Farmland values still soaring? Not so fast

In early August, the USDA released its annual estimates of farmland values, showing an increase of 7.6 percent for U.S. cropland in 2014 over a year earlier. Values in the district were up even more; South Dakota saw the biggest increase in the country at 20.8 percent (see table). This was something of a surprise, given results from the Minneapolis Fed’s second-quarter survey of agricultural credit conditions, which indicate that farmland price growth has slowed and even decreased in some cases.

USDA table -- 8-28-14

One reason for the discrepancy is obvious—the numbers come from different surveys. The Fed survey covers lenders, while the USDA’s covers landowners themselves and is also much larger and more thorough. But another reason USDA land values showed a bigger jump this year goes back to June, when earlier USDA estimates of 2009-13 land values were revised. In most states, earlier values were revised down, which makes the increase in 2014 look bigger than it otherwise would have.

For example, the USDA estimated that Minnesota cropland sold for $4,850 an acre when it released its summary in August 2013. Last June, it revised that estimate down to $4,050 an acre, 9.5 percent less than the earlier estimate. The newly released 2014 Minnesota estimate of $4,870 is nearly unchanged from the earlier 2013 number, so much of the apparent jump this year reflects a downward revision of last year’s statistics (see chart).

Given the larger sample size and rigorous methodology, the USDA survey is a better indicator than the Fed’s. But the revisions suggest that land prices may not have grown as much in 2013 and earlier years as initially thought.

USDA farmland chart -- 8-28-14

Russia’s retaliatory sanctions have little effect on district exports

The direct economic effect of Russia’s retaliatory sanctions banning certain food and agricultural product imports from the United States is likely to be minimal for the Ninth District.

The list of products covered by these sanctions effective Aug. 7 includes all categories of (slaughtered) beef, pork, poultry and fish; most categories of milk and milk-based products, including cheeses and curds as well as a number of categories of fresh fruits, nuts and vegetables.

• Based on 2013 data, Russian sanctions would cover about $750 million of U.S. exports, representing 7 percent of U.S. exports to Russia and 0.05 percent of total U.S. exports.

• In the same year, Ninth District states exported $9 million worth of food and agricultural products to Russia now subject to sanctions, which account for 3 percent of district exports to Russia and 0.02 percent of total exports from the district (see chart).

• One of the reasons for the small impact is that sanctions notably do not cover sales of live animals, which accounted for 40 percent of the district’s agricultural exports to Russia last year. The list also excludes cereals and grains, as well as fruits, nuts and vegetables if prepared or preserved.

• Among Ninth District states, Wisconsin is most affected, particularly its concentrated or sweetened milk producers, exporters of frozen fruits and nuts, and kidney bean and white pea bean farmers, for whom the Russian market accounted for 17, 12 and 11 percent of total exports, respectively.

Exports also make up only a portion of total farm receipts, further dampening any potential impact. According to 2012 USDA data, for example, Wisconsin’s export revenues accounted for about 27 percent of total farm receipts and about 14 percent of total receipts from dairy products, its top agricultural commodity.

Russian food sanctions -- 8-26-14

Business survey: Ninth District should continue to grow

Results from a Federal Reserve Bank of Minneapolis ad hoc survey of 603 Ninth District firms (see methodology) reveals that economic activity at firms across industry sectors increased over the past four quarters and should continue over the next four quarters (see table).

Looking back: Firms across industries reported increased sales revenue, profits, productivity and employment. The availability of labor decreased, especially in the construction sector, where the majority of respondents reported a lack of available labor. Respondents from most sectors reported increases in selling prices and input costs. Wage and benefit increases were moderate. They also noted an uptick in availability of financing.

Looking forward: Respondents are more optimistic for the next four quarters, as a higher proportion of respondents reported expectations for increased sales revenue, profits, productivity and employment. The availability of labor is expected to continue to decrease. Respondents expect to raise prices and pay more for inputs. However, wage and benefit increases are expected to be moderate.

State economic outlook: Respondents expect their state economies to grow as well. Employment, consumer spending and profits are all expected to increase. However, the vast majority of respondents across industries expect inflation to increase.

August ad hoc table -- 8-21-14

Ad hoc survey methodology: On Monday, August 18, an email was sent to 5,000 contacts (not a random sample) from various sectors around the Ninth District. By 12 noon Wednesday, August 20, 603 responses were received, representing a 12 percent response rate. The largest number of responses came from finance (24 percent), professional services (20 percent), manufacturing (15 percent), real estate (13 percent), construction (8 percent) and nonprofits (7 percent).

Fish on! License sales slowly rebounding in Ninth District

Fishing is a favored pastime for many residents in Ninth District states, and after years of decline, district sales of fishing licenses have been rising in recent years and are higher on balance over the past decade.

License sales have been strongest in the district’s most populous state, Minnesota (see Charts 1a and 1b). Montana licenses have been quite stable over this period, while South Dakota has seen a general decline, and North Dakota is experiencing a small revival in recent years after dipping during the recession.

Fishing charts 1a-1b -- 8-19-14

A variety of factors have affected the recent uptick in district residents spending their summers trying to land a big catch, or trying their luck on frozen lakes. The most obvious factor is economic. The Great Recession reduced household disposable income available for nonessential goods, and as a result fishing licenses decreased in the years immediately following (2009-11). Since then, however, fishing licenses have rebounded significantly as households have regained their disposable income. This is particularly the case in Minnesota, which was hit much harder by the recession than either of the Dakotas.

Another factor is demographic. The recent increase in license sales can be partly attributed to the baby boom generation. As the baby boomers (now age 50 to 68) begin their retirement years, more are spending their free time on the lake. According to the St. Paul Pioneer Press, the Minnesota Department of Natural Resources has found that fishing participation rates have stabilized in Minnesota due to the increased participation of the baby boomers. Because this generation is so large, their increased participation outweighs the downward participation trends of the other age groups.

Nonresident licenses are also an important source of license sales and especially revenue, given higher prices charged to out-of-state anglers. However, states vary in their ability to attract them; in 2013, nonresident tourists bought 44 percent of all licenses in Montana, but just 20 percent in Minnesota, with the Dakotas in the middle.

But nonresident licenses have been trending modestly upward in Minnesota and North Dakota, possibly due to cheaper costs—$45 in both states for an annual license, compared with $60 and $69 in Montana and South Dakota, respectively, where nonresident licenses have been falling (see Charts 2a and 2b).

Fishing charts 2a-2b -- 8-19-14

Start me up: Tech start-ups in the Midwest

In recent years, tech start-ups have made big headlines for massive rounds of funding by venture capitalist firms looking to invest in the next Facebook or Twitter. In a geographic sense, Silicon Valley receives by far the most start-up funding, according to data from PricewaterhouseCoopers and the National Venture Capital Association.

But the Midwest has two metro areas—Chicago and Minneapolis-St. Paul, Minn.—with considerable start-up funding. Comparing the tech start-up financing in these two regions shows that Chicago has a considerable lead over the Twin Cities in an absolute sense, with more than $3 billion in start-up funding from 2010 to 2013, according to local sources in each region (see Chart 1).

However, viewed on a per-capita basis, there is more balance (see Chart 2). While Chicago still holds a considerable edge, Minneapolis-St. Paul has been slowly gaining some momentum in start-up funding over this period. Much of Chicago’s funding in 2011—easily the largest annual gap between the two metros—is also due to a single start-up, when Groupon raised $972 million.

Tech startups -- 8-19-14

Health insurance premiums vary widely for state workers

Health insurance for employees is a major expense for state governments, but costs vary widely across the nation and Ninth District, particularly for premiums involving workers and their families, according to a new report this week by the Pew Charitable Trusts.

Monthly, employer-paid premiums for employees (only) are relatively similar among Ninth District states, from a low of $427 in North Dakota to a high of $587 in Wisconsin, which is also the only state whose employees share in the premium cost, at $97 per worker. Montana state employees, on average, receive a small credit of $21, according to Pew.

Much bigger differences occur in state health care coverage for workers and their dependents. South Dakota actually spends slightly less (per month, per worker) on family coverage ($493) than on single coverage ($496), and the state also requires a considerable cost share of $183. State-based costs for families in North Dakota are twice as high as in its southern neighbor, and South Dakota workers pay nothing. Premium costs in Minnesota and Wisconsin are higher still. With a total monthly premium of almost $1,700, Wisconsin has the second-highest health care premiums for state workers with dependents in the country, behind only New Hampshire.

State helath care premiums -- 8-13-14

Homeownership rates continue to dip

Several years after the biggest housing bust in memory, and with several years of renewed (if modest) growth, many believe the housing market is on the path to recovery. Homeownership rates, however, have yet to reverse their downward trend.

Since 2005, homeownership rates have seen a steady and comparatively steep decline, from 69 percent to less than 65 percent in the second quarter of this year. The annual trend has been more volatile in Ninth District states, but is generally following the same downward pattern, especially in Minnesota and Wisconsin (see charts). Only South Dakota is anywhere near its peak in homeownership rate over the past decade.

Homeownership -- 8-4-14

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

 

 

 

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