Rural Economy Growing, Lending Contracting

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 |  Includes: DBC, GSG, RJA
by: T. Marc Schober

The rural economy continues to grow and is at the strongest position in the last two years due to higher farmland prices, rising farm equipment sales, improving retail sales, and continued confidence. The improving conditions are partially offset by limited access to capital and concerns about the new financial reform bill.

The Rural Mainstreet Index (RMI) declined in June to 52.6 from May’s 54.3, but this is the first time in more than two years that index was above growth neutral 50.0 for two consecutive months. Creighton University economist Ernie Goss said, “After 26 consecutive months of below growth neutral readings, the overall index has now moved above growth neutral for two consecutive months.”

Farmland

The farmland-price index increased to 54.7 in June from May’s 52.7, which is the fifth straight month above growth neutral and substantially above it March 2009 low of 33.1. “Even as the rising value of the dollar has put downward pressures on estimated 2010 farm income, farmland prices are being bid up significantly in the region,” said Goss.

The Federal Reserve Bank of Chicago also reported strength in farmland values as prices rose 4% in the Corn Belt over the last 12 months. In Iowa, average farmland prices increased 8% since March 2009.

Farm equipment sales continue to increase as the index rose to 53.1 in June from May’s 50.9. Goss noted the improving conditions, “In addition to an expanding rural economy, we are tracking significant improvements in farm and ranch land prices and farm equipment sales. I expect both of these factors to remain healthy in the months ahead.”

Lending

The primary concern in the rural economy continues to be access to capital. This is evident as one-third of the responding banks reduced loan volumes over the past six months. Bankers are also concerned about the new financial reform bill as 60% of respondents expect the new regulations to reduce long-term real estate loans.

Don Reynolds, president of Regional Missouri Bank said, “The financial reform bill also may significantly lower our lending limit to one borrower, increase an already heavy regulatory burden, and take away card interchange income.” Goss also noted, “As a result, many of the bankers expect the impact to fall more heavily on community banks.”

Outlook

Overall, we see the continued strength in the rural economy as a sign that conditions are improving for agriculture, despite significant headwinds such as a stronger dollar, lower commodity prices, sovereign debt concerns in Europe, and a cooling Asian economy. The continued rise in the farmland-price index shows that farmers are expanding the operations and are re-investing in agriculture.

The Rural Mainstreet Indexes are compiled from a survey of small community bank CEOs from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming.

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Disclosure: No positions