Economy not looking so bad, as viewed from the farm

By Alister Bull

KANSAS CITY, Missouri (Reuters) - The U.S. housing crisis looks pretty distant when viewed from the cornfields of middle America, although land values pushed up by record commodity prices also evoke past booms that ended in bust.

Farm prices in the corn belt jumped an eye-popping 20-plus percent last year. Economists at the Kansas City Federal Reserve say that so far, the gains seem to be based on anticipated profits from future harvests, not speculation.

If prices suddenly turned lower, the sector could suffer, and it would not be the first time. Farm values collapsed 40 percent between 1982-87, squeezed by higher production costs and lower agricultural earnings.

"If prices stay put we're somewhat better, but if they don't, we're somewhat in trouble ... It's not all roses," said Dennis Kvatum, a soybean and wheat farmer in Beardsley, Minnesota.

On the other hand, farmers have far fewer debts than in the 1970s and 1980s, giving them a decent cushion.

"Rising farmland values might be a sign of a bright, new, golden age in agriculture -- but they are not without risks, noted the Kansas City Fed's latest Economic Review.

In the meantime, the rest of the regional economy is benefiting from the sector's strength, albeit with typical Midwestern understatement.

"Our business is really not bad. In fact, it's pretty good," said Mike Haverty, chief executive officer of Kansas City Southern railway, whose trains haul cargo like coal and grain for export to ports in Mexico.

Surging energy costs have not dented the railroad man's enthusiasm because strong demand has helped him to pass along roughly 70 percent of these increases to customers.

A monthly manufacturing survey by the Kansas City Fed of its district declined in June, but it did show that companies' expectations for future activity remained positive and export activity was solid.

The Kansas City Fed's seven-state district spans the farming heartland of Oklahoma, Kansas, Nebraska and western Missouri, as well as the Rocky Mountain states of Colorado, Wyoming and northern New Mexico, where energy and ranching, as well as tourism, are economically dominant.

DOING WELL

"The major food exporters, energy and commodity producers of our district are doing well," Kansas City Fed President Thomas Hoenig told Reuters in an interview earlier this month.

"Our housing industry is under pressure, but by much less than in southern California," he said, referring to a region of the country at the heart of the subprime mortgage meltdown.

U.S. agricultural exports have skyrocketed more than 40 percent this year due to both higher prices and larger volumes, amid soaring demand from markets like India and China, whose massive emerging middle classes want to eat more and better.  Continued...