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Drought Pushes Borrowing Higher, Land Prices LowerDrought Pushes Borrowing Higher, Land Prices Lower

Drought conditions continue to weigh on the rural mainstreet economy.

Burt Rutherford

August 30, 2012

6 Min Read
Drought Pushes Borrowing Higher, Land Prices Lower

“The drought is dampening economic activity across the region,” says Creighton University economist Ernie Goss. “Companies with close ties to the farm, such as ethanol, and agriculture equipment sellers are experiencing pullbacks in growth. I expect food processors to take a hit later in the year as higher food prices work their way through the system.” 

In his monthly survey of rural banks throughout the heartland, 31% of bankers say the drought is negatively affecting business activity in their area for August. The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, declined for the third straight month to 47.1, from 47.9 in July.

RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

According to Jim Eckert, Anchor State Bank president, Anchor, IL, “Uncertainty over future tax policy and the costs of ‘Obamacare’ have many of our farm and commercial customers sitting on the sidelines in borrowing and hiring staff.”

However, rural banks have ample money to loan, according to a survey by the Kansas City Federal Reserve Bank. “Bankers indicated ample funds were available for farm loans, and interest rates edged down further,” the survey indicates.

Here’s a look at how the RMI breaks down:

Farming: According to surveys for the past several months, farmland price growth has weakened significantly. However, there is a great deal of variance across the region with irrigated areas and those not impacted by the drought continuing to report solid growth. The August farmland price index (FPI) weakened with an August reading of 52.8, down from July’s 58.6, the lowest level since July 2009.

The Kansas City Fed survey found similar results. “After surging at the beginning of the year, district farmland values rose less rapidly during the second quarter,” says Jason Henderson, Omaha branch executive. “District farmland values rose less than 3% during the second quarter, roughly half the rate of growth at the beginning of the year,” Henderson says. Non-irrigated cropland values rose solidly, while irrigated cropland values held steady and ranchland values edged up.

In spite of weakening land values, this is the 31st consecutive month that Creighton’s FPI for farmland values has been above growth neutral. The farm-equipment sales index sank to 38.3, its lowest level since October 2008, and was down from July’s 46.1.

“The drought is putting a dent in farmland price growth and the purchase of agriculture equipment, including trucks,”says Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton, Omaha, NE.

This month, bank CEOs were asked about the drought’s impact on farm borrowing. About 41% said the drought has encouraged greater agriculture borrowing. This is up significantly from July when only 29% of bankers reported an increase in borrowing as a result of the drought.

Additionally for August, 46% of bankers reported that livestock producers in their area were reducing their herd size in response to the drought. Last month, only 13% of bankers reported that livestock producers were doing so.  

Bill Hess, CEO of Iowa Savings Bank in Carroll, IA, reports that the drought and high grain prices have caused livestock finishers to reduce risk by cutting numbers.

Banking: Farmers increased their demand for loans with the loan-volume index climbing to 67.6 from July’s 65.3 – the sixth consecutive month that the index has risen.  

The checking-deposit index advanced to a weak 49.1 from 47.9 in July, while the index for certificates of deposit and other savings instruments slumped to 33.0 from July’s higher 41.7. “The drought appears to be increasing the cash needs of farmers in the region. We have been tracking a reduction in the percent of farmland and farm equipment cash sales and upturns in the degree of bank financing,” Goss says. 

Hiring: August’s hiring index declined to 51.9 from July’s 52.8. “Even though we tracked hiring growth for the month, the index was down from July and June. I expect hiring to drift lower with job losses in the months ahead as the impacts of the drought spread to more and more rural mainstreet businesses,” according to Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, sank to 39.6 from July’s 40.9 and June’s much stronger 58.5. “The drought has definitely lowered the economic and business confidence of bank CEOs in the area,” Goss says.

Home and retail sales: The August home-sales index rose to 60.2 from July’s 58.6, with the August retail-sales index rising to 45.2. That’s below growth neutral, but up from July’s 44.4. “The pace of sales for homes in the area remains positive. On the other hand, for a second straight month, drought conditions weakened retail sales,” Goss adds.

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. The RMI survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation.

Colorado: After 19 straight months with an RMI above growth neutral, Colorado plummeted to 25.2 from July’s weak 50.1 and June’s 57.6. The FPI and ranchland price index (RPI) declined to 44.2 from 61.3 in July. Colorado’s new hiring index (NHI) for August was 43.0, well down from July’s 51.8. Mike Bass, president of the First National Bank of Hugo said, “The drought has not affected tourism/recreational spending in Colorado, but the fires across the state have had a major impact on tourism.”

Illinois: For a third straight month, Illinois’ RMI remained below growth neutral. The August index slumped to 34.4 from July’s 36.1. Farmland prices were below growth neutral with a reading of 45.3 for August, down from July’s 50.4. The state’s NHI dipped to 43.7 from July’s 44.6.

Iowa: August RMI rose to 49.2 from July’s 48.6. FPI declined to 57.2 from July’s 63.5. Iowa’s NHI for August dipped to 51.6 from 53.3 in July.

Kansas: RMI for August advanced to 50.1 from July’s 43.2. FPI sank to 53.2 from 58.4 in August, while the NHI decreased to 48.9 from 49.9 in July.

Minnesota: August RMI declined to 52.9 from July’s 54.6. FPI dipped to 60.3 from 66.2 in July, while NHI decreased to 53.7 from July’s 55.1.Minnesota has been spared much of the negative drought impacts. Pete Haddeland, CEO of First National Bank in Mahnomen, says, “Our crops here still look good. We have had the right amount of rain at the right time. The hot summer has had a positive impact on our resorts.”

Missouri: RMI declined to 39.8 from 44.3 in July, with FPI slipping in August to 44.6 from 50.2 in July, and NHI dropping to 31.6 from 35.8 in July.

Nebraska: For a second straight month, growth in Nebraska’s rural economy moved into negative territory. August RMI rose to 44.1 from July’s 43.4, and FPI slipped to 48.9 from July’s 52.3. NHI advanced to a weak 46.0 from July’s 45.8.

North Dakota: The North Dakota RMI declined but remained strong with a regional high of 72.1, down from July’s 75.6. FPI slipped to 68.9 from 73.6 in July, while NHI rose to 67.8 from 66.4 in August.

South Dakota: RMI expanded to 52.2 in August from July’s 46.7. FPI dipped to 49.3 from 50.4 in July, and NHI increased to a still weak 46.3 from July’s 44.6.     

Wyoming: RMI slumped to 36.7 from July’s 39.3, while August FPI and RPI declined to 49.5 from July’s 52.3. NHI remained below growth neutral but advanced to 46.4 from July’s 45.8.

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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