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Friday, 22 August 2008 04:21 |
The Washington Post
By: Neil Irwin
Originally Published: August 20, 2008
BLAIR, Neb. -- The trucks rumble down the main drag of this farm town all day long, the ones heading east brimming with grains of No. 2 Yellow Corn, the ones going west filled with Sweet Bran, a cattle feed that looks like breakfast cereal and smells like warm beer.
That eighteen-wheeled evidence of prosperity shows why the Plains states are a bright spot in the otherwise gloomy national economic picture. Here, the housing market is holding up just fine, the banks are making plenty of loans, and employers keep adding jobs.
The good times in farm country show the difficulty facing policymakers grappling with the nation's economic distress, underscored yesterday by data indicating the steepest rise in monthly wholesale prices in 27 years and a 17 year low for new housing construction.
The numbers are gloomiest for Sun Belt states with eviscerated housing markets, and there, interest rate cuts and stimulus checks are helping ease the pain. But in the area stretching from the oilfields of Texas north to the Dakotas, where the economy is holding up fairly well, those government actions may prove unnecessary -- and even contribute to new bubbles.
Retail spending in the middle of the country was strong even before the $600 tax rebates this spring, and low interest rates and a tax provision in the economic stimulus bill are helping to goose already booming sales of farm equipment and pickup trucks.
The price of farmland in Nebraska has doubled in the past three years, primarily reflecting the boom in commodity prices. The increase also reflects the impact of rate cuts by the Federal Reserve that enabled buyers to bid up land with borrowed money. But if crop prices drop toward historical norms, it could mean sharp decreases in land prices that would devastate some farmers.
Corn has risen to nearly $6 a bushel, from around $2 in 2005; earlier this summer it was as high as $7.50. For an average-sized Nebraska farm with an average yield, that means an extra $900,000 in revenue (though that has been offset significantly by higher costs for fertilizer and fuel).
"People on the East Coast and West Coast are seeing their food bill rise, well, a lot of that increase is ending up here," said Ernie P. Goss, an economist at Creighton University in Omaha.
The jobless rate in Nebraska was 3.4 percent in July, barely up from 3.1 percent a year before. The national rate rose to 5.7 percent from 4.7 percent in that span.
The availability of loans to farmers is the strongest it has been in five years, according to a survey by the Federal Reserve Bank of Kansas City, even as banks nationwide are becoming reluctant to lend money. The reason: There wasn't much overbuilding of housing here, so most regional banks are not saddled with the same bad mortgage and construction loans as their counterparts on the coasts.
Encouraging Investment
The good times are not uniform across the region; ranchers have been pummeled by high prices for feed and fuel, and there has been flooding in Iowa.
In Blair, however, long-vacant storefronts have been turned into furniture shops and restaurants in the past couple of years, and Wal-Mart is looking to open a store just down the way. The billion-dollar Cargill plant that turns grains of corn into high-fructose corn syrup and ethanol just announced another $100 million expansion, adding a Danish company that makes enzymes out of corn -- a reflection of booming global demand for all types of commodities.
That prosperity also shows itself on Lyle Schjodt's farm a few miles outside Blair, where he farms 1,000 acres of corn and soybeans, 150 head of cattle, and 1,200 hogs. He still has the first tractor he ever bought, back in 1968, in a shed. "I've been farming for 39 years, and I haven't seen a better year than this one," he said.
Schjodt is upgrading his equipment; he just ordered a $120,000 Case IH planter, a massive red device that deposits seed corn every seven inches in 30-inch-wide rows. He bought a new $50,000 Ford F-350 back in the spring, too.
The government stimulus bill passed in February included provisions that will let him depreciate the value of those big-ticket purchases immediately. "They're some pretty attractive write-offs," Schjodt said. "It will get my tax bill down a lot in what's looking to be a real good year for income. I just wanted to take advantage of that."
His farm-equipment dealer, Victors Inc., is having a banner year, helped by those tax provisions and actions by the Fed, which has cut the bank lending rate it controls from 5.25 percent to 2 percent. The rate that Victors customers have to pay for a loan to buy a tractor or combine has dropped to about 5.75 percent, from 6.25 percent in the spring.
Not long ago, you could show up and buy a new tractor off the lot; now there is a 10-month backlog.
The main reason is high farm incomes, but "lower rates make the purchases more affordable for people," said Brad Victor, the owner.
Victor has expanded his staff from 20 to 25 people in the past 18 months and is building a 16,000-square-foot warehouse, decisions that would be hard to reverse if demand retreats.
The soaring prices for farm land echo the boom in housing prices in coastal regions from 2002 to 2006. Schjodt recently bought 20 acres that adjoined his property for $4,600 an acre; four years ago he made a similar purchase for $2,500 per acre.
Schjodt paid cash, but many of his peers borrow money to buy land -- up to 70 percent of the purchase price, frequently with variable-rate debt. In past run-ups of land prices, that has created problems. When interest rates rose sharply in the early 1980s and crop prices declined, thousands of farmers lost their land.
"I've been through two or three of these things in my lifetime," said Jim Realph, who worked in the farm credit system in the 1980s and is now mayor of Blair. "The biggest risk is the interest rates. If they swing up higher, it makes it much harder for a farmer to keep paying the debt."
A Far-Reaching Boom
The boom spreads beyond land and farm equipment. "You can tell when farmers are doing well," Schjodt said, "because they go out and buy a new truck."
Nationally, truck sales are battered by skyrocketing fuel costs. But auto sales are up 8 percent in the Omaha area so far this year, according to sales tax receipts.
High fuel prices are pushing people in Blair to consider other options, said Paul Cech, chief financial officer of Woodhouse Auto Family, a dealership in Blair. "But at the end of the day, you can't throw a bunch of equipment in the back of a Ford Fusion."
Those sales, too, have been helped by lower rates. The typical bank auto loan for someone with good credit is a full percentage point less than it was a year ago, Cech said, which reduces the monthly payment on a typical vehicle he sells by about $20.
"Have you seen Truck Mountain?" asks Cech, referring to the rows of pickup trucks, up and down a hill. "Pretty impressive, huh?" If those sales trends were to reverse, the thousands of trucks in inventory on Truck Mountain could become more burden than selling point.
On the main drag, business at Fernando's Cafe and Cantina, one of the recent additions to a once-desolate downtown, is up 10 percent over last year.
The strong sales environment is helping trigger new long-term investment. Wal-Mart has scaled back on its expansion plans nationally, but it is in negotiations to build a new store in Blair, which is about 35 miles northwest of Omaha. Several other retailers are opening nearby.
This isn't Blair's first retail boom. "The '70s, those were some good years," said Realph, who is also a farmer, real estate broker and seller of crop insurance. "Everybody was making money."
Then that commodities boom ended with a thud, as prices plummeted in the early-1980s. "We lost all our main street businesses," Realph said, sitting at his desk as agricultural prices on the Chicago Board of Trade flash on a flat-screen monitor up on a shelf, interspersed with weather maps. "We lost a lot of the people who were coming into Blair to buy things. We used to have a Penney's, you know."
He is proud of the new prosperity but cautious. "There are no straight-line graphs," Realph said. "Things just don't go up forever. I don't know when this will end, or whether it will be bad when it does, but this will go the other way."
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