Record U.S. Exports Reflect Midwest Agricultural Boom

The unemployment rate in North Dakota is 3.7 percent, and “if it wasn’t for cable news, we probably wouldn’t have any idea that the rest of the country was any different,” said Doug Johnson, co-owner of crop insurer TCI Insurance in West Fargo, who added six new employees this year.

As businesses across the U.S. struggle to recover from the deepest recession since World War II and the national jobless rate remains stuck at 9.6 percent, Johnson has benefited from his location in the northern Great Plains, where a boom in commodities, such as wheat and soybeans, is helping to create jobs, lift farmers’ incomes and fuel demand for goods ranging from Deere & Co. (DE) tractors and Agco Corp. (AGCO) combines to dinners at local restaurants.

The agricultural Midwest -- particularly North and South Dakota, Kansas and Nebraska -- has been leading the U.S. economic recovery as its banks, businesses and households avoided the worst of the housing bubble’s collapse and the financial crisis that followed. Now the region is getting a further boost from record exports of commodities, driven by demand in China and Russia and a declining dollar. U.S. farm shipments next year may surpass the 2008 record of $115.3 billion, Joe Glauber, the U.S. Department of Agriculture’s chief economist, said last month.

“This has been the brightest spot in the U.S. economy throughout the recession, the only part of the country that has held up reasonably well,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

‘Significant Tailwind’

“The rise in commodities prices has been a very significant tailwind for the entire region,” as strong demand worldwide drives sales of products, including agricultural equipment, financial services and fertilizer, he said. “It goes beyond the farm itself.”

Ray Gaesser, 58, who grows soybeans and corn near Corning, Iowa, says he installed new drying and grain-handling equipment this month and may buy tractors, combines or planters next year.

“We are in a cycle that is good for agriculture right now,” he said. “We are pretty optimistic.”

North Dakota and two other states in the region had the lowest unemployment rates in the U.S. during September, with South Dakota at 4.4 percent and Nebraska at 4.6 percent. These are also the three states with the largest share of gross domestic product from agriculture: 10.9 percent for North Dakota, 9.4 percent for South Dakota and 6.8 percent for Nebraska, according to data from the Bureau of Economic Analysis.

Job Creation

North Dakota and Nebraska will help lead the nation in job creation next year, according to Moody’s, which estimates their nonfarm payrolls will grow by 1.53 percent and 1.35 percent, the third and seventh best rates in the country.

“Obviously the economy in North Dakota did not put a stop to our plans” for expansion, said Johnson, who now employs 23 people at his crop-insurance company.

Farmers have done “extraordinarily well,” Ann Duignan, an analyst at JPMorgan Chase & Co. in New York, said in an interview. “With high commodities and low inputs, you’re looking at significant margins and that means a big splurge of spending into the yearend.”

Duignan recommended farm-equipment manufacturers Agco, Deere and CNH Global NV in a Nov. 9 report to clients. Moline, Illinois-based Deere, the world’s largest maker of farm machinery, is “the No. 1 brand of choice in the crop segment” and best positioned to benefit from the strength in U.S. agriculture, she said. “They’re the ones who are making the money.”

Rising Earnings

Deere reported a 47 percent jump in fiscal third-quarter earnings on Aug. 18 as net income climbed to $617 million, beating analysts’ estimates. The company earned about 65 percent of its revenue and 80 percent of its operating income from the U.S. and Canada in 2009, according to data compiled by Bloomberg.

CNH, an Amsterdam-based unit of Italian automaker Fiat SpA that makes Case and New Holland farm equipment, got 43 percent of its revenue from the U.S. and Canada, while North America accounted for 22 percent of Duluth, Georgia-based Agco’s revenue.

“We’re setting up for a very interesting 2011,” Duignan said. “Overall it’s going to be a good year for farmers.”

Agriculture fared better than other sectors of the U.S. economy during the recession, as an expanding world population and growth in emerging economies supported demand for crops. China was a net importer of corn last year for the first time since 1996, even as its government sold state-owned inventories.

Declining Dollar

The U.S. dollar has declined 7.3 percent in the second half of the year as food prices surged after cold in China, drought in Russia and parts of Europe, and flooding in Canada damaged harvests. The spot price of corn has gained 46 percent since July 1, wheat is up 28 percent and soybeans have risen 25 percent, according to the USDA. The S&P GSCI Agriculture Index added 41 percent, compared with the 17 percent advance in the broader S&P GSCI Index (SPGCCI) of 24 commodities.

Farmland values also are rising. Land prices in some areas of the Federal Reserve Bank of Kansas City’s district -- which includes Kansas, Nebraska, Wyoming and parts of Missouri -- increased as much as 12 percent in the third quarter from a year earlier, the biggest jump since the fourth quarter of 2008, the Fed bank said Nov. 12.

Land Speculation

That may be prompting some speculation, as people see land as “an inflation hedge,” Thomas Hoenig, the bank’s president, said Oct. 25 in a speech in Lawrence, Kansas. Buyers are thinking “you can’t go wrong with land,” he cautioned. “I don’t want to see that.”

Farm incomes climbed this year to $77.1 billion, 19 percent higher than the 2000-2009 average of $64.8 billion, the USDA forecast in August.

The increase “is absolutely very important to the broader economy,” said Ernie Goss, a professor of economics at Creighton University in Omaha, who conducts monthly surveys of Midwestern banks and supply managers. “Truck sales are up because farmers are buying trucks. That benefits local auto dealerships. And that creates spending money at the local Pizza Hut.”

While agriculture accounts for 1 percent of the more than $14 trillion U.S. economy, its impact may be 10 times greater when related businesses such as farm supplies, grain handling and food making are included, Jason Henderson, an economist at the Kansas City Fed, said in an October interview.

Lagging Areas

Other parts of the country are still lagging behind farming areas, according to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

While “the agricultural side of the Midwest is doing well,” the plains states “are very, very different than the industrial Midwest,” she said.

Unemployment in Michigan is 13 percent, the second highest after Nevada at 14.4 percent. The jobless rate in the Detroit metro area has stalled above 13 percent for 21 months.

Consumers in farming areas are in the best shape, according to an index of financial distress that includes credit, housing, and employment compiled by Atlanta-based CredAbility, which provides nonprofit credit counseling. Four of the five states with the most favorable conditions in the third quarter were North Dakota, South Dakota, Nebraska and Wyoming.

That coincides with the Fed districts that had the lowest unemployment rates in September: 7.2 percent for Kansas City and 6.2 percent for the Minneapolis district, which includes the Dakotas.

‘Economic Phenomena’

“Some of this relative success can be explained by strong markets for oil, minerals and agricultural commodities,” Narayana Kocherlakota, president of the Minneapolis Fed Bank, said in a speech today in Sioux Falls, South Dakota. “But it is also true that many cities in the Ninth District, like Sioux Falls, are mostly removed from these economic phenomena and yet they continue to perform well.”

The Minneapolis bank is studying the reasons for the district’s success to determine if they could be “replicated at the national level,” he said.

With incomes climbing, farm-credit conditions improved in the third quarter, according to a report from the Kansas City Fed. More district bankers noted higher loan-repayment rates and fewer loan renewals and extensions, the bank said. Average farm-loan interest rates fell to 6.7 percent, the lowest since the survey began in 1976, and collateral requirements eased.

‘Irrational Exuberance’

“The housing debacle and morass was not nearly as significant in this part of the country,” Goss said. “The banking problems were not nearly as great. There was irrational exuberance on the East and West coasts; that was not here.”

Baker Implement Co., a 150-employee farm-equipment dealer in Kennett, Missouri, has hired six or seven employees in the past two years and may add a similar number during the next year, said President Paul Combs, 45. His business sells tractors, combines, cotton pickers, sprayers, planters and hay equipment.

“We are in a boom” as farmers “put money back into our communities,” he said. “To the extent the agriculture sector does well, though it is a small part of the economy, it is a big part of our economy down here.”

To contact the reporters on this story: Joshua Zumbrun in Cleveland at jzumbrun@bloomberg.net Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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