While farm income appears to be holding strong, businesses linked to agriculture continue to experience pullbacks in economic activity.

Burt Rutherford, Senior Editor

September 26, 2012

6 Min Read
Rural Economy Remains Below Growth Neutral

In this most political of political times, both presidential candidates are ratcheting up their rhetoric on the economy. Largely absent from the discussion, however, are comments about rural America and the economic situation on the main streets of small, agricultural communities.

Perhaps that’s because more and more people outside agriculture have heard of the astronomically high prices for many ag commodities and assume that means that all’s good down on the farm. However, whoever occupies the White House next January will have a mixed bag to address when he turns his thoughts to U.S. agriculture.

One of the most up-to-date lenses on the rural economy is the monthly Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral. For September, the RMI came in at 48.3, up slightly from 47.1 in August and 47.9 in July, but the third straight month below growth neutral.

“The drought continues to dampen economic activity for businesses linked to agriculture, such as ethanol and agriculture-equipment sellers. I expect food processors to take a hit later in the year as higher food prices work their way through the system,” says Ernie Goss, the Creighton University economist who calculates the monthly RMI.

Here’s a breakdown of the elements that constitute the overall RMI Index: 

Farming: After declining for three straight months, the farmland-price index (FPI) moved higher, climbing in September to 61.6, its highest level since May of this year, and up from 52.8 in August. “Bankers in some parts of the region are reporting farmland prices as high as $20,000/acre. Despite the drought, farmers continue to put more air into the farmland price bubble. This is the 32nd consecutive month that FPI has risen above growth neutral. The farm-equipment-sales index rose to a growth neutral 50.0 from August’s very weak 38.3,” Goss says.

Bank CEOs were asked this month to project farmland price growth for the next year. There was a great deal of variation across the 10-state region with an average gain of 3% expected. The most drought-affected areas expected the least growth. About 13% of the bankers expect price declines over the next year, up from 9% this time last year.

Banking:  Farmers increased their demand for loans, as the loan-volume index climbed to 70.2 from 67.6 in August, the seventh consecutive month of increase. The checking-deposit index weakened to 48.3 from 49.1 in August, while the index for certificates of deposit and other savings instruments rose to an anemic 38.4 from 33.0 in August.

“As in previous months, the drought appears to be increasing the cash needs of farmers in the region. We’ve been tracking a reduction in the percent of farmland and farm-equipment cash sales and upturns in the degree of bank financing,” Goss says. 

As part of the September survey, Goss asked bankers about the expected impact of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act on their bank’s costs. On average, the CEOs expect Dodd-Frank to increase their bank’s costs by 9%. More specifically, 58% of bankers surveyed expect their costs to increase 2-9%, 36% expect costs to rise 10-15%, and 6% anticipate a 15% increase or more.

Some bankers say it doesn’t stop there. Michael Flahaven, president of Wenona State Bank in Wenona, IL, expects a third round of qualitative easing (QE3), along with current low loan demand and low interest rates into 2015, to “kill” small community banks.

Hiring: September’s new hiring index (NHI) declined to 50.9 from 51.9 in August. “Even though we tracked hiring growth for the month, the index is trending down. I expect job losses in the months ahead as the impacts of the drought spread to more and more rural mainstreet businesses,” said Goss.

Confidence:  The confidence index, which reflects expectations for the economy six months out, increased to a frail 43.0 from August’s 39.6 and well down from June’s much stronger 58.5. “The drought along with a lethargic national economy is negatively affecting the business confidence of bank CEOs in the region,” Goss says.

Home and retail sales: The September home-sales index slipped to a solid 58.8 from 60.2 in August. “As in the national economy, the rural mainstreet housing market is improving,” Goss says.

State-by-state outlook

Each month, community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of a 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculture and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300.

Colorado: For a second straight month, Colorado’s RMI was below growth neutral, rising to 45.2 from 25.2 in August. The FPI and ranchland price index (RPI) increased to 48.4 from 44.2. Colorado’s September NHI was 39.8, which was down from 43.0 in August.

Illinois: For a fourth straight month, the RMI for Illinois remains below growth neutral. September climbed to a weak 48.0 from 34.4 in August. Farmland prices bounced back above growth neutral to 54.6 from August’s 45.3. The state’s NHI increased to 44.0 from August’s 43.7.

Iowa: RMI slipped to 48.7 from August’s 49.2, while FPI advanced to 62.8 from August’s 57.2. NHI for September dipped to 49.4 from 51.6 in August.

Kansas:RMI slipped to 49.5 from 50.1 in August, and FPI rose to 62.8 from August’s 53.2. The state’s NHI increased slightly to 49.1 from August’s 48.9.

Minnesota: September RMI fell to 51.7 from August’s 52.9, while FPI jumped to 71.1 from August’s 60.3. NHI rose to 54.9 from August’s 53.7.

Missouri: RMI rose from August’s 39.8 to a regional low of 41.6, while FPI increased to 50.2 from August’s 44.6. NHI advanced to 48.1 from 31.6 in August.

Nebraska: For a third straight month, growth in Nebraska’s rural economy remained in negative territory. RMI rose to 48.8 from 44.1 in August, FPI advanced to 59.2 from August’s 48.9, and NHI expanded to a weak 47.0 from 46.0 in August.Cameron Mathis with Tilden Bank in Creighton, says the harvest is progressing with yields on dryland better than expected and corn yields on irrigated land very good.

North Dakota: RMI declined, but remained strong with a regional high of 60.5, down from 72.1 in August. FPI was unchanged from August’s 68.9, and NHI rose slightly to 68.0 from August’s 67.8.

South Dakota: RMI dipped to 48.3 from 52.2 in August, while FPI climbed to 58.1 from August’s 49.3, and NHI was unchanged from August’s 46.3.     

Wyoming: RMI expanded to 46.9 from August’s 36.7, while the September FPI and RPI expanded to 52.9 from August’s 49.5. NHI remained below growth neutral with a September reading of 42.9, down from 46.4 in August.

About the Author(s)

Burt Rutherford

Senior Editor, BEEF Magazine

Burt Rutherford is director of content and senior editor of BEEF. He has nearly 40 years’ experience communicating about the beef industry. A Colorado native and graduate of Colorado State University with a degree in agricultural journalism, he now works from his home base in Colorado. He worked as communications director for the North American Limousin Foundation and editor of the Western Livestock Journal before spending 21 years as communications director for the Texas Cattle Feeders Association. He works to keep BEEF readers informed of trends and production practices to bolster the bottom line.

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