Personal income: One Dakota leaps, the other stumbles (kind of)

The Bureau of Economic Analysis just released figures on personal income, and Ninth District states fared comparatively well (see charts). Montana and Minnesota ranked in the top five in per capita income growth, and Michigan was ninth.

But the Dakotas stole the headlines, being the top and—maybe surprisingly—bottom state in terms of both total and per capita income growth last year. North Dakota was head and shoulders above other states, seeing a rise of 9.9 percent in per capita income. The next closest was Ohio, at 3.8 percent. Total personal income in North Dakota rose by 12.4 percent, thanks to strong worker migration to the state as well as rising wages.

Its southern sibling didn’t fare so well last year. In fact, South Dakota was the only state in the union to see a decline in per capita (-1.3 percent) or total personal (-0.2 percent) income. The likely culprit is agriculture, a volatile sector that suggests the state’s 2012 performance is not something to fret over.

Rewind to 2011. Farm income in South Dakota that year hit a record $4.6 billion—more than double 2010 levels—and was a big reason the state led the country in income gains in 2011, at 12 percent. Fast forward to 2012, a year with severe drought that hurt South Dakota ranchers and farmers more than in many neighboring states. Total farm income dropped to $3.3 billion—still a decent year on average. But the $1.3 billion drop in annual farm income last year represents significantly more than the $60 million drop in total state income recorded by the BEA.

Minnesota farmland has bumper crop of $$$

It’s no secret that the farm economy has been robust for a considerable stretch. That persistent strength can be seen in the market value of farmland in Minnesota, especially when compared with other types of property, particularly residential, which is by far the state’s largest segment of so-called real property.

It’s almost like agriculture didn’t get the memo on the recession and slow recovery. Thanks mostly to steadily strong crop prices, farm property saw exceptional growth during the recession through 2010 (see Chart 1). The last two years have been flatter—but still growing—in stark contrast with virtually all other real property. Like corn during a good growing season, farmland value as a share of all real property grew from 16 percent in 2007 to 24 percent in 2012 (see Chart 2).

Minnesota’s lakes: More impaired, but don't be afraid to jump in

In the land of 10,000 lakes, the Minnesota economy has a unique relationship to water that is widely used for fishing, general recreation and even moving goods to market. So it raised some eyebrows when the state announced that more than 600 bodies of water were added this year to its list of impaired lakes and rivers.

But before the “ick” factor makes you put away that canoe, or pull the kids from their favorite swimming hole, it helps to get the background story. Turns out that the measure is more building block than condemnation—a work-in-progress assessment for preserving one of the state’s most valuable natural resources.

Since the mid-1990s, the federal government has required states to assess their water quality. Since then, the number of impaired bodies of water—those that don’t meet various federal water quality standards—has risen steadily and now stands at more than 3,600 (see chart). A map shows that these impaired water bodies are widespread (see map).

 

While this might not be “good” news for boaters and anglers, neither is it necessarily cause for great concern, according to officials with the Minnesota Pollution Control Agency, which puts the list together. The state has an incredibly large amount of water—92,000 miles of streams alone—and the growing impairment numbers “are indicative of our growing monitoring efforts,” said David Christopherson, who does environmental reporting and special studies for the agency’s water division.

Water bodies make the list if they exceed any number of water quality standards, like turbidity (excessive sediment), eutrophication (too much nutrient, often phosphorous from farm run-off), presence of fecal coliform or a host of other standards. In putting together its biennial impairment report, the agency “uses all available data” from internal and external sources with information about any of the state’s water bodies. As a result, the data are neither comprehensive nor systematic; given that the list comes from a partial assessment, it’s not even a random sample that could be considered scientifically representative.

The list also is highly sensitive to evolving standards for water quality. For example, a huge spike in listings in 1998 was the result of a first-time federal advisory on mercury and fish consumption, and mercury impairment is by far the biggest source of listings. Christopherson added that the state will be applying additional nutrient standards in the near future, “and I would expect to see a big jump (in impairments) then too.”

As a result, he said, “I don’t think (the impairment list) gives us much indication of overall water quality” in the state. Instead, Christopherson said the impairment list is more like a slow-growing benchmark that will give policymakers and others the data necessary to develop a more comprehensive approach to improving and maintaining water quality. “This is a primary driver in terms of what we’re doing” to improve water quality. “Once they get on the list, we have to deal with them.”

He acknowledged that “there are a lot of water quality issues out there. It’s a big issue and will take a long time to address … (but) I don’t think anyone here is particularly surprised” by the growing list of impaired lakes and rivers. The agency generally believes that about 40 percent of water bodies could stand some improvement, and the list “matches what we’ve been finding for years and kind of expected. A lot of other (states) are worse.”

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.

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.”

CRP: Production potential trumping conservation

Critics of farm subsidies often say the programs “pay farmers not to farm.” While that isn’t a fair characterization of most ag policy, it is literally true of the Conservation Reserve Program, where farmers can collect rental payments from the federal government for voluntarily pulling certain acres from production and returning them to a more natural state.

While that might sound like a can’t-lose business model, farmers across the country and Ninth District have been pulling acreage out of CRP at a fast pace since the recession. From 2000 to 2006, the program saw little fluctuation in enrolled acres. But starting in 2007, district states saw a steady outflow of enrolled acres (see Chart 1). Montana and North Dakota each lost almost 1 million CRP acres over this period (about 29 percent of enrollment), while Wisconsin saw the biggest percentage drop (39 percent), but has easily the smallest enrollment among district states.

The decline in district states reflects—and is a big contributor toward—a broader decline in acreage nationally because the district has nearly 30 percent of all CRP acres. So what’s behind the decline? Simple cost-benefit analysis. Over the past few years, prices for corn, wheat and soybeans have been at sustained highs.

CRP rental rates are determined through a bidding process, whereby interested farmers submit a price at which they will remove acreage from production for 10 years, and the USDA picks which contracts it will purchase. Contract prices have been rising, but they haven’t kept up with crop prices—which, not coincidentally, started rising in 2007. So the fall in CRP acreage simply means farmers believe these acres will be more profitable in production than conservation.

In aggregate, CRP payments might seem big; farmers in each district state have received hundreds of millions of CRP dollars since 2007. But as Chart 2 shows, these payments are tiny relative to overall farm income, and they are likely to decline further if more land exits the program, as many expect. The fact that acres are enrolled under 10-year contracts has probably prevented a faster decline. Those contracts can provide some idea of where the program is heading, which will be the subject of a future Roundup post.

Cashing in on the farm might mean holding onto it

Robust agricultural prices have led to strong farm balance sheets. That lure of high profits has generated anecdotes of some eye-popping sales of farmland and whispers of a farmland boom for a couple of years running.

But that’s only the wind blowing in your ears—there is no widespread evidence of a speculative boom, says a recent report by Steven Taff and Minnesota Land Economics, an online data warehouse maintained by the Department of Applied Economics at the University of Minnesota.

The price of land has risen considerably since 2000, even after adjusting for inflation, including a strong rise from 2007 to 2010. While farm income wasn’t particularly strong during the first half of that decade, farmers saw some of their best years during and after the recession.

But the lack of unbridled speculative bidding can be seen in the fact that the number of sales has dropped by 50 percent since 2007, and the number of acres sold has fallen even more—evidence that farmers are perfectly happy to take profits from fields, rather than from land sales (see chart). That was particularly the case last year, when the number sales, total acres and median prices all declined compared with 2010.

The MLE database goes back to 1990 and includes some 54,000 farmland sales covering 6 million acres. The data come from state Department of Revenue compilations of property transactions, which are reported annually by county auditors. The distribution of those sales, broken out by year, offers an interesting timeline of farmland sales and values in the state over this period (see video at bottom; note that land values in the video are not adjusted for inflation).

Taff points out that ag land near the Twin Cities, other large cities and high-amenity locations has “always been affected by factors other than agricultural,” including recreation, housing development and retirement. “This results in some parcels selling for far more than we might expect if we simply focused on their farm income potential.”

 

 

 

Robert Frost redux: Levees make good neighbors, especially in Velva

The city of Minot and surrounding region is still recovering and rebuilding from last summer’s devastating floods, when a raging Souris River damaged more than 4,700 residential, commercial, farm and public properties. A recent report by the U.S. Army Corps of Engineers put total structural damage at nearly $700 million.

But the floods would have exacted an even larger toll without emergency levees that were hurried into place when it became known that the region was in eminent danger of historic flooding. Though there was not enough time to build levees high enough to avoid catastrophic flooding in many places, the Corps estimates that an additional 1,500 structures would have been damaged, to the tune of more than $200 million, had no levees been erected (see table at bottom).

The tiny community of Velva, population 1,100, was the biggest beneficiary of emergency levees. A total of 29 homes and 5 businesses were damaged by the flood, totaling about $1 million. But emergency levees protected almost 500 structures, preventing $88 million in damage.

Minot and Burlington were the hardest hit, and the least saved, in a proportional sense. Minot suffered structural damages estimated at $577 million, while levees saved further damage to about 800 structures and $105 million in additional costs. Neighboring Burlington was barely spared; it suffered $32 million in property damage, and levees prevented just $94,000 in additional damage.

Total flood recovery costs also exceed these damage figures. Minot Mayor Curt Zimbelman recently told a U.S. Senate Budget Committee field hearing that the city’s unmet needs for flood recovery total almost $1 billion, about half of which is for a flood control project that would protect the city from a similar event in the future.

A brave new ethanol world?

The past decade or so has been manic-depressive for ethanol producers. The fuel went from a niche market to being praised as the savior of rural America and a key to breaking the U.S. addiction to foreign oil. Then, seemingly overnight, it became reviled for its inefficiency and was blamed for higher prices at the grocery store and food riots in the developing world.

Popular or not, ethanol has become big business in the Ninth District. In addition to the many corn producers growing the primary feedstock for ethanol, the district is home to some 43 ethanol plants, mostly in Minnesota and South Dakota (see map). Together they produce almost 2.5 billion gallons a year, according to the Renewable Fuels Association.

Critics of ethanol have charged that the industry is dependent on subsidies. Meanwhile, producers and advocates have shot back that improvements in technology and increasing oil prices mean that ethanol is now competitive without subsidies. This theory is now being subjected to a real-world test.

That’s because the primary ethanol subsidy, the federal Volumetric Ethanol Excise Tax Credit, ended on Jan. 1. The credit (45 cents per gallon, most recently) went to blenders who mixed ethanol with gasoline. In addition, a 54-cent per gallon tariff on imported ethanol also expired at the end of 2011. Even though the tax credit, which had been in effect for more than 30 years, went to blenders, it had always been an indirect subsidy to ethanol distillers and feedstock farmers.

All of this has some district corn growers and distillers worried about the impact of removing subsidies. They can take heart from a pair of studies that estimate the impact will be minor. An analysis by the Center for Agricultural and Rural Development at Iowa State University focused on how much blame ethanol deserved for the surge in corn prices from 2006 to 2009. They did this by creating a model of the corn market and then running simulations in which various economic factors and policies were removed. It turned out that while ethanol was responsible for a large share of the rise in corn prices, most of that increase was due to demand-driven factors; only 8 percent of the price increase was due to direct ethanol subsidies.

A June forecast by the Food and Agricultural Policy Research Institute at the University of Missouri suggested that the effects of removing the blender’s credit and the tariff will be modest—a reduction of average corn prices over the next 10 years by 18 cents per bushel, less than 4 percent. An earlier analysis found that removing the tariff had a more substantial impact than removing the subsidy.

One reason the impact of removing subsidies and tariffs is less dramatic than might be expected is because there are still federal and state mandates for ethanol use. In addition, last January the Environmental Protection Agency approved a 15 percent ethanol blend (up from 10 percent) for cars made in 2001 and later. So there are other demand-drive government policies to support the ethanol market.

USDA proposes office closures across nation, district

The U.S. Department of Agriculture announced this month that it would close 259 offices across the country with the expectation of saving $145 million annually in operational efficiencies.

In the Ninth District, a total of 17 offices are slated for closure (see map). Minnesota has the highest tally with seven offices on the list, followed by South Dakota with five. Montana and North Dakota each have two closures. Michigan has three, but only one is in the Upper Peninsula portion located in the district (in Marquette). Wisconsin has two offices on the list, but neither is in the northwestern portion of the state that is part of the Ninth District.

The USDA has four types of field offices being affected. Farm Service Agency offices are the most numerous and make up half of all closures nationwide, and 10 of the 17 district closures. Many of the recommended closures are in offices that have two or fewer employees, or are within 20 miles of another office. The remainder is mixed between six additional departments within the USDA. In district states, closures are in Food and Nutrition Services (4), Food Safety and Inspection Service (1) and Natural Resource Conservation Service (2).

The move is a smaller-scale version of recent proposals from the U.S. Postal Service, which is considering closing thousands of post offices, including almost 400 in the Ninth District. But unlike the post office proposal, where almost 11 percent of closures were in Ninth District states, fewer than 7 percent of USDA office closures will be in the district.

Flood affects business, banking in the Ninth District

Many communities in the Ninth District were hard hit by flooding this past year (see past reports in the fedgazette). But banks in district states report that, in general, the impact on local economies will be modest overall, according to a fall survey by the fedgazette.

A total of 86 banks responded to the (nonscientific) survey, including 52 from the Dakotas and Montana, which saw the worst flooding. In terms of their local economies, bankers reported that agriculture and retail sectors in general have been hit the hardest. For example, 15 of 25 Montana bankers reported adverse flood impacts on agriculture, and 44 percent of North Dakota bankers said retail has been negatively affected, along with about one-third of bankers in North and South Dakota regarding the transportation sector. Construction saw a mixed response, with roughly equal (and small) numbers of bankers stating there were negative and positive effects from flooding.

But those difficulties were not necessarily flowing through to bank business to the same degree. A large majority of respondents across district states said that loan repayments from existing clients have not been negatively affected across major portfolio areas (construction, agriculture, commercial and industrial, and commercial real estate; see Chart 1). Agriculture saw the highest reports of repayment problems (36 percent in Montana; 24 percent in North Dakota). Among the minority of banks reporting repayment issues with any loans (about one in three), many said they restructured loans or made other accommodations in loan terms.

Maybe more importantly, bankers said they expected little change in future loan repayments (see Chart 2). Agricultural loans were again the area of biggest concern. In terms of loan demand, most banks reported no flood-related changes; in fact, slightly more banks saw an increase in loan demand related to the floods compared with those reporting a decrease.

The survey was conducted in cooperation with state banking associations, who passed the survey along to an estimated 750 members. While overall results appear modestly positive under the circumstances of widespread flooding this summer, results likely vary significantly among individual communities, given the different localized effects of flooding.