Rural Mainstreet Index Nosedives: Drought Impacting Ethanol/Biodiesel Production

Interview with professor Goss can be viewed at:http://www.youtube.com/watch?v=Q8YMP_cO5sQ

July Survey Results at a Glance:• Rural Mainstreet Index plunges to lowest level in almost two years.• Farmland price growth declines.• Drought pushes agriculture-equipment sales to lowest level since recession.• Almost two-thirds of bankers report cutback or closing of ethanol/biodiesel plants due to drought.

Newswise — OMAHA, Neb. – Drought conditions pushed the June Rural Mainstreet Index (RMI) to its lowest level since 2010.

Overall: The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, declined to 47.9, its lowest level since September 2010 and down from last month’s 56.7.

As reported by Jim Ashworth president of Carlinville National Bank in Carlinville, Ill., “The drought is severe in west-central Illinois. Conditions are like those in Steinbeck's Grapes of Wrath, but no one today wants to move to California.”

Creighton University economist Ernie Goss said, “The drought is putting a dent into the economies of the agriculturally dependent areas of the 10-state area. Just as the region has benefited mightily from very healthy farm income over the past few years, we are now detecting warning signals of a significant economic reversal for rural areas.”

Even for those areas not suffering from drought, there is concern. Pete Haddeland, CEO of First National Bank in Mahnomen, Minn., expressed the view of the minority of areas with solid crops, “Our crops look good up here, but we still need rain.”

Farming: According to the July survey, farmland prices continue to head higher but at a much slower rate. However, for a third straight month, farmland price growth weakened with the July index dropping to 58.6, its lowest level since September of 2010 and down from last month’s 60.0. Even so, this is the 30th consecutive month the index has been above growth neutral. The farm-equipment sales index sank to 46.1, its lowest level since March 2009, and was down significantly from last month’s 54.7. “Much weaker economic conditions are slowing growth in farmland prices. Furthermore, farmers are clearly reducing their purchases of agriculture equipment. This pullback will soon affect urban areas of the region,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

This month, bank CEOs were asked about the impact of the drought on ethanol/biodiesel production in their area. Of bankers with plants in their area, almost two-thirds, or 64.3 percent, reported negative impacts with 21.4 percent indicating plant closures and 42.9 percent detailing cutback in operations. Only 35.7 percent reported no impact from the drought. The lack of available crops and higher prices for corn and soybean are having significant and negative impacts on ethanol and biodiesel producers in the area,” said Goss.

The impacts of the drought are particularly negative for livestock producers. Korey Schow, CEO of the Bank of Keystone in Keystone, Neb, said, “Persistent hot and dry conditions are causing cow/calf producers to sell a portion of their herd due to lack of pasture.”

Banking: Farmers increased their demand for loans with the loan-volume index climbing to 65.3 from June’s 64.2. This marks the fifth consecutive month the index has risen. Bankers were asked what the impact of the drought was on farmer borrowing. Approximately 29 percent of the bank CEOs indicated that drought conditions had increased borrowing from farmers.

The checking-deposit index sank to 47.9 from 55.3 in June, while the index for certificates of deposit and other savings instruments advanced to a weak 41.7 from June’s 38.9. “The drought appears to be increasing the financial 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,” said Goss. Hiring: July’s hiring index declined to 52.8 from 59.1 in June. “Even though we tracked hiring growth for the month, the index was down for June. I expect hiring to drift lower with job losses in the months ahead as the impacts of the drought spread,” said Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, plummeted to 40.9 from June’s much stronger 58.5. “This is the largest one month decline that we have recorded since we began this monthly survey in December 2005. The drought has turned economic optimism into economic pessimism,” said Goss.

Home and retail sales: The July home-sales index declined to a solid 58.6 from June’s record high 66.4. The retail-sales index for July sank to 44.4 from June’s much stronger 54.6. “The pace of sales for homes in the area remains positive. On the other hand, drought conditions hammered retail sales for the month,” said Goss.

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. The Rural Mainstreet Index (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. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

Colorado: For the 19th straight month, Colorado’s Rural Mainstreet Index (RMI) remained above growth neutral. However, the index for July declined to a weak 50.1 from June’s 57.6 and 65.2 in May. The farmland and ranchland price index declined to 61.3 from June’s 62.4. Colorado’s hiring index for July was 51.8, down from June’s 57.5. Mike Bass, president of the First National Bank of Hugo said, “Wheat harvest in our area was 2 and one-half weeks weeks early. Average yield for our area was 30 bushels per acre, a decrease of 30 percent from the previous year.” Illinois: For a second straight month, the RMI for Illinois moved below growth neutral. The July index slumped to 36.1 from June’s 43.6. Farmland prices remained above growth neutral with a reading of 50.4, down from June’s 51.5. The state’s new-hiring index dipped to 44.6 from 50.2 in June. Southern Illinois is being battered by the drought. According to Jim Eckert, president of Anchor State Bank in Anchor, “Many corn fields will yield next to nothing. Most will have drastically reduced yields unless rain comes quickly. Soybeans are badly hurt by the drought, but could still be revived by timely rains.” Iowa: The July RMI for Iowa decreased to 48.6 from 56.1 in June. The farmland price index slipped to 63.5 from June’s 64.6. Iowa’s new-hiring index for July dipped to 53.3 from June’s 58.9. Larry Winum, president of Glenwood State Bank in Glenwood, reported that, “Last year we battled flooding, this year we have no moisture. We need to find the right rain dance or crop yields are going to be in serious trouble.” Additionally Bill Hess, CEO of Iowa Savings Bank in Carroll, said, “Rated crops in the area as fair but poor may be a better term if high temperatures and no rain remain the pattern.”

Kansas: The Kansas RMI for July slumped to 43.2 from June’s 50.7 and May’s much stronger 62.1. The farmland price index sank to 58.4 from June’s 59.6. The state’s new-hiring index decreased to 49.9 from 55.6 in June. As in most states, some areas are doing well while others not. For example, Michael Johnson, CEO of Swedish American State Bank in Courtland, reported, “We have been blessed with recent rain.” On the other hand, Dale Bradley CEO of the Citizens State Bank in Miltonvale, said, “A weak economy and continued drought conditions make it difficult for us all.” Minnesota: The July RMI for Minnesota declined to 54.6 from June’s 62.1. Minnesota’s farmland price index dipped to 66.2 from June’s 67.4. Minnesota’s new-hiring index decreased to 55.1 from June 60.9. Minnesota farming conditions appear to be much better than those found in other states. Bryan Grove, CEO of American State Bank in Grygla, said, “Our area of northwest Minnesota has had spotty rains, keeping crop conditions good. Small grains look decent – harvest should start within 10 days. Soybeans also look good, but are needing rain soon to maximize potential.” Brian Nicklason, president of Woodland Bank in Remer, said, “We have limited farming in our area but the soy beans and corn crops look outstanding. The logging industry is still struggling due to lack of markets in the paper Industry.”

Missouri: The RMI for Missouri declined to 44.3 from 48.9 in June. The farmland price index for June slipped to 50.2 from June’s 51.2. Missouri’s new-hiring index slumped to 35.8 from 41.4 in June. Don Reynolds, president of Regional Missouri Bank in Salisbury, reported, “Dry weather and poor crop prospects are starting to take a tool on attitudes.” Nebraska: Growth in Nebraska’s rural economy moved into negative territory for July. The July RMI for the state slumped to 43.4 from June’s 50.9. The farmland price index slipped to 52.3 from 53.4 in June. Nebraska’s new-hiring index declined to 45.8 from June’s 51.4. Lyndell Woodbury, reporting for banks in seven Nebraska communities said, “The drought has affected the pastures most significantly in north central Nebraska, and dryland crops have been significantly impacted in all of our communities. Impact to Main Street will be felt 4th quarter of this year and into 2013.” Kelly Hammerlun reporting from Imperial, indicated that crops in irrigated areas were doing well while those in nonirrigated areas were “worthless.”

North Dakota: The North Dakota RMI for July declined but remained strong with a regional high 75.6 from June’s 88.9. The farmland price index slipped to 73.6 from June’s 90.2. North Dakota’s new-hiring index declined to 66.4 from 79.4 in June. John Brown, executive director of the Independent Community Banks of North Dakota reported, “Crops look really good in our area at this time.” South Dakota: The July RMI for South Dakota declined to 46.7 from June’s 49.5. The farmland price index dipped to 50.4 from June’s 51.5. South Dakota's new-hiring index for July slumped to 44.6 from 50.2 in June.

Wyoming: The July RMI for Wyoming slumped to 39.3 from 46.8 in June. The July farmland and ranchland price index declined to 52.3 from 53.4 in June. Wyoming’s new-hiring index sank to 45.8 from 51.5 in June. Bob Sutter, vice chair of Hilltop National Bank in Casper, Wyo., said, “Wyoming state revenues are down due to the low natural gas prices, even though the oil exploration continues at a high level. This is due in part to our strong oil and gas exploration infrastructure that is active both in Wyoming and in the North Dakota shale play.”

Follow Ernie Goss on Twitter www.twitter.com/erniegoss For historical data and forecasts, visit our website at:http://www2.creighton.edu/business/economicoutlook/ For ongoing commentary on recent economic developments, visit our blog at: www.economictrends.blogspot.com