A drought takes no prisoners.

That’s becoming more and more evident as the heavy hand of heat and drought tightens its grip on the nation’s breadbasket. Ironically, for cattlemen at least, one of the victims of the widening disaster is biofuels production, which is finding high prices and low supplies of its feedstocks too much to bear.

In fact, almost two-thirds of bankers in a sample of small, rural communities report a cutback or closing of local ethanol/biodiesel plants due to Mother Nature’s scorched earth policy.

That’s according to a monthly survey of rural bankers in a 10-state area conducted by Ernie Goss, the Jack A. MacAllister chair in regional economics at Creighton University in Omaha, NE. From his monthly survey, Goss calculates a Rural Mainstreet Index (RMI), which gives a real-time indication of the economic health of ag- and energy-dependent rural communities, with 50.0 representing growth neutral.

For June, the RMI declined to 47.9, its lowest level since September 2010 and down from last month’s 56.7. Drought is the driver, Goss says.

Bank CEOs were asked about the impact of the drought on ethanol/biodiesel production. Of bankers with plants in their area, 64.3% reported negative impacts with 21.4% indicating plant closures and 42.9% detailing cutback in operations. Only 35.7% reported no impact from the drought.

“The lack of available crops and higher prices for corn and soybeans are having significant and negative impacts on ethanol and biodiesel producers in the area,” Goss says.

Cattlemen know something about that. The impacts of the drought are particularly negative for livestock producers. Korey Schow, CEO of the Bank of Keystone in Keystone, NE, says, “Persistent hot and dry conditions are causing cow-calf producers to sell a portion of their herd due to lack of pasture.”

According to Goss, “The drought is putting a dent into the economies of the ag-dependent areas of the 10-state area. Just as the region has benefited mightily from very healthy farm income over the past few years, we are now detecting warning signals of a significant economic reversal for rural areas.” 

Which means bankers and their clients are feeling the heat. “The drought is severe in west-central Illinois. Conditions are like those in Steinbeck's “Grapes of Wrath,” but no one today wants to move to California,” says Jim Ashworth, president of Carlinville National Bank in Carlinville, IL.

There is concern even in areas not suffering from drought. Pete Haddeland, CEO of First National Bank in Mahnomen, MN, expressed the view of the minority of areas with solid crops, “Our crops look good up here, but we still need rain.”

July RMI results

Here are the results of the most recent RMI survey:

Confidence:The confidence index, which reflects expectations for the economy six months out, plummeted to 40.9 from June’s 58.5, the largest one-month decline recorded since the monthly survey began in December 2005. “The drought has turned economic optimism into economic pessimism,” Goss says.

Farming: The July survey shows farmland prices continue to head higher but at a much slower rate. However, for a third straight month, farmland price growth weakened with the July index dropping to 58.6, its lowest level since September 2010 and down from last month’s 60.0.

Even so, this is the 30th consecutive month the index has been above growth neutral, Goss says. However, the farm equipment sales index sank to 46.1, its lowest level since March 2009, and was down significantly from last month’s 54.7.

“Much weaker economic conditions are slowing growth in farmland prices. Furthermore, farmers are clearly reducing their purchases of agriculture equipment. This pullback will soon affect urban areas of the region,” Goss says.

Banking:  Farmers increased their demand for loans with the loan volume index climbing to 65.3 from June’s 64.2, the fifth consecutive month the index has risen. Of the bank CEOs, 29% indicated that drought conditions had increased farmer borrowing. “The drought appears to be increasing the financial 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: July’s hiring index declined to 52.8 from June’s 59.1. “Even though we tracked hiring growth for the month, the index was down for June. I expect hiring to drift lower with job losses in the months ahead as the impacts of the drought spread,” Goss reports.

Home and retail sales: The July home sales index declined to a solid 58.6 from June’s record high 66.4, while the retail sales index for July sank to 44.4 from June’s 54.6. “The pace of sales for homes in the area remains positive. On the other hand, drought conditions hammered retail sales for the month,” Goss says.

State-by-state outlook

Each month, community bank presidents and CEOs in nonurban, ag- and energy-dependent portions of a 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, ag- and energy-dependent portions of the nation. RMI covers 10 regional states, focusing on 200 rural communities with an average population of 1,300, and provides the most current real-time analysis of the rural economy.

Colorado:  For the 19th straight month, Colorado’s RMI remained above growth neutral. However, the July index declined to a weak 50.1 from June’s 57.6 and 65.2 in May. The farmland and ranchland price index declined to 61.3 from June’s 62.4. Colorado’s hiring index for July was 51.8, down from June’s 57.5. According to Mike Bass, president of the First National Bank of Hugo, “Wheat harvest in our area was 2 ½ weeks early. Average yield for our area was 30 bu./acre, a decrease of 30% from the previous year.”

Illinois: For a second straight month, the Illinois RMI moved below growth neutral, slumping to 36.1 from June’s 43.6. Farmland prices remained above growth neutral with a reading of 50.4, down from June’s 51.5. The state’s new hiring index (NHI) dipped to 44.6 from 50.2 in June. Southern Illinois is being battered by the drought. According to Jim Eckert, president of Anchor State Bank in Anchor, “Many cornfields will yield next to nothing. Most will have drastically reduced yields unless rain comes quickly. Soybeans are badly hurt by the drought, but could still be revived by timely rains.”

Iowa: Iowa’s July RMI decreased to 48.6 from 56.1 in June. The farmland price index (FPI) slipped to 63.5 from 64.6, while NHI dipped to 53.3 from June’s 58.9. Larry Winum, president of Glenwood State Bank in Glenwood, reports that, “Last year we battled flooding, this year we have no moisture. We need to find the right rain dance or crop yields are going to be in serious trouble.” Additionally, Bill Hess, CEO of Iowa Savings Bank in Carroll, says, “Crops in the area are rated as fair, but poor may be a better term if high temperatures and no rain remain the pattern.”

Kansas: The Kansas RMI for July slumped to 43.2 from June’s 50.7 and May’s much stronger 62.1. FPI sank to 58.4 from June’s 59.6, and NHI decreased to 49.9 from 55.6. As in most states, some areas are doing well, while others not. Michael Johnson, CEO of Swedish American State Bank in Courtland says, “We’ve been blessed with recent rain.” On the other hand, Dale Bradley, CEO of the Citizens State Bank in Miltonvale, says, “A weak economy and continued drought conditions make it difficult for us all.”

Minnesota: July RMI declined to 54.6 from June’s 62.1, with FPI dipping to 66.2 from June’s 67.4, and NHI decreasing to 55.1 from June 60.9. Minnesota farming conditions appear much better than in other states. Bryan Grove, CEO of American State Bank in Grygla, reports, “Our area of northwest Minnesota has had spotty rains, keeping crop conditions good. Small grains look decent. Soybeans also look good, but are needing rain soon to maximize potential.” Brian Nicklason, president of Woodland Bank in Remer, says, “We have limited farming in our area but the soybeans and corn crops look outstanding. The logging industry is still struggling due to lack of markets in the paper industry.” 

Missouri: Missouri’s RMI declined to 44.3 from 48.9 in June, with FPI slipping to 50.2 from June’s 51.2, and NHI slumping to 35.8 from 41.4 in June. Don Reynolds, president of Regional Missouri Bank in Salisbury reports, “Dry weather and poor crop prospects are starting to take a toll on attitudes.”

Nebraska: Nebraska’s rural economy moved into negative territory, as the July RMI slumped to 43.4 from June’s 50.9. FPI slipped to 52.3 from 53.4 in June, and NHI declined to 45.8 from June’s 51.4.

Lyndell Woodbury, reporting for banks in seven Nebraska communities, says, “The drought has affected the pastures most significantly in north central Nebraska, and dryland crops have been significantly impacted in all of our communities. The impact to main street will be felt into 2013.” Kelly Hammerlun, reporting from Imperial, said crops in irrigated areas were doing well while those in non-irrigated areas were “worthless.”

North Dakota: July RMI declined but remained strong with a regional high 75.6 from June’s 88.9. FPI slipped to 73.6 from June’s 90.2, and NHI declined to 66.4 from 79.4. John Brown, executive director of the Independent Community Banks of North Dakota, reports, “Crops look really good in our area at this time.”

South Dakota: RMI declined to 46.7 from June’s 49.5, with FPI dipping to 50.4 from June’s 51.5, and NHI slumping to 44.6 from 50.2.

Wyoming: RMI fell to 39.3 from 46.8 in June, while FPI declined to 52.3 from 53.4 in June. NHI sank to 45.8 from 51.5 in June. Bob Sutter, vice chair of Hilltop National Bank in Casper, says, “Wyoming state revenues are down due to the low natural gas prices, even though oil exploration continues at a high level. This is due in part to our strong oil and gas exploration infrastructure that is active both in Wyoming and in the North Dakota shale play.”