Jason Henderson

English

Research Papers in Economics

ural America will remember 2005 as a year of 
hurricanes,  drought,  and  surging  gas  prices.  But        
these disasters did not stop the farm sector from 
posting another banner income year—nor did they stop 
the Main Streets from enjoying solid gains in employment 
and income. 
Heading into this year, the rural economy appears 
poised for another round of robust activity, especially if 
private sector forecasts hold true. The biggest threat to this 
positive outlook appears to be higher energy prices. Rising 
oil and natural gas prices quickly translate into higher 
production costs for factories, farms, and households. Still, 
higher energy prices are also underpinning a new wave of 
investments and market opportunities in rural America’s 
emerging bio-based energy sector. 
CONTINUED RECOVERY IN 2005 
Main Street businesses continued to make solid job 
and income gains last year, as rural payrolls rose 1.2% 
during the ﬁrst three quarters of the year, matching metro 
areas and pushing rural unemployment down from 
6.0% to 5.7%. Sustained job growth translated into 
stronger incomes, which strengthened in the second half 
of the year. In rural areas, average weekly earnings growth 
averaged a solid 2.4% during the ﬁrst ten months, slightly 
below the 2.6% rate in metro areas. 
R
2006
The economic strength on Main Street was broad-
based, with both services and goods-producing sectors 
adding jobs (Chart 1). Rural service ﬁrms continued to 
lead the way, with 1.6% annual growth in November. 
Professional and business service ﬁrms added jobs at 
a 3.7% clip. The strength in such ﬁrms, which tend 
to employ people with higher skill levels, signaled the 
continuing transformation of the rural economy toward 
high-skill activity. Wholesale, transportation and utility 
sectors grew solidly, and recreation service growth stayed 
strong despite easing in the summer and fall due to higher 
gas prices. Job growth in recreation destination counties 
grew 3.5%.
A ROBUST RURAL ECONOMY
Jason Henderson, Senior Economist
Center for the Study of Rural America            • Vol I   Issue I
Chart 1
Rural Business Job Growth
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Feb-04M a y -04A ug-04N ov-04 Feb-05 May-05 Aug-05 Nov-05
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Percent change from year ago
Source: Calculations based on Bureau of Labor Statistics Data
Service producing
Goods producing
GovernmentCenter for the Study of Rural America
The rural goods-producing sector also strengthened, 
thanks to strong construction and mining activity and 
stable rural factories. By the third quarter, annual job 
growth in these sectors crested at 1.5%. Residential 
construction continued to expand as housing permits 
rose 3.8% during the ﬁrst ten months. Surging oil prices 
underpinned strength in mining as oil companies expanded 
rig activity. Rural factory closures and mass layoffs 
continued to abate, and job rolls edged up for the year. 
The strong growth in rural services and goods-
producing ﬁrms overcame weakness in rural government 
sector employment. Government jobs expanded less than 
1%. Gains were weak despite improved ﬁscal conditions 
for state and local governments. 
ANOTHER BANNER YEAR FOR AGRICULTURE
Despite drought and hurricanes, the farm sector 
enjoyed its second-largest year on record for net farm 
income, topping $71.5 billion (Chart 2). This ﬁgure 
stayed just 13% below the 2004 record despite rising 
production costs, which trimmed strong livestock and 
crop incomes. 
Strong consumer demand for meat in both domestic 
and foreign markets continued to bolster livestock in 
2005. In domestic markets, per capita red meat and 
poultry consumption reached its second-highest level on 
record, trailing only 2004 levels. Foreign consumption 
was also strong as red meat exports rose 30%. Pork 
exports stayed strong as exports to Japan and South Korea 
(countries that continued to ban the import of U.S. 
beef in 2005) set record highs. Beef exports to Canada 
and Mexico strengthened as these countries opened 
their borders to U.S. beef. In December, Japan ﬁnally 
announced it will allow the importation of U.S. beef from 
animals under the age of 20 months. While this came as 
welcome news, some analysts suggested it will take several 
years to rebuild the Japanese market. 
Even in the face of high prices, livestock producers 
showed restraint in boosting output. High prices typically 
lead to a chain of supply increases as producers start 
rebuilding breeding stocks. In 2005, cattle slaughter 
edged down as producers retained heifers and cows for 
breeding. Still, actual meat production rose as producers 
sent larger animals to slaughter. For the livestock segment 
as a whole, total red meat and poultry production inched 
up 1.7% in 2005. 
Strong demand and lean supplies led to high prices 
and proﬁt opportunities for most segments of the meat 
industry. Hog producers 
enjoyed the biggest proﬁt 
opportunities, as market 
prices stayed well above 
break-even levels throughout 
the year. Cattle ranchers 
beneﬁted from feeder cattle 
prices that approached 
record levels. But strong 
feeder cattle prices limited 
proﬁt opportunities for 
feedlot operators as fed cattle 
prices just covered break-
evens throughout most of 
the year.
While the Midwestern 
drought and the record 
hurricane season devastated 
certain regions of the 
country, they barely 
page 
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
90
1996 1997 1998 1999 2000 2001 2002 2003 2004* 2005*
Billion Dollars
Source: USDA
Billion Dollars
Direct Gov’t
Payments
Emergency 
Assistance
Chart 2
U.S. Net Farm Incomeinﬂuenced national crop production. According to 
USDA, drought in the Midwest led to soybean and corn 
production losses of $221 and $486 million, respectively. 
The losses were concentrated in Arkansas, Illinois, 
Indiana, Missouri, Ohio and Wisconsin. Hurricanes 
Katrina and Rita led to $882 and $195 million in crop 
production losses, respectively, mainly in the South. While 
large, these losses accounted for only a small portion of 
U.S. gross cash receipts. In fact, the 2005 U.S. soybean 
and corn crops were the second-largest on record and, 
coupled with a big 2004 crop, led to large amounts of the 
crops held in storage. 
Big crops led to lower prices for producers. Despite 
drought, bin-busting corn and soybean crops pushed 
farm prices for the 2005 crop below the 2004 average. 
While wheat production was down 2.8% from a year 
ago, average farm prices fell below 2004 levels due to 
weaker demand. 
Lower prices led to a surge in government payments. 
Subsidies were expected to reach $22.7 billion in 2005, 
up 70.7% from 2004. The biggest gain, $4.8 billion, 
was in the loan deﬁciency programs and countercyclical 
programs, which increase payments as prices fall. Ad hoc 
and emergency payments also rose $3.1 billion, with a 
sharp increase in disaster assistance payments. 
While the national production impacts of Katrina 
and Rita were small, the hurricanes intensiﬁed input 
price pressures on farmers throughout the nation. Fuel 
and oil prices were already rising before Katrina and Rita, 
but prices spiked in their wake. For 2005 as a whole, 
fuel and oil costs for farmers jumped an estimated 40%. 
USDA estimates that farm production costs go up $85 
million every time fuel prices rise 10%. Crop producers, 
especially wheat and corn producers, which typically 
spend proportionately more on fuel and oil, are expected 
to bear the brunt of the rising prices. Costlier nitrogen gas 
is expected to lead to additional gains in fertilizer prices 
in 2006. 
Despite rising costs, stronger incomes helped the 
farm balance sheet. Farm debt ratios fell in 2005 as farm 
equity gains outpaced rising debt. Nationally, farm real 
estate equity rose 7.3%, with some regions posting record 
farmland value gains. For example, in the Tenth Federal 
Reserve District, ranchland values surged 13% above 
last year. Strong land value gains continued to be fueled 
by robust investment and demand for recreational and 
residential land.
MORE OF THE SAME IN 2006?
The rural economy appears ready to reap another year 
of prosperity, especially if the national economy grows 
as private sector forecasters expect. Given supply and 
demand conditions, the farm sector could reap another 
bountiful year. Higher energy prices pose a risk to the rural 
outlook—but could also help spur a promising set of new 
investments in rural America.
Robust nonfarm growth. Activity on Main Street 
should stay strong in the year ahead, as rural growth 
follows national economic growth. Various analysts and 
forecasters expect 2006 to be strong for the national 
economy, with economic output expanding 3.5% in the 
ﬁrst half to 3.1% in the second half (Gerena-Morales 
and Annett). According to the Institute for Supply 
Management, growth could be broad-based as both 
manufacturers and nonmanufacturers are expected to 
enjoy solid gains.
As a result, job gains in goods-producing ﬁrms 
that strengthened as 2005 progressed should underpin 
continued resiliency. National indicators suggest robust 
manufacturing activity in the year ahead. Higher energy 
prices should continue to fuel solid growth at rural mining 
and mineral extraction ﬁrms. In service sectors, rural 
business job gains are expected to continue, with strong 
gains in high-skill industries. Many ﬁrms are engaging in 
“homeshoring,” outsourcing service-based jobs to rural 
America instead of overseas. By taking advantage of lower 
costs than in major metro markets, but closer proximity to 
ﬁrms, several businesses garnered media attention in 2005. 
For example, wages for software developers are $35 to $40 
per hour in rural areas, compared to $75 to $100 per hour 
in major metro markets and $20 per hour in India (Hall).
Another solid year for agriculture. Despite lower 
projections for farm prices, farm incomes in 2006 are 
likely to remain healthy by historical standards. Livestock 
revenues will likely stay robust as rising output offsets 
lower prices. Total red meat and poultry production is 
expected to rise 3%. While meat exports are expected to 
match this 3% rise, domestic consumption is expected 
Center for the Study of Rural America page Crop revenues may not be quite so resilient. Two 
years of bumper crops in the U.S. market have depressed 
prices from the highs posted in 2004. Corn and soybean 
prices are expected to fall well below year-ago levels 
(Table 1). While soybean prices are expected to remain 
above their historical levels, corn prices are expected to 
stay below theirs. Wheat prices could remain near 2005 
levels as drought and other production-
related issues have trimmed global grain 
inventories. Lower crop prices in 2005 
led to a surge in government payments. 
If prices remain low, government 
payments this year will probably remain 
near record levels. 
ENERGY’S IMPACT
The biggest risk to a robust rural 
economy in 2006 will be high energy 
prices. Rural businesses are already feeling 
the pinch of higher prices. In the farm 
sector, higher energy prices have pushed 
up input prices substantially. Last year, 
farmers paid 40% to 50% more for 
fuel than in the year before (Chart 3). 
to rise a more modest 1.7%. With production outpacing 
consumption, prices are expected to ease slightly yet 
remain above historical averages (Table 1). 
Fertilizer prices also rose last year, and the jump in natural 
gas prices will probably translate into even higher fertilizer 
prices in 2006. Rural nonfarm businesses also face rising 
input costs due to higher energy prices. 
Energy prices will have an even bigger economic 
impact on rural area than metro areas, given their 
industry mix. For example, rural manufacturers are 
more concentrated in energy-intensive industries, with 
more than a third of rural manufacturing earnings 
coming from industries with above-average energy 
costs, compared to a quarter for metro manufacturers. 
Rural residents are also challenged by higher 
energy prices due to their reliance on the automobile 
and longer commuting patterns. With surging gas 
prices, commuting costs have increased substantially. 
According to the Consumer Federation of America, 
rural households in 2005 spent $2,087 for gasoline, 
compared to $1,705 for urban households. 
Higher energy prices hurt the rural economy, but 
they can also fuel new investment opportunities in 
rural America. Bio-fuels production has surged recently 
with the rapid expansion of ethanol and bio-diesel, a 
fuel produced mainly from soybeans. Last year, the U.S. 
produced more than 4 billion gallons of ethanol, up from 
1.7 billion gallons in 2001. According to the National 
Bio-diesel Board, bio-diesel production expanded from 
roughly 5 million gallons in 2001 to over 25 million last 
year. Higher oil prices are making bio-fuels production 
Center for the Study of Rural America page 
Livestock Prices
(Dollars per hundredweight)
2006 2005 Average 2001 to 2003
Choice Steers 79-85 87.09 74.81
Feeder Steers 97-103 111.23 86.03
Hogs (barrows and gilts) 44-47 50.01 40.06
Broilers 68-73 71.00 58.90
Milk 13.35-14.15 15.10 13.20
Crop Prices
(Dollars per bushel)
2005/06 2004/05 Average 1998 to 2001
Corn 1.60-2.00 2.06 1.90
Wheat 3.25-3.50 3.40 2.63
Soybeans 5.00-5.70 5.74 4.4
Source: Livestock, Dairy, and Poultry Outlook report and 
World Agricultural Supply and Demand Estimates, USDA, December 2005.
Table 1
USDA Annual Price Projections
50
75
100
125
150
175
200
225
250
275
300
325
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
50
75
100
125
150
175
200
225
250
275
300
325
Index (1990-1992=100)
Source: USDA
Fuel
Fertilizer
Chart 3
Prices Paid by Farmersmore proﬁtable and fueling new investments in bio-fuel 
plants, many in rural America. As of November 2005, 24 
ethanol plants were under construction with another 56 
proposed plants for bio-diesel production (Map 1). These 
investments not only boost nonfarm economic activities, 
they also provide new market opportunities for farm 
products. For example, according to USDA, the annual 
amount of corn used to produce fuel has increased from 
less than 500 million bushels before 1995 to more than 
1.5 billion bushels last year. 
The resilient rural economy overcame 2005’s 
natural disasters and high energy prices to post another 
prosperous year. Main Streets posted strong job growth, 
and robust farm incomes underpinned a strengthening 
rural economy. The stage is set for another year of 
economic growth in 2006. 
High energy prices pose the biggest risk to the rural 
economy. Rural businesses and farmers will pay higher 
input costs, and rural households will spend more for gas. 
Still, higher energy prices may fuel new investments and a 
new generation of market opportunities in rural America.
Center for the Study of Rural America page 
Plants under construction
Existing plants
References
Cooper, Michael, “The Impact of Rising Prices on Household Gasoline 
Expenditures,” Consumer Federation of America manuscript, September 
2005.
Gerena-Morales, Raphael and Tim Annett. “Growth May Slow in 2006 as Boom 
in Housing Cools,” Wall Street Journal, January 3, 2006, pp. A1-A2.
Hall, Kevin G. “Home Ofﬁces Help Stem Flow of Jobs Overseas,” Knight-Ridder 
newspapers, Denver Post.com, December 5, 2005.
Map 1
Ethanol Production Plants
(as of November 18, 2005)
Source: American Coalition for Ethanol

Growth May Slow

Home Ofﬁces Help Stem Flow of Jobs Overseas,” Knight-Ridder newspapers, Denver Post.com,

The Impact of Rising Prices on Household Gasoline Expenditures,” Consumer Federation of America manuscript,

A robust rural economy

http://www.kansascityfed.org/Publicat/mse/MSE_I_06.pdf

A robust rural economy

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