Rural Mainstreet Index Below Growth Neutral Again: More Air in Farmland Price Bubble

September Survey Results at a Glance:

· Rural Mainstreet Index remained below growth neutral for a third straight month.
· Farmland-price index rebounded to highest level in four months. Approximately 13 percent of bankers expect farmland prices to decline in next 12 months.
· On average, Dodd-Frank legislation is expected to increase bank costs by 9 percent.
· More than nine of ten bankers anticipate early harvesting this year.

While farm income appears to be holding strong, businesses linked to agriculture continue to experience pullbacks in economic activity according to the latest survey of bank CEOs reporting for the Rural Mainstreet economy.

 Overall: The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, was up slightly for September at 48.3, from 47.1 in August and 47.9 in July. However, it was the third straight month the index has been below growth neutral.

Creighton University economist Ernie Goss said, “The drought continues to dampen economic activity for businesses linked to agriculture such as ethanol, and agriculture-equipment sellers. I expect food processors to take a hit later in the year as higher food prices work their way through the system.”

Farming: After declining for three straight months, the farmland-price index moved higher. The September reading climbed to 61.6, its highest level since May of this year, and up from 52.8 in August. “Bankers in some parts of the region are reporting farmland prices as high as $20,000 per acre. Despite the drought, farmers continue to put more air into the farmland price bubble. This is the 32nd consecutive month that the farmland-price index has risen above growth neutral. The farm-equipment-sales index rose to growth neutral 50.0 from August’s very weak 38.3,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

This month, bank CEOs were asked to project farmland price growth for the next year. There was a great deal of variation across the 10-state region with an average gain of approximately 3 percent expected. Areas that suffered the most from the drought were expected to grow the least. Approximately 13 percent of the bankers expect price declines over the next year. This is up from 9 percent this time last when we asked the same question.

 This year bankers expect harvesting to occur much earlier than normal. Only 9 percent anticipate a normal harvest time while 48 percent expect harvesting to occur one to two weeks early and the remaining 58 percent of bankers anticipating harvesting to take place three to four weeks ahead of schedule.

Pete Haddeland, CEO of First National Bank in Mahnomen, Minn., reported the harvest in his area is a month early but yields are great. He expects a record sugar beet harvest. Likewise, Jon Schmaderer, president of Tri-County Bank in Stuart, Neb., indicated that initial yields on irrigated land look promising.

Banking: Farmers increased their demand for loans with the loan-volume index climbing to 70.2 from 67.6 in August. This marks the seventh consecutive month the index has risen. The checking-deposit index weakened to 48.3 from 49.1 in August, while the index for certificates of deposit and other savings instruments rose to an anemic 38.4 from 33.0 in August. “As in previous months, the drought appears to be increasing the cash 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.

This month we asked bankers about the impact or expected impact of the implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act on their bank’s costs. Bank CEO’s, on average, expect their bank’s costs to grow by approximately 9 percent as a result of Dodd-Frank. Roughly 6 percent anticipate an increase of more than 15 percent, 36 percent expect an expansion of 10 percent to 15 percent with the remaining 58 percent forecasting an upturn of 2 percent to 9 percent resulting from the implementation of Dodd-Frank.

Michael Flahaven, president of Wenona State Bank in Wenona, Ill., expects QE3, along with current low loan demand and low interest rates into 2015 to “kill” small community banks.

 Hiring: September’s hiring index declined to 50.9 from 51.9 in August. “Even though we tracked hiring growth for the month, the index is trending down. I expect job losses in the months ahead as the impacts of the drought spread to more and more Rural Mainstreet businesses,” said Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, increased to a frail 43.0 from August’s 39.6 and well down from June’s much stronger 58.5. “The drought along with a lethargic national economy are negatively affecting the business confidence of bank CEOs in the region,” said Goss.

Home and retail sales: The September home-sales index slipped to a solid 58.8 from 60.2 in August. “As in the national economy, the Rural Mainstreet housing market is improving,” 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 a second straight month Colorado’s Rural Mainstreet Index (RMI) moved below growth neutral. The September RMI rose to 45.2 from 25.2 in August. The farmland and ranchland price index increased to 48.4 from August’s 44.2. Colorado’s hiring index for September was 39.8, which was down from 43.0 in August.

Illinois: For a fourth straight month, the RMI for Illinois remained below growth neutral. The September index climbed to a weak 48.0 from 34.4 in August. Farmland prices bounced back above growth neutral to 54.6 from August’s 45.3. The state’s new-hiring index increased to 44.0 from August’s 43.7.

Iowa: The RMI for Iowa for September slipped to 48.7 from August’s 49.2. The farmland-price index advanced to 62.8 from August’s 57.2. Iowa’s new-hiring index for September dipped to 49.4 from 51.6 in August.

 Kansas: The Kansas RMI for September slipped to 49.5 from 50.1 in August. The farmland-price index rose to 62.8 from August’s 53.2. The state’s new-hiring index increased slightly to 49.1 from August’s 48.9.

Minnesota: The September RMI for Minnesota declined to 51.7 from August’s 52.9. Minnesota’s farmland price index bounced to 71.1 from August’s 60.3. Minnesota’s new-hiring index rose to 54.9 from August’s 53.7.

Missouri: The RMI for Missouri rose to a regional low of 41.6 but up from August’s 39.8. The farmland price index for September increased to 50.2 from August’s 44.6. Missouri’s new-hiring index advanced to 48.1 from 31.6 in August.

Nebraska: For a third straight month, growth in Nebraska’s rural economy moved into negative territory. The September RMI rose to 48.8 from 44.1 in August. The farmland-price index advanced to 59.2 from August’s 48.9. Nebraska’s new-hiring index expanded to a weak 47.0 from 46.0 in August. Cameron Mathis with Tilden Bank in Creighton, reported that the harvest was progressing with yields on dryland better than expected and corn yields on irrigated land very good.

North Dakota: The North Dakota RMI for September declined, but remained strong with a regional high 60.5, down from from 72.1 in August. The farmland-price index was unchanged from August’s 68.9. North Dakota’s new-hiring index rose slightly to 68.0 from August’s 67.8.

South Dakota: The September RMI for South Dakota dipped to 48.3 from 52.2 in August. The farmland price index climbed to 58.1 from August’s 49.3. South Dakota's new-hiring index for September was unchanged from August’s 46.3.

Wyoming: The September RMI for Wyoming expanded to 46.9 from August’s 36.7. The September farmland and ranchland price index expanded to 52.9 from August’s 49.5. Wyoming’s new-hiring index remained below growth neutral with a September reading of 42.9, down from 46.4 in August.

 Next month’s survey results will be released on the third Thursday of the month, Oct. 18.