HUNTIN' DAYLIGHT -- ROCK BOTTOM...MAYBE

by: Wes Ishmael

“Much of the recent economic data suggest that the economy has bottomed out and that the worst risks are behind us. The economy seems to be brushing itself off and beginning its climb out of the deep hole it's been in... This summer likely marked the end of the recession and the economy should expand in the second half of this year,” said Janet Yellen, President and CEO, Federal Reserve Bank (FRB) of San Francisco September 14.

A day after Yellen made those comments, Ben Bernanke FRB chairman spoke at the Brookings Institution. During questions and answers after his speech, Bernanke is widely reported to have said the Great Recession was over, at least from a technical standpoint. Wall Street surged on the news. Major financial indices—Dow, NASDAQ and S&P 500—closed at their highest levels in a year.

The Great Recession is Dead

Though markets remain fragile and volatile, there are plenty of signs that the nation's economy is on the cusp of recovery, including:

Industrial growth and capacity—Industrial output rose 0.8 percent in August, following an upwardly revised increase of 1.0 percent in July. The gain in July for manufacturing was revised up 0.4 percent, to 1.4 percent. In August, the capacity utilization rate for total industry advanced to 69.6 percent, albeit, a level 11.3 percent below its average for the period 1972 through 2008.

Personal Savings Rate—averaged about 10 percent in the mid 1980's, plunged to approximately 1.5 percent in recent years. So far this year, consumers have reversed course by choice and necessity to lift personal savings rate to about 4.5 percent.

Home sales and prices—Though still negative, average home sales and prices in most major markets have made gains during the past couple of months, according to the most recent S&P/Case-Shiller Home Price Indices

“A particularly hopeful sign is that inventories, which have been shrinking rapidly, now seem to be in better alignment with sales,” Yellen said. “That's occurred because firms slashed production rapidly and dramatically in the face of slumping sales. Recent data suggest that this correction may be near an end and firms are now poised to step up production to match sales. In fact, I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers.”

Long Live the Great Recession

Of course, there are also plenty of reasons to suggest getting back to an economy akin to what it was prior to the recession is going to take some long, hard slogging.

“…The gradual expansion gathering steam will remain vulnerable to shocks,” Yellen explained. “The financial system has improved but is not yet back to normal. It still holds hazards that could derail a fragile recovery. Even if the economy grows as I expect, things won't feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years (9.7 percent currently), meaning hardship for millions of workers. Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee (FOMC) best promotes the Fed's dual mandate for full employment and price stability.

That queasy economic feeling applies to agriculture, too.

In September, USDA economists projected net farm income at $54.0 billion in 2009, down $33.2 billion (38 percent) from the preliminary estimate of $87.2 billion for 2008. The 2009 forecast is $9 billion below the average of $63.2 billion in net farm income earned in the previous 10 years.

In other words, in 2009, average family farm household income is forecast to be $75,895, down 5.2 percent from 2008, and 8.0 percent below the five-year average for 2004-08. In 2009, the average family farm is forecast to receive 7.6 percent of its household income from farm sources, with the rest from earned and unearned off-farm income.

The expected plunge in farm income, of course, has plenty to do with the fact that commodity prices feel like they're back within the sphere of reality, compared to a year ago.

“For most U.S. crops, market prices have declined from last year's peaks but remain well above pre-2007 levels,” said Pat Westhoff, senior economist and co-director of the University of Missouri Food and Agricultural Policy Research Institute (FAPRI). He was alluding to that organization's mid-year baseline price projections, a limited update of the 10-year projections released last March.

“On the livestock side, the baseline shows recovery in 2010 for meat and dairy prices but depends on general economic recovery and continued reduction of supplies,” said Scott Brown, FAPRI livestock economist.

In the cattle sector, Brown said the outlook depends on where you are in the supply chain.

Though declining commodity prices are pulling back feedlot breakevens, feedlots have endured a historic blood-letting of equity. The baseline projects price recovery for fed cattle based on a declining to steady supply. Fed cattle projected at $85 per hundred this year will rise to $93 in 2010 and $98 in 2011. All are projections are based on Nebraska direct sales.

Feeder steers at Oklahoma City are projected at $103 per hundred this year, followed by $115 in 2010 and $123 in 2011.

Corn prices for this marketing year are projected at $3.47 per bushel, down from $4.05 last year. By the end of the shortened baseline, prices are back at $3.98.

Corn plantings continue to rise through the baseline from 88.5 million acres next year to 90.4 million acres in 2014. Added acres come largely from cotton and sorghum plantings.

Soybean acres remain stable, going from 77.9 million acres next year to 78 million acres in 2014.

Soybean prices, projected at $9.44 per bushel for this marketing year, decline to $9.12 next year, then rise steadily to $9.74 by 2014.

“Lower petroleum prices have reduced production costs,” Westhoff said. Those lower prices also reduce demand for bio-fuel. This lowers demand for corn and soybeans, major sources of those fuels.

Incidentally, peak cull cow prices are likely past for 2009, according to the Livestock Marketing Information Center (LMIC).

“Looking ahead, fall cull cow prices will likely continue to erode at least well into the fourth quarter of this year as dairy cow slaughter remains large and pork prices keep beef sales on the defensive,” say LMIC analysts. “Rather large dairy cow slaughter is expected to continue into at least early 2010. Overall, in 2010 cull cow prices are forecast to rebound compared to 2009's as supplies of cull cows are expected decline.”

According to LMIC, Federally Inspected (FI) total cow slaughter on a weekly average basis in 2009—as of the end of August (latest actual data)—has been nearly two percent larger than 2008 and more than 16 percent higher than the 2003-2007 average. Through the end of the August FI dairy cow slaughter was 15 percent more than in 2008 and about 21 percent more than the prior five-year average. During the same eight months of 2009 FI beef cow slaughter was nearly 8 percent less on average than a year ago, but when compared to the 2003-2007 average was still roughly 13 percent more. Through mid-August this year dairy cow slaughter accounted for six percent more (46 percent) of the total cow slauughter mix than a year ago.

“Cull prices in the Southern Plains have averaged lower than last year during the first eight months of 2009, due to many factors including, but not limited to: larger imports of lean beef (especially from Australia and New Zealand), a year-to-year decline in cow byproduct (e.g. hides) values, very low wholesale pork prices, and increased U.S. cow slaughter,” say LMIC analysts. “From January through August, lean cull cow prices on a weekly basis in the Southern Plains averaged just under $48/cwt., 12 percent lower than 2008's and six percent less than the 2003-2007 average price. So far this year, cull cow prices peaked in late June at just below $55/cwt.”

Overall, Brown cautions as the economy recovers, demand for agricultural products increases, raising prices. At the same time, demand and prices for oil also increase. Oil prices, which hit $145 per barrel leading into the recession, are projected to average $61.31 per barrel for 2009-10. By 2015, the end of the baseline, the price rises to $94 for West Texas intermediate crude.

“The slow recovery I expect means that it could still take several years to return to full employment. The same is true for capacity utilization in manufacturing. It will take a long time before these human and capital resources are put to full use,” Yellen explained.

Similarly, in his Brookings Institution speech, Bernanke emphasized, “Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives.”







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