Sunday, July 22, 2012

Drought Impacting Ethanol/Biodiesel Production: Rural Mainstreet Turns Negative

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.

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.
Ernie Goss

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