Farm Belt Becomes Driver For the Overall Economy As Prices Rise, Spending Spreads to Tractors, Trucks

BOWMAN, N.D. — This year’s price rally in agricultural commodities is so robust that farmers and ranchers are emerging as a growth engine for middle America, helping to lift the region out of recession and increasing the chances for a period of sustained national growth.

By SCOTT KILMAN
Staff Reporter of THE WALL STREET JOURNAL

http://online.wsj.com

Christmas has come early to much of the Great Plains, a region racked by five years of agricultural recession. Net farm income — a rough measure of profitability — is jumping 58% over the past 12 months to $55.8 billion, says the Agriculture Department. And a big chunk of that money is reaching farmers right now because this is the season that a lot of them sell their recently harvested crops and newly weaned calves.

Like a drought-breaking rain, that money is causing a flood of pent-up activity. Agriculturally dependent businesses of all sorts — from farm-town merchants to commodity processors — are receiving a boost, as farmers and ranchers splurge on clothes, tractors, pickup trucks, even houses.

For the first time in a century, a house is being built on the banks of Deep Creek here in North Dakota. The record price that 32-year-old rancher David Septon reaped for the 90 calves he sold in October means he can afford to move his wife and three young daughters from the cramped and drafty home in which his grandfather once lived to a new place that will cost $100,000. "When we got a $1 a pound for our cattle, we decided we could do it," says his wife, Monica.

True to the nature of the boom-and-bust agricultural cycle, prices are climbing because supplies have shrunk to unusually low levels. World grain supplies are the tightest since the 1970s. A count of the U.S. cattle population on July 1, meanwhile, found the fewest animals since the survey began in 1982.

In a rare alignment of market forces, demand for farm commodities is strengthening at a time of tight supplies. The lower exchange rate of the dollar and a buying spree by China for soybeans and cotton helped to lift U.S. agricultural exports in October to $6 billion, a record for any month.

American consumers are willing to pay more for beef and eggs, thanks in part to the high-protein diet craze. And the ethanol-fuel industry is rapidly increasing its use of corn.

The present boom is proving that agriculture still matters in the U.S. Rising farm incomes are helping to ease the blow of the loss of manufacturing jobs in Midwest states. Ohio grain farmers, for instance, are reaping $1 billion more in revenue from this year’s crops than from their 2002 harvest, a 66% jump, figures Ohio State University economist Matthew C. Roberts.

"The farm sector is a significant source of strength for the U.S. economy," says Sung Won Sohn, chief economist of Wells Fargo Bank.

This upturn has the potential to be unusual both for its scope and strength. It is rare to have crop prices and livestock prices climbing at the same time. Everyone from the Texas cotton farmer to the Montana sheepherder is making more money from farming. The price of soybeans, used in everything from energy bars to margarine, is up 35% from a year ago. The price of cattle is up 38%. Cotton is up 49%. Egg prices are 46% higher.

The USDA’s food commodity index jumped 26% in November from the same month last year to the highest level since its creation in 1975.

"This is as big and swift of a change in the farm economy as we’ve seen in a generation," says Mark Drabenstott, director of the Center for the Study of Rural America at the Federal Reserve Bank in Kansas City, Mo.

"We’ve never had it this good," says Fred Adams, chairman and chief executive of Cal-Maine Foods Inc. of Jackson, Miss. Egg prices, which have soared to a record, are lifting profits so much that the egg processor’s directors are shelving plans to take the company private. The stock price has tripled since early November.
[farm]

The Farm Belt still has its problems. The farm population is shrinking as technology — from self-steering tractors to pest-proof crops — reduces the number of people needed for farming. And farming powers such as Brazil and Russia are emerging to challenge the U.S. for lucrative export markets.

But on the Plains, where the economy is more dependent on agriculture, rising farm spending is helping states such as the Dakotas and Nebraska out-perform the nation in terms of job creation. A widely followed index of business conditions in Nebraska, for example, jumped 21% in November despite the continued slump of Omaha’s telecommunications-services sector. The index, compiled by Creighton University economist Ernie Goss, is a survey of everything from business orders and production to inventories and employment.

In South Dakota, rising prices of grain and livestock are swelling the state’s economy by $800 million, estimates Matthew Diersen, an economist at South Dakota State University. The typical commercial farmer in North Dakota has an extra $24,000 in pretax income this year, according to a survey by North Dakota State University.

On the seven-block-long Main Street of Bowman, which is surrounded by ranches and wheat fields in southwestern North Dakota, the Christmas retail business is humming. At Dale’s Clothing, where Christmas business is up 20%, ranchers are buying jewelry and ski jackets as gifts instead of the coveralls that were popular last year. The Buick dealership sold eight new and used Park Avenue sedans in November. It usually sells just one or two. And West Plains Implement Co. is selling $75,000 tractors at the rate of four a month, compared with its normal monthly business of one.

A new bank is moving to town, bringing the total to three in Bowman, population 1,600. "We’re starting to see people invest back into the area," says Rod Diede, manager of the Bowman branch of Dakota Community Bank.

Although farmers themselves are a tiny part of the population, they have an outsize impact on the economy because farming is such an expensive enterprise. A full-time Midwest grain farmer often owns millions of dollars of equipment and land, and spends hundreds of thousands of dollars annually on supplies. The businesses that sell to farmers and use farm products account for about 12% of the nation’s gross domestic product and about 17% of jobs, according to the USDA.

The farm equipment industry, for example, appears to be beginning to pull out of its worst slump since the mid-1980s farm debt crisis. Sales of tractors with at least 100 horsepower — the type used by full-time farmers — climbed 3.7% in November compared with the same month last year, according to the Association of Equipment Manufacturers in Milwaukee.

The higher commodity prices will probably stimulate a planting boom in the spring, which means more business for seed and pesticide makers such as DuPont Co. and Monsanto Co.

For consumers, the farm boom shouldn’t increase their food costs significantly. The prices farmers are paid are usually a tiny part of the cost of making food; processing, packaging and transportation are all becoming bigger expenses.

John M. Urbanchuk, an economist at LECG LLC, Wayne, Pa., says he expects retail food prices to climb 3.2% in 2004, compared with a food price inflation rate of a little more than 2% this year.

The big exception is beef. Some economists expect retail beef prices to jump 15% in 2004. Prices are climbing so quickly that many steakhouses have stopped printing prices on their menus.

The commodities-price rally is a big change, too, for milling and packaged-food executives. China is buying so many American soybeans that U.S. processors such as Archer-Daniels-Midland Co. might have a hard time finding enough supply to keep their facilities operating next summer. U.S. traders expect China to buy as much as 350 million bushels of soybeans, which is a record and 14% of this year’s U.S. harvest.

One sign of the food industry’s nervousness is the hectic activity in the agricultural pits of the Chicago Board of Trade. Trading in futures contracts has been heavy this year in part because companies are using hedging strategies as protection against rising costs. The number of soybean futures contracts that traded hands in November was up 43% from November 2002, for instance.

"I’m getting calls from people I haven’t heard from in a decade," says Dan Basse, president of AgResource Co., a Chicago commodity-advisory firm.

How long will the farm boom last?

The agriculture sector is characterized by long spells of depressed commodity prices broken by sharp rallies. The last big grain-price rally was in the mid-1990s, and it persisted for just over two years until a currency crisis in Asia doused the region’s appetite for U.S. commodities.

Several economists think the farm economy will stay strong at least through next year. One big difference compared with a decade ago is that there is little sentiment in Washington to try weaning farmers from federal subsidies. Under the six-year farm bill signed by President Bush in 2002, farmers are reaping $19.7 billion in direct government payments this year although that might fall by as much as $5 billion next year if the rally persists.

A lot depends on the continuation of the economic boom in China, where consumers are using their swelling buying power to buy more meat. China is importing U.S. soybeans mostly to fatten hogs and poultry. "I think China will be a long-term factor," says Keith Collins, chief economist at the USDA, which expects China to import $5.4 billion of agricultural goods from the U.S. in the fiscal year ending Sept. 30, 2004, compared with $3.5 billion in fiscal 2003.

The length of the commodity price rally also depends on how quickly farmers here and abroad can increase their production, as they are wont to do. Here on the Plains, at least, it will take a few years for ranchers to increase their herds to full capacity.

But pressure to expand is building. Steve Brooks, a 50-year-old Angus rancher who lives near Bowman, was unable to buy a bull he wanted at an auction earlier this month in Montana because bidding soared past his self-imposed limit of $12,000. The contest ended at a steep $16,000.

He bought another bull.

Write to Scott Kilman at [email protected]