Farm income continues to be the big driver of the rural mainstreet economy. According to Larry Winum, president of Glenwood State Bank in Glenwood, IA, “Agriculture had another strong year with all indications that 2012 will continue to be positive for farmers.”

The Rural Mainstreet Index (RMI), which ranges between 0 and 100, dipped a bit from January’s very strong level, declining to 59.6 from January’s 59.8. Despite the strong February numbers, we expect to see a bit slower growth in farm income as a result of somewhat softer agriculture commodity prices and higher input prices. This will dampen growth for the rural mainstreet economy for 2012. However, growth will continue to be healthy but won’t match 2010-2011 expansion.

Here’s a look at a few specific areas:

Farming: After falling in January from December’s record level, farmland prices once again headed higher. The Farmland Price Index (FPI) for February climbed to 75.0 from 74.3 in January and down from December’s 84.1. This is the 25th straight month FPI has been above growth neutral. The farm equipment sales index sank to a still robust 63.4 from January’s 72.3.

No downturn in growth rates for farmland prices and other factors tied to agriculture have been detected as yet. I’m concerned that any significant slump in agriculture commodity prices or an increase in interest rates could take a lot of the air out of the farmland price bubble.

When asked to forecast 2012 farmland prices, 21% of the bankers surveyed expect them to expand by more than 6%, while 46% forecast a 1-5% growth. Meanwhile, 25% anticipate no change in farmland prices for 2012, while 8% expect to see a decline.

In the interest of federal deficit reduction, bankers were asked what changes to federal ag support payments they would back. Only 10% supported eliminating ag subsidies in 2012, but 41% said they’d support a phase-out over five years. Another 25% thought there should be no change to the current payment system, and 24% supported limiting ag subsidies to farms of less than $500,000 in revenues.

Banking: Very strong cash balances among farmers continue to weaken loan demand. The loan volume index for February slumped to 31.2 from January’s 45.5 and December’s 50.8. The checking deposit index dipped to a very healthy 64.5 from 68.2 in January, while the index for certificates of deposit and other savings instruments climbed to a tepid 50.0 from January’s weaker 47.8.  

Hiring: February’s new hiring index (NHI) rose to 53.7 from January’s 51.5. Year-over-year job growth for rural mainstreet communities is almost double that for urban areas of the region.

Confidence:  The economic confidence index, which reflects expectations for the economy six months out, rose to 60.3 from January’s 56.1. Improving national economic reports are clearly and positively affecting the economic outlook of bankers in our survey.

Home and retail sales:  For the first time since July 2011, the rural mainstreet home sales index climbed above growth neutral with a February reading of 51.5, up from January’s 49.2. The retail sales index for February sank to 50.0 from January’s 51.5. Very healthy farm income has yet to translate into consistent healthy retail sales and home sales for rural mainstreet merchants.