By Stewart Doan

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, Jan. 31 – Jason Henderson, vice president and Omaha Branch executive of the Federal Reserve Bank of Kansas City, joins us this week on Open Mic to discuss the outlook for the farm and larger rural economy. Henderson dismisses ideas that current farm sector fundamentals – strong commodity prices, incomes, land values and exports – represent a new “normal” for U.S. agriculture. In our interview, he focuses more on the “bust cycle” that he's sure will follow once interest rates start to rise. In the meantime, Henderson, who manages the Kansas City Fed’s Main Street Economic publication, says rural America has changed a lot since the 1980’s: community banks are in good financial shape, as are rural retailers, which he notes saw “solid” Christmas holiday sales and are hiring workers at a faster pace than businesses in metropolitan areas.

Agri-Pulse Open Mic Interview Transcript Reprinted with Permission from For more information or for additional copies of this transcript, please contact or 573-873-0800.

Jason Henderson, January 31, 2011

SD: Jason, welcome to Agri-Pulse Open Mic.

JH: It’s a pleasure to be here.

SD: With near record commodity prices, fairly low debt to equity and relatively low interest rates, it seems like the best of times for American agriculture. Are things really as good on the ground as they seem to be on paper?

JH: Well, I think in terms of the last six months, we’ve seen strong prices for both crops and livestock so it’s rising revenues and moving incomes in rural America. Farm incomes look like they’ve jumped thirty percent in 2010 and that’s improved a lot of balance sheets and income statements in the farm sector.

SD: Is this period that agriculture is in now the new normal?

JH: I think in terms of agriculture, this is another series of boom and bust cycles. Agriculture historically, when interest rates fall to record low levels, or real rates are are negative as they are today, agriculture enjoys a period of prosperity, but when interest rates start to rise agricultural and farm incomes start to fall.

SD: How much of the credit or the blame, depending on one’s point of view, do the rise of ethanol and biodiesel get for the current ag environment?

JH: I think in terms of ethanol and biodiesel, in 2006 they brought a new source of demand for crops into the market and that really did a lot to support higher crop prices out there. But at the same time, we also saw since 2006 strong export activity and historically it’s been export activity that has shaped and driven agricultural farm incomes. So if you look at the 2011 USDA forecast once you adjust for inflation, it looks like U.S. agriculture exports next year could be at all time record highs, topping the previous high in 2008 and topping 1970s levels and so I think it’s, while ethanol has brought a new source of demand, I think we just can’t ignore our traditional source of strength for agriculture, and that’s the export market.

SD: Farmland values have posted significant gains since last fall. Is that kind of growth we have seen sustainable?

JH: We have seen tremendous growth in farmland values, primarily in the Midwest, ten to fifteen percent gains depending on the region, even higher in some locations. It’s raising questions though in my mind about the sustainability of these levels at these high record levels. What we’re looking at is rent-to-value ratios. Right now, rent-to-value ratios, or the return on farmland, is at record lows, and so below four percent across a broad swath of the Corn Belt. A lot of times these returns on investment are going to be influenced by what’s the alternative investment opportunities you have out there, CD rates are extremely low. And so, when you get low rates of return on farmland values, at some point in time when the economic situation improves, we’re going to have this demand for higher rates, higher profitability. And so, is that going to be, is this return to normal levels of returns of about seven, seven and a half percent, is that going to come from higher cash rents or is going to come from lower farmland values? And I think that’s the question that we’re looking at. Is this potential imbalance going to be corrected with stronger incomes or just lower land values?

SD: How soon before you think we’ll know the answer to that question?

JH: I think one of the triggers is going to be what interest rates do. I think there’s a tremendous amount of interest rate risk in agriculture. A lot of different universities, and here at the Federal Reserve Bank of Kansas City, we’re also looking at this and putting out some information talking about the amount of interest rate risk, and so I think that one trigger is going to be when interest rates do rise and come off their historical lows. Interest rates have a couple of different impacts. Number one, higher interest rates will raise the rate of return that investors demand on farmland in there, so that could lower farmland values or it could make some changes in there. But the second thing higher interest rates do is oftentimes they higher interest rates strengthen the value of the dollar which tends to shrink agricultural exports and once agricultural exports shrink, that lowers commodity prices in general and that lowers farm incomes.

SD: Budget challenges aside for the moment, given the current climate, is this the best possible time if there is such a thing for policymakers to be having a conversation with farmers and ranchers about changing the way Washington provides a safety net to agriculture?

JH: I think it is a time that we can think about what should agricultural policy be. It’s appeared that we are in a different era where there is a different level of dynamics out there in terms of prices, markets, and it’s putting a policy structure that allows agriculture to succeed in the future. And so if this is a new normal, what people have been talking about, and if globalization has been changing and the markets are changing and the demand structures and the competitors have been altered, I think it’s a good time for people to step back and sit down and think about agriculture long term and what’s the role of policy.

SD: You deal with bankers daily. How is agricultural lending today different than it was in 2008?

JH: The biggest difference is that bankers are asking more questions than what probably they did in 2007 and 2008. In terms of we went through a strong demand period in 2008, we had the spike in commodity prices there then all of a sudden in 2009 we had that collapse during the recession, and we’ve been having these wide swings of volatility in terms of farm incomes and so when bankers are coming in and talking to the producers, they’re talking a lot about risk management and it’s asking them how are you going to deal with the wide swings in input costs, fertilizer costs, fuel costs. How are you managing that? What are you doing to manage your risk on the revenue side, in terms of hedging prices, locking in prices going forward? Are you matching what you’re locking in, in terms of on the revenue side, with your input costs? Because agriculture is a commodity business and you want to protect margins. If you just lock in revenues on one side, but you don’t try to control your production costs, then you’re really a speculator in the market in some cases. And so, what are you doing to manage your margins and managing your profits out there, especially in this period of high volatility in agricultural commodity markets. So I think there’s a lot of questions being directed about risk management.

SD: Do hometown banks have the money and are they sound enough to be significant lenders to agriculture or has this financial shakeout we’ve gone through in the last couple of years consolidated ag lending?

JH: Commercial banks and community banks on Main Streets are strong. When we look at agricultural banks, they’ve posted some of the strongest gains over the last three or four years. Their returns on assets and equity have been a lot stronger than their larger peers, and so they’re in strong financial health. They have a lot of funds on their books to lend. The biggest complaint that we get from some of them is that their crop producer has made so much money over the last year that they’re not coming in for that operating loan. They just don’t need a loan to pay for some of their inputs out there, so that’s where their struggle is which we’ve been hearing from them. They have a lot of funds. They’ve not been turning farmers away for loan activity because of a lack of funding. They’re in solid, strong positions and willing to lend to agriculture. They’re just looking for stronger demand and some growth opportunities in their markets.

SD: The most recent issue of the Fed’s Main Street Economist declared that rural America is leading the recovery in the overall economy. Are small businessmen on Main Street hiring again?

JH: Yes they are. We’re looking at, in terms of rural areas, heading into the end of last year, rural employment was almost one percent above year ago levels, whereas in metro areas, employment levels were still below the previous year’s levels. So, a lot of that is being driven by these commodity markets. If you look at mining dependent areas and farming dependent areas, when you get high crude oil prices and you get high crop prices and agricultural commodity prices, that brings a lot of money into rural communities. Farmers are not just sitting on their cash. I think their favorite activity is buying tractors and their neighbors’ land. Tractor sales are up dramatically. We saw solid retail sales over the holiday Christmas season in rural communities, and so I think they’re doing, will strengthen agricultural and in mining communities, in rural places is spilling over to increased sales activity and to increased jobs.

SD: Does the situation with rural housing mortgages mirror the concerns we hear expressed about the condition in general nationally in the housing market?

JH: Rural housing mirrors urban housing to some extent. Rural places didn’t have the boom in home prices, so they didn’t have the bust in home prices. But at the same time we have seen rural building activity slow. A lot of it really around I would say that exurb area surrounding a broader metro area, that has slowed. That’s probably been the biggest area of slow-down. Rural building activity still remains sluggish compared to what it was in 2005 and 2006, but the value of rural homes has held up much better, and we don’t see the foreclosure problems in rural communities that we have in our urban neighbors. So, I think we have sluggishness in rural home building, but it’s just not to the extent that we have seen in major markets such as Las Vegas, California, Florida out there. It does vary by geography. For example, rural communities in Florida are going to have a bigger struggle than what rural communities in the Midwest are, where the Midwest economy is much stronger and much more dependent on a commodity-based agriculture, whereas Florida, while it does have a strong ag base as a share of it’s economy, is just not as large.

SD: What’s the biggest challenge facing rural America today?

JH: I think the biggest, one of the challenges for rural America is that, because of our distance, a lot of times we need to think outside of our communities and think about going beyond our boundaries, and that we need to change, that we need also give people in rural places an honest assessment that strong businesses can be built in rural places and you can tap a global market. A lot of times people think that, because rural is remote, that you’re not able to do it, but there are some successful businesses that are being built in rural communities, even the smallest of rural communities, that have a global reach. And so that rural areas, when they have a solid infrastructure, when they have quality health care and good schools, provide a quality and standard of living for people that not only allows them to live well off but also to built solid and strong businesses. So, I think a lot of it is changing the mindset of rural places, and touting our successes that are out there and letting people know that rural America has changed a lot from the 1980s, and it does provide some opportunities.

SD: Jason Henderson is Vice President and Omaha Branch Executive of the Federal Reserve Bank of Kansas City. Jason, thank you for joining us on Agri-Pulse Open Mic.

JH: Thank you. It was my pleasure.

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