Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.
Rising Farm Income Drives Rural Economy
Nov 22, 2010
For the first time since June, the rural economy expanded due to higher farm income, strong farmland prices, and improving confidence in economic conditions, partially offset by weak employment. In the November survey, bankers reported that farmland price have increased roughly 8% over the last year and farm equipment sales are the highest since May, 2008.
The overall Rural Mainstreet Index (RMI) improved to 53.3 this month from October’s 48.4 and September’s 47.6, according to the survey of bank CEOs in a 10-state region. This is the first time since June the overall index has been above growth neutral 50.0 and is the highest reading since May of this year.
“The Rural Mainstreet economy is behaving like the nation with a lot of zigzags in growth. However, I expect very healthy farm income to begin to have positive but somewhat muted impacts on businesses on Rural Mainstreet. Businesses heavily dependent on the farm economy continue to do quite well though,” said economist Ernie Goss, co-author of the report.
High grain prices and expectations for higher farm income have driven the farmland price index to 68.1 in November from 60.0 in October. This is the tenth straight month the index has been above growth neutral. The RMI survey is consistent with the Chicago Fed’s third-quarter survey which reported farmland values rose 10% in the last year in the Seventh District.
“While growth for businesses on Rural Mainstreet has been fragile at best, farm indicators remain very strong, including farmland prices and the sale of agricultural equipment. This month, we asked bankers how much prices for irrigated farmland had expanded in their area over the past year. Approximately 23 percent indicated that prices had grown between 11 percent and 20 percent with average growth of almost 8 percent,” noted Goss.
The farm equipment sales index also improved to 68.7 in November from 61.0 in October, and is at its highest level since May, 2008. Scott Tewksbury, CEO of Heartland State Bank added, “One area farm equipment dealer told me he had record sales for October.”
Loan volumes declined for the second straight month in November to 35.2 from October’s 48.4. Strong farm income in 2010 has significantly reduced farmer demand for borrowing. The other two banking indicators, checking deposits and certificates of deposits, were above growth neutral for the ninth straight month.
Bankers noted that hiring still remains weak in the rural economy as the November hiring index rose to a still weak 46.8 from 46.0 in October. Goss commented that “Many areas in the Rural Mainstreet area are still losing jobs.”
Bankers were also asked about the federal blenders’ tax credit of 45 cents per gallon of ethanol produced, which is set to expire on Dec. 31. Responses were mixed on what action Congress should take regarding the program. Roughly 1/3 of respondents would support extending the credit for three to five years, 36% supported a one to two year extension, 13% supported a permanent extension, while 18% called for the expiration of the tax credit.
The November survey showed that the rural economy is beginning to recover, driven primarily by rising farm income. Bankers are confident about the economy over the next six months, as the confidence index improved to 63.8 in November from October’s 57.3.
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