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Sunday, April 15, 2012

The 2012 Rural Economic Belt:  Tighter or Looser?


Global demand for farm commodities and higher commodity prices marked the 2011 economy, and additional economic gains are in the picture for 2012. But there is a qualifier on that, and for rural Americans to enjoy continued prosperity, it will depend on how strong the rest of the US economy gets.

The strong economy in rural America pushed ahead in 2011 despite some significant headwinds, say Jason Henderson and Maria Akers of the Omaha Branch of the Kansas City Federal Reserve Bank.  Their latest issue of the Main Street Economist   identifies those headwinds as rising energy prices, a weak housing market, and tight local and state governmental budgets which put the brakes on growth.  The economists say there were a number of pluses, including growth in rural jobs by 1%, and a decline in the unemployment rate to a half percent lower than the metropolitan unemployment rate.

The key drivers were record high food prices and fuel exports, which pushed commodity prices higher.  But the economists say energy prices, which usually dampen economic growth, were a positive for rural America where oil drilling activity surged providing jobs and economic support.  For agriculture, “global food demand boosted exports, straining already tight food supplies. U.S. agricultural exports jumped 18 percent in 2011, reaching record highs.  Crop exports rose 21 percent in 2011 due to strong wheat, cotton and grain shipments. On the livestock side, annual red meat and dairy exports soared almost 30 percent while poultry exports rose 17 percent.”  The consequence of this demand dropped grain inventories to record lows and prices to record highs:
• Crop exports rose 21 percent in 2011 due to strong wheat, cotton and grain shipments.
• Annual red meat and dairy exports soared almost 30 percent while poultry exports rose 17 percent.
• Corn and wheat prices more than doubled from 2010 to 2011.
• The price of soybeans shot up nearly 50 percent in the same period.
• The inflation-adjusted value of annual crop production rose 13 percent and hit a new high in 2011 despite some drought-reduced yields.
• The annual value of livestock production rose 15 percent from 2010 levels and was the fifth-highest on record after adjusting for inflation. 
• As a result of shrinking supplies from herd liquidations, feedlot operators paid escalating prices for feeder cattle.
• Declining poultry production during the second half of 2011 reduced broiler stocks and pushed prices higher at year-end.
• Prices for dairy products rose an additional 24 percent during 2011.
• Real net farm income in 2011 was expected to exceed 2010 levels by 22 percent.
• Farmland values soared as much as 20 to 40 percent above year-ago levels.
• The Association of Equipment Manufacturers reported a 3.5-percent and 1.9-percent year-over-year increase in four-wheel and two-wheel drive tractor sales, respectively.

All of this combined to spur job gains in rural American farming communities, where agribusiness is the primary employer.  Rural manufacturing reports a 4% increase in employment, with expansion of overtime hours.  But many of those plants also enjoyed a burst of export business, with processed food and metal products reporting a 24% increase in export growth. 

But it was not all rosy.  “Rural retailers have struggled, showing the downside of high commodity prices. Rural consumers spend a greater share of their income on fuel costs.  High fuel and food costs strained rural household budgets, and after posting strong growth the previous year, rural retailers cut employment by more than 2 percent in 2011. Business contacts noted that high gas prices also affected rural tourism. Leisure and hospitality firms in rural areas reduced staff more than 10 percent in 2011.” 

However, in the coming year the Kansas City Fed economists report many factors are poised to continue the upward growth and expansion.  Among those are:
• Oil prices are expected to rise 6 percent in the coming year.
• Lean global supplies could also support farm incomes in the coming year.
• Gross farm income is expected to rise 1.5 percent in 2012.
• Crop receipts are projected to edge up in 2012 as expanding production offsets slightly lower crop prices.
The strength in the agriculture and energy economies hinges on global demand and exports, which have helped drive the gains seen in 2011.  The International Monetary Fund projects global economic growth at 3.3% in 2012, lead by a 5.4% growth in developing countries.  And Henderson and Akers say the projected 2.2% to 2.7% rise in the US Gross Domestic Product will help strengthen rural business activity.  Subsequently, more jobs and more income would prompt additional spending on rural Main Street.

Unfortunately, the trend may be down, with the IMF adjusting global growth downward because of the financial conditions in Europe and the sovereign debt crisis.  Consequently economic uncertainty in the currency markets would factor into global demand that would affect US exports.  The Federal Reserve has also trimmed its expectation for US economic growth due to “persistence of fiscal tightening at the federal, state, and local levels,” along with European financial problems.

The Fed economists summarize their report by saying, “In sum, with robust commodity markets, rural America is well-positioned to enjoy solid economic gains in 2012. The ability to tap global markets by exporting raw commodities and processed goods has rekindled growth in rural America’s farming, mining and manufacturing communities. Yet, the headwinds from rising gasoline prices, weak housing markets and fiscal challenges have limited rural growth over the past year. If the headwinds abate, rural America is poised for healthy economic gains on Main Street.”

Posted by Stu Ellis on 04/15 at 11:37 PM | Permalink

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