RURAL MAINSTREET INDEX WEAKENS IN JULY
Jul. 21, 2014
Source: Creighton Univ. news release
After moving below growth neutral in February, the Rural Mainstreet economy has moved above the 50.0 threshold for five straight months, according to the July survey of bank CEOs in a 10-state area. However, the index has been trending lower since June 2013 when the reading stood at 60.5.
Overall: The Rural Mainstreet Index (RMI), which ranges between 0 and 100, with 50.0 representing growth neutral, fell to 51.8 from June's 53.6.
"Agriculture commodity prices have plummeted for farmers in our region. The drop has slowed growth in the region according to our survey with prices below breakeven for a significant share of agriculture producers. I expect readings to move even lower as these lower prices spill over into the broader economy in the weeks and months ahead," said Ernie Goss, Ph.D., the Jack A. MacAllister Chair in Regional Economics at Creighton University Heider College of Business.
Farming and ranching: The farmland and ranchland-price index for July slumped to 48.3 from June's weak 49.1. "Much weaker crop prices are definitely taking some of the air out of agriculture land prices. At this point in time, land prices appear to be moving gradually lower without significant volatility," said Goss.
The July farm-equipment sales index slumped to 33.4 from June's very weak 35.0. The index has been below growth neutral for 13 straight months. "Farmers have certainly become more cautious in their purchase of both additional land and equipment. This is having negative impacts on implement dealers across the region," said Goss.
According to a large share of bankers, crop prices, including corn, are close to or below the breakeven price for farmers. Approximately, one-third of bankers, or 31.6 percent, reported that current crop prices are below farmers' breakeven price.
But as reported by Scott Tewksbury, president of Heartland State Bank in Edgeley, N.D., current spot prices for corn in his area are below $3.00 per bushel and well below the cost of production.
As a result, more than four in 10 bankers, or 40.3 percent, expect loan defaults to climb in the year ahead if crop prices remain at current levels.
However, previous strong farm economic conditions are expected to soften the impact of current low prices. According to Todd Douglas, CEO of the First National Bank in Pierre, S.D., "A majority of agriculture borrowers have strong enough balance sheets to cover lower commodity prices for a short-term period, however, not for a sustained period."
According to Fritz Kuhlmeier, CEO of Citizens State Bank in Lena, Ill., "Cash margins and strong balance sheets will keep defaults modest for one year, but look out beyond that!"
Other bankers look for the improved financial sophistication of farmers to soften the blow of lower prices. For example, Jim Ashworth, president of Carlinville National Bank in Carlinville, Ill., said, "In general, area farmers have become better at marketing their grain and hedging their price exposures than in years past."
Jeff Bonnett, president of Havana National Bank in Havana, Ill., indicated that he expects significant economic impacts from current low corn prices for rural areas if farmers do not experience a large decrease in input prices.
Banking: The July loan-volume index rose to a very healthy 79.8 from June's robust 74.6. The checking-deposit index increased to 53.5 from June's 50.9, while the index for certificates of deposit and other savings instruments dipped to 37.8 from 39.4 last month.
"We have been tracking upturns in agriculture lending among bankers. This month bankers reported, on average, a 7.1 percent increase in agriculture lending over the past year. Lending is likely to continue to expand as a result of low crop commodity prices," said Goss.
Hiring: Rural Mainstreet businesses continue to hire at a solid pace, though the July hiring index declined to a healthy 59.7 from June's 63.2. "Despite weaker conditions in the crop farming sector, businesses in the Rural Mainstreet economy are adding jobs at a very healthy rate and well above the pace in urban areas of the region," said Goss.
Confidence: The confidence index, which reflects expectations for the economy six months out, plummeted to 42.9 from last month's 55.5. "Much weaker agriculture commodity negatively affected the outlook of bank CEOs and more than offset an improving outlook for livestock producers," reported Goss.
Home and retail sales: The July home-sales index dipped to a still healthy 64.1 from 66.1 in June. The July retail-sales index increased to 55.4 from 51.8 in June. "Strong growth in home and retail sales contrasts to weaker growth at the national level in both areas," said Goss.