Sunday, January 28, 2007

Ethanol Pushes Farm Economy Forward

January Survey Results At A Glance:
Ethanol and higher grain prices advanced the non-urban economies in nine-state area at the fastest pace since the survey began in 2005.
Over 70 percent of bank CEOs supported shifting more funds to rural economic development as outlined in the new farm bill.
Only 14 percent of bankers expect severe January weather to have significant and negative impacts on their area economies.
Confidence index rose to a record high.

The Mainstreet economic index from a January survey in non-urban, agriculturally dependent portions of a nine-state area advanced to its highest level since initiation of the survey in late 2005. Each month, community bank presidents and chief executive officers (CEOs) 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, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.
"Bank presidents and CEOs in the region reported very strong economic conditions for January with the overall index rising to 61.2 from December’s 58.5, which is significantly above growth neutral 50.0," said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of City National Bank in Greeley, Neb., created the monthly economic survey.

Much of this growth can be traced to expanding ethanol production and 10-year-high grain prices. According to Kurt Henstorf, president of the First National Bank in Shenandoah, Iowa, “The farm economy in our area is strong due to good crop yields, high prices and an ethanol plant due to come on line in the next few months. That sector is healthy and is spilling over into other areas of the local economy, giving us strength overall.”

Bankers in all states reported job gains for January. The rate of new hiring in the region escalated as the regional employment index climbed to 61.2 from December’s healthy 58.8 and November’s solid 56.1. “We have all underestimated the impact of the construction and operations of ethanol plants on Mainstreet. Current job growth for most rural portions of the states surveyed is running at roughly twice the pace of the historical average. I don’t expect this to change for the short term unless the Fed unexpectedly raises interest rates or natural gas prices increase significantly. As in past months, bankers in non-urban areas, especially those in Colorado and Wyoming, reported that labor shortages were restraining growth in their local areas,” said Goss.

January’s bad weather did produce economic hardships for many portions of the survey area. Economic impact appeared to be isolated with only 14 percent of the bankers reporting that recent storms were likely to have a significant and negative economic effect. However, losses in some areas are likely to spill into outlying areas: more than 38 percent of Nebraska bankers indicated January weather would present economic problems in the months ahead.
John Nelson, president of First Tier Bank in Holdrege, Neb., said, “Area ice storms have crippled our local economy. Many businesses remain closed, while the ones remaining open have had to purchase or rent generators.”

Kathy Thuman, president of Farmers State Bank in Maywood, Neb., said, “Southwest Nebraska escaped the power outages and livestock loss from the recent central Nebraska storms, but the area will nonetheless be affected by losses in the rest of the state.”

This month the survey asked bankers about the impending 2007 farm bill. Over 72 percent of the bankers support increasing the share of funds provided by the new bill to support rural economic development, despite the fact that money would be diverted from farms. Joe Kennedy, CEO of First National Bank in Frankfort, Kan., remains skeptical that the 2007 farm bill will benefit Mainstreet businesses.

Even with very healthy grain prices and a likely strong farm income, bankers reported few new purchases of agricultural equipment as the index rose only slightly to 52.3 from December’s growth neutral 50.0. “Farmers appear to be reluctant to use recent high grain income to purchase new equipment,” said Goss.
The Fed’s halt in raising interest rates, improvements in agricultural commodity prices and lower oil prices have pushed bankers’ confidence to a record 66.3 from December’s already robust 60.6.

There continues to be a very healthy market for farmland with a January farmland price index of 70.2 which was up from December’s 69.8, but down slightly from 71.0 for January of 2006. As stated by Goss, “I expect upward pressures on farmland prices for 2007 from biofuels expansion and robust farm income.” According to James Brown, CEO of Hardin County Savings Bank in Eldora, Iowa, “Farmland prices continue to increase as demand is strong from both farmers and investors. The big question is: Will seed genetics provide the increase in crop yields that we need to supply both the ethanol and feed-grain markets?”

Post-Christmas buying was weak as the retail index declined to 45.0 from December’s growth neutral 50.0. Home sales on Mainstreet weakened even more with a January reading of 34.7, down from 35.6 in December and 43.5 in January 2006. Bank indicators for January were mixed with the loan-volume index rising to 45.9, about the same level from a year earlier, but up slightly from December’s 45.2 and November’s 41.7. Checking deposits declined again to 57.1, compared to 66.1 one year earlier and 57.7 in December. CD purchases remained strong with a January reading of 64.3, up from December’s 61.5 and January 2006’s 61.3.

Ernie Goss

No comments: