One more call for ethanol

Ethanol’s popularity has swung dramatically over the past decade. It went from being touted as the answer to oil dependency and a savior for rural economies to getting derided as a waste of corn that drove up the price of food while providing questionable environmental benefits. One criticism directed at ethanol was that it wouldn’t be as competitive an energy source if it didn’t benefit from hefty government subsidies.

The latter criticism got put to the test beginning in 2012. That was when the federal blenders’ tax credit, the primary subsidy to ethanol production, was discontinued after Congress opted not to renew it. And indeed, national production of ethanol peaked in late-2011 and went into decline after the credit expired (see Chart 1).

Ethanol CH1 -- 7-24-14

However, production has been on the increase during the last year, nearly returning to the pre-expiration peak over the three months from December 2013 through February 2014 (the USDA tracks quarterly ethanol production by marketing year, which goes from September through August).

The likely reason for this rebound is that, in spite of the end of the tax credit, other market conditions have turned favorable for ethanol producers. In particular, the price of corn used to produce ethanol has dropped sharply from its late-2012 peak (see Chart 2). The price of the fuel itself hasn’t dropped nearly as much as this input cost, pushing up profit margins for distillers, while the price of gas—a substitute—has remained elevated over the same period.

This all adds up to happy news for distillers, and the good times are likely to continue; the USDA forecasts corn prices to stay down this year and also projects that more corn will be used to produce ethanol than in any previous year.

Ethanol CH2 -- 7-24-14

 

Made in (but not owned by) the USA

Investment is typically seen as a sign of economic strength, as people and financial entities put their money where they believe it can be most productive and profitable. Foreign direct investment (FDI) tracks the amount of money international firms invest in the United States, and a recent report on the matter by the Brookings Institution shows that it’s growing in the Ninth District, but not as fast as it is elsewhere in the country.

In 2013, for example, companies invested $1.46 trillion in locations outside their home country, and the United States is the single largest destination of that capital, receiving $193 billion, according to the report. This investment manifests itself in many forms: spreading technology, facilitating the exchange of knowledge and inducing new trade.

It also employs millions of people, which the Brookings report investigated more closely. Among Ninth District states, the trends are somewhat diverging. In five Ninth District states (cumulative), total employment at foreign-owned establishments (FOEs) grew by about 50 percent from 1991 to 2011, and the share of total private employment at FOEs increased as well (see Chart 1). The growth in this share of employment tended to be modest—about one-half of a percentage point—with the exception of North Dakota, whose share of FOE employment tripled over this period, most likely as a result of foreign firms investing resources in (and hiring workers for) the Bakken oil patch.

However, across the board, district states have a lower share of FOE employment than the national average and (with the exception of North Dakota) saw less growth in the share of FOE employment. As a result, most distrct states fell in ranking among their peers in FOE’s share of total private employment (see table embedded in Chart 1).

One caveat to FDI trends: Much of this investment is the result of acquisitions or mergers of U.S. companies by international firms. So a considerable amount of the resulting “growth” in FOE employment is a methodological quirk—namely, a shift in the nationality of the parent company. This was particularly the case in North Dakota. Among district states, only Wisconsin was close to the national average in the share of FOE employment growth coming from new openings (see Chart 2).

FDI Ch1-2

Coal producers fire up exports

District coal producers are fighting to retain market share in a national power generation industry that derives an increasing share of its energy input from alternative sources. One survival strategy that has gained traction recently is exporting to Asian countries with a large and growing appetite for coal.

Over the past half-decade, coal’s position as the dominant feedstock for power plants has been eroded by cheap natural gas, increasingly competitive renewables and stringent federal air quality regulations that have rendered many coal-burning plants too costly to operate. In 2008, 48 percent of U.S. power generation was coal-fired, according to the Energy Information Administration; in 2013, coal’s share was 37 percent.

Many coal producers have turned to foreign markets to offset an overall drop in domestic coal consumption. In Montana, the go-to export destinations are South Korea, Taiwan and Japan. “There’s huge demand for coal in southeastern Asian countries for power generation,” said Bud Clinch, executive director of the Montana Coal Council, an industry trade association.

Subbituminous coal from southeastern Montana is cheaper than coal from many other parts of the country, and its high energy content makes it economical to ship overseas via rail and cargo ship. (No coal is exported from North Dakota; the total output of the state’s lignite mines goes to local power plants.)

Since 2009, Montana coal exports have increased sharply, mostly due to shipments from the Spring Creek mine outside Decker, near the Wyoming border (see chart). Over 40 percent of Montana coal comes from this mine, owned by Cloud Peak Energy of Wyoming. In 2013, Spring Creek exported 4.7 million tons to East Asian customers—triple the amount from 2009—mainly through a coal terminal in the Canadian port of Vancouver.

Signal Peak Energy’s Bull Mountain mine near Roundup, Mont., also exports coal, and developers of the proposed Otter Creek coal mine southeast of Ashland, Mont., plan to ship coal to Asia via a new rail link to BNSF’s Colstrip terminal.

But limited port capacity on the Pacific Coast constrains coal exports from Montana and other western states. Ramping up shipments depends on the opening of new coal export terminals in Oregon and Washington state—projects that face opposition from environmental groups concerned about global warming and the impact of coal handling on local air and water quality.

For more on other mining activity in the district, look for the upcoming July issue of the fedgazette

Coal exports -- 7-3-14

 

 

A new tool for the college graduate job market

For those graduating from college and looking for a job, or for those heading to college and looking to choose a career path, the state of Minnesota has a new tool that offers a snapshot of how previous postsecondary graduates have performed in the job market.

The Graduate Employment Outcomes website is a collaboration between the Minnesota Department of Employment and Economic Development and the Minnesota Office of Higher Education. It offers prospective students and soon-to-be graduates information on wages and employment achieved by those receiving graduate, bachelor’s, associate and sub-baccalaureate degrees.

For example, the site shows that the most popular majors among the graduating class of 2011 were in health, business management and humanities, together accounting for about half of all degrees issued in the state (see chart). Such information can help incoming students view the supply pipeline (and their competition) in certain fields.

Pay at college -- chart 6-30-13

The tool also allows a comparison of wages across majors within degree types. Site users would find, for example, a number of sub-baccalaureate certificate holders who worked full-time and earned well over $40,000 during their second year after graduation in 2011 (see table), but also that earnings vary with the type of degree.

However, users need to be cautious in interpreting the results of the tool due to data limitations.

For example, the online tool shows that employment 12 months after graduation is higher for sub-baccalaureate certificates (71 percent) and associate degrees (72 percent) compared with bachelor’s degrees (63 percent) and graduate degrees (63 percent). This flies in the face of unemployment levels that are inversely lower as a person gets more education.

Part of the explanation likely can be found in what is not measured by the new data tool, which matches graduates of postsecondary education institutions in Minnesota with state unemployment insurance wage records. While this data match accounts for many Minnesota graduates, it doesn’t capture graduates who are self-employed or are employed by a business in another state; nor does it track graduates from other states who are employed at a business in Minnesota.

As a result, part of the answer to the 12-month employment puzzle likely stems from the fact that recipients of associate and sub-baccalaureate degrees from Minnesota institutions are historically more likely to reside in Minnesota before entering a postsecondary education program and remain in Minnesota after graduation to work compared with bachelor’s and graduate degree holders. This means they are also more likely to show up in the data.

Pay at colleges -- Table 6-30-14

Personal income weak across Ninth District in first quarter

Personal income in all Ninth District states grew less than the national average in the first quarter of 2014, according to just-released figures from the Bureau of Economic Analysis.

Quarterly personal income in North Dakota fell at an annualized rate of 2.9 percent, the worst of any state (see chart). Personal income in both North Dakota and South Dakota fell two quarters in a row.

Personal income chart -- 6-25-14

The subpar economic performance is almost wholly due to huge reductions in farm earnings, which were steepest in North Dakota (see table). Crop prices for most of the district crop commodities fell, while many input costs rose. This put downward pressures on farm earnings. However, Wisconsin saw gains in farm earnings, possibly attributable to dairy, whose output prices remained firm as feed input costs decreased.

In that light, economic conditions are not as dire as they might seem. Almost all the industry groups experienced some gains in income in the first quarter. Oil production is still growing in North Dakota, as the mining industry (which includes oil production) grew by an annualized 8 percent in the first quarter after rising over 7 percent in the fourth quarter of 2013.

Personal income table -- 6-25-14

Crying over spilled oil

The Bakken oil boom has been a big economic story over the past few years, not just in the region but nationally. As documented on the Minneapolis Fed website devoted to the subject, the combination of market conditions and new technology has led to an explosion in drilling activity and production in the oil-producing areas of North Dakota and Montana, and a surge in demand for related jobs.

But it hasn’t been all economic good news. Booming oil extraction has led to a big increase in spills of oil, chemicals and other drilling byproducts, according to an analysis of state records by EnergyWire. From 2009 to 2013, the number of spills tripled, roughly in line with the increase in oil production (see Chart 1). Most of the spills (and oil production) occurred in North Dakota.

The volume of fluid spilled has grown even faster, in part because of a dramatic spike in 2013 (see Chart 2). One of the biggest incidents was a wastewater spill of 17,000 barrels last November in Bowman County, N.D.

As that incident attests, not all of these occurrences are oil spills. The fracking process used to extract shale oil from formations like the Bakken requires pumping large volumes of water mixed with other chemicals at high pressure. Some of the spills in the database are of seawater and other fracking fluids. And a few of the records cover spills of diesel fuel and assorted other fluids used by drilling machinery. Over the past several years, the proportion of spills involving oil appears to have remained fairly stable, at around two-thirds.

Oil spills -- 6-23-14

 

Ninth District completely out of drought

Heavy rains across the district have people worried about flooding rivers and wet basements. But the silver lining from the rain clouds is that for the first time in three years, the Ninth District is completely drought-free (see top map).

Even with the late planting and wet fields, this bodes well for district farmers. A decade ago, the district was engulfed in drought (see bottom map). In some areas, the drought was extreme, and farm production was negatively affected. For example, wheat output in Minnesota, the Dakotas and Montana in 2010 (an ample-moisture year) was 17 percent higher than the 2003 harvest, while corn and soybean production was 38 percent and 45 percent higher, respectively, in 2010.

Drought map 1 -- 6-23-14

More big farms, but not everywhere

The United States has been losing farms for the better part of 90 years, the result of slow, steady consolidation of farms into bigger operations thanks to increased mechanization and other productivity enhancements that bring increasing returns to scale. The most recent agricultural census shows that this consolidation is still ongoing, but comes with some interesting caveats.

The census, done every five years and most recently in 2012 (with data just now coming available), shows that the overall number of farms declined by almost 5 percent nationwide, or about 95,000 farms, since 2007. However, total farm acreage dropped by less than 1 percent.

The drop in farm numbers was even more accelerated in Minnesota and Wisconsin, where farms declined by about 9 percent and 13 percent, respectively. The two states also lost a combined 3.5 percent of farmland acreage. Farms were lost in virtually all categories of size, from very small to quite large. However, there is growth among the very largest farms—those over 2,000 acres—both in the United States and in Minnesota and Wisconsin (see Chart 1).

The Dakotas and Montana, on the other hand, are seeing very different farm trends; overall loss of farms is much smaller, ranging from 5.4 percent in Montana to a 3.3 percent drop in North Dakota. South Dakota actually saw total farms increase by 2.6 percent. Total farm acreage in these states dropped by 1.6 percent—more than the national average, but less than half the rate in Minnesota and Wisconsin. The Dakotas and Montana are also seeing growth in very small farms—those under 100 acres—and a decline in large farms (with a small exception of South Dakota’s largest farms; see Chart 2).

Farms by size & revenue Ch1-2 -- 6-20-14

It’s difficult to say exactly what’s behind this trend. While organic and other small-farm operations are growing, this is also likely a function of more small hobby-farm residences, as well as an increase in hunting properties being bought with growing income in the region, but kept (and rented out) as farm property.

While the number of small farms grew in Montana and the Dakotas, all three states are nonetheless dominated by large-revenue farms, where between 32 percent (Montana) and 42 percent (South Dakota) of farms have revenues exceeding $1 million. That compares with about 20 percent nationwide, and just 18 percent in Wisconsin and 29 percent in Minnesota (see Chart 3).

Farms by size & revenue Ch3 -- 6-20-14

Head of the 2013 class (again): North Dakota

North Dakota is like the kid at school who gets all the awards. She can’t help it. Everyone else tries hard, but she’s just that good.

The Bureau of Economic Analysis came out with its most recent estimates on state gross domestic product for 2013. Several Ninth District states were well above average, with Montana and South Dakota both cracking 3 percent and Minnesota not far behind at 2.8 percent.

But North Dakota was running laps around most states at 9.7 percent growth last year. It beat the next closest state (Wyoming) by two full percentage points (see Chart 1).

Those following economic activity in the Ninth District know that North Dakota’s performance is no fluke, the result of a sustained oil boom that started in the early part of the last decade. Since 2003, the state has seen its economy grow at an annual compound rate of 6.6 percent (adjusted for inflation). That's double the growth rate of all but four states over this period.

To put that in context, the state’s economy has roughly doubled since 2003 (inflation-adjusted) to $56 billion in annual output. By comparison, the Montana and South Dakota economies have also done very well among states over this period, ranking among the top quarter in annual growth. Considerably smaller in output compared with Montana and South Dakota in 2003, North Dakota easily leapt over both in total output over the past decade (see Chart 2).

2013 state GDP Ch1

2013 state GDP Ch2

 

Growth in student debt slows, but will it last?

For much of the past decade, student debt has grown rapidly on two margins—the share of consumers affected and the amount owed by each debtor—and has generated considerable concern over the attendant pressure on household budgets and rise in delinquencies. But growth in both measures has slowed recently in the Ninth District.

In the Ninth District in early 2005, about 15 percent of consumer credit files included some form of student debt, with a median balance owed of about $7,000, according to the Federal Reserve Bank of New York/Equifax Consumer Credit Panel. By early 2011, the share of district files with student debt grew to over 20 percent and the median balance owed by those with student debt rose to over $11,750. The prevalence and median balance for most other forms of consumer debt grew much more moderately or even contracted over the same period (see Figures 1a and 1b).

Student debt ch1-2 6-5-14

However, since 2011, the two measures of student debt are no longer growing rapidly in tandem. Growth in the share of district residents with student debt slowed first. This share grew by just 0.2 percentage points per year between the first quarter of 2011 and the first quarter of 2014, compared with 0.9 percentage points per year between the first quarters of 2005 and 2011. The median student loan balance among district residents with student debt climbed rapidly until more recently, rising by 6 percent from early 2011 to early 2012 and by a further 9 percent by early 2013. However, it has been nearly flat since, rising just 0.2 percent from the first quarter of 2013 to the first quarter of 2014.

It is premature to say that the period of rapid growth in student debt is over. As seen in Figure 2, both measures are volatile from quarter to quarter and even year to year. For example, although generally slow since 2011, growth in the share of district residents with student debt rebounded after a dip in 2012, and by late 2013 this share reached 21 percent for the first time. Still, for those concerned about the burden of student debt, these recent data show at least a pause in its previous rapid, two-edged pace of growth.

For further details on student debt and general consumer credit conditions in the Ninth District and the nation, see the Consumer Credit Conditions web page.

Student debt Ch3-- 6-5-14

 

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