5 posts from August 2012

One quarter at a time: District banks slowly improving

It has taken some time, but Ninth District banks continue the long trek to better health, according to a banking conditions report by the Federal Reserve Bank of Minneapolis for the second quarter of this year.

The report measures asset quality, profitability, loan growth and other metrics for more than 700 commercial banks in the Ninth District, roughly half of which are in Minnesota. Ron Feldman, senior vice president of supervision, regulation and credit at the bank, noted that the quarter “was pretty strong. There was strong improvement in asset quality and loan growth, and at least some improvement in profitability, and some of the metrics are back to their 20-year norm.”

While banks in every state saw improvements, those in North and South Dakota are generally in the best shape. Loan growth among North Dakota banks grew 12 percent year-over-year. “That’s really, really remarkable for a state that, on average, sees 7 percent loan growth over 20 years, and it really reflects that we’re seeing tremendous economic performance in North Dakota.”

Feldman also pointed out that the strengthening trend among district banks has been consistent with Minneapolis Fed forecasts on the matter. For more detail, readers can view the embedded video below, where Feldman talks about recent benchmark performance and forecast accuracy.



If ol’ MacDonald had a specialty farm

In the summertime, farmers markets often brim with locally grown fruits and vegetables, along with the consumers who crave them. Even if you pay a little more for fresh produce than at the grocery store (though that’s not always the case), you figure it puts a little money in the pockets of local farmers, right?

But the profitability of many so-called specialty crops—which in the Midwest includes most any fruit or vegetable—varies considerably, according to an August report by the Minnesota Department of Agriculture. The report uses actual farm records from 2008 to 2011 from in-state producers to find out average financial performance for nine crops. At least five farms had to have grown the crop for it to be included in the analysis.

Just as strawberries are often the first crop out of the field, so too are they first in financial returns after direct expenses and overhead are paid, followed by assorted vegetables (see Chart 1). In some cases, they didn’t have much competition; four of the nine categories did not recover their basic costs or merely broke even.

Farm specialty crops Chart 1 -- 8-23-12

The difference in profitability appears to be due to a couple of factors. First, the most profitable crops had a clear edge in average revenue per acre (see Chart 2). Four other crops have medium-sized revenues—$4,000 to $6000 per acre—but only raspberries and cantaloupe were consistently profitable, thanks to lower costs. Three other crops had low costs, but also low revenues, and basically broke even after direct expenses (like seed, fertilizer and machinery use) as well as overhead (hired labor, taxes) were paid. These figures are fairly generous in their calculation of farm profits, the report pointed out, as they “do not cover full compensation to the owner for labor and management.”

Farm specialty crops Chart 2 -- 8-23-12

Makin’ power while the wind (subsidy) is still blowin’

Like a nice, steady breeze, the nation’s wind power capacity has been expanding, with Ninth District states making a major contribution. But whether that arc of increase continues could well depend on what Congress decides regarding an expiring tax credit.

After five years of strong growth, the United States now trails only China in installed capacity (47 to 62 gigawatts, respectively) and has 1.5 times the wind-generating capacity of Germany and seven times that of France, according to a comprehensive August report by the U.S. Department of Energy. Wind still makes up a small portion of domestic power generation, at 3.3 percent, but that’s a fourfold increase just since 2006.

Texas is the leader in wind development, and by a wide margin (see Chart 1). But Minnesota and North Dakota are in the top 10 in wind capacity. Minnesota installed as much new wind capacity last year—542 megawatts (MW)—as many states have in sum. South Dakota also made its mark. It has almost 800 MW of wind capacity, virtually all of it installed since 2007, and representing almost all of the state’s increase in power generation over this period. Wind’s share of electricity capacity in the state leapt from less than 2 percent in 2007 to 22 percent, the highest rate in the country (see Table 1).

Wind power Ch1& Table1

But the industry is nervously awaiting congressional action on a federal wind energy production tax credit of 2.2 cents per kilowatt hour—currently equal to more than $1 billion annually and set to expire at the end of the year. The credit was created two decades ago and has been extended numerous times or reborn after being allowed to expire. Its renewal is questionable this time around given sentiment in Congress about budget deficits.

The credit's expiration could affect not only future wind power generation in district states, but also district employment at a fair number of manufacturing facilities that supply the various components and services for wind farm development (see map).

Already there have been rumblings, according to local news reports. Otter Tail Corp., of Fergus Falls, Minn., has announced plans to sell DMI Industries, a maker of wind towers in West Fargo, N.D., with the eventual fate of 216 employees unknown. St. Paul-based WindLogics, a wind forecasting company, recently cut 10 employees because development work has stopped.

Officials with Mortenson Construction, one of the largest wind farm builders in the country and located in Golden Valley, Minn., said several hundred jobs could be eliminated if the tax credit expires. In Aberdeen, S.D., officials at the Molded Fiber Glass plant have reportedly put on hold a plan to add 100 to 200 jobs in light of the tax credit limbo.

 Wind map -- 8-15-12jpgSource: U.S. Department of Energy

Minnesota lodging: Now I lay me down to sleep

Irrespective of the record heat, summer is a time for vacations, especially to places like the northwoods of Minnesota, where camping and old-time resorts with individual cabins are a time-tested tradition for many families. But as in any industry, things change, and the lodging industry in Minnesota has undergone some subtle shifts in the places people lay their heads during vacation or while on a work trip.

Explore Minnesota Tourism, the state’s tourism office, keeps a running (though unofficial) tally of lodging facilities of varying type, including indoor and outdoor. From 2002 to 2011, the total number shrank by 4 percent (see Chart 1). Resorts saw a 26 percent decline and had the largest loss in absolute numbers, losing about 290 operators. Private campgrounds saw a smaller loss in number (about 190) but a higher percentage loss (28 percent). That loss was somewhat offset by growth in state and other public campgrounds, which are fewer in number. Hotels and motels grew slightly, and vacation homes for rent (not listed in the chart) grew strongly from a percentage standpoint, but its listings are still small, at just 90 in 2011.

MN tourism Ch 1 -- 8-8-12

Despite the loss of facilities, the total number of lodging units has remained mostly unchanged over this period (see Chart 2). First, a little context: Riding the coattails of a hot economy in the 1990s, a tourism and lodging boom added thousands of hotel and other lodging units to the state. The echo of that boom started to die out in 2003, and the number of indoor lodging units in the state actually dropped by 1,500 by 2007. But by 2011, the number of indoor lodging units had bounced back by almost 1,900 units (about 2.5 percent).

At the campsite, it’s a fairly similar story (see Chart 2). Despite an erosion of campground operators, the number of individual campsites in 2011 is mostly unchanged from 2002, though there was some volatility in the middle. From 2006 to 2008, the number of tracked campsites fell by about 3,500 (10 percent), but then quickly rebounded by 2011.

Shifts in consumer demand underly these short- and long-term lodging patterns, as consumers demand new and different accommodations and amenities over time, and recessions tend to force out less competitive facilities from the market, leaving new opportunities when demand rebounds. Explore Minnesota reports that the state lodging industry saw “moderate improvement” through the first half of 2012, including a 1 percent increase in occupancy.

MN Tourism Ch 2 - 8-8-12

Wisconsin ratepayers hot over staying cool

In a summer with record heat, Wisconsin residents and businesses are finding out firsthand the high cost of keeping things cool inside. In fact, they are paying more than most for that comfort, according to a June energy assessment by the Public Service Commission of Wisconsin. But that wasn’t the case just a decade ago.

Back in 2002, retail power prices for residential, commercial and industrial customers were average to below average compared with neighboring states and the nation. Over the next eight years, Wisconsin’s electricity rates for all types of customers went up steadily. The state now has the highest, or nearly the highest, electricity rates among neighboring states across all three customer categories. It also has higher rates than the national average for residential and industrial power, and very similar rates for commercial power (see chart).

WI electricity -- 8-1-12

Among several drivers behind these rate increases, like higher costs for input fuels and spot-power purchases, the report offers some historical context, attributing the state’s rising prices mostly to its position in the long construction cycle for new power generation and transmission, and the subsequent timing of two recessions.

Improvements to electricity infrastructure to meet future power demand and service reliability needs are years—even decades—in the making for utilities. Wisconsin’s economy was quite strong in the 1980s and 1990s and, as a result, “Wisconsin entered the (electricity) construction cycle earlier than other states in the Midwest.” Utilities that built new generation facilities in the 1990s and early 2000s were entitled to recover those costs, which led to higher rates as the state’s economy—and particularly its power-hungry manufacturing base—started to struggle even before the official start of the 2001 recession.

The state’s economy has yet to regain strong footing, and the most recent recession compounded cost-recovery efforts by utilities because many saw a decline in electricity sales (and thus revenue) from the economic slowdown and increased energy conservation efforts. Still, because of their special regulated status, some utilities were allowed to raise rates again.

Even the commission acknowledged the irony, saying that “rate increases during a general usage downturn are confusing to customers … (m)any ratepayers have expressed their anger and frustration publicly and directly to the Commission about utilities raising rates during a time when they are using less in order to reduce their energy costs.”

The report notes, however, that all is not lost for ratepayers in Wisconsin. Having made the investments in new generation, if the economy ever returns to robust growth—and electricity use—“new cost-competitive plants will be positioned to potentially sell any additional energy into the wholesale market benefitting retail customers, because such revenues are directly credited to a utility’s expected revenue requirement during a rate proceeding, reducing the amount of money to be collected from ratepayers.”