November 2, 2012

Farmers’ Markets and Local Foods Flourishing in the Midwest

By Rhiannon Jerch[1] and David B. Oppedahl

As Americans’ eating habits have evolved, so have our Thanksgiving feasts. Despite the holiday’s grounding in tradition, popular trends reinvent even the most common menu items. Cranberry sauce appeared on the American table after it was fed to Union troops during long stalemates of the Civil War.[2] Whipped cream appeared ubiquitously on pumpkin pie after the handheld mixer became a mainstay in the American kitchen.[3] Today, farmers’ markets and other direct channels are bringing local heritage turkeys to our dinner tables.

Likely, you have seen a farmers’ market pop up in your town square, neighborhood park, or in a vacant parking lot. Every week in over 6,000 neighborhoods across the countr y, people are going to farmers’ markets. Today there are over 4.5 times as many farmers’ markets throughout the U.S. as there were 20 years ago, according to the Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture (USDA). Just in the past year, the number of farmers’ markets has increased 9.6% to a total of 7,864. Considering these numbers account for only documented markets, the actual numbers may be much higher.[4][5]

What is motivating this rapid growth? The popularity of farmers’ markets is more of a renewal than a new phenomenon. Vegetable and produce markets have been a mainstay of American communities from the beginning. America’s first recorded farmers’ market appeared in Hartford in 1643 as a mandate by the General Court of Connecticut. The farmers’ market was, in some senses, a precursor to nationhood.[6]

Today, policymakers, academics, and farmers alike are enthusiastic about the rural and community development potential of direct farm marketing. Thomas Vilsack, the Secretary of the USDA, proclaimed the nation’s first Farmers’ Market Week (August 5 to 11, 2012) “to further awareness of farmers’ markets and of the many important contributions farmers make to daily life in America….”[7] Farmers’ markets have been touted as community revenue generators that simultaneously strengthen economic ties between metropolitan consumers and rural producers. Not to mention, they bring fresh vegetables, freshly baked breads, and sometimes home-made nonfood items, like soap and candles, to eager metropolitan patrons. The USDA estimated the U.S. local food market to be worth $4.8 billion in 2008, half as much as Starbucks’ entire international net sales in the same year.[8]

How do the five midwestern states of the Seventh Federal Reserve District[9] measure up against the rest of the country in direct farm sales? Michigan and Illinois ranked fourth and fifth, respectively, among all 50 states for total farmers’ markets in 2012. Michigan has 294 documented farmers’ markets this year, while Illinois has 264. California, New York, and Massachusetts led the nation with 661, 332, and 305 farmers’ markets, respectively. All Seventh District states registered above the national average of 139 farmers’ markets per state. Indiana, Iowa, and Wisconsin reported 152, 208, and 211, respectively, as of 2012.

[MAP 1 – National Map of Farmers’ Market Locations and total markets per state as of July 2012]

Click to enlarge

Since the AMS began documenting farmers’ market trends in 1994, the period between 2009 and 2011 witnessed the highest national two-year growth rate to date: farmers’ markets expanded by over 36%. During this time, Michigan experienced the highest growth of all states. The number of markets nearly doubled, from 163 markets in 2009 to 322 in 2011. The only other states with growth over 80% were Oregon and Massachusetts. Average growth across the nation was 22.5%. Like Michigan, Wisconsin and Indiana have seen many new farmers’ markets pop up in the past two years at growth rates of 30% and 40%, respectively, while Iowa and Illinois saw little change.[10]
Click to enlarge

[MAP 2 – National Map of Farmers’ market growth by state from 2009-2011]

Click to enlarge

Within the Seventh District, farmers’ markets are most concentrated near major cities, such as Des Moines, Cedar Rapids, Madison, Chicago, Indianapolis, and Ann Arbor. Not surprisingly, Chicago’s home county, Cook County, with 93 markets, has the highest number of farmers’ markets of all Seventh District counties.

[Map 3 – Seventh District Map of Farmers’ Market Locations and total markets per county as of July 2012]

Click to enlarge

However, this pattern shifts when viewing direct farm sales per person. Crawford County in southwest Wisconsin, with two farmers’ markets and a population of approximately 17,000, claimed the highest direct farm sales per resident at $92 as of 2007.[11] Wayne County, Michigan, with 26 farmers’ markets—the county with the second largest number of markets in the Seventh District—had substantially lower direct farm sales per capita at $0.90 per resident.[12]

It is not surprising that farmers’ markets concentrate in highly urbanized areas; aggregate demand is highest near major cities and farmers can reach a greater customer base by selling at urban markets.

However, individual demand for fresh fruits and vegetables appears more idiosyncratic. Counties containing major metropolitan areas, such as Des Moines, Indianapolis, Detroit, and Milwaukee, reported less than $5 per capita in annual direct farm sales as of 2007. Average shoppers tended to spend more outside of the larger cities. Crawford, Door, and Vernon counties in Wisconsin rank in the top five counties with highest per capita direct farm sales, and each has fewer than 30,000 inhabitants.

[Map 4 – Seventh District Map of Direct Farm sales per capita by county]

Click to enlarge

Why are per person sales so much higher in these more rural counties? If cities draw the most farmers to market, why aren’t urbanites also spending more than their suburban and rural counterparts? Agritourism may be part of the answer. Berrien County, Michigan, has the highest agritourism revenue in the Seventh District, grossing over $2 million in 2007, and also has the second highest direct farm sales per capita.[13] Door County draws many visitors each year to its fruit orchards and wineries; Door County had the seventh highest agritourism revenue in the Seventh District, grossing over $680,000 in 2007. However, this does not explain Crawford County, where residents spend over $90 each per year at farmers’ markets, despite the fact that agritourism is negligible. The dynamics of farmers’ market patronage likely involve several crosscurrents, including residents’ incomes, community organization, awareness of environmental and health issues related to food, educational attainment, and proximate land quality.

[Map 5 – Seventh District Map of agritourism sales by county]

Click to enlarge

The nation’s heartland has been a leader in the ongoing evolution of fresh food marketing. Seventh District residents spent slightly more at farmers’ markets in 2007 than the average American—about $8.50 per person versus $8.00. Future opportunities for the District’s market goers are strong. Growth trends may widen the gap. Between 2009 and 2011, Seventh District counties added 38% more farmers’ markets on average, a rate twice as high as the national average of 18.4%. Considering national growth in farmers’ markets has remained above 10% for the past five years, we can expect to see more farmers stacking baskets of peaches and bunches of kale under tents in our town squares and parks, as well as more patrons enjoying the local bounty.


______________________________________________________________________________________

[1] Rhiannon Jerch is a graduate student in the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. Her research interests include consumer behavior, choice theory, spatial econometrics, and food policy. Rhiannon interned with the economic research department of the Federal Reserve Bank of Chicago in 2012. Previously, Rhiannon worked in transfer pricing with Ceteris US, LLC in Chicago and in transaction services with PricewaterhouseCoopers in Cairo, Egypt. Rhiannon received a bachelor's degree in economics from the University of Illinois at Urbana-Champaign. (Return to text)

[2] “Thanksgiving, The Civil War, and Cranberry Sauce.” Julia Sexton, Westchester Magazine. October 20, 2010. (Return to text)

[3] “Early rotary egg beaters,” Home Thing Past. (Return to text)

[4] USDA Agricultural Marketing Service. Farmers Markets Search. (Return to text)

[5] USDA Agricultural Marketing Service. “Farmers Market Growth.” (Return to text)

[6] Masiunas, John B. Class Lecture. Local Food Systems. University of Illinois at Urbana Champaign, Department of Crop Sciences, Urbana IL. Spring 2012. (Return to text)

[7] link (Return to text)

[8] Starbucks Corporation Fiscal 2011 Annual Report. (Return to text)

[9] The Seventh Federal Reserve District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. (Return to text)

[10] USDA Agricultural Marketing Service. “Farmers Market Growth.” (Return to text)

[11] Total value of farm sales direct to consumers (including sales from roadside stands, farmers markets, pick-your-own, door-to-door, etc., but not sales of craft items or processed products, such as jellies, sausages, and hams) divided by the number of residents of the county. USDA. Food Environment Atlas Documentation. July 2012. (Return to text)

[12] Per capita direct sales were unavailable for Cook County. (Return to text)

[13] USDA. Food Environment Atlas. July 2012. (Return to text)

Posted by Testa at 11:00 AM | Comments (0)

October 20, 2011

What’s behind the large and rapid gains in Midwest farmland values?

by David Oppedahl


Rapid increases in the value of Midwest farmland have contrasted sharply with the malaise of other real estate markets. At 17% (see chart), the year-over-year increase in the value of farmland in the Seventh Federal Reserve District for the second quarter of 2011 was the largest recorded since the 1970s, according to a survey conducted by the Chicago Fed and reported in the latest issue of AgLetter. Agricultural land values in Indiana and Iowa climbed 20% or more in a year, while agricultural land values in Illinois climbed almost as much. “Good” agricultural land in the Seventh District rose 4% in the second quarter of 2011 relative to the first quarter of 2011. Bankers in the survey commented that there were more summer auctions of farmland than usual, particularly as demand for farmland remained strong from both farmers and investors. Some bankers expressed concerns about the risks facing farmland markets, especially with regard to declines in crop prices. However, these views formed a minority, as just 2% of responding bankers expected farmland values to fall in the third quarter of 2011 (36% of survey respondents anticipated higher farmland values in the third quarter, and 62% expected no change).

On November 15, 2011, the Federal Reserve Bank of Chicago will hold a conference to explore the factors contributing to these large increases in midwestern agricultural land values and associated cash rental rates. At the conference, experts from academia, the farm industry, and policy institutions will present research on the causes of rapid increases in agricultural land values and cash rents, as well as their interrelationship. The goals of the conference include analyzing demographic and geographical characteristics of Midwest farmland ownership; understanding the dynamics of farmland valuations; assessing the risks facing agriculture and the banking industry from rising farmland values; and discussing policy implications for agricultural lending stemming from current farmland trends. Visit here for additional details.

A report on agricultural land values from the U.S. Department of Agriculture showed similar increases for 2011, as of January 1. There was a 16.2% gain on an acre-adjusted basis for the five Seventh District states from the start of 2010 to the start of 2011, calculated from data in the USDA report. Furthermore, there have been large increases according to surveys in Indiana and Illinois. Wisconsin farmland values have risen too, although not as quickly.

Recent data from the Iowa Farm and Land Chapter #2 of the Realtors Land Institute confirmed that farmland values continued their fast ascent in Iowa. The institute’s survey results indicated that there was a 12.9% jump in Iowa’s agricultural land values between March and September of 2011. Further information about Iowa’s farmland is available from an annual survey conducted by Iowa State University. Michael Duffy from Iowa State University will present on the demographics of farmland ownership at the Chicago Fed conference.

By the end of this year, net farm income for 2011 is projected to have risen $24.5 billion from that of 2010, to $103.6 billion, according to the latest USDA forecasts. This estimated rise in net farm income should help propel farmland values upward even further. This forecasted rise in net farm income is due to anticipated increases of $34.7 billion in the value of crop production and $22.7 billion in the value of livestock production, even though the cost of purchased inputs is projected to rise $28.0 billion. Government payments were forecasted by the USDA to decrease 18% from 2010—to $10.2 billion for 2011.

Higher crop prices have boosted the expected stream of earnings from crop production, supporting further gains in farmland values. According to data from the USDA, crop revenue for 2010 in the Seventh District jumped 34% above that of 2009, despite below-trend corn yields. The Seventh District value of corn for grain produced in 2010 was $31.8 billion, and the value of soybeans was $16.6 billion. In 2011, corn and soybean prices have kept well above the levels of a year ago. Relative to a year earlier, September corn prices were 49% higher and soybean prices were 27% higher, even though crop prices have fallen from summer highs.

The USDA estimated that the nation’s 2011 harvest of corn for grain will be slightly smaller than the 2010 harvest. It also estimated that the five Seventh District states’ 2011 harvest of corn for grain will be 2.4% larger than the previous year’s harvest. Soybean production was estimated to decline 8.1% for the U.S. and 9.9% for the five Seventh District states. Total usage of corn, at 12.7 billion bushels, would result in U.S. ending stocks of 866 million bushels—the tightest in 15 years. Total soybean usage in the U.S. of 3.13 billion bushels would leave ending stocks at 160 million bushels, tighter than a year ago. The USDA estimated price intervals for the 2011–12 crop year of $6.20 to $7.20 per bushel for corn and $12.15 to $14.15 per bushel for soybeans. Based on the midpoints of these projected price ranges, the value of the Seventh District corn crop in the current year would rise 25% from 2010, while the value of the soybean crop would decline almost 1%.

In addition, livestock prices were well above the levels of 2010 in September 2011. Prices for hogs, cattle, and milk were 9.6%, 17%, and 18% higher this September than last September, respectively. The livestock sector has experienced higher revenues, but higher feed costs have limited the rise in income for the sector. The combination of higher revenues for crop and livestock production has been an impetus for the significant increases in agricultural land values seen this year in the Seventh District.

According to the AgLetter covering the first quarter of 2011, farmers tended to outbid investors for agricultural land at auctions, some respondents reported. Although investors often bowed out in the bidding, they are showing growing interest in farmland. This should not be too surprising given the mixed results other investments have been generating in recent years. Jennifer Ifft, a conference speaker, co-wrote a piece that examines the role of investors in California farmland markets. The reporting bankers in the Seventh District thought farmers bought an even higher share of farmland this year than during the prior year; 48% of the respondents saw an increasing share of land purchased by farmers and only 6% saw a decreasing share in the period from October 2010 through March 2011. With 75% of the bankers observing higher demand for the purchase of farmland and just 1% observing lower demand, the market for farmland was ripe for fast rising land values.

This summer there was a set of articles about agricultural land values published in Choices, which was designed to educate readers on farmland. Another good resource on farmland values, from Purdue University, provides an analysis of farmland values, co-written by Brent Gloy (also a presenter at the conference).

Rents for farmland headed up

Seventh District cash rental rates for agricultural land in 2011 rose sharply relative to 2010—the only year over the past five that had an increase of less than 7%. Seventh District cash rents climbed 16% from 2010. Cash rental rates were up 14% in Illinois, 15% in Indiana, 16% in Iowa, 18% in Michigan, and 20% in Wisconsin. After being adjusted for inflation using the Personal Consumption Expenditures Price Index, Seventh District cash rental rates increased 14% from 2010. This increase was the second largest, behind that of 2008, since tracking of Seventh District cash rents began in 1981.

USDA results on cash rents for cropland showed an increase of 8.8% nationwide for 2011, as of January 1. Cash rents in the Seventh District rose 8.3% in Illinois, 7.8% in Indiana, 11% in Iowa, 12% in Michigan, and 7.6% in Wisconsin.

With the increase in Seventh District farmland values matching that for cash rental rates for 2011, there was no change in the price-to-earnings (P/E) ratio for Seventh District agricultural land (see chart). The unchanged P/E ratio indicated relatively balanced demand to purchase versus rent farmland. In an asset valuation model, the present price of an asset should reflect both current profitability and expectations for future earnings. The P/E ratio for farmland can be constructed as the ratio of indexes based on average farmland values per acre and cash rental rates per acre (the latter representing the earnings potential of farmland). Both cash rental rates and farmland values have risen because of higher agricultural prices.

Cash-renting agricultural land, although increasingly with clauses that allow owners to benefit when crop prices increase further, remained the dominant method (80%) in the Seventh District for farm operations by someone other than the owner. With 16% of farmland on crop shares, 1% on a bushel basis, and 3% on other arrangements, there appeared to be an inclination by owners to get more involved in farm operations and garner higher returns in 2011. Illinois remained the Seventh District state with the lowest percentage of cash rentals (68%), even as rentals on a crop share basis diminished (26%). Additional information on cash rental arrangements can be found from the University of Illinois.

Come join us on November 15, 2011, at the Federal Reserve Bank of Chicago to discuss these agricultural trends and the issues that they raise.

Charts:

Posted by Testa at 1:32 PM | Comments (0)

September 6, 2011

Innovation and the District’s Food Industries, and "Clean Tech" Conference Announcement

By David Oppedahl and Bill Testa

We all eat, yet the variety of what we eat is mesmerizing. Whether we eat the newest power bar developed in a laboratory or the latest organic, heirloom tomato, innovation is essential to food reaching our mouths. Everyone has a stake in the innovation of the agricultural and food industries—from the inhabitants of the rural Midwest, to the research scientists in our nation’s labs and universities, to people around the world who benefit from pest-resistant strains of grain. Agricultural innovations already have enhanced a wide range of products, including nutritional supplements, plastics, and energy materials derived from production agriculture. The future holds even more promise for benefits derived from the agriculture and food pipelines, especially enhanced nutrition, drought-resistant crops, and new functional foods. However, the safety of the food system remains a vital and ever-present concern, as well as a new source of job creation.

A Regional Strength

It is an interesting feature of regional economies that they often continue to be the innovative centers of the industries that were born there. Perhaps this is not all that surprising, since it is innovation that so often drives and sustains industries—innovation encompassing not only the creation of new products to sustain consumer demand, but also the productivity-enhancing technological improvements to fend off competition from other companies, industries, and countries. Yet, as regions search for their own economic renewal, they may overlook their innovative roots, opting instead to recruit or grow the latest hot sector—be it personal computing equipment, homeland defense, information technology, or biotechnology.

Historically, the Midwest economy is as closely linked with agriculture and the food industry as it is with, say, manufacturing. Indeed, the bountiful production and transport of farm products for export not only supported the region’s employment and income throughout most of its growth and development, but also fed the hordes of factory workers who were once needed to operate the region’s factories and mills.

Today, the innovations of production agriculture remain a legacy feature. Nationally, the identifiable value added from innovation in food processing is significant, though far from the top among industries. According to the most recent National Science Foundation survey (2008), U.S. food companies poured $3.18 billion into R&D domestically and another $683 million abroad.

Such expenditure figures are not publicly available for individual regions. But we can look at the Bureau of Labor Statistics’s occupation data for each state to get a sense of innovation-related employment in agriculture and the food industry. These jobs would include: food scientists and technologists; animal scientists; soil and plant scientists; and agricultural and food science technicians. Moreover, unlike the R&D spending numbers, these employment figures include people across the spectrum from government to university, to nonprofit lab, to private business ventures.

Occupational specialties vary from state to state. Also, due to the sample sizes, there are anomalies in the results for specialized occupations for some states. Yet, overall across all of them, the Seventh District states are 31 percent more concentrated in these occupations than the U.S. average; 39 percent more concentrated if we use a broader eight-state definition of the Midwest region (including Minnesota, Missouri, and Ohio). Thus, our region benefits more than the nation from the growth in spending on innovation in the agriculture and food sectors of the economy.

Food Safety is Paramount

As the variety and breadth of our diet expand, so do concerns about food safety. News accounts of foodborne illnessses regularly appear, although the U.S. food system remains among the safest in the world. Public concerns about food safety led to the passage of the Food Safety Modernization Act, signed into law in January 2011. The act will impose new requirements on food manufacturers, processors, packers, distributors, exporters, and importers. It will speed the industry’s movement toward a more science-based food safety system, compelling firms to seek innovative solutions in order to comply and be competitive in dynamic markets.

The academic and government laboratories of the Midwest are important research partners with the private sector. A conference called “Food Safety: Policy Changes, Science-based Opportunities” was held this summer at the Federal Reserve Bank of Chicago as part of a dialog between research institutions and industry in order to further partnerships and generate connections that will improve food safety via innovative technologies and refined systems. It was organized by an array of groups under the auspices of the Global Midwest Alliance.

At the event, David Oppedahl of the Chicago Fed gave an overview of key issues from a regional perspective with regard to food safety. Farming and food manufacturing combined to generate 3.4% of the District’s output in 2008, over 1% more than for the country (see figure 2 at end). Just one form of foodborne illness, salmonella, cost the U.S. economy $2.7 billion in 2010, with almost 1.4 million cases reported. The costs to the nation in medical expenses, lost employment compensation, and premature deaths are significant, although challenging to quantify.

The event’s keynote speaker, Robert Hibbert, K & L Gates L.L.P., compared the food safety system of the 20th Century with that of the 21st Century under the new act. Whereas the former regime involved more reactive regulations and enforcement, the updated food safety system will strive for prevention and traceability. Although resources remain limited, there are plenty of demands on the science and technology: improving process methodologies, enhancing control mechanisms, establishing traceability systems, gathering and exchanging information, and researching virulence in order to establish standards. Challenges to this agenda include the limits of science, expanding the foundation of basic research, communicating risk, and issues with clearances and approvals. Hibbert concluded that firms must “put up with the process,” while at the same time challenging it. An understanding of the emerging regulatory system and business realities will guide the industry toward a safer food supply and improved public health.

A panel on the scientific aspects of food safety was moderated by Paul Sebesta, U.S. Department of Agriculture. The panelists were Rosie Newsome, Institute of Food Technologists, Carla Little, Illinois Department of Public Health, and Todd Ward, U.S. Department of Agriculture. Newsome talked about the Institute’s initiatives and the resources they provide to advance the science of food. Little presented information on her agency’s efforts to ensure a safe food supply for Illinois, while facing increasing complexity in the food chain, globalization, and multi-state outbreaks of foodborne illnesses. Ward outlined the food safety programs at the National Center for Agricultural Utilization Research in Peoria, which focus on developing information and science-based solutions for detecting and removing toxins from food and preventing toxin contamination of food.

Finally, an industry panel, moderated by Matthew Botos, Illinois Science & Technology Coalition, focused on specific firms’ roles in the field of food safety and the opportunities for technological innovators. Justin Ransom, OSI Industries, shared experience gained from running the Food Protection and Quality Systems group, which oversees a global network of food manufacturing plants that handle both raw materials and finished products. Greg West, National Pasteurized Egg Inc., talked about his firm’s rapid growth to meet the demand for safer eggs (especially from restaurants) through innovative technology that maintains the look and taste of fresh eggs while extending shelf life and eliminating salmonella. D. J. Alwattar, Northland Laboratories, outlined his company’s specialized testing expertise, which provides a key component in the industry’s push to meet the challenges of food safety through innovation.

Upcoming Midwest "Clean Tech" Conference Announcement

On September 14, a related meeting at the Federal Reserve Bank of Chicago will focus on innovations in “clean” technology, including those that affect the food industry and agriculture. Organized by the Global Midwest Alliance, “Midwest Clean Tech 2011” will have a particular focus on global issues for innovation partnerships.

Posted by Testa at 8:50 AM | Comments (0)

July 10, 2008

Assessing the Midwest Floods of 2008 (and 1993)

By Rick Mattoon

As water levels recede, the region is beginning to take stock of impact from some its worst flooding since 1993. The geographic footprint of this year’s flooding (depicted below) is less extensive than the nine states and 504 counties affected 15 years ago. And as always, an assessment of the short- and long-term impact of this natural disaster on the national and regional economy will be difficult. In this blog, I will look at the effect of natural disasters on economies and contrast current flood conditions with those the region faced in 1993.



Click to enlarge.

How to think about the losses to the U.S. economy

From a conceptual viewpoint of our economy, natural disasters impact our economic well-being in two basic ways. First, they destroy what we have produced in the past—our “capital stock”—including lives, homes, commercial buildings, public infrastructure and property. Second, they often interrupt normal commercial activity and production. Transportation and deliveries do not take place, people cannot get to work and work places become dysfunctional until normalcy is restored.

In a December 1993 Chicago Fedletter, Bill Testa, Gary Benjamin and I wrote, “Perhaps the most meaningful definition of economic loss due to a disaster is the value of output of goods foregone—that is, the total net output that would have been produced had it not been for the disaster. Foregone output results for two reasons. First, natural disasters destroy productive capital stock such as roads, bridges and factories, thereby reducing output until such time as the capital stock is restored. Second, natural disasters can interrupt day-to-day business activity.”

As that article points out, the impact of the natural disaster tends to have a somewhat unusual affect on the national income accounts—the official way in which we measure the nation’s economic output and income from quarter to quarter. Following the 1993 floods, estimates for the third quarter reduced personal income by $9 billion and forecasted uninsured losses to be $2 billion. Losses to proprietors’ incomes were estimated at another $1 billion.

Remarkably, such initial losses soon appear to translate into economic gains as business and households rebuild. The rise in construction activity and the resumption of business activity often boost gross domestic product (GDP) estimates for future quarters, as households and businesses attempt to rebuild their physical capital and, in the case of businesses, to fill order backlogs. For example, following Hurricane Andrew, annualized GDP growth hit 5.7% in the fourth quarter of 1992, spurred by rebuilding activities.

However, such rebuilding does not reflect an actual economic gain in the broad long-term perspective. In most cases the rebuilding merely replaces lost capital stock—meaning that, in the long term, the nation’s product will not exceed what would have been produced without the disaster. While the immediate burst of economic activity is quite evident, the losses from the foregone output of interrupted and diminished business activity may go largely undetected because the diminished growth takes place in small amounts spread over many years.

Regional economic losses

The ultimate extent of the damage to the region’s economy will in large part depend on who pays for the rebuilding. If the losses are in large part covered by the national government and insurance companies, and if reimbursement is prompt, the region can conceptually restore output and even increase its levels of economic growth. However, if the 1993 flood experience is a guide, it is more likely that the region will absorb a significant share of the disaster-related cost. Because flood insurance was not extensively used, it was estimated that 15% to 25% of the flood costs were borne by state and local governments, not to mention the costs to uninsured homeowners who were forced to rebuild using their own resources. In the most recent floods, it was estimated that only about 1% of Iowans owned flood insurance. In hard hit Cedar Rapids, only 777 of the 4,000 homes damaged or destroyed by flooding were covered. Despite efforts after the 1993 floods to expand coverage, the cost of the policy and the limits of coverage still deter homeowners from purchasing polices. It is estimated that the average cost of a policy in Iowa is $500 per year with coverage only including direct flood damage and not related damage such as water that enters the house through a backed up basement drain. Even if property owners choose to be fully insured, insurance must be paid for. Thus, residents of these regions do bear at least some of the costs in choosing to live and work in disaster prone areas. Currently $2.7 billion in federal flood relief has been approved to aid 2008 flood victims. This does not include the value of low-interest loans and small business assistance as well as the value of crop insurance and private insurance.

Specific categories of losses--Agriculture

In both floods, the greatest concern focused on flooded crop land. In the 1993 floods, nine million acres were submerged by the flood. The lost acreage had been expected to produce 6% of the region’s harvest that year. The estimated crop losses were $7 billion. The states with the largest percentage loss were Missouri 12%, Minnesota 11%, South Dakota 8% and Iowa 7%. In this year’s flooding, damage is heaviest in Iowa where 2 million to 3 million acres of corn and 2 million acres of soybeans were flooded. The American Farm Bureau estimates crop losses at $8 billion for the region, with $4 billion of the total in Iowa. Other states with significant estimated losses are Illinois ($1.3 billion), Missouri ($900 million), Indiana ($500 million) and Nebraska ($500 million). The Bureau points out that it is not only the flooding that will impact crops but also the excessive rainfall that occurred this year.

A June 30 estimate by the USDA projected this year’s corn harvest to be down from 86.5 million acres to 78.9 million, or 8.7 percent. However, the impact on prices may be softened if a robust corn harvest occurs, since supplies should be sufficient to meet demand for food, feed and ethanol. Following the USDA report, corn futures fell from $7.55/bushel to $7.25/bushel, significantly off the $8/bushel price recorded on the Chicago Board of Trade in the immediate wake of the flooding. Still, this price is significantly elevated over the early June $6/bushel price.

One big difference between this year’s floods and that of 1993 was the preexisting stocks and prices of corn and soybeans. In 1992, a bumper crop had been harvested. For example, the stock-to-use ratio for corn hit 25% in 1992 and even in the flood year of 1993 ended at 11%. While prices rose, the increase was a modest hike from $2/bushel to $2.50/bushel. Today the corn stock-to-use ratio is only 6%; prices spiked accordingly to $8/bushel immediately after the flood before retreating to the current price. This tightness reflects the increasing demand for corn both for export and for ethanol. Given this, even if the number of acres lost is smaller than in 1993, the impact on prices will need to be closely monitored.

Spillover issues into other agriculture markets also need to be considered, as livestock feed prices are affected. The condition of the fields for next year’s planting will need to be assessed as well.

Structures

Given the smaller geographic footprint, the potential cost of rebuilding and the infrastructure loss is considerably less in this year’s flooding. While Cedar Rapids and parts of Iowa City were severally impacted, much of the flooding was contained within sparsely populated areas. In 1993, an estimated 45,000 to 55,000 private homes were destroyed, and between 35,000 and 45,000 commercial structures were damaged. Similar to today, most of the homes did not carry flood insurance, making uninsured losses the most significant issue. Estimated property and nonagricultural losses totaled $5 billion before insurance.

Another difference with the 1993 floods was the damage to infrastructure. In 1993, 1,000 miles of road were closed, and 500 miles of railroad track were underwater. Nine out of 25 non-railroad bridges were damaged and closed. This time, some highways were closed for several days due to flooding but damage to bridges, locks and other infrastructure was limited. The exception of course is in cities such as Cedar Rapids where infrastructure losses in the downtown are extensive. Cedar Rapids had 1,300 city blocks underwater, forcing 24,000 residents to evacuate. Preliminary damage estimates have been placed at $736 million or roughly $6,095 per capita. This must also be placed in the context of disruption to Iowa’s second largest city of over 120,000 people with a 2005 gross metropolitan product of $11.2 billion.

Transportation disruptions

One of the more immediate problems that flooding causes is transportation disruptions. The 1993 floods were so extensive that barge traffic on the Mississippi was halted for 2 months. In contrast, barge traffic is expected to be affected for 3 to 4 weeks this time. By July 5, the entire Mississippi was reopened to navigation. Railway disruptions were also more severe in 1993. The destruction of rail bridges added four days to rail shipping times for several months while this time rail disruption was minimal for almost all major freight lines. The effected lines caused temporary delays of 1 to 2 days for most shipments.

What happens next?

For towns that were most directly affected, the question is, what does the path to recovery look like? Unlike individual farms and factories, cities’ and towns’ economies are composed of complex interrelationships that have developed over many years. A natural disaster can upset, disrupt and even destroy those relationships so that restoration is often impossible and sometimes undesirable. And so, the form of rebuilding may require careful consideration and evaluation.

Following the 1993 event, many communities and individuals simply choose not to rebuild. Other communities used natural disasters to redefine themselves. An interesting example of a town rebuilding after a flood was Grand Forks, North Dakota. The Minneapolis Fed chronicled the rebuilding of Grand Forks in a September 2006 Fedgazette article. Grand Forks was the victim of flooding in 1997. In April of that year, 80% of the town was submerged. By 2006, the area was largely restored with the region’s economy growing at a faster pace than before the flood. This was due largely to the influx of $600 million in federal disaster aid (approximately $10,000 per resident).

After much painful disruption, lengthy deliberation and hard planning, the flood eventually spurred a new vision for the area. Roughly 1,200 homes in the 100-year flood plain were bought out by the Federal Emergency Management Agency as part of a flood protection plan. The population rebound remained slow until the Army Corps of Engineers finalized a flood protection plan in 2000. Once this occurred, a building boom was unleashed. The city supported this by providing $10,000 forgivable loans for people staying at the same address for a specific period of time. The new housing was more expensive than what it replaced, with the new larger homes carrying average price tags of $138,000 versus the $85,000 homes that had been destroyed.

For business, the greatest disruption was for restaurants, bars, hotels and any business where discretionary spending is important. Many of these businesses had to lay off workers. Other businesses such as banks, health care and manufacturing suffered lost sales but did not suffer drastic employment declines. In fact given the gains in construction jobs, employment in Grand Forks rebounded to its pre-flood level in five months. To some observers, the newly rebuilt Grand Forks with its improved infrastructure and new capital stock is better positioned for growth than before the flood, but this is only true because of significant government subsidies and 10 years of hard work. And of course, it is not true for every household and business impacted by the flood, as many chose to leave Grand Forks.

Conclusions

The 2008 flood may seem to be milder in its overall economic impact on the larger region and the nation, but it is just as devastating for those who have suffered it as it was for those in previous floodings. The ultimate costs and impacts can only be known over time as damages become known, as the extent of relief is determined and as households, businesses and towns decide how to respond to the disruption. Most though not all of the agricultural costs and recovery will be known by the end of the growing/harvesting season. In contrast, the recovery and rebuilding process for towns, businesses and households will be protracted and laborious.

Posted by Testa at 1:59 PM | Comments (1)

October 26, 2007

Oppedahl on the agriculture R&D conference

By Guest Blogger David Oppedahl

Have you ever wondered how the U.S. can produce so much food with relatively few farmers? On September 24, 2007, at the Federal Reserve Bank of Chicago you could have learned some of the reasons behind the cornucopia of output from U.S. agriculture at our conference The Role of R&D in Agriculture and Related Industries: Today and Tomorrow. The conference explored the role of research and development (R&D) in agriculture, biotechnology, and the food industry, focusing on policies that promote industry growth and rural development. This conference brought together those interested in the R&D issues facing agriculture and related sectors of industry, particularly biofuels and food manufacturing.

The goals of the conference were to examine agricultural R&D from a midwestern perspective, explore the implications of R&D for industry growth, and discuss the influence of government R&D policies on industries and rural development. The sessions of the conference covered the following topics: 1) agriculture R&D and funding, 2) biotechnology and food R&D, 3) biofuels R&D, and 4) a policy discussion about the best ways to promote agriculture-related R&D. Next I’ll highlight a few of the presentations.

William Testa, vice president and director of regional programs at the Chicago Fed, kicked off the day with opening remarks that emphasized the role Chicago has played in the development of agriculture in the Midwest. “Almost from its inception, Chicago has been the nexus and commercial center for a broader region whose wealth emanates from production agriculture,” Testa said. Yet, shifts in agricultural labor due to increased productivity have affected the region’s economy. Testa noted that fewer production jobs in agriculture and related industries have led to struggles in rural development, though agriculture remains a key sector. “At heart, production agriculture must remain in the Midwest where land, climate, and transportation infrastructure are superior,” Testa stated. Moreover, R&D activities have played a key role in shoring up the District economy and offer hope for a bright future. The web of R&D efforts in the Midwest is likely to grow, creating more opportunities for the region through better products and new technologies. Testa concluded, “I am optimistic here today that the dissolution between research lab and factory and farm that has taken place in other regions and in other industries is not our Midwest region’s destiny.”

My presentation opened the first session and emphasized the link between the amazing productivity in agriculture during the last 60 years and agricultural research. Recent data from the U.S. Department of Agriculture demonstrated that, while using fewer inputs than in 1948, the agricultural sector in the U.S. produced more than 2.5 times as much output in 2004 as it did over a half century ago. Of course, the use of some inputs, like fertilizers, has increased. However, the contraction in farm labor more than offset these increases. Yet, there was a shift in the source of agricultural productivity during this period. In the 1948–1980 period, almost three-quarters derived from an increase in inputs per worker, whereas in the 1981–2004 period, two-thirds derived from growth in total factor productivity (TFP), which reflects changes in technology and other factors rather than labor-saving productivity alone. Government policies fostering agricultural research have promoted the long-term health of agriculture via TFP. According to Fuglie and Heisey, “There is a consensus that the payoff from the government’s investment in agricultural research has been high.” There are even greater benefits to the public from agricultural research when one considers the social returns from private research as well as public funding.

Orion Samuelson, agribusiness director at WGN Radio Chicago since 1960, presented the keynote luncheon speech, expanding on this theme of the changes in agriculture due to government policies. He passed along a few of his many experiences related to the changes in agriculture during his association with the industry. Orion touted rural electrification as the single factor that changed agriculture the most in the twentieth century; farm life was transformed by a reliable supply of electricity. He also said that research played a vital role in agriculture’s growth and that research funding should be expanded to sustain the industry’s growth. An example of the key role of research is the ongoing development of drought-resistant crop genetics via biotechnology, which will contribute to the record corn crop this year. Samuelson contended that we’re just seeing the beginning of biotechnology’s impact across the industry. Moreover, he predicted that U.S. agriculture would rise to the challenge of helping feed the world through agricultural R&D, just as it has over past decades.

The final session explored policies that would strengthen agricultural R&D in the U.S. Jeffrey D. Armstrong, dean of the College of Agriculture and Natural Resources at Michigan State University, discussed CREATE-21, a set of proposals to integrate the U.S. Department of Agriculture’s research, extension, and teaching functions and double U.S. funding of agricultural research to about $5.4 billion per year over a seven-year period. Moreover, the funding would become more competitive under CREATE-21, making research better suited to the changing needs of agriculture.

Lastly, Robert L. Thompson, Gardner Chair in Agricultural Policy at the University of Illinois at Urbana–Champaign, looked at the resource constraints facing world agriculture, even as world food demand could double by 2050. In this scenario, research investment is particularly essential for the future as well as it has been in the past. Also, the Midwest may play an even larger role in feeding the world with exports because of the water and land constraints that many regions across the globe face. But increased funding of R&D is needed to meet the rising global demand for food products. Indeed, R&D plays a key role in achieving greater output and in enhancing productivity, which will allow for more exports. Moreover, a better mix of funding with enhanced government participation would benefit agriculture and the world because private sector investment alone will not reach the socially optimal level in all areas of research.

The other presentations at the conference were excellent as well. Most of the presentations from the conference are now available online, so be sure to check them out to learn more about R&D in the agricultural, food, and biofuel sectors. (A special Chicago Fed Letter summarizing the conference presentations will come out in the near future.)

Posted by Testa at 10:54 AM | Comments (0)


Please enter the security code you see here