A new snapshot of the rural financial picture shows economic conditions might be slumping. The just-released Creighton University Rural Mainstreet Index fell below growth neutral for the first time since October 2022. The survey of rural bankers fell to 45.6, which is down 4.5 points from the previous month.
The economist behind the survey, Dr. Ernie Goss, professor of economics at Creighton University, says the rural economy continues to experience slow, to no, to negative growth. He points to the slowing economy, higher borrowing costs and labor shortages as part of the decline.
Now it’s the banks themselves that many people are watching, after several high-profile banks collapsed in the past week. What does this mean for the banks producers rely on.
Based on the timing of their survey, Goss says some ag bankers responded before the bank defaults started to expand. However, he is confident the current banking situation is not like the financial industry crisis in 2008 and 2009. That meltdown was caused by the loss in value of mortgage-backed securities.
Most banks in rural America are less susceptible because they have fewer risky depositors. Goss also says the farming community was in a fairly solid financial condition going into the recent series of interest rate hikes by the Fed. However, there are some banks that invest in bonds, which have decreased in value while interest rates have climbed. Coupled with the nervousness among larger depositors at some banks, it does bear watching.
“We could have some businesses, manufacturers and farmers feeling that fear, which could lead to withdrawing deposits at these banks and push some, I’m reluctant to say failure, but it sure could make it tough for regional and even national banks,” Goss says.
Other ag bankers tell us they are less concerned about a large-scale crisis and agree banks in rural areas should be more insulated than Silicon Valley Bank, for example.
Nate Franzen, president of the agribusiness division for First Dakota National Bank in Yankton, S.D., says: “Because these banks were so heavily concentrated in just one or two industries, I believe this is not a systemic risk like 2008 and 2009. That said, certainly in a rising interest rate environment there are new risks that banks need to manage, and I’m confident the vast majority of community banks and well-managed diversified banks will be just fine.”
Goss says in their survey of bankers as part of the Rural Mainstreet Index only 13.6% tightened credit standards for farm loans in the past year in the face of rising interest rates. He expects that will change substantially. He adds that in their survey about a third of the bankers recommended an interest rate hike of 50 basis points in the March FOMC meeting, but he thinks the likelihood is much lower now. In fact, he expects 25 basis points or no rate increase at all.
