Rural areas ; Farm income ; Rural development

Jason Henderson

English

Research Papers in Economics

February 2004
Economic headlines in rural America were mostly positive
in 2003, especially in the farm sector. Low global supplies,
strong demand, and high prices underpinned strong gains in
U.S. farm income. On Main Street, job losses and factory
closures eased. 
Still, it remains unclear whether the rural economy can
build on the optimism of 2003 in the coming year.
Demand for U.S. farm products remains uncertain, espe-
cially in light of the recent mad cow scare. Rural communi-
ties struggle to create the high-skill, high-wage jobs that
currently pace U.S. economic growth. Despite these chal-
lenges, though, the prospect for a stronger rural economy
this year looks promising.
CENTER FOR THE STUDY OF RURAL AMERICA
Federal Reserve Bank of Kansas City
Will the farm rebound
lead a rural recovery?
Commentary on the rural economy
The Main Street 
Economist
Center for the Study of Rural America
Jason Henderson
EconomistThe Main Street Economist February 2004
The Farm Sector in 2003
The biggest headlines in the farm sector
were written by the cattle industry. Overall,
the industry enjoyed a boom year as com-
paratively low supplies and strong demand
led to record-high prices and profits. U.S.
cattle and beef supplies fell as the 2002 herd
liquidations left fewer cattle for slaughter. In
May, global supplies were trimmed as mad
cow disease in Canada led to global bans on
Canadian beef. And, domestic demand for
beef strengthened as low-carb diets, such as
the Atkins and South Beach diets, gained
favor. The combination of short supplies
and rising demand created record-high
prices and profits for U.S. cattle producers. 
But in December, when mad cow
disease was discovered in the U.S., the
nation’s major trading partners banned
U.S. beef imports. Cattle futures prices
dropped 20 percent. Fortunately, domestic
demand remained strong. 
In the spring, much of the public’s
attention centered on drought conditions
and prospects for bumper crops. By July,
drought conditions had abated in most of
the grain producing regions and U.S. grain
production rebounded sharply. The wheat
crop was 44 percent above year-ago levels.
Corn yields reached record highs. 
Despite a bumper U.S. crop, world
grain supplies remained historically low
and helped underpin strong U.S. grain
prices. In contrast to the bin-busting U.S.
grain crops, drought conditions in other
countries limited world grain production.
In addition, world demand for grain was
strong, pushing world grain inventories to
their lowest levels in over two decades and
boosting wheat and corn crop receipts.
In August, though, the drought revis-
ited many parts of the Farm Belt. The
drought slashed soybean yields and helped
boost prices; but it also created pockets of
farm financial distress. According to
bankers in drought regions of the Kansas
City Federal Reserve District, loan repay-
ment rates in were lower and rates of loan
renewals and extensions were higher.1
The record-high prices were also driven
by increased global demand. In beef
markets, Canadian mad cow disease sparked
a surge in U.S. beef exports to Japan. In
soybean markets, strong demand from
China, the world’s largest importer of soy-
beans, underpinned a rally in soybean prices.
And the decline in the value of the dollar
helped boost the demand for U.S. exports as
U.S. products became more affordable in
foreign countries. In 2003, the value of the
dollar dropped 20 percent against the cur-
rencies of major agricultural competitors,
and agricultural exports jumped 5.3 percent.2
The year ended with uncertainty. In
November, new U.S. import restrictions on
various Chinese products triggered China’s
suspension and rescheduling of an agricul-
tural trade visit, rocking prices in the soybean
market. The collapse of trade talks at the
ministerial meeting of the World Trade
Organization in September, coupled with dif-
ficulties finalizing a Free Trade of the
Americas agreement, created further trade
uncertainty. Farm subsidy payments
remained at center stage in both negotiations.
The 2002 Farm Bill did little to ease tensions,
with subsidy payments under the new bill
jumping 70 percent to $19.7 billion. 
The Main Street Economy in 2003
The farm sector rebounded sharply in
2003, but Main Street struggled to add jobs
in a jobless recovery. By August rural job
levels had dipped below levels of a year ago.3
In the third quarter, the national
economy soared, leading to an uptick in
rural jobs. By November, rural job levels had
eclipsed year-ago levels, with economic
strength spreading throughout most sectors
of the rural economy. In the fourth quarter,
the service-producing sector produced strong
job gains after weakening for most of the
year. Improving state and local tax revenues
helped turn government sector job loses into
job gains. While rural factories shed another
2.0 percent of their jobs in 2003, the losses
paled in comparison to 2002.
The Rural Economy in 2004
Despite some uncertainties, the 2004
outlook for the rural economy looks promis-
ing. Strong farm finances and low supplies
could sustain the farm recovery in 2004.
Heading into the year, the farm sector’s
debt-to-asset ratio remained low, and loan
repayment rates continued to improve.
Small world crop inventories have led to
bullish commodity markets. And beef pro-
duction is expected to fall as the industry
prepares to launch a new cattle cycle with
more herd rebuilding.  This move should
cut the number of cattle sent to slaughter
and lower beef production. 
The strength of the farm recovery may
well depend on the weather and exports.
Drought conditions have intensified since last
fall. Livestock prices will probably remain
under pressure from global bans of U.S. beef.
And, while grain exports are expected to
strengthen, recent trade conflicts with China
and the resulting soybean price swings under-
score the volatility of U.S. export activity. 
On Main Street, optimism appears to
be rising. A stronger national economy
should produce job gains. If the rural
nonfarm economy continues to track the
national economy, rural job levels should
gain momentum. The challenge for rural
communities will be to capture more of the
high-skill jobs that have propelled U.S. eco-
nomic growth. In 2003, less than a quarter
of the rural service-producing job gains
came from the producer services sector,
which employs many high-skilled workers. 
On balance, hopes for a stronger rural
recovery were boosted in 2003, as the farm
sector enjoyed a banner year and signs of
optimism began to emerge on rural Main
Streets. Mad cow disease and a persistent
drought could limit the farm recovery. And
on Main Streets, rural job gains have not
been concentrated in the high-skilled indus-
tries with the best chance to boost rural
incomes. Still, rural America starts this year
cautiously optimistic that a stronger eco-
nomic recovery can emerge at the farm gate
and on Main Street.
- 2 -
References
1The Kansas City District includes Colorado, Kansas,
Missouri, Nebraska, Oklahoma, Wyoming, western Missouri,
and northern New Mexico.
2Calculations based on USDA’s real trade-weighted index of
U.S. agricultural competitors.
3Rural is defined as nonmetro for statistical purposes.The Main Street Economist February 2004
- 3 -
Survey of Agricultural Credit Conditions
Federal Reserve Bank of Kansas City
September 30, 2003
Highlights from the third quarter survey*
• Farmland values continued to post solid gains and provide stability for farm balance sheets. In the third quarter, annual gains in
farmland values were 5.1% for nonirrigated cropland, 4.3% for irrigated cropland, and 5.9% for ranchland. A rebound in crop
production and higher government payments have boosted incomes and helped support cropland values. Gains in ranchland val-
ues outpaced cropland value gains due to the strong cattle market and recreational demand for land.
• District farm credit conditions improved again in the third quarter supported by a rebound in farm income. The index of farm
loan repayment rates moved to its highest third quarter level in six years, while renewals and extensions eased from the high levels
of a year ago. Two-thirds of district bankers expect total farm income in 2003 to rise above last year. More than 90 percent expect
higher livestock income. However, less than half of bankers expect crop incomes to rise, as drought reduced crop production in
some parts of the district.
• The district farm commodity price index moved higher in the third quarter. Strong cattle prices have supported gains in the
index, as the cattle industry accounts for the majority of district farm cash receipts. Cattle and wheat prices were higher than the
previous quarter, but hog and corn prices fell. Livestock and soybean prices were well above year-ago levels, but prices of all
remaining crops were significantly lower than in 2002.
• Interest rates on new farm loans edged down in the third quarter. At the end of the quarter, interest rates on new farm loans aver-
aged 7.22% for operating loans, 7.28% for machinery and intermediate-term loans, and 6.82% for real estate loans. Since
September, interest rates in national money markets have moved up.
*Note: 298 banks responded to the third quarter survey.
*Please refer questions to Nancy Novack, associate economist, at 816-881-2423 or nancy.l.novack@kc.frb.org.
-2
-1
0
1
2
3
4
5
6
7
8
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Sample percent change from a year ago*
Nonirrigated Cropland Values
Tenth District
*Percent changes are calculated using responses only from those banks reporting in both the
past and the current quarter.
Loan repayment rate
Loan renewals or extensions
Diffusion index*
50
60
70
80
90
100
110
120
130
140
150
160
1999 2000 2001 2002 2003
Farm Credit Conditions
Tenth District
*Bankers responded to each item by indicating whether conditions during the current
quarter were higher than, lower than, or the same as in the year-earlier period. The
index numbers are computed by subtracting the percent of bankers that responded
“lower” from the percent that responded “higher” and adding 100.On the Web: www.kc.frb.org
The Main Street Economist February 2004
Highlights from the third quarter.*
• The rural nonfarm economic
recovery continued to weaken in
the third quarter of 2003.  Rural
job levels remained below a year
ago for the second straight quarter.
A third-quarter surge in the
national economy led to improve-
ments in metro job levels, narrow-
ing the gap between rural and
metro growth. 
• Contraction in government
employment and continued
weakness in goods-producing
employment led to weak busi-
ness job growth. Government
employment dipped below
year-ago levels as various gov-
ernment entities struggled with
budget crises. Despite improve-
ment, goods-producing
employment remained well
below year-ago levels as rural
factories struggled to add jobs.
Gains in service-producing
sectors were unable to offset
the losses in government and
goods-producing sectors.
• The construction sector contin-
ued to be the highlight of the
rural economy in the third
quarter as low interest rates
boosted construction activity.
The value of rural building
permits jumped well above
year-ago levels. The number of
rural building permits rose
more than 6 percent above a
year ago, led by strong single-
unit construction activity. 
Summary of Economic Conditions
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
Percent change from year ago
2000:Q1 2000:Q3 2001:Q1 2001:Q3 2002:Q1 2002:Q3 2000:Q2 2000:Q4 2001:Q2 2001:Q4 2002:Q2 2002:Q4 2003:Q1 2003:Q2
Metro Areas
Rural Areas
2003:Q3
Rural and Metro Job Growth
Source: Bureau of Labor Statistics
-9.0
-6.0
-3.0
0.0
3.0
Percent change from year ago
Government
Service-producing
Goods-producing
2000:Q1 2000:Q3 2001:Q1 2001:Q3 2002:Q1 2002:Q3 2000:Q2 2000:Q4 2001:Q2 2001:Q4 2002:Q2 2002:Q4 2003:Q1 2003:Q2 2003:Q3
Rural Job Growth by Sector
Source: Bureau of Labor Statistics
2.0
0
4.0
6.0
8.0
10.0
12.0
Value of permits (millions of dollars)
Q1 Q2 Q3 Q4
2000
2001
2002
2003
Rural Residential Construction
Source: Bureau of Labor Statistics
*Please refer questions to Nancy Novack, associate economist, at 816-881-2423.
For more current analysis on the state of the rural farm and nonfarm economies, visit our web site at www.kc.frb.org.
Note: Data for all tables are not seasonally adjusted.  Job data were revised and reclassified in January 2003.

3Rural is defined as nonmetro for statistical purposes.The Main Street Economist February

Data for all tables are not seasonally adjusted. Job data were revised and reclassified in

Percent change from year ago

Please refer questions to Nancy Novack, associate economist, at 816-881-2423 or nancy.l.novack@kc.frb.org.

Will the farm rebound lead a rural recovery?

http://www.kansascityfed.org/Publicat/mse/MSE_0204.pdf

Will the farm rebound lead a rural recovery?

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