November 10, 2011

Nonmetropolitan counties bouncing back

Bill Testa[1]

In terms of income and population growth, nonmetropolitan counties in the Seventh Federal Reserve District states have had their ups and down over the past few decades. The nonmetropolitan population of the Seventh District has not generally kept pace with its metropolitan counterpart—as in many other parts of the country; the nonmetropolitan areas have continued to (modestly) lose population share in recent decades. Despite this continued share loss in population, nonmetropolitan counties have maintained their standing in per capita income since 1969. This maintenance of per capita income has been achieved amid much upheaval in rural industry structure. Production agriculture has tended to slip in relative importance in many nonmetropolitan counties over the long term, although recent strength in crop prices are lifting fortunes in many rural counties. In places where production agriculture has waned over the long term, manufacturing activity has widely become a backstop. In addition, many nonmetropolitan economies have become more prominent destinations for recreation and retirement.

The U.S. population has been urbanizing throughout most of the nation’s history. At its inception, approximately 95% of the nation’s population lived in the countryside. This rural share diminished to about one-half as the twentieth century dawned, and today it amounts to about one-fifth. In the Seventh District, nonmetropolitan counties also account for around one-fifth of the population—ranging from Iowa’s 42.3% of the total population residing in nonmetropolitan counties to Illinois’s 12.8%.

In recent decades, urbanization has continued in the Seventh District, albeit at a much slower pace than it has done historically. The nonmetropolitan population of the District made up 21.5% of the total population in 1969 versus an estimated 20.3% in 2009. During the 1970s, nonmetropolitan counties actually gained population share over metropolitan counties in the District.

As seen below, the nonmetropolitan population grew at a healthy pace during the 1970s, and dropped steeply thereafter during most of the 1980s. The 1990s saw a pickup in nonmetropolitan population, followed again by decline during the most recent decade.

While the population in the Seventh District has continued to shift to metropolitan counties, nonmetropolitan counties have managed to sustain their relative per capita income. Per the chart below, the average nonmetropolitan per capita income gained modestly on that of the metro areas during the 1970s, and then it slipped behind during the subsequent two decades and has rallied somewhat during the past decade. However, within the past two to three years, rising prices of farm commodities—especially those of corn and soybeans—are lifting incomes in many nonmetropolitan counties of the District. The recent rise in agricultural fortunes, along with the farmland boom accompanying it, will be the subject of an upcoming conference here on November 15.

The fact that per capita incomes in nonmetropolitan counties have kept pace with those of metropolitan counties over the long run is somewhat remarkable given the shrinking role of production agriculture in directly generating income and jobs. Farm productivity has soared as farm operators have been able to produce more crops and livestock with less per-unit inputs, especially less labor hours. By way of illustration, per-acre crop yields for two of the Seventh District’s major commodities—corn and soybeans—have doubled since the mid-1960s. Such productivity has enhanced the diets of U.S. households and, increasingly, those of the developing world as well. However, productivity gains have also served to lower real prices of raw farm products over the long term, as the demand for them has not kept pace with rising production. In the process, farm income employs and supports and fewer local workers and households. In the Seventh District today, farm production directly generates only 1-2% of the District’s output and income.

Manufacturing activity has become a major offset to shrinking farm activity in many of the Seventh District’s nonmetropolitan areas. The maps below show those nonmetropolitan counties where the share of income derived from manufacturing activity exceeds the statewide average. In 1969, 53.13% of nonmetropolitan counties could make this claim. By 2009 65.62% of nonmetropolitan counties could do so.

Declining agricultural employment and income account for part of the rising (relative) importance of manufacturing in nonmetropolitan counties. But so do trends favoring a rural location for manufacturing plants as well as a favorable mix of industries that are already concentrated in nonmetropolitan counties. Generally, manufacturing plant location has come to favor nonmetropolitan locations where land prices and transportation costs may be less expensive. The rise of truck and intermodal transportation has especially favored those nonmetropolitan areas with access to highways, along with connections to the more traditional rural roads originally constructed to convey raw farm products. In addition, manufacturing production that is tied to nearby farm products—such as food and ethanol processing—has also performed well, thereby buoying manufacturing employment in nonmetropolitan areas. As the chart below indicates, food processing employment levels in the Seventh District overall have stayed fairly level since 1990, and they have actually gone up in the District’s three more rural states of Iowa, Indiana, and Wisconsin. Over the same period, total manufacturing payroll jobs have declined by 30%.

In many parts of the Seventh District and throughout the U.S., many rural counties have also come to depend on their scenic assets, such as lakes, rivers, and forests, as the basis for economic growth and development. For many rural counties that experienced population and income declines associated with waning agriculture, forestry, mining, and manufacturing, promotion of recreation and retirement can help their reverse their fortunes.

Since employment and income from such activities as tourism (and retirement) are scattered across many statistical categories, researchers Calvin L. Beale and Kenneth M. Johnson have classified recreation-intensive counties by analyzing a variety of data. Their analysis published in 2002 identifies all such “recreation” U.S. nonmetropolitan counties as defined in 1993 (following the 1990 U.S. Census of Population and Housing). Such recreation counties are identified in each of the five Seventh District states, with many of them located in central and northern Wisconsin and northern Michigan. The authors’ find that population growth was higher in recreation nonmetropolitan counties than in other nonmetropolitan counties that continue to depend on farming, mining, manufacturing, and other economic activities. (According to the authors, the same applies to retirement counties—which are defined as those with significant in-movement of older people in the 1980s—relative to other nonmetropolitan counties.) However, they also point out that there may be downsides to the economic development attendant to recreation. Such development may cause environmental stresses on the land and natural resources. Additionally, it can often be in conflict with more traditional economic agricultural activities, such as the raising of livestock. While such conflicts have arisen in the Midwest, more harmonious relationships between agriculture and tourism can also be seen. In particular, agri-tourism and local agricultural sourcing have been on the rise.[2]

Nonmetropolitan areas of the Seventh District states differ widely in their economic performance and structure. On the average, they struggle to maintain population and economic viability. Even though production agriculture has slipped in importance, it continues to drive the income and attendant economic activities in many rural regions. At the same time, manufacturing, recreation, and retirement are often helpful avenues for many nonmetropolitan counties to develop their incomes and populations.
[1]For a longer treatment of this topic, see the opening presentation at the recent Chicago Fed conference titled Economic Development in Rural Wisconsin.(Return to text)

[2] See the 2010 Chicago Fed conference titled The Intersection of Midwest Agriculture and Rural Development, available here, as well as the 2009 Chicago Fed agricultural event here. (Return to text)

Posted by Testa at 11:10 AM | Comments (0)

January 19, 2011

Today's Nexus Farming and Rural Development

David Oppedahl is the Federal Reserve Bank of Chicago’s business economist who researches agriculture and rural economies. This past fall, he held a conference that explored the changing nexus between farming and rural growth and development in the Midwest.

Farming activity itself directly generates a declining share of income in the Midwest, as it does in most other parts of the U.S. This may seem illogical because farm yields and production continue to soar in response to strong demand for grains and livestock—both from here and abroad. But in terms of income generated directly through farming, farm operations suffer from much the same phenomenon as many manufacturing industries—i.e., rising output volumes have not been sufficient to offset falling (real) prices. Falling prices have come about as productivity gains have lifted production yields while lowering the costs of production per unit[1]. In addition, productivity gains have been accomplished with greater use of labor-saving machinery and other technologically-advanced inputs such as seed and pesticides. The chart below documents the smaller share of personal income from farming in the states of the Seventh Federal Reserve District.

While income generated from farming activity itself may be decreasing in importance to rural economies, income generated from activities related to farming is countering this trend. These activities include the processing of agricultural products (such as grain milling and oilseed processing); food preparation and packaging; and livestock slaughter and processing. Such activities usually take place nearby farms in order to save costs on transportation. To see the importance of such activities, see Oppedahl’s chart, which adds “food manufacturing” income to direct farming income. It is seen here that food processing alone doubles the income share contributed by agriculture to the Seventh District’s economy.

Farm products are also increasingly used as feedstocks for nonfood processing—the most prominent being biofuel processing. Although the manufacturing of biofuels has boosted the economies of many rural communities in the Midwest, the use of foodstuffs to meet energy needs is not without controversy on ethical, environmental, and cost-effectiveness grounds.

Perhaps less controversial, greater local food sourcing was the focus of some discussions at Oppedahl’s recent conference. Farmers and other rural entrepreneurs are increasingly reshaping their products and distribution channels to meet changing demands for food. Local foods are being sourced and modified to meet or serve a growing segment of consumers who are more health- and eco-conscious. While local foods operations tend to be run at a smaller scale, employment and income may grow at them because some consumers see more value in their products (e.g., relative freshness)—and are willing to pay premium prices for them. In some instances, high-quality and special-feature farm products are being featured at local restaurants and accommodations, generating new food-oriented travel destinations. Aesthetically pleasing small-scale farms themselves may become vacation spots as a result of the explosion in popularity of locally and organically grown food products.

If you want to know more about how these trends are playing out in the Seventh District, check out the conference presentations from David Oppedahl’s conference, which are summarized in this month’s Chicago Fed Letter.

[1]These price trends refer to the past several decades. Many farm commodity prices have risen over the past year.(Return to text)

Posted by Testa at 10:00 AM | Comments (0)

August 13, 2008

Energy Prices and Where We Live and Work

For those of us who are aged 50 and older, it is easy to forget that younger generations did not experience the energy crunch of the 1970s nor the many (often failed) public policy responses to the OPEC oil price run-ups. With today’s similar developments in energy markets, it is fascinating to compare the two eras. In some ways, history repeats itself. In other ways, it does not.

The auto industry upheaval appears to be repeating the 1970s. As then, domestic automakers (and their fuel-consuming fleets) are suffering dearly from the sudden hike in gasoline prices; foreign-domiciled automakers, not so much. In both the 1970s and today, the vehicles of Asian automakers tend to be smaller and more fuel-efficient. Unlike the 1970s, however, today even Toyota is paying for its lurch toward large vehicles such as its large pickup truck, the Tundra.

Another apparent similarity between the eras is that some analysts are predicting that rising fuel costs will reshape our patterns of living and working toward more compact urban forms, to the detriment of far suburban and rural areas. However, the actual shifts that took place in the landscape of America surprised us somewhat during the 1970s and early 1980s.

The U.S. was already well-suburbanized by the mid-1970s. But in response to higher fuel prices, it was commonly thought that beleaguered central cities were in store for some respite from the population flight that they had been experiencing. With their denser housing patterns, high job concentrations, and well-developed public transit systems, large cities would offer shelter from high gasoline prices. In suburban and rural areas, where driving distances were long, residents would pay the price. The pace of suburban sprawl would slow, the pace of rural shrinkage would accelerate. For those of you too young to remember, these predictions did not come to pass.

These same predictions are being made today as gasoline prices have doubled. In a recent study, Joseph Cortright offers evidence that shifts toward more compact cities are already underway, as households eschew housing on the urban fringe where commuting distances are long. Indeed, in large metropolitan areas like Chicago, housing prices in closer-in neighborhoods have been holding up relatively well over the past year. The era of urban sprawl has been pronounced dead, with households and employers expected to favor greater density as a way to economize on energy-related travel costs.

However, the contrast between expectations in the 1970s and what actually came to pass may give us pause in assessing today’s predictions. Just the opposite took place in the 1970s era. Central cities of large metropolitan areas, especially in the Northeast and Midwest, experienced their worst decade of the century. Population tended to flee to the suburbs, especially middle and upper middle income residents. The apparent reasons for flight included rising crime, school desegregation, and the near-completion of an interstate highway system that funneled homeowners to cheap and abundant housing on the perimeter.

While rural areas in some areas of the U.S. did continue to decline, on the whole the 1970s was hailed as the decade of the “urban to rural turnaround.” The charts below indicate population growth over past decades for metropolitan versus nonmetropolitan counties. Though energy expenditures were higher on average for rural households, rising energy prices for coal, natural gas, and petroleum raw materials spurred a boom in exploration and mining in many parts of the U.S. Rural rebound was also spurred by a resurgence in prices and exports of agricultural commodities and processed foods. The falling exchange value of the dollar against world currencies following the dollar’s detachment from gold in 1971 was accompanied by favorable prices for U.S. foodstuffs on global markets. Faltering agricultural production in some foreign nations such as the former Soviet Union contributed to rising U.S. farm income. So too, thanks in part to the interstate highway system, some types of manufacturing began to discover rural areas as hospitable sites for production.

Click to enlarge.

Click to enlarge.

Will these surprising patterns repeat themselves in the current era of high prices for energy materials? Rural areas are once again finding themselves amidst an energy and food commodity boomlet. Surging agricultural demand from developing nations has contributed to rising U.S. exports and commodity prices. The falling value of the U.S. dollar since 2002 has also contributed, as have the U.S. legal mandates and subsidies for the use of corn-based ethanol as a transportation fuel. In the Seventh District, the growth pattern in farmland prices looks much like the late 1970s and early 1980s, rising at double digits annually through the decade.

In other regions, coal mining and energy exploration activity are buoyant.

However, this time around, conditions would seem to favor central cities versus rural and far suburban areas more than in the 1970s. Rates of crime declined over the 1990s in most major U.S. central cities. Central city schools continue to struggle to educate and graduate low-income students, in particular. Yet, most such school systems enjoy greater financial stability, and many have innovated and expanded their offerings to serve populations who are diverse culturally, as well as economically. Rather than shunning large cities, many highly educated households are finding the older architecture, diverse community, and rich array of amenities in central cities attractive. To some degree, employers have followed educated employees back into central cities; or they have found that the density of the central city makes for more productive business activity in the “new economy,” which rewards face-to-face contacts in conjunction with sophisticated telecommunications. Should these recent trends continue, higher gasoline prices may only add one more advantage to the higher density of older central cities.

These trends may leave some suburbs on the fringe as the losers in the current era. The map below illustrates the average commuting time for suburban areas of the Chicago metropolitan area. Many households who buy or rent in suburban areas choose the low housing prices that such areas offer at the expense of longer trips to work. The sudden rise in gasoline prices may have left many such households with larger shocks to household budgets than their more urban counterparts. The Center for Neighborhood Technology in Chicago has constructed neighborhood maps of U.S. metropolitan areas which estimate average household expenditures for commuter travel. For Chicago and most other metropolitan areas, these estimates show that average household energy expenditures climb on the fringes of metropolitan areas. Even as measured as a share of household income, far-suburban households are more severely affected by rising fuel costs.

Click to enlarge.

Some revisionist interpretations of the 1970s experiences of “urban to rural” turnaround have also been made by analysts such as Paul Gottlieb. And it seems that the turnaround of that period has been overstated by an inherent bias of measurement—the tendency to overstate the population growth of nonmetropolitan counties during periods in which household growth is robust nationally. In such periods, population growth in nonmetropolitan counties can flip their defined status from nonmetro to metro, thereby inflating the measured pace of growth in consistently defined “nonmetro” counties.

Given the experience of the 1970s, it is difficult to draw firm and rapid conclusions concerning whether an era of higher fuel costs will reshape our urban, suburban, and rural landscape and, if so, how. To be sure, higher fuel costs have changed the desirability of work and residential locations. But we also know that households and businesses can adapt to such marked price shocks in other ways than moving. In particular, as today’s fleets of autos and trucks wear out, they will surely be replaced by more fuel-efficient vehicles, thereby allowing many long commutes and delivery trips to resume at moderated cost. Such was the case following the energy price shocks of the 1970s.

Note: Thanks to Vanessa Haleco-Meyer, Bill Sander, and Graham McKee for comments and assistance.

Posted by Testa at 10:33 AM | Comments (2)

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)

October 11, 2006

Global Agriculture Conference

On average, rural America has not been faring as well as metropolitan America in terms of population and income growth. Is this trend yet another painful adjustment that can be attributed to globalization?

Globalization policies continue to be closely intertwined with agricultural markets, which have been the historic lifeblood of rural communities in the Midwest. Last month, the Chicago Fed held a conference on “Globally Competitive Agriculture in the Midwest.” The event included the Midwest release of a task force report by the Chicago Council on Global Affairs, Modernizing America’s Food and Farm Policy. Conference discussion concerned how current global trends and policy debates are affecting agriculture and rural communities, and how prospective policies such as the next Federal farm bill and the Doha round of the world trade talks might play out.

During the conference discussion, several presenters expressed the opinion, without challenges from the audience, that globalization was in some way responsible for the lagging economic performance and stark challenges facing the rural Midwest. However, I think that it is somewhat mistaken to confuse globalization with technological advances and associated structural changes now taking place in the production of agriculture.

First, to concede some ground to the opposition, several forces of globalization have hastened structural adjustments taking place in smaller towns and rural communities. In particular, an expansion of the world market for goods and services has sharpened the economic specializations of many countries and their subnational regions. For the U.S., as global markets in goods, services, and capital have been opened up, the domestic economy has shifted away from manufacturing production and less-skilled services such as back office processing, some software production, and call center activity in favor of advanced services such as finance, investment, and management. For such advanced services, the large urban form, rather than the smaller city or rural town, is the more productive and favorable locale. This preference of industries performing such advanced services has contributed to the growth of large metropolitan areas, such as New York, Chicago, Washington, D.C., Atlanta, and San Francisco.

Aside from that, there is little to argue about globalization as a detriment to rural economic growth. And even at that, I would argue that technological advancements, rather than globalization, account for most of the structural changes that are moving us toward an advanced services economy in the U.S. New technologies, particularly their adaptation in wireless communication and in advanced computing, are highly complementary to such service production, with or without globalization. This is evident the world over as wages, salaries, and employment opportunities have risen sharply for those workers who have the education and technical skills to work with advanced communication and technical tools.

While rural areas have not fared as well in advanced services, the net effects of globalization on commodity production and income in rural areas are mixed rather than one-sided. In much of rural America, the local economy is highly dependent on commodity agriculture or on commodity materials such as energy products, minerals, and timber. Here, relentless productivity advances, especially in agriculture, have obviated the need for as much labor as in the past. In turn, lessened labor demand has put pressure on rural growth.

Yet, such labor substitution is hardly related to globalization. It is true that global markets can introduce competition into commodity markets. Yet, on the flip side, falling transport costs and more open markets also increase possibilities for heightened exports and firmer prices for the commodities produced in rural areas. In the Midwest, for example, global exports in soybean and corn have helped to sustain jobs and income. More recently, as developing countries have improved their diets, U.S. exports of beef, pork, chicken, and poultry have grown. Here, the competitive advantage in grain production translates into local livestock production. The processing of grains and livestock (in order to shed weight and volume before exports) is kept close to the location of grain and livestock production, that is, rural communities.

Growing global growth has also boosted prices of carbon-based fuels. As a result, exploration, mining, and production of fuel sources are providing more jobs and lifting income in many rural communities. In corn-producing states, federal subsidies have combined with rising prices of fossil fuels to spur rapid expansion of corn-based ethanol capacity as a viable energy source. As a result, prices for corn have been raised and are expected to remain so. Moreover, ethanol plants are being built near corn production in rural communities, thereby boosting associated manufacturing jobs.

But ethanol production has not been the only source of manufacturing jobs in rural communities. In the Midwest, as shown below, rural and nonmetropolitan counties have been gaining share of manufacturing jobs at the expense of metropolitan counties for several decades. There are several reasons for this shift, but the dominant factor points to technological changes in production. In particular, areas with lower population density are favored for many types of production due to easier transportation access and lower land costs. And if these forces have been accelerated by global competition, rural areas are the beneficiaries. Income from manufacturing is replacing income earned on farms as the dominant economic base across the Midwest.

Click to enlarge.

Click to enlarge.

Of course, rural communities in the Midwest face many challenges in the years ahead. For one, manufacturing production centers sited in rural communities are highly vulnerable to global competition. So, too, commodity prices have historically been volatile such that commodity-based economies have often been whipsawed by downward price swings. Global markets show no promise of easing the variability of commodity price swings.

For these reasons, rural communities are striving to avail themselves of development opportunities as they present themselves. On October 24–25, 2006, the Chicago Fed will be partnering with Iowa groups on an informational conference in Ames, Iowa, called “Expanding the Rural Economy through Alternative Energy, Sustainable Agriculture, and Entrepreneurship.”

The question of whether globalization has been a net plus or a net negative for rural areas is not an easy one. Yet, more than ever, rural communities will want to stay closely attuned to trends and policies related to global affairs.

Posted by Testa at 2:01 PM | Comments (0)

May 18, 2006

Small Towns, Big Headquarters

Two corporate headquarters location developments made Midwest headlines on May 10. One was the news story that UAL, the holding company for Chicago-based United Airlines, was considering moving its corporate offices from Chicago's suburbs to the city's central business district or possibly to another city. On the same day, Whirlpool announced a restructuring that will close the headquarters offices of recently acquired Maytag in Newton, Iowa, and consolidate them in Whirlpool’s headquarters location in Benton Harbor, Michigan. Of the two announcements, the Maytag closure illustrates an important trend for small towns and less populous metropolitan areas; large company headquarters are shifting toward more populous metropolitan areas.

Many small towns and smaller metropolitan areas in the Midwest have historically been home to large company headquarters, especially of industrial companies. In fact, some highly successful companies were founded in these places, and they subsequently maintained their headquarters operations there even as their production operations and sales expanded to be national and even global scope. To illustrate, below is a partial listing of Fortune magazine’s top 1,000 companies that can be found in smaller cities and metropolitan areas in the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.

Places that host large company headquarters often fare well in several respects. Headquarters are renowned for funding local charitable and civic programs. In addition, headquarters employees tend to be highly educated and committed to social and public service. Accordingly, the loss of such a headquarters by a small town or metropolitan area can be a difficult blow.

Even after a loss, headquarters towns can be more fortunate in the aftermath than towns that experience large production plant closures. Headquarters sometimes leave behind a substantial legacy, such as philanthropic foundations or founding families, or important institutions, such as hospitals or colleges and universities. In the recent wake of Upjohn/Pharmacia’s headquarters pullout of Kalamazoo, Michigan, an anonymous donor(s) has funded The Kalamazoo Promise program which has promised to pay for college tuition (in-state) for local students who complete high school in good standing. This scholarship program is not necessarily funded by anyone associated with Upjohn, since the town also hosts headquarters of other large companies such as Stryker and other wealthy individuals. However, the original Upjohn Company has left other more apparent legacy assets. For example, the Kalamazoo area hosts the Upjohn Institute, an important labor research organization that was begun by the company’s founder. And the new owner of the former Upjohn-Pharmacia facilities, Pfizer, is assisting the town in several ways including in the creation of local spin-off technology start-ups.

Nonetheless, the departure of the Upjohn/Pharmacia headquarters will be felt. The list below illustrates some of the places that have been or will be struggling to close the civic gap left behind.

It appears that the tendency for less populous areas to lose these headquarters, which usually happens amidst a merger or acquisition, is part of a broader trend. Studies examining such events over the past 40 years indicate that nonmetropolitan counties in the U.S. are losing share of large company headquarters. The gainers have been metropolitan areas of 1 million or more. Metro areas of this size have been growing in number, especially in the Sunbelt. With their larger population sizes, these metro areas typically have the features that are attractive to headquarters operations, namely diverse business services such as law and accounting, as well as significant air travel capability for headquarters executives.

It remains to be seen if smaller metro areas in the Midwest will be able to reverse or compensate for this trend in other ways. To date, as the chart below illustrates, places of smaller size have generally grown less rapidly over the past 15 years.

Posted by Testa at 12:08 PM | Comments (1)

February 21, 2006

Rural Economies and Globalization

Rural economies in the U.S. are on the front lines of the upheavals associated with globalization. Many rural economic engines are based on commodity production and traded goods—namely, routinized manufactured products and production agriculture. Such industries are coming under competitive pressure from overseas economies that often enjoy significant cost advantages. These are also the types of production activities that regularly experience sharp productivity gains—and attendant labor efficiencies—as a result of technical progress. As a result, many rural work forces are shrinking; rural economies are, on average, underperforming metropolitan area economies. In response, rural areas are searching for ways to become innovative in nature rather than commodity-based as a way to stay vibrant.

The Global Chicago Center of the Chicago Council on Foreign Relations recently convened its second in a series of meetings intended to assist print journalists connect global events with their readerships. The Global Chicago Center has fashioned a web-based guide for media so that local experts on global affairs can be readily sourced by local journalists. This particular meeting in Chicago focused on newspaper journalists in rural regions of the Midwest. Experts and analysts of rural regions met with the journalists to discuss the ways in which globalization is affecting rural economies and what, if anything, can be done about it. For some rural regions, the answer to the latter question is not much.

Due to high productivity on farms, which has helped give Americans the world’s highest standard of living, production agriculture employs relatively few people. Indeed, farmers account for only 2 percent of the U.S. work force and only 11 percent of rural population.

Manufacturing now dominates many more rural counties than does agriculture, but the type of manufacturing activity there is vulnerable to global competition and displacement. Over the past 50 years, manufacturing plants locating in rural areas have been seeking a low-cost environment and high-quality but lower-skilled rural workers. Nonetheless, technological progress and heightened global competition often have an adverse impact on these operations. As the figure below shows, metropolitan economies in the Seventh District are easily outperforming nonmetropolitan areas on average.

Click to enlarge image.

Why are metropolitan areas adapting more successfully to globalization? At least part of the answer is that innovative industries or groups of activities have more frequently emerged or prospered in urban areas. And innovative companies can sometimes stay one step ahead of the competition—even low-cost competition—by spinning out new products and conducting business with new processes and management techniques.

But all is not lost in rural areas, according to Lee Munnich of the Humphrey Institute at the University of Minnesota. Munnich has studied what he calls “rural knowledge clusters” in Minnesota. These clusters are proximate groups of innovative, inter-related firms, workers, entrepreneurs and, sometimes, educational institutions. They have managed to thrive, often building an industry related to local features or activities such as the snowmobile “cluster” of leading firms in northwest Minnesota. Other knowledge clusters in Minnesota identified by Munnich include:

  • Mankato: wireless and radio frequency technology
  • Alexandria: automation/motion control technology
  • Winona: advanced composite materials
  • Northwest Minnesota: recreational transport equipment
  • Southwest Minnesota: precision agricultural equipment

Munnich argues that you cannot build a knowledge cluster from scratch, but you can identify existing clusters and build on them. Building blocks include programs to encourage further entrepreneurship, mentor and provide seed capital for new ventures, and create complementary work force programs at the local colleges.

One who agrees with Munnich’s assessment that rural economies are struggling is Mark Drabenstott, Vice President at the Kansas City Fed and Director of their Center for the Study of Rural America. Drabenstott reports that the top 310 fastest growing counties in the U.S. over the past ten years accounted for three-fourths of total U.S. economic growth and that only eight of these were nonmetropolitan counties. Rural areas must find ways to achieve the critical mass of talent and innovation that are needed to compete in today’s global economy.

According to Drabenstott, finding ways to develop rural economies toward greater scale and innovation is far from simple. For one thing, rural areas vary enormously. So what might be a successful path to redevelopment in one area might be entirely different from what will work in another area.

Another hurdle is that rural areas themselves often lack the local capacity to understand and react to global phenomena. And nationally, few resources are being devoted to assisting rural economies in handling their development challenges. For instance, almost two-thirds of USDA expenditures are earmarked for payments and subsidies for commodity agriculture; only 0.5 percent is going toward rural economic development.

Drabenstott sees a few bright spots in rural America. U.S. agricultural exports have been steadily shifting away from commodities and toward “consumer” food products and other higher value added agriculture. So too, many rural manufacturing firms are adapting to global competition by adopting world class manufacturing processes. Immigrants are also bringing their entrepreneurial enthusiasm to parts of rural America, and foreign companies are also scouring rural economies for investment opportunities.

As the Global Chicago Center sees it, newspaper journalists in rural areas can help their readers and their communities in understanding and reacting to the challenges and opportunities that accompany globalization.

Posted by Testa at 10:07 AM | Comments (0)

February 2, 2006

Rural Economic Development

Necessity is the mother of invention, and if ever invention was needed, it is in today’s rural America. This is especially true in the portion of the Midwest stretching from central Illinois westward to Kansas and Nebraska and, from there, north and south from the Dakotas in the north to west Texas in the south. There, declining population, disappearing towns, and falling incomes plague many communities. In such places, farming and farmland have traditionally been the way of life. But rising productivity in farming has almost eliminated the need for farmers to live on and work the land, with barely 1 percent of American’s population living on farms according to the 2000 Census. As jobs and population shrink, derivative businesses such as banks, schools, and hospitals are consolidating and re-shaping vigorously in order to survive and prosper.

Many rural communities continue to fight back. The Chicago Fed’s Community Affairs program and its partners gathered in Des Moines this past November to assess the “invention” taking place in rural America (link). Bankers, economic development officials, and business and community leaders met to explore avenues to economic development in the rural Midwest; they met to share best practices and approaches.

The entire Des Moines conference will be summarized for an upcoming issue of the Chicago Fed publication Profitwise News and Views (link). But for those of us, like myself, who’d rather not wait, many fine presentations from this event are already available online (link).

Many communities have turned to manufacturing and distribution activities as sources of income and jobs. The same roads and rail that are useful for farm products are readily adaptable for hauling processed and finished goods. Today, according to the analysts at the USDA’s Economic Research Service (link), more rural counties count manufacturing as their dominant economic base than they do farming. Those same roads are also often a convenient vehicle to convey skilled workers many miles to jobs at factories and distribution centers. The further processing of farm products continues to boost manufacturing, especially food processing and, more recently, the processing of farm product into bio-fuels (link). A downside has been that rural production wages have not fared well, on average.

Advances in telecommunications hold the promise that service jobs can develop or can be outsourced to rural counties, much as some are decentralizing overseas. Broadband and other high-speed high-capacity infrastructure services have been expanding in rural areas, though this growth lags that of urban areas where proximity makes the up-front costs of connection less prohibitive.

A further impediment to locating many information jobs in rural areas is that information exchange via telecom is not an easy substitute for some types of human discourse, especially where face-to-face communication is needed to evaluate information or where the information is otherwise ambiguous or interpretive in nature. Nonetheless, for those workers who prefer rural living or quality of life, telecom infrastructure at least makes rural location possible.

Many rural communities are on the forefront in making the most of their abundant land resources to enhance rural quality of life. Traditional outdoors amenities such as hiking, birding, and hunting are being augmented with new initiatives like agricultural tourism, including harvest fairs and winery-related tours, retail, and lodging. At the same time, small towns are using available economic development financing tools to redevelop their towns and to help new generations discover the sense of place and social fabric of rural America.

Posted by Testa at 12:33 PM | Comments (0)

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