thomas m hoenig : recent developments in us agriculture and its role in the us economy statement by mr thomas m hoenig, president of the federal reserve bank of kansas city, before the senate committee on agriculture, nutrition and forestry, washington dc, 17 february 2011. * * * thank you, madam chair. i appreciate the opportunity to discuss recent developments in u. s. agriculture and its role in the u. s. economy. agriculture remains a vital industry in the expansive region that the federal reserve bank of kansas city serves and, accordingly, our bank has a long tradition of focusing significant attention on industry developments. our observations on agriculture, in turn, have given us useful insight into the u. s. and global economies more broadly. in my remarks this morning, i ’ ll describe recent developments in the nation ’ s farm economy and discuss some risks that have my attention. recent developments in u. s. agriculture agriculture – broadly defined as farm production and output from related industries – accounts for almost one - sixth of u. s. jobs and economic activity. while the farm share of economic output has declined as other parts of our economy have grown, increased activity in broader agricultural industries – manufacturing, transportation, distribution and food retailing – has opened new job opportunities in both rural and metro communities. a robust agricultural sector cushioned the rural economy in our and other regions across the nation during the recent recession, and the industry ’ s strength is supporting further improvement in the rural economy today. in 2010, strong demand and tight supplies for most farm commodities contributed to a sharp rebound in farm profits, which then supported sales in farm equipment and other farm - based industries. strong profits from agriculture also girded important elements of our rural financial system. commercial banks with large agricultural loan portfolios posted stronger returns than their peers over the past three years. while more than 300 commercial banks failed during this time, only 22 were agricultural banks. agriculture is also benefitting directly from the rebounding economic strength of china and other emerging market economies, where rapid income growth is driving up food demand. the united states remains a net exporter of agricultural products, shipping more than 40 percent of its wheat, cotton, soybeans and rice crops to foreign countries in 2010. united states crop and meat exports are expected to rise to record highs in 2011. looking out a little further, economists expect global growth to exceed 4 percent well into 2012, with the developing and emerging market economies remaining in the lead. rapid

5 percent, the capitalized value of irrigated farmland in eastern nebraska could fall by a third to $ 3, 300 per acre ( chart 3 ). if capitalization rates would rise to 10 percent as they did during the 1980s farm crisis, land values could drop by half. additional analysis suggests that other regions face similar interest rate risks. rising interest rates could also cut farmland values by reducing farm revenues. higher interest rates tend to raise exchange rates, which limits agricultural exports, in turn depressing commodity prices and farm revenues. in 1981, the spike in real interest rates led to higher exchange rates and contributed to lower agricultural exports. with falling exports, commodity prices and farm revenues dropped, which pushed farmland values to their 1985 lows. if a similar event occurred today, farmland values could fall. for example, if capitalization rates return to their historical average and corn prices drop to $ 4 per bushel, their 2009 average, irrigated land values in eastern nebraska could fall almost 50 percent to $ 2, 700 per acre ( chart 4 ). other regions face similar risks. in sum, rising interest rates could trigger a sharp decline in farmland values. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches