“The drought is dampening economic activity across the region,” says Creighton University economist Ernie Goss. “Companies with close ties to the farm, such as ethanol, and agriculture equipment sellers are experiencing pullbacks in growth. I expect food processors to take a hit later in the year as higher food prices work their way through the system.” 

In his monthly survey of rural banks throughout the heartland, 31% of bankers say the drought is negatively affecting business activity in their area for August. The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, declined for the third straight month to 47.1, from 47.9 in July.

RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

According to Jim Eckert, Anchor State Bank president, Anchor, IL, “Uncertainty over future tax policy and the costs of ‘Obamacare’ have many of our farm and commercial customers sitting on the sidelines in borrowing and hiring staff.”

However, rural banks have ample money to loan, according to a survey by the Kansas City Federal Reserve Bank. “Bankers indicated ample funds were available for farm loans, and interest rates edged down further,” the survey indicates.

Here’s a look at how the RMI breaks down:

Farming: According to surveys for the past several months, farmland price growth has weakened significantly. However, there is a great deal of variance across the region with irrigated areas and those not impacted by the drought continuing to report solid growth. The August farmland price index (FPI) weakened with an August reading of 52.8, down from July’s 58.6, the lowest level since July 2009.

The Kansas City Fed survey found similar results. “After surging at the beginning of the year, district farmland values rose less rapidly during the second quarter,” says Jason Henderson, Omaha branch executive. “District farmland values rose less than 3% during the second quarter, roughly half the rate of growth at the beginning of the year,” Henderson says. Non-irrigated cropland values rose solidly, while irrigated cropland values held steady and ranchland values edged up.

In spite of weakening land values, this is the 31st consecutive month that Creighton’s FPI for farmland values has been above growth neutral. The farm-equipment sales index sank to 38.3, its lowest level since October 2008, and was down from July’s 46.1.

“The drought is putting a dent in farmland price growth and the purchase of agriculture equipment, including trucks,”says Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton, Omaha, NE.

This month, bank CEOs were asked about the drought’s impact on farm borrowing. About 41% said the drought has encouraged greater agriculture borrowing. This is up significantly from July when only 29% of bankers reported an increase in borrowing as a result of the drought.

Additionally for August, 46% of bankers reported that livestock producers in their area were reducing their herd size in response to the drought. Last month, only 13% of bankers reported that livestock producers were doing so.  

Bill Hess, CEO of Iowa Savings Bank in Carroll, IA, reports that the drought and high grain prices have caused livestock finishers to reduce risk by cutting numbers.

Banking: Farmers increased their demand for loans with the loan-volume index climbing to 67.6 from July’s 65.3 – the sixth consecutive month that the index has risen.  

The checking-deposit index advanced to a weak 49.1 from 47.9 in July, while the index for certificates of deposit and other savings instruments slumped to 33.0 from July’s higher 41.7. “The drought appears to be increasing the cash needs of farmers in the region. We have been tracking a reduction in the percent of farmland and farm equipment cash sales and upturns in the degree of bank financing,” Goss says. 

Hiring: August’s hiring index declined to 51.9 from July’s 52.8. “Even though we tracked hiring growth for the month, the index was down from July and June. I expect hiring to drift lower with job losses in the months ahead as the impacts of the drought spread to more and more rural mainstreet businesses,” according to Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, sank to 39.6 from July’s 40.9 and June’s much stronger 58.5. “The drought has definitely lowered the economic and business confidence of bank CEOs in the area,” Goss says.

Home and retail sales: The August home-sales index rose to 60.2 from July’s 58.6, with the August retail-sales index rising to 45.2. That’s below growth neutral, but up from July’s 44.4. “The pace of sales for homes in the area remains positive. On the other hand, for a second straight month, drought conditions weakened retail sales,” Goss adds.