The Minnesota Agri-Growth Council Annual Meeting and Speakers Conference is the organization’s premier annual event, bringing together key stakeholders in the food and agriculture industry from Minnesota and the Upper Midwest. As part of this program, Jason Henderson, an Omaha Branch Executive of the Federal Reserve Bank of Kansas City, presented on monetary policy and food prices.

2. Monetary Policy and Food Prices Jason Henderson Omaha Branch Executive Federal Reserve Bank of Kansas City The opinions expressed are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

4. The Balancing Act of Monetary Policy Sustainable Economic Growth (Unemployment) Price Stability (Inflation)

5. Market fundamentals drive ag prices. Monetary policy is an amplifier. Percent of annual use Dollars per bushel Source: USDA U.S. Corn Inventory and Farm Price

7. High farm incomes in low interest rate environments. 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)

8. In 1900, only a few counties had land values with more than $1000 per acre. Real Farmland Values in 1900 Source: USDA

9. By the end of WWI, $2000 to $3000 per acre was common. Real Farmland Values in 1920 Source: USDA

10. By the end of the Great Depression, land values were back to 1900 values. Real Farmland Values in 1940 Source: USDA

11. By 1970s, productivity gains had boosted farmland values. Real Farmland Values in 1969 Source: USDA

12. Farmland values surged in the 1970s. Real Farmland Values in 1982 Source: USDA

13. Within 5 years, farmland values dropped back to 1969 levels. Real Farmland Values in 1987 Source: USDA $3,000 or more $2,000 to $3,000 $1,000 to $2,000 $500 to $1,000 $500 or less

14. Today, robust energy and agricultural prices spur cropland value gains. Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City Non-irrigated Cropland Values (Percent change 2010:Q2 to 2011:Q2)

16. Soaring global food prices start to ease World Food Prices Source: FAO of the United Nations 2011 2008 2010 2009 Index

17. Yet, U.S. food prices continue to rise, especially for food consumed at home. Percent change from previous year U.S. Food Price Inflation Source: Bureau of Labor Statistics

20. Rising food prices stress household budgets, especially the poor. Source: USDA Percent Food Share of Household Expenditure by Country, 2010 Poorest 20% in the U.S. spend 35% of household income on food.

21. Food price inflation is projected to slow. Source: USDA 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

24. Inflation is based on money and velocity. Definition of Inflation: Too much money chasing too few goods M V Q Quantity Theory of Money M oney * V elocity P rice = Q uantity

25. The monetary base is not money supply. Source: Federal Reserve Board of Governors Growth in Monetary Aggregates Index (Jan 2000=100)

26. Banks are holding monetary base in excess reserves. Source: 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.