6 posts from February 2014

The little independent pharmacies that could (with a little help)

With all that booming going on in Williston and the surrounding Bakken region, it’s enough to give everyone a tension headache. Good thing you can pop into the Walmart pharmacy for some relief.

What’s that? No Walmart pharmacy? OK, fine, a Walgreens will do just fine. None of those either?

Turns out that all the oil activity in the Bakken region—and strong overall growth across the state—has been a boon to independent pharmacies, running against the nationwide trend of pharmacy growth mostly among pharmacy chains and supermarket and mass merchant locations like Walmart. In 2007, North Dakota had 80 pharmacies; by 2013, that number had almost doubled to 151 pharmacies, according to the National Community Pharmacists Association, which publishes an annual digest of pharmacy statistics.

But the truly notable part of this pharmacy growth in North Dakota is that it came entirely from independent pharmacies (see chart). The number of pharmacy chain stores dropped by one over this period, and there are no supermarket or mass merchant pharmacies to speak of in the state—in any year. Meanwhile, the number of independent pharmacies grew by almost 150 percent.

This seeming economic anomaly is, in fact, born from “a 40-year-old law [that] tilts heavily toward independent community pharmacies,” according to the NCPA, in email correspondence. In 1964, the state passed a law requiring that majority ownership of a pharmacy be by a licensed pharmacist. Existing chain stores were grandfathered in, but the NCPA noted that “this law prevents national chains from moving in” and has withstood referendums and legal challenges. “So the natural rush of chain pharmacies like CVS and Walgreens that usually accompanies a job surge hasn’t occurred.”

ND pharmacies -- 2-28-14

A new farm bill, at last

After more than two years of delays in Congress, many agricultural producers were beginning to think they would never see a new farm bill.

The previous five-year legislation expired in 2012, but disagreements over cuts to the Supplemental Nutritional Assistance Program (or SNAP, but better known, anachronistically, as food stamps) kept drafts of bills bouncing back and forth between the House of Representatives and the Senate. In the meantime, Congress voted to temporarily reauthorize funding for existing farm support programs, thereby preventing an automatic reversion to World War II-era policies.

Then in late January, somewhat surprisingly, the House passed a version similar to those that had previously passed the Senate. The Senate quickly approved it, and President Obama signed it into law on Feb. 7. The new five-year bill is 949 pages long and makes some big changes to existing programs, while altering others very little. While a lot more remains to be said about agricultural policy, the following is a short list of prominent changes in the bill.

Elimination of major programs. Direct payments to farmers have been perhaps the best-known and least-popular commodity program, in place since 1995. These involved automatic, per-acre payments to farmers regardless of production. The new farm bill cuts these completely, saving about $5 billion a year. The existing dairy program, which has a major impact in the district, will also be eliminated in favor of an insurance-based approach. The sugar program was also being eyed for major overhaul, but remains essentially intact.

New safety-net programs. Along with direct payments, some other commodity supports have been removed (like countercyclical payments and average crop revenue payments), but replaced with similar programs. The new law establishes the Price Loss Coverage Program that pays crop producers when prices fall below a threshold. Or if facing a loss, producers can turn to the Agricultural Risk Coverage Program under which payments are based on revenue (and whose formula is based on county or farm-level revenue, as opposed to the old formula based on state average revenues).

The main change from the previous system is that payments won’t be based on acres planted in a given year, but on those assigned to each farm by the USDA based on plantings in recent years. This change is intended to correct distortions the old system created for planting decisions.

Expansion of crop insurance subsidies. As crop prices trended up, subsidized crop insurance became a more important policy for many farmers than traditional subsidies. The new bill makes federal crop insurance programs the cornerstone of ag policy, essentially codifying this trend. The subsidized portions of some premiums will increase, and some thresholds for payouts will be loosened. It also creates new insurance programs for livestock and dairy producers. Details of how insurance programs will work going forward are yet to emerge, as the USDA has six months to set them up.

Cuts to conservation programs. The bill reduces the number of conservation programs from 24 to 13 and caps total enrollment at 24 million acres. This acknowledges a broader trend of falling participation in conservation programs. However, there is a silver lining for environmentalists: Farmers must be in compliance with conservation practices to be eligible for payments and insurance subsidies. This is intended to address the criticism that insurance encourages the conversion of fragile ecosystems to cropland.

Cuts for the rich and the poor. While cuts to SNAP were not as high as House leadership had been pushing for, spending on the program is projected to decline by $8 billion over 10 years, mainly through changes in eligibility. As a political compromise, and to counter criticisms over subsidies going to wealthy farmers, the farm bill also capped total payments from all commodity support programs at $125,000 to any individual or entity, and there is a limit of $900,000 adjusted gross income to be eligible for payments from some commodity and conservation programs. The USDA will also issue new guidelines on who counts as being “actively engaged in farming,” so Wall Street tycoons and Hollywood celebrities who own farmland might not be able to collect payments anymore. However, a proposal to limit insurance subsidies for high-income earners didn’t make it into the final version of the bill.

There is a lot more in the bill, of course—programs to promote agricultural exports, local food production, weather insurance, you name it. Expect more coverage as details on these and other policies emerge.

Strong 2013 for Ninth District mid-cap stocks

While 2014 is off to a rocky start, stocks of mid-cap companies in the Ninth District had a strong year in 2013 with a 27 percent gain, similar to the 28 percent increase in the S&P MidCap 400 Index (see chart, at bottom).

In 2013, growth was broad-based, with all sectors reporting net increases in market capitalizations. But certain sectors stood out. Almost a quarter of the total market value added was accounted for by growth in the technology sector, led by Stratasys, a manufacturer of 3D printers based in Eden Prairie, Minn., which posted strong gains in market capitalization and prices during this period.

Industrial goods, utilities and services sectors also had robust increases in market value. Buffalo Wild Wings doubled its market valuation from $1.4 billion to $2.8 billion; MDU Resources Group, a diversified utilities and energy-related services provider based in North Dakota, saw its market cap increase by 41 percent ($1.7 billion) in 2013, while the market value of Polaris Industries, a Minnesota-based manufacturer of snowmobiles and off-road vehicles, grew 70 percent ($4.1 billion).

Strong overall growth notwithstanding, a few companies in the district decreased in value during 2013, including the Minnesota-based logistics company C.H. Robinson Worldwide, which lost 14 percent ($1.5 billion) of its market capitalization during the year.

While 2013 was strong, the first month of 2014 saw Ninth District stock values decline by 6 percent, while the S&P MidCap 400 Index decreased by 2 percent. Grocery chain Supervalu and Select Comfort each lost about a fifth of market value during January, while Polaris’ market cap gave back a good portion of its 2013 gains when it dropped 16 percent ($1.7 billion) to start the new year.

The district mid-cap index for 2013 is constructed on monthly data running from January 2 to December 31. See technical notes for methodology and other details.

District Mid-Cap index -- 2-24-14

Student loan defaults widespread, and rising

First, the good news: According to the National Association of Colleges and Employers, U.S. firms expect to hire almost 8 percent more class of 2014 grads than they hired from the class of 2013.

The bad news: It can’t come fast enough for many attending college, because many are facing unsustainable debt and defaulting on their student loans.

Nationwide, the student loan default rate jumped this year to 14.7 percent (for those starting loan repayments in fiscal year 2010), a significant increase from 13.4 percent (for those starting repayment in 2009; for default rate background and methodology, see description at the end). Every district state saw its cumulative default rate also increase for the 2010 cohort group, though rates are typically much lower than the national average (see table, left). North Dakota’s rate of 5.6 percent for the 2010 cohort group is a small fraction of the national rate and has risen comparatively little over the past two years.

But other district states have witnessed large jumps in their default rates, and all but North Dakota are now above or approaching 10 percent, led by South Dakota’s 13 percent. Higher default rates are widespread among institutions; for the roughly 250 district schools with students in the 2010 repayment cohort, 182 saw their default rate rise; for 110 schools, it grew by 2 percentage points or more.

In most states, proprietary and two-year schools are bearing the brunt of higher default rates. In Minnesota, for example, default rates have gone up across the board, but the increase and overall rates at four-year public and private universities are a fraction of those seen among public two-year and private, proprietary schools (see chart, right).

Student loan defaults -- 2-20-14

Default rate description and methodology: Student loan defaults at the institutional level are tracked and released annually in the fall by the U.S. Department of Education. Data were gathered for 273 higher education institutions in Ninth District states, including all of Wisconsin. The agency uses a three-year default rate, which tracks those entering repayment (whether graduated or not) at any point during a federal fiscal year (Oct. 1 to Sept. 30) and defaulting by the end of the third fiscal year. Student loans are not in default until they are 270 days late. In essence, default rates measure those ex-students who have fallen more than nine months behind in loan repayments at some point within 24 to 36 months (depending on how close to the end of the fiscal year they started repaying loans). The agency also tracks two-year default rates, but will be phasing this measure out in favor of the three-year default rate.

Ninth District businesses remain optimistic

There has been a fair amount of attention given to the possibility of an economic slowdown in 2014. While only a small anecdote in the volume of economic data, a recent survey still suggests a positive outlook in 2014 for the Ninth District economy.

The Federal Reserve Bank of Minneapolis conducted an ad hoc survey of 135 Ninth District firms and asked them about their outlook for 2014 (see methodology). Over 80 percent expressed optimism for their community’s economy over the next 12 months. This is comparable to the 74 percent of respondents to the November 2013 fedgazette Business Outlook Poll. Results by sector show that construction respondents were the most positive with 9 out of 10 reporting optimism, followed by manufacturing (87 percent), professional services (80 percent) and finance, insurance and real estate (79 percent).

“Seeing improved trends,” said a Minnesota banker, reflecting the overall mood of respondents; 53 percent expect increased sales for their operations compared with only 9 percent that expect decreased sales. Part of the sales increase is due to higher productivity, which 65 percent said occurred at their firm over the past 12 months. Higher sales expectations are partially reflected in the 39 percent of businesses that expect to increase prices, while 8 percent expect to lower prices.

More companies also plan more capital investment—30 percent expect an increase over last year’s spending, while 12 percent predict a decrease. Companies are having a better time financing these capital expenditures through better access to bank credit; 19 percent reported improved access, while only 5 percent noted deteriorated access.

More companies are hiring, too, with 34 percent expecting more employment and only 9 percent expecting less. Firms are facing some challenges; 44 percent noted that securing workers was a challenge, and over half reported that complying with government regulation was a challenge. FIRE respondents, at 69 percent, reported the most concern about complying with regulations.

Ad hoc survey methodology: On Feb. 10, an email was sent to 1,000 business contacts from various sectors around the Ninth District. By 5 p.m. on Feb. 12, 135 responses were received, representing a 13.5 percent response rate. The largest number of respondents came from finance, insurance and real estate (44 percent), professional services (24 percent), manufacturing (14 percent) and construction (10 percent). The disproportionate number of FIRE responses could have some unknown influence on results.

More Montana students staying in school

The Montana Office of Public Instruction released a report this week showing a fifth consecutive annual decline in the state’s high school dropout rate, during which it has gone from 5 percent to 3.6 percent. In student terms, the improvement means that more than 700 students stayed in school in 2012-13 compared with five years earlier (see Chart 1). This has translated to a higher graduation rate for cohort classes that started high school four years earlier. In just five years, it has increased from about 81 percent to more than 84 percent.

Along racial lines, there is good and bad news. The good news is that dropout rates for American Indians in Montana have declined almost three percentage points. The bad news is there continues to be a significant gap in dropout and subsequent graduation rates between American Indians and other student populations. Despite significant improvement, the current 9.5 percent dropout rate for American Indian students is about two and a half times the statewide average and means that only 65 percent of these students are graduating with their original freshman class.

Montana dropouts -- 2-5-14