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Rural Economy Humming; Bankers Fear Bubble May Burst

are we on the verge of a land bubble burst
While the rural economy continues to gain strength and momentum, some bankers fear the economic bubble that rural America is enjoying may burst.

Take a bunch of kids, a package of balloons, and mix thoroughly with a hot, sultry summer afternoon. Before long, pandemonium will prevail as water-balloon wars fill the air with brightly colored projectiles. Balloons are stretched tight as the combatants gird for another assault; so tight, in fact, that sometimes they burst before being lobbed at the intended victims.

Take a drought and an ethanol-fueled corn demand and mix thoroughly with a cheap money policy. Before long, pandemonium will prevail as the battle to own farmland heats up the rural economy. The question is whether the rural economic balloon is being filled to its breaking point?

Some ag bankers fear it might be, according to responses to the monthly 10-state rural mainstreet survey of rural bank CEOs conducted by Creighton University economist Ernie Goss.

The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, dipped to a still healthy 56.9 in March from February’s 58.2. “Very healthy farm income continues to boost the rural mainstreet economy though growth has slowed a bit,” Goss says.

However, more and more bankers are concerned about recent strong growth. For example, Dale Bradley, CEO of The Citizens State Bank in Miltonvale, KS, says, “I still think we are on the bubble.”

Here’s what the March survey revealed:

Farming: The farmland price index (FPI) expanded slightly to a strong 67.2 from February’s 67.0, the 40th consecutive month that FPI has been above growth neutral.

“Current readings are consistent with farmland price growth between 12% and 16%. The farm equipment-sales index declined to 60.5 from 65.8 in February. The Federal Reserve’s cheap money policies continue to bolster farm commodity prices, farm income, farmland prices and farm equipment sales. The Fed has indicated little change in this pro-agriculture money policy for 2013, which means we’ll likely continue to see healthy growth in farmland prices and farm equipment sales,”says Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

This month, bankers were asked several questions related to ag conditions in the region.

  • First, they were asked how much they expected the cost of farm/ranch inputs, such as fertilizer, to increase in 2013. On average, bankers anticipate a 6.5% growth over last year. Jeff Bonnett, president of Havana National Bank in Havana, IL, says he’s expecting a 9% growth.
  • Bankers also were asked how much growth they expected in agriculture land rents for 2013. A 9.3% increase in cash rents for farmland is expected for 2013.
  • Finally, bankers were asked to gauge the growth in the financing of farmland purchases over the past 2-5 years. About 3.2% of bank CEOs say they’re seeing the highest expansion in the financing of farmland in decades, while 52.4% indicated an increase in farmland financing. Another 19% reported no change in the percentage of farmland purchases that were financed, while 28.6% indicated a reduction in financing of farmland sales (i.e., an increase in cash sales).

Banking: The loan-volume index moved above growth neutral for the month to a tepid 51.5 from February’s weak 46.7. The checking-deposit index advanced to 70.5 from 67.2 in February, while the index for certificates of deposit and other savings instruments sank to 42.4 from last month’s 47.6. “Banking data continue to reflect healthy farm income and an expanding rural mainstreet economy,” Goss says. 

Hiring: March’s new hiring index (NHI) slipped to 54.9 from 59.4 in February, but remains higher than January’s 52.4. “The growth rate in new hiring has been trending upward. Since the beginning of 2011, rural companies have been adding new workers.  However, the pace of that new hiring began to increase in October 2012,” Goss says.

Confidence: The confidence index, which reflects expectations for the economy six months out, strengthened to 52.3 from 51.7 in February. “The failure of Washington to pass a new farm bill continues to weigh on the rural mainstreet outlook,” Goss says.

Additionally, weather concerns remain an issue. David Callies, CEO of Miner County Bank in Howard, SD, reports, “Continued drought (is) still the biggest concern.”

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Home and retail sales: For a second straight month, the homes sales index (HSI) took a large positive jump. March HSI soared to 69.2 from February’s 65.0, while the March retail-sales index advanced to 51.6 from 46.6 in February and January’s 44.5. “Rural mainstreet consumers remain very cautious in terms of their retail purchases,” 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, agriculturally and energy-dependent portions of the nation. RMI is a unique index covering 10 regional states, focusing on 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: For a sixth straight month, Colorado’s RMI moved above 50.0, rocketing to 75.2 in March from February’s 61.1. The FRI and ranchland price index (RPI) expanded to 71.2 from February’s 70.2. Colorado’s NHI for March expanded to 67.8 from 54.6 in February.

Illinois: RMI in March remained above growth neutral for the sixth consecutive month, but declined to 56.9 from February’s 61.4. FPI declined to 68.1 from February’s 71.2, and NHI increased to 57.1 from last month’s 55.3. In contrast, Jim Eckert, president of Anchor State Bank in Anchor, says, “Area small towns are in decline and small businesses are not doing well. Reduction of hours at rural post offices has affected the ability to do business and caused additional declines in customer traffic.”

Iowa: March RMI moved to 65.2 from February’s 59.8, while FPI declined to 66.7 from 70.4 in February. NHI for March improved to 61.3 from February’s 54.7.

Kansas: RMI for March rose to 52.8 from 47.2 in February. FPI climbed to 69.1 from February’s 60.0, and the state’s NHI expanded to 57.8 from 47.8 in February.  

Minnesota: March RMI fell to a strong 66.8 from February’s 73.4, while FPI sank to 72.1 from February’s 83.3, and NHI fell to 59.8 from February’s 63.3.

Missouri: March RMI shrunk to 56.3 from February’s 64.5, while FPI climbed to 74.1 from February’s 67.5, and NHI soared to 61.1 from 52.8 in February.

Nebraska: After moving below growth neutral for January, Nebraska’s RMI broke above growth neutral for two straight months, with March RMI expanding to 54.9 from February’s 52.7. FPI advanced to 65.4 from 60.7 in February, and NHI increased to 58.0 from February’s weak 48.3.Bill McQuillan, president of CNB Community Bank of Greeley, says, “Our pastures were 75% moisture-deficient from our average rainfall during 2012 because of the drought. We will need at least 20 in. of rain this year before we will be able to utilize our livestock pastures.”

North Dakota: March RMI fell to 61.2 from February’s regional high of 78.9. FPI declined to a robust 79.8 from 86.4 in February, and NHI decreased to 63.4 from 75.1 in February. 

South Dakota: March RMI improved to 58.8 from February’s 54.1, while FPI fell to 62.4 from 65.0 in February, and NHI for March advanced to 58.4 from 51.1 in February.

Wyoming: March RMI declined to 52.8 from 54.1 in February, while FPI and RPI decreased to 61.8 from 64.6 in February. NHI climbed above growth neutral with a March reading of 53.9, which was up from February’s 51.9.


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