Set tone for farm economy
Non-farm economic conditions — what's happening in the national and even international economies — set the stage for what happens with farm prices and farm income.
The job market and overall economic growth are two of the factors cited by Steve Deller, professor of Agricultural and Applied Economics at the UW-Madison, speaking at the ninth annual Wisconsin Agricultural Economics Outlook Forum.
He cited figures showing that 'we are right back to where we were just before the Great Recession.' The national economy is growing, but only modestly. In a survey, economists arrived at a consensus that the U.S. economic growth rate will be at about 2.6 percent in the coming year. That's a little below the 3.2 percent average growth rate seen since 1947.
As far as the overall state ag economy, Deller said: 'We all know Wisconsin has an $88 billion agricultural economy. But that figure is probably on the high side.'
Since that tally of the state's farm economy was done, processors have taken significant losses, especially in dairy, he said. 'There is a debate on how often we should really do that kind of update on the value of the ag economy and we decided to do it every five years.'
The five-year mark was chosen because then there is useful data from the U.S. Census of Agriculture. Estimates done every year would potentially fluctuate pretty wildly.
Today, with commodity prices down and the imminent closure of significant ag-related processors in the state — Oscar Mayer and Tyson — a better current tag on the state's ag economic value would be lower, somewhere around $65 billion, he told reporters.
The growth in other ag-related economic areas like local foods is 'not enough to offset the losses from these major processors,' Deller said.
The Wall Street Journaldoes a monthly survey of 72 economists, which showed a belief that the U.S. Gross Domestic Product (GDP) would grow this year at 2.6 percent as of December 2015. (The January figures aren't out yet.)
The unemployment rate is expected to stabilize around 4.6 percent over the next two years, he said, slightly below the 5.8 percent average since 1947. Deller noted that this figure doesn't reflect the number of 'discouraged' workers who have left the labor market or who are 'underemployed.'
Still he said, 'unemployment is going in the right direction.'
There has been job growth since the Recession, but income hasn't kept pace. In 1999, the average U.S. income was $64,900 and now it stands at $57,800. Deller said that statistics represents the 'hollowing out of the middle class.'
A major structural problem for the U.S. economy and for Wisconsin is the declining middle class and widening income inequality. This brings uncertainty into the picture and clouds the crystal ball for economists.
Another element that brings uncertainty is the economic outlook of our trading partners, especially China. The trading picture is important for dairy, beef, pork and other agricultural exports.
Inflation stands at a modest 2 to 2.5 percent. Since 1947 the average rate of inflation has been 3.6 percent, using the Consumer Price Index, a set of data kept by the U.S. Department of Labor. He said forecasters expect inflation rates to remain modest for the 'foreseeable future.'
Deller noted however, that big swings in the prices for food and energy can skew the inflation rate. 'Recent forecasts of energy prices, particularly oil prices, have been wildly inaccurate.' That comes, at least in part, from the fact that oil is controlled by relatively few influencers and their behavior can be difficult to predict.
Gasoline is now cheaper than it was in the 1960s, he said, once inflation is calculated into the price.
Interest rates, which have been almost zero for years, are beginning to tick upward. Forecasters believe that the U.S. Federal Reserve Bank will continue to boost interest rates upward in coming months and years. The Federal Fund Rate was recently raised from zero to 0.25 percent and is expected to rise to about 2.2 percent in the next two years.
The Wisconsin economy is in a weak recovery from the Great Recession with job growth 'below what we would have expected given national growth rates and historical patterns. Unemployment rates are reasonable but the number of discouraged workers remains an issue.'
Deller noted that economists believe there is less than a 15 percent chance of going into recession in the next year.
Another element that influences the ag economy is the value of the dollar because it influences the price of our agricultural exports. A strong dollar makes it difficult for our dairy products, beef, pork, poultry or feed grains to compete against those products from other exporting nations.
Deller said all the signs indicate that the U.S. dollar will remain strong. 'Our economy – compared to others in the world -- is strong and stable right now and appears likely to remain so.'