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Kansas City Fed Report Looks at Rural Economy for 2010

Agency sees potential for more stable profits thanks to a weaker dollar and a strengthening global economy.

Published on: Mar 19, 2010

The farm boom ended in 2009 thanks to three factors - contracting food demand, declining export activity and the slump in ethanol production - according to a new report from the Federal Reserve Bank of Kansas City. However, the report also sees a rebound coming in 2010 due to several factors.

In the report - titled "Will the Rural Economy Rebound in 2010?" - author Jason Henderson recaps the decline in farm demand that occurred when worldwide global activity slumped last year. This stall caused a drop in U.S. farm income, and a slide in overall ag economic activity.

Recapping what happened, Henderson points to the fact that investors flocked to "safe haven" investments including U.S. treasuries, and the dollar strengthened. Ag exports fell 20% during the first 10 months of 2009 with the biggest declines in livestock exports. That includes a 45% decline in dairy exports, which decimated local cash prices for fluid milk.

Concerns over H1N1 flu virus also sliced up pork exports, adding insult to injury. And wheat and corn exports fell to do shrinking export volumes. Yet soybean exports remained a bright spot with China's appetite for the oilseed limiting the drop in the crop's price.

Weaker energy demand also dinged the ag market with the demand for ethanol from corn falling. The combination of lower demand and falling oil prices stalled ethanol production during the first four months of the year.

But prospects are improving, with stronger economic activity into the latter half of 2009, with rising food demand and stronger crude oil prices in the third quarter. The report points to gains in export and energy activity during the fall harvest as a boost to crop prices and farm profits in 2009. But even with a year-end price rebound, gross crop revenues fell 10.6%, yet market returns for key crops stayed above historical levels.

Less bright for livestock

Livestock producers took the brunt of the impact of the economic slowdown throughout all of 2009. The one-two punch of soft demand with low prices combined with higher than average production costs significantly impacted returns. Losses narrowed at the end of year.

Weak protein demand brought lower livestock prices in 2009, the report notes. Milk prices saw the biggest shift, falling 30% below year-before levels. Feed costs fell, but remained historically high, erasing profits for many.

While livestock and poultry producers responded to lower profits in 2008 into 2009 by reducing herd and flock size - meat and poultry production fell 4% during the first 10 months of 2009 - income still fell further.

Farm balance sheets health

Farmers did their best during the downturn to maintain farm financial health - despite the downward pressure. Net farm income fell to $52 billion in 2009, a big drop from $80 billion in 2008. Bankers reported reduced capital spending in 2009 with bankers reporting softer loan demand.

Farm financial conditions also weakened with loan delinquencies rising to 2.5% in 2009 with charge-off rates rising to 0.6%. However, these numbers remain below their historical averages. Federal Reserve surveyes show more bankers reporting lower repayment rates and higher levels of loan renewals and extensions.

Ag credit surveys by the Fed still show tight standards for farm loans. Commercial banks report collateral requirements remained elevated in 2009 due to rising risk in ag portfolios and bankers are using guaranteed loan programs more often to cut their own risk.

Farmland values remained near record highs in 2009 after softening heading into the year, with weaker commodity prices. Farm profits, while softer, have continued to underpin these land values.

Pegging a recovery

The 'jobless' recovery that may be underway in 2010 could bring an increase in gross domestic product of 2.5 to 3.5%. That's an anemic return to economic health at best, the report notes.

The good news that a stronger global environment will bolster exports - including for ag products. Ag exports are expected to rebound throughout the year with stronger global economies and the weaker dollar. World grain inventories remain near historical lows which could underpin farm level prices.

The report concludes that risks remain in both domestic and foreign demand for rural products. You can read the entire report HERE.