5 posts from August 2011

The Red River rises (again, and again)

Given widespread flooding in district states (which will be profiled in the October fedgazette), one area that has remained out of the flood news—at least in a comparative sense—is the Red River Valley.

It’s not that the valley hasn’t flooded. This year the Red River near Fargo, N.D., hit flood stage in March and by early April had come within two feet of 2009 levels, a flood that created widespread damage. Farmsteads and other rural residential properties bore the brunt of this year’s flooding. When the Red dipped below flood stage—finally—in late August, the river had spent about 5 months over flood stage at Fargo. Other locations on the Red River have been above flood stage for six to 12 weeks, and numerous tributaries leading to the Red were similarly swollen.

But flooding is also fairly commonplace in the region. Just since 1997, Fargo has experienced major flooding five times, including each of the last three years (see chart). As a result, the region is also getting better at flood protection, using an exhaustive set of sandbag, earthen and other levees to protect residents and businesses, and taking away one of the major sources of news—namely, flood damage.

Red River levels 
 
But the city is looking at more permanent solutions in hopes getting out of the annual scramble to sandbag properties and erect temporary levees, which have been a drain on human and government resources. Since the record 2009 flood, Fargo and Moorhead (across the Red River in Minnesota), along with Cass County (home to Fargo), have spent $62 million buying out more than 250 homes in the flood plain, according to local reports.

There is also $1.8 billion proposal for a 35-mile diversion of the Red River around Fargo—in essence a release valve for the Red River to spill into when it breaches its normal banks. The state of North Dakota (including affected communities) and the federal government reportedly would have equal cost share, at about $785 million, while Minnesota would assume $200 million in costs. The city is considering less-expensive interim solutions, but has said it does not have the resources to implement both interim and permanent solutions.

It might want to hurry. In late August, the National Weather Service issued warnings that the Red River Valley could face an unprecedented fourth year of major flooding next year, due to a very wet 2011 and saturated ground moving into winter.

A primer on consumer spending on food and energy

Inflation is up. No, it’s down. Actually it’s both, and how much that matters depends to some degree on where you land on the income scale.

As everyone knows, gas and food prices have been rising. In mid-July, a gallon of Minnesota gas was $1 (almost 40 percent) higher than last year, while food prices in June’s Consumer Price Index (CPI) were up 3.7 percent from a year earlier.

Higher gasoline and food prices mean consumers have less to spend on other goods and services. Fortunately, the prices of other goods and services have increased more modestly. In June, the core rate of inflation, which strips out relatively volatile food and energy prices, was up 1.6 percent from last year. But once food and energy prices are added back in, headline (or total) inflation was up 3.4 percent.

Certainly higher food and energy prices impact consumers, but their impact varies depending on income, according to the Consumer Expenditure Survey (CE). The CE provides information on the buying habits of consumers, including their out-of-pocket expenditures, income and consumer unit (families and single consumers) characteristics. It’s used for a variety of purposes, such as examining the impact of policy changes, studying spending habits and determining the relative importance to place on various consumer goods and services in the CPI.

CE data show that energy and food expenditures account for about 20 percent to 30 percent, depending on household income level (see Chart 1). Within food and energy, gasoline expenditures account for about 3 percent to 5 percent of total expenditures.

Consumer expenditures -- CH1 8-23-11 

In 2009, the largest expenditure for all households was shelter; low-income households spent the largest share of income on shelter—a full quarter of their expenditures. Meanwhile, high-income households tend to spend a larger share of their income on personal pensions and insurance compared with low-income households.

Over the past 20 years, the percent of consumer expenditures in any given category hasn’t changed dramatically. The greatest change was in shelter; the median consumer now allots about 5 percentage points more of expenditures for shelter. That increase is offset by a decline in the share of spending on food and transportation (excluding gasoline and motor oil).

From 1989 to 2009, total expenditure increased 6 percent, adjusted for inflation. Expenditure growth on a percentage basis among individual categories varied widely: Health care increased over 40 percent, followed by shelter at 38 percent (see Chart 2). Meanwhile, expenditure on food decreased 11 percent and transportation (less gasoline and motor oil) dropped 16 percent.

Consumer expenditures -- Ch#2 8-23-11 

As food and energy prices rise, the relative change to consumer expenditures over time helps keep these and other price changes in perspective. For more information about the CPI, look for Phil Davies’ article in the September issue of The Region.

Inside the mailbox: Proposed post office closures in the district

Many people in small communities, and even some in large-city neighborhoods, might be facing a longer trek to get stamps and to mail those Christmas packages.

Citing high costs and the rise of electronic mail and other delivery alternatives, the U.S. Postal Service faces a significant structural budget deficit. In turn, it is studying the budget ramifications of closing thousands of offices nationwide.

Most recently, in July the USPS released a list of 3,653 offices for possible closure; district states (including all of Wisconsin, and the Upper Peninsula of Michigan) were home to 393 locations on the list (see map). This comes on top of a 2009 proposal still being studied regarding the possible closure of 728 post offices, including 65 in district states plus the U.P. The results of this initial proposal are expected sometime this year or next.

Post office closures -- 8-3-11 
 
 Combined, better than 10 percent of the proposed 4,400-odd closings are in district states, with Montana and the Dakotas seeing the biggest potential hits. Each state has about 90 post offices between the two lists. Minnesota is tops in the district with 111 offices, but the state is twice the size of these three states put together.

What those figures represent in terms of fairness and shared pain depends on the comparison. Between the two proposals, Montana and the Dakotas are facing post office location cutbacks of about 30 percent (see chart). But district states also have about 8 percent of the nation’s 32,000 post offices, and just 4 percent of its population, which means on average each one serves about half as many people as the national average. That ratio is even worse in the more sparsely populated Dakotas and Montana (see chart).

Post office closures -- Ch1 8-3-11 

Wisconsin is the outlier in the group, with just 54 post offices identified for further study, or about half the number as Minnesota. The U.P. reportedly has 25 post offices on the list. On a population basis of about 300,000 in the U.P., that’s roughly on par with Montana. But USPS data do not break out total post office figures between lower and upper Michigan.

District air service: Flyin’ high and dry

In mid-July, travelers in small cities across the district got the unfortunate news that they would be losing air service when Delta Air Lines announced it was dropping service to 24 small regional airports nationwide, 14 of which are in the district, and several others immediately nearby (see map, at end).

Delta cited a few reasons for the cutbacks, the primary one being low usage rates during a period of higher fuel costs. Average occupancy rates on regularly scheduled flights along most of the cut routes range from 60 percent to as low as 12 percent for Thief River Falls, Minn.

But there is another culprit—the uncertain future of the federal Essential Air Service program. Readers of the fedgazette might be familiar with EAS, which subsidizes airlines on flights between (often very) small isolated markets and major hubs. The program is still in effect but expires in 2013, and its renewal in the current atmosphere of budget tightening seems unlikely.

Delta is subsidized for operations in nine of the 14 district airports it is leaving. Those routes were formerly served by Northwest Airlines before its merger with Delta and date back to the era prior to airline deregulation in 1978. But in recent years, flights to and from subsidized locations were operated by subcontractor Mesaba.

Passengers who have already booked flights in and out of those cities don’t need to worry just yet. The EAS program requires Delta to continue operations for at least 90 days, or until another carrier jumps in to take advantage of the subsidy.

 Delta air service cuts -- 8-3-11

Buying the farm isn’t what it used to be

The value of farmland is based largely on the value of the crops a farmer can produce on it. Recently, prices for district crops like corn, wheat and soybeans have been at historic highs, and those prices appear to be seeping into farmland values.

Bankers responding to the Minneapolis Fed’s first quarter (April) survey of agricultural credit conditions reported that prices for nonirrigated farmland increased 21 percent in the district in the first quarter of this year from a year earlier, though there were differences across states. Cash rents for farmland increased substantially over that period as well (see map).

Farmland values map -- ag credit 8-3-11 
 
 Those increases are part of a huge runup in farmland prices and rents over the past decade, according to historical data from the U.S. Department of Agriculture’s National Agricultural Statistics Service. Though 2010 saw a slight dip in both categories, every district state has seen significant longer-term increases in farmland values (see Chart 1).

Rents have also increased over this period, though much more modestly, with the exception of South Dakota (see Chart 2). Farmland is rented by landowners to producers who want to use it to grow crops, so rental rates have to be in line with the value of what the land produces. That’s why rental rates have been ramping steeply across district states since about 2007, coinciding with the runup in commodity prices. The smaller rise in rents may be also due in part to increases in inputs costs like fuel and fertilizer. So while output prices have soared, the profit margins in farming haven’t gone up as much.

Farmland and rental prices -- Ch 1-2  7-28-11 

To see if land prices are in line with the rental revenues that can come from land, price-to-rent ratios offer a comparison of the two against each other (see Chart 3). It appears that while the ratio is slightly elevated, it peaked both nationally and in district states in 2007-08 and has come down slightly since then.

Farmland price to rent ratio -- Ch 3   7-28-11