Archive for July 22nd, 2008

KANSAS CITY, Missouri (Reuters) – The U.S. housing crisis looks pretty distant when viewed from the cornfields of middle America, although land values pushed up by record commodity prices also evoke past booms that ended in bust.

Farm prices in the corn belt jumped an eye-popping 20-plus percent last year. Economists at the Kansas City Federal Reserve say that so far, the gains seem to be based on anticipated profits from future harvests, not speculation.

If prices suddenly turned lower, the sector could suffer, and it would not be the first time. Farm values collapsed 40 percent between 1982-87, squeezed by higher production costs and lower agricultural earnings.

“If prices stay put we’re somewhat better, but if they don’t, we’re somewhat in trouble … It’s not all roses,” said Dennis Kvatum, a soybean and wheat farmer in Beardsley, Minnesota.

On the other hand, farmers have far fewer debts than in the 1970s and 1980s, giving them a decent cushion.

“Rising farmland values might be a sign of a bright, new, golden age in agriculture — but they are not without risks, noted the Kansas City Fed’s latest Economic Review.

In the meantime, the rest of the regional economy is benefiting from the sector’s strength, albeit with typical Midwestern understatement.

“Our business is really not bad. In fact, it’s pretty good,” said Mike Haverty, chief executive officer of Kansas City Southern railway, whose trains haul cargo like coal and grain for export to ports in Mexico.

Surging energy costs have not dented the railroad man’s enthusiasm because strong demand has helped him to pass along roughly 70 percent of these increases to customers.

A monthly manufacturing survey by the Kansas City Fed of its district declined in June, but it did show that companies’ expectations for future activity remained positive and export activity was solid.

The Kansas City Fed’s seven-state district spans the farming heartland of Oklahoma, Kansas, Nebraska and western Missouri, as well as the Rocky Mountain states of Colorado, Wyoming and northern New Mexico, where energy and ranching, as well as tourism, are economically dominant.


“The major food exporters, energy and commodity producers of our district are doing well,” Kansas City Fed President Thomas Hoenig told Reuters in an interview earlier this month.

“Our housing industry is under pressure, but by much less than in southern California,” he said, referring to a region of the country at the heart of the subprime mortgage meltdown.

U.S. agricultural exports have skyrocketed more than 40 percent this year due to both higher prices and larger volumes, amid soaring demand from markets like India and China, whose massive emerging middle classes want to eat more and better.

The benefits of this boom have been felt broadly, with retail sales taxes up in neighboring Nebraska, for example, in an indication that consumers have continued to spend and buoy a service sector suffering at a national level.

“Record high commodity prices have lifted farm profitability and that has spilled over into capital spending,” said Jason Henderson, a rural economist and head of the Omaha branch of the Kansas City Fed.

“We’re going to have some solid growth in 2008 and our service sector is holding up well,” he said, adding that west Nebraska may be one of the few places in the country where demand for SUVs has defied $4-plus gasoline.

The Kansas City Fed calculates an index of farm incomes and capital spending based on a survey of agricultural banks.

This gauge soared to around 160 during 2007 from a reading near 100 in the fourth quarter of 2006, with capital spending tracing a similar climb. But the pace of gains for both were expected to slow over the coming months.

“Rising input costs are limiting crop profit margins. Livestock producers are posting huge losses due to higher feed costs,” it noted in its most recent survey of agricultural credit conditions, which covered the first quarter.

On top of margin pressures, higher commodity prices also up the ante for agricultural businesses that have to buy and store produce at the higher prices, and finance these inventories with bank credit.

“Your county grain elevator used to need a credit line of $10 million and now that is more like $40 million,” said Paul DeBruce, chief executive of DeBruce Grain, a huge private grain distributor with $4.6 billion of turnover in fiscal 2008.

Some if his grain elevators customers were negotiating harder on when they would get paid than on price — an indication of their need for cash — and order backlogs for agricultural equipment were lean, in a sign of slowing demand.

“The industry is not in trouble, but it is under strain,” the Kansas City-based DeBruce said.


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