In Farm Country's Boom, Hints of a Bubble

By Neil Irwin
Washington Post Staff Writer
Wednesday, August 20, 2008

BLAIR, Neb. -- The trucks rumble down the main drag of this farm town all day long, the ones heading east brimming with grains of No. 2 Yellow Corn, the ones going west filled with Sweet Bran, a cattle feed that looks like breakfast cereal and smells like warm beer.

That eighteen-wheeled evidence of prosperity shows why the Plains states are a bright spot in the otherwise gloomy national economic picture. Here, the housing market is holding up just fine, the banks are making plenty of loans, and employers keep adding jobs.

The good times in farm country show the difficulty facing policymakers grappling with the nation's economic distress, underscored yesterday by data indicating the steepest rise in monthly wholesale prices in 27 years and a 17 year low for new housing construction.

The numbers are gloomiest for Sun Belt states with eviscerated housing markets, and there, interest rate cuts and stimulus checks are helping ease the pain. But in the area stretching from the oilfields of Texas north to the Dakotas, where the economy is holding up fairly well, those government actions may prove unnecessary -- and even contribute to new bubbles.

Retail spending in the middle of the country was strong even before the $600 tax rebates this spring, and low interest rates and a tax provision in the economic stimulus bill are helping to goose already booming sales of farm equipment and pickup trucks.

The price of farmland in Nebraska has doubled in the past three years, primarily reflecting the boom in commodity prices. The increase also reflects the impact of rate cuts by the Federal Reserve that enabled buyers to bid up land with borrowed money. But if crop prices drop toward historical norms, it could mean sharp decreases in land prices that would devastate some farmers.

Corn has risen to nearly $6 a bushel, from around $2 in 2005; earlier this summer it was as high as $7.50. For an average-sized Nebraska farm with an average yield, that means an extra $900,000 in revenue (though that has been offset significantly by higher costs for fertilizer and fuel).

"People on the East Coast and West Coast are seeing their food bill rise, well, a lot of that increase is ending up here," said Ernie P. Goss, an economist at Creighton University in Omaha.

The jobless rate in Nebraska was 3.4 percent in July, barely up from 3.1 percent a year before. The national rate rose to 5.7 percent from 4.7 percent in that span.

The availability of loans to farmers is the strongest it has been in five years, according to a survey by the Federal Reserve Bank of Kansas City, even as banks nationwide are becoming reluctant to lend money. The reason: There wasn't much overbuilding of housing here, so most regional banks are not saddled with the same bad mortgage and construction loans as their counterparts on the coasts.

Encouraging Investment

The good times are not uniform across the region; ranchers have been pummeled by high prices for feed and fuel, and there has been flooding in Iowa.

In Blair, however, long-vacant storefronts have been turned into furniture shops and restaurants in the past couple of years, and Wal-Mart is looking to open a store just down the way. The billion-dollar Cargill plant that turns grains of corn into high-fructose corn syrup and ethanol just announced another $100 million expansion, adding a Danish company that makes enzymes out of corn -- a reflection of booming global demand for all types of commodities.

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