5 posts from March 2011

The oil straw gets longer, fatter in ND

By now, most are familiar with the oil boom in the Bakken Formation, located mostly in western North Dakota and eastern Montana (and if not, go here and here). But many might not know that the region is only starting to suck hard on the oil straw.

The state saw production leap from less than 100,000 barrels per day in 2005 to about 350,000 toward the end of last year. Most of that production comes from oil shale in the Bakken Formation, where studies have identified up to 4 billion barrels of recoverable oil.

But continued geologic research is showing the potential for still more oil (as well as natural gas) above and below the Bakken (in formations dubbed Tyler, Lodgepole and Spearfish). One particular formation, Three Forks, lies beneath the Bakken “interval” of oil shale and holds an estimated 1 billion to 2 billion barrels of oil.

A December report by the Industrial Commission of North Dakota noted that the new discoveries, coupled with expected improvements in extraction technology, could double oil production in the state by the end of this decade, and possibly sooner (see chart; the geologic oil basin reaches into South Dakota, but little production currently exists, or is predicted there). Experts, the report said, “predict at least an additional ten to twenty years of intense drilling and development, followed by several more decades of continued petroleum production.”



District farm conditions are strong

Just about any farmer or rancher will tell you it’s a good time to be in their business. Crop prices have climbed back up near the record highs they saw a couple years ago, thanks to crop failures in places like Russia and Australia amid a global economic recovery. International demand for meat and animal products is up too.

Regional agricultural banks are seeing the consequences of this growth, according to a January survey of ag lenders in the Ninth District. The lenders reported an increase in farm incomes, thanks to high commodity prices. More than two-thirds of lenders surveyed said farm incomes increased in the fourth quarter of 2010. This increase was consistent throughout district states (see Chart 1). Their outlook for the coming three months was similarly upbeat, save for lenders in Wisconsin.

Joe ag conditions 3-22-11-- Chart 1 

Not only have district farmers’ incomes increased, but their net worth has been bolstered by a surge in land values. Values of both irrigated and nonirrigated farmland saw increases in the double digits in the final quarter of 2010 from a year earlier (see Chart 2). Ranchland values and cash rents also rose substantially around most of the district.

Joe ag conditions 3-22-11-- Chart 2  

This prosperity has had some ironic repercussions for agricultural bankers. Continuing an ongoing trend, loan demand was mostly flat because farmers are cash-rich, according to district lenders. Repayment rates for loans increased, and most district lenders said there was no change in the number of their customers extending or renewing their loans. Ag bankers are expecting robust market conditions to continue in the near future as well.

The Minneapolis Fed, along with other Federal Reserve district banks, surveys agricultural lenders four times a year. More details and previous survey results are available here.

Hospitals pay more for free care

While the nationwide debate over health care policy continues, many hospitals in the Ninth District are dealing with rising expenses for care given to low-income patients.

Not every state tracks charity expenses at hospitals, but in Minnesota and Wisconsin the cost of providing free or discounted health services has been increasing for years and compounded by the recession (see Chart 1). In Minnesota, charity care expenses at over 130 community hospitals rose by 31 percent (inflation-adjusted) from 2007 to 2009. Wisconsin hospitals, which incur about twice the level of charity care as those in Minnesota, saw charity care rise by about 28 percent in real terms between 2005 and 2009, according to the Wisconsin Hospital Association.

Charity care charts 

The impact of charity expenses on the bottom line of district hospitals is small—between 1 percent and 3 percent of total operating expenses. But in Minnesota charity care as a share of operating expenses more than doubled from 2002 to 2009 (Chart 2, above). Wisconsin’s charity care rate is consistently higher (1.6 percent in 2009), which explains much of the disparity in charity care expenses between the two states. But the rate has risen less over this period in the Badger State.

The increase in charity care likely stems from the recession, in which many workers lost their health benefits along with their jobs, as well as steadily rising costs for health coverage. Some of the cost increases may be due to hospitals adopting looser eligibility rules based on household income, access to public assistance and other factors.

Data on charity care costs for 2010 aren’t available. However, there is anecdotal evidence that such spending has leveled off. At Avera Health, a nonprofit network of hospitals and clinics in eastern South Dakota and surrounding states, charity care costs rose to $17.8 million in 2009, a 31 percent increase in constant dollars since 2007. But charity expenses fell last year to $16.2 million.

The tax deduction man cometh

It’s not often you love paying your mortgage. But about this time of year—tax time—many filers are happy to claim the tax benefits of the home mortgage interest deduction.

At a time when the deduction is also coming under political scrutiny—President Obama’s deficit commission proposed much stricter limitations on this tax expenditure—it’s useful to see who benefits the most. The short answer: Not homeowners in the Ninth District, and particularly not those in the Dakotas.

According to an analysis of IRS data last year by the Tax Foundation, about 26 percent of all 2008 tax returns claimed the mortgage interest deduction (see chart). With 33 percent of returns claiming the deduction, Minnesota has one of the highest rates in the country, and its homeowners claimed easily the largest deduction among district states.

Something of the opposite is true in the Dakotas, where just one of seven tax returns claimed the credit—the two lowest rates in the country, and barely half the national rate. The average deduction among those that did claim the credit was also significantly smaller than the national average, and roughly half the average deduction taken in California (tops, at almost $19,000).

The Dakota gap likely exists for a variety of economic reasons, including historically lower average income and property values—and thus lower average mortgages, which in turn lowers the incentive to itemize tax returns to claim the mortgage interest credit.

However, the Dakota economies have been performing better than most states of late; housing is actually growing in the energy-booming western part of North Dakota, and average incomes in both states have been growing faster than the national average. So in the future, more Dakotans might be looking to their mortgage payments for some tax relief—if it’s still around.

Home mortgage tax credit -- NEW TITLE 

Endowments climbing, still in the hole

Despite a nice bounce-back year for most university endowments, many continue to lick financial wounds inflicted by the stock market collapse in 2008 and 2009.

Though they hold a low profile, higher-education endowments possess major money. Just in the Ninth District, there are more than 50 endowments with assets of at least $10 million at higher education institutions, and a baker’s dozen have more than $100 million in assets, according to figures from the National Association of College and University Business Officers (NACUBO).

In 2007, these endowments controlled upward of $10 billion in assets before suffering steep losses from the financial collapse and recession. Most saw two consecutive years of investment losses, which were compounded by regular, planned disbursements that support annual scholarships and other higher education programs.

Endowments saw a strong rebound in 2010, with total assets growing by almost 10 percent in the district. (Change in assets includes investment growth plus monetary donations to the fund—say, from alumni—minus disbursements.) A handful of endowments saw growth of 16 percent or better, including those at Carthage College, Northland College and Viterbo University (all in Wisconsin), the University of St. Thomas (Minn.), Minnesota State University-Mankato, University of Mary (N.D.), Augustana College (S.D) and the Montana Tech Foundation.

Yet despite the recent growth, the large majority of endowments are well short of assets held in 2007. Among 31 endowments that reported assets in both 2007 and 2010, collectively they are down 15 percent over this period. The district’s largest endowment—$2.2 billion, at the University of Minnesota—is $600 million smaller than it was in 2007.

Endowment charts

According to NACUBO figures, only two endowments in the district have more assets today than in 2007: the University of South Dakota Foundation (6 percent higher), and the College of Saint Benedict (in Minnesota, about 4 percent higher).

Top 10 endowments