The rural economy continued to improve in December, driven by rising farm income and high grain prices. The USDA estimates that 2010 farm income increased 31% from 2009, which has led farmers to reinvest cash flows into farmland and farm equipment. The healthy rural economy has also led to improving employment numbers and lending conditions.
The overall Rural Mainstreet Index (RMI) continued to increase this month to 55.4 from 53.3 in November, according to the survey of bank CEOs in a 10-state region. This marks the second straight month the index is above growth neutral 50.0, and the fourth straight month the index has increased.
“Very healthy farm income is rippling across the Rural Mainstreet economy. Businesses heavily dependent on the farm economy continue to experience very strong economic conditions,” said Creighton University economist Ernie Goss, co-author of the report.
Farmland prices have been increasing very quickly over the past few months. The farmland price index was above 50.0 for the 11th straight month at 76.9 in December. This is the highest the index has been since March of 2008. Rising farm income has allowed farmers to reinvest their cash flows back into farmland to expand their operations.
“This month bankers were asked to name the biggest threat to the Rural Mainstreet economy for 2011. Over one-third or 35 percent indicated that a bursting of the farmland price bubble was the number one threat to the economy for next year. More than one in four or 27 percent of the bankers named low agricultural commodity prices as the number one risk for the Rural Mainstreet economy,” said Goss
Farmers have also been expanding their operations by investing in new farm equipment. In December, the farm equipment sales index expanded to a record high 77.8 from November’s 68.7.
Loan volumes sky rocketed this month to 52.3 from last month’s 35.3 as land and equipment buying has increased the demand for ag lending. The other two banking indicators, checking deposits and certificates of deposits, were above growth neutral for the tenth straight month.
Survey respondents expect the Fed could increase interest rates sooner, rather than later. Bankers were asked this month when they thought the Federal Reserve would increase interest rates and 62% thought that is would occur in 2011 and 38% thought in 2012.
The rural economy finally began to add jobs in December as the hiring index increased to 50.1 this month marking the fifth straight month of improvement. Goss noted that “While many metropolitan areas continue to shed jobs, agriculturally dependent small towns have begun to see improving job prospects.”
Bankers confidence in the economy six months out dipped slightly as the index declined to 62.2 from 63.8 in November, although is well above last December’s reading of 53.7.
This month, bankers responded that the bursting of a farmland price bubble posed the biggest threat to the rural economy, but we are skeptical, due to the nature of the surveyed question. Bankers had to decide whether a change in federal alternative energy policy, low farm commodity prices, or the bursting of a farmland price bubble would be the biggest threat. We would have responded with the same choice, although of potential risks in 2011, this is near the bottom of our list.
We are very excited about the improving prospect of the rural economy. Agricultural fundamentals are the best in decades, due to low supplies, increasing exports, and sustained demand for biofuels. The improving economy is reflected in the expansion of the RMI, demand for farmland, and increased purchases of farming equipment. Farmer balance sheets are at the most conservative levels in over 40 years, which helps us feel comfortable that even if the unexpected happens, farm economy is well positioned to capitalize on the increasing demand.
Read more about agriculture and farmland here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.