Rural Economic Erosion Continues -- Goss
The full extent of the sharp downturn in grain prices over the last few months likely won't be felt until next year, though the trend toward rural economic contraction is well underway, according to new economic data from a prominent Midwestern economist.
In his latest audit of Rural Mainstreet economic conditions, Creighton University economist Ernie Goss says the Rural Mainstreet Index (RMI) -- his measure of rural economic viability -- is nearing the "growth-neutral" point, indicating that the fall in grain prices and resulting farm income drop has started to work its way into the rural economy in the nation's center in general.
"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," Goss says in a university report. "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."
The ag downturn is yet to completely work its way into the rural economy in general -- but it's coming. While his RMI remains at 51.8 for the overall rural economy, RMI for the farm sector specifically has dipped to 48.3. (It ranges from 0 to 100, with 50.0 representing growth neutral, according to a university report.) Other specific sectors of agriculture show even more bleak RMI numbers; the farm machinery sector's at 33.4 on Goss's RMI. But in this case, it's the continuation of a longer trend; the RMI for the machinery sector has been sliding lower for just over a year. And the same is happening in other areas of the business of farming.
"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," Goss says in a university report. "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."
It's all being driven by what almost one third of the ag bankers responding to Goss's survey say is a grain marketplace at price levels below farmer breakevens. Furthermore, variables like these likely won't turn around in the near future.
"I expect readings to move even lower as these lower prices spill over into the broader economy in the weeks and months ahead,” Goss says. This has caused general confidence to erode in the rural Midwest and Plains. Goss's "confidence index" has fallen to 42.9 on the RMI, down from 55.5 a month ago.
"Much weaker agriculture commodity negatively affected the outlook of bank CEOs and more than offset an improving outlook for livestock producers," the economist says.
That's all bad news for the rural economy. But, while critical farm economic variables are slumping and it's starting to eat away at the rural economy in general, it's yet to translate to an erosion in the farm lending sector. That is likely coming soon.
"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," one South Dakota ag lender says, according to Goss. "Cash margins and strong balance sheets will keep defaults modest for one year, but look out beyond that!" adds another, Goss says.