Rural Economy Perks Up

The Survey of the Mainstreet Economy for May indicates strengthening in the economies of the non-urban, agriculturally dependent portions of the seven-state survey area for the month. However, retail sales remain weak across non-metro areas of the seven states.
Bank presidents and CEOs in the region, which includes the rural and non-urban portions of Colorado, Iowa, Kansas, Missouri, Nebraska, South Dakota and Wyoming, reported expanding economic conditions as the overall index increased to 54.5, its highest level this year, up from April’s 48.0, and above growth-neutral 50.0.

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Bankers reported that farm land prices continue to grow with a May reading of 60.9, up slightly from April’s very healthy of 60.4. Craig Brewster, President of Butte State Bank in Butte, Nebraska said that, “In our area we have two different land values. The dryland and pasture in Boyd County, Neb., has maintained about the same value. The irrigated land in Holt County, Neb., has seen a decrease in land values. The decrease in irrigated land values in Holt County is due to energy cost.”

Furthermore, drought conditions are having a negative impact of farm land prices in some areas. President Mike Bass of the First National Bank of Hugo, Colorado, said, “The drought continues in our area. Our winter wheat crop is starting to suffer from a lack of moisture.”
Farm equipment sales dropped below 50.0 for the second straight month to 43.5. Higher farm costs related to energy prices continues to cut into farmers’ willingness to buy new farm equipment. More than 30 percent of bankers reported that higher energy prices were having a significant impact on farm operations. “Farmers are switching to all-electric irrigation systems to minimize diesel and natural gas inputs,” said President John Schmaderer of Tri-County Bank in Stuart, Neb. Only four percent of survey participants reported that higher energy prices were affecting business operations in their area.

Hiring in the rural areas strengthened dramatically to 62.1 from April’s 39.4. Job growth was much stronger in Wyoming and Colorado where higher energy prices are positively affecting growth. Bankers in Kansas and Missouri reported downturns in hiring while CEOs in Nebraska, South Dakota and Iowa detailed solid upturns in hiring. “Mainstreet is doing fair to good. A new ethanol plant in Northwest Kansas will be up and running. Two more are being built,” reported Joe Kennedy, CEO of the First National Bank in Frankfort, Kansas.

May home sales were weak and the availability of homes in many areas is restraining growth. President Charlie Walsh of Burlington Iowa’s Farmers & Merchants Banks and Trust said, “I believe, interest rates will continue to rise. Homes sales are down due to a lack of homes in the housing market. Our certificates of deposits are up due to a special we had during the month of March 2006.”

Confidence abounds in rural areas that have ties to energy production, especially ethanol. “We have some potential good job growth on the horizon. We have a biodiesel plant that will become operational in March 2007,” said Dale Torpley, President of Federation Bank in Washington, Iowa.

CEO Steven Lane of Security Savings Bank in Farnhamville, Iowa, added, “The building of two ethanol plants in the area has stimulated new jobs at a better pay scale. Seems to give everyone a brighter attitude.”

Banking conditions remained robust with expansions in loan volume, checking deposits and certificates of deposits with indices of 74.2, 57.6 and 59.1, respectively.
Looking six months out, bankers see future conditions even stronger than current conditions with a May confidence index 62.1, up from April’s 54.3 and March’s stable 51.6.

Responses to two specific May survey questions showed that:
* About 4 percent of CEOs expect higher energy prices to significantly affect businesses operations compared to over 30 percent that anticipate escalating energy costs to significantly impact farm operations.
* Almost 61 percent of CEOs report that their area is not vulnerable to corporate re-structuring as recently experienced by Newton, Iowa with the announced closure of the Maytag plant.