconomic Growth

(Unemployment)

Price

Stability

(Inflation)



Market fundamentals drive ag prices.Monetary policy is an amplifier.

0

1

2

3

4

5

6

7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

U.S. Stocks-to-Use Ratio (Left Scale)

Average Annual Farm Price (Right Scale)

Percent of annual use Dollars per bushel

Source: USDA

U.S. Corn Inventory and Farm Price



What are the Implications forAgriculture?

Agriculture’s “Golden Eras” emerged during low interest rate environments.

• Through a weak dollar, farm incomes surge in low interest

rates environments.• Farmland values boom as low interest rates boost the

capitalization of farm incomes.

• The “Golden Eras” of agriculture –

1910s: low rates used to finance WWI – 1970s: low rates to stimulate growth – 2000s: low rates used to combat “Jobless Recoveries”



High farm incomes inlow interest rate environments.

-5.0

-2.5

0.0

2.5

5.0

7.5

0.0

25.0

50.0

75.0

100.0

125.0

1970 1975 1980 1985 1990 1995 2000 2005 2010

Constant 2005 dollars (billions) Percent

Source: Henderson and Briggeman (2011), “What are the Risks in Today’s Farmland Market?” Main Street Economist , Issue 1.

Farm Incomes and Interest Rates

Yield on 1 Year Treasury

adjusted for inflation

(Right Scale)

Real Net Farm Incomes

Less Government Payments

(Left Scale)



In 1900, only a few counties had landvalues with more than $1000 per acre.

$3,000 or more

$2,000 to $3,000

$1,000 to $2,000

$500 to $1,000

$500 or less

Real Farmland Values in 1900

Source: USDA



By the end of WWI,$2000 to $3000 per acre was common.

$3,000 or more

$2,000 to $3,000

$1,000 to $2,000

$500 to $1,000

$500 or less


Source: USDA



By the end of the Great Depression,land values were back to 1900 values.


$3,000 or more

$2,000 to $3,000

$1,000 to $2,000

$500 to $1,000

$500 or less

Source: USDA



By 1970s, productivity gains hadboosted farmland values.

$3,000 or more

$2,000 to $3,000$1,000 to $2,000

$500 to $1,000

$500 or less


Source: USDA



Farmland values surged in the 1970s.

$3,000 or more

$2,000 to $3,000$1,000 to $2,000

$500 to $1,000

$500 or less


Source: USDA



Within 5 years, farmland valuesdropped back to 1969 levels.


$3,000 or more

$2,000 to $3,000$1,000 to $2,000

$500 to $1,000

$500 or less

Source: USDA



Today, robust energy and agricultural pricesspur cropland value gains.

Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City

Non-irrigated Cropland Values(Percent change 2010:Q2 to 2011:Q2)



What are the Implications forAgriculture?

• The Benefits – Farm incomes are high

– Farmland values boom

• The Costs – Food prices escalate, especially for the poor.

– Depending on your perspective, food vs. fuel.



Soaring global food prices start to ease

120

140

160

180

200

220

240

260

120

140

160

180

200

220

240

260

J F M A M J J A S O N D

World Food Prices

Source: FAO of the United Nations

2011

2008

2010

2009

Index



Yet, U.S. food prices continue to rise,especially for food consumed at home.

-4

-2

0

2

4

6

8

10

-4

-2

0

2

4

6

8

10

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Food Away From Home

Food at Home

Overall Food Prices

Percent change from previous year

U.S. Food Price Inflation

Source: Bureau of Labor Statistics



Why is there a difference betweenworld and U.S. food price inflation?

Source: USDA

Commodities account for a smaller share of processed foods.

Farm share of U.S. food dollar

Beef products 45 cents

Milk products 30 cents

Fruits andvegetables 25 to 28 cents

Bread 4 cents

Corn flakes 4 centsCorn syrup 3 cents

The U.S. Food Marketing Bill

2008

1) Labor 40%

2) Farm value 16%

1960s to 1970s

1) Farm value 33%

2) Labor 29.5%



Rising food prices stress householdbudgets, especially the poor.

6.89.8

11.0

14.8

22.3

24.8

27.7

38.0

40.6

41.9

43.7

0 10 20 30 40 50

U.S.Canada

Germany

Japan

China

Brazil

India

Egypt

Jordan

Pakistan

Algeria

Source: USDAPercent

Food Share of Household Expenditure by Country, 2010

Poorest 20% in the U.S. spend 35%

of household income on food.



Food price inflation is projected to slow.

Commodity 2011 2012

Overall Food 3.5 to 4.5 2.5 to 3.5

Food away from home 3.0 to 4.0 2.0 to 3.0

Food at home 4.0 to 5.0 3.0 to 4.0

Meats 6.5 to 7.5 3.5 to 4.5

Dairy products 5.0 to 6.0 3.5 to 4.5

Fruits and vegetables 3.5 to 4.5 3.0 to 4.0

Sugars 2.5 to 3.5 2.0 to 3.0

Cereals 4.0 to 5.0 4.5 to 5.5

Source: USDA



Food vs. Fuel

What we know: Ethanol is based on

mandates, tariffs, and subsidies.

•What are the public benefits?

•Can we afford it?

•Is ethanol environmentally sustainable?

•What is the impact on global food prices?

•How long before advanced ethanol is viable?

Ethanol policy is being scrutinized again.Will the answers be different?

•Does it reduce our dependence on foreign oil?



What are the Risks forAgriculture?

• Future inflation – Inflation rose in 2011

• Headline CPI inflation: 3.9% over the past year.

•Core CPI inflation: 2.0% over the past year.

• Yet, forecasts suggest slower inflation in 2012.

• Inflation expectations remain stable.

Ultimately, velocity is the key to inflation.



M oney * V elocityP rice =

Quantity

Definition of Inflation:

Too much money

chasingtoo few goods

M

V Q

Quantity Theory of Money

Inflation is based on money and velocity.



The monetary base is not money supply.

100

150

200

250

300

350

400

450

500

100

150

200

250

300

350

400

450

500

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

M2

Monetary Base

Source: Federal Reserve Board of Governors

Growth in Monetary Aggregates

Index (Jan 2000=100)



Banks are holding monetary basein excess reserves.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10Source: Federal Reserve Board of Governors

Excess Reserves in Depository Institutions

Trillion dollars

When will inflation start?Banks start lending

Consumers start spending

Businesses start investing

In short, if excess reserves fall

before the Fed balance sheet.



Conclusions

• Market fundamentals drive market prices, monetarypolicy is an amplifier.

• Agriculture’s “Golden Eras” emerged in low interest rate

environments.

• Agriculture enjoys booming farm incomes and landvalues, but …

• Urban consumers bear the burden of higher food prices.

• Velocity will shape inflation in the future.

The key is bank lending, consumer spending,

and business investment.

Monetary Policy and Food Policy

Documents

Transcript of Monetary Policy and Food Policy