Top Ten Rural Trends For the Farm Credit System

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Top Ten Rural TrendsFor the Farm Credit System

• Mark Drabenstott
• Center for the Study of Rural America
• www.kansascityfed.org

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Top Ten Rural Trends For the FCS

• The rural economy has been through tremendous
  change
• But thats not the big story.
• It will undergo even greater change in the
  future.
• As constructed, will the FCS be a major player
  in that change?

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Todays big question

• What are the critical trends in the rural
  economy that will shape the lending environment
  for the FCS over the next 5 years?

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1. A whole lot of consolidating going on.

• Globalization changes everything for commodity
  industries
• And rural America is built mostly on commodities.

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Globalization forges The New Economic Geography

• The old rural economy is fueled by
  commodities...
• Agricultural, industrial, mineral, timber.
• Globalization creates a new imperative
• Be the low-cost producer.
• In most cases, Be bigor be gone.
• A consolidating economic map.

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Competition heating up Especially from South
America.
Share of World Soybean Production
Percent
Percent
United States
Brazil and Argentina
Source USDA
Center for the Study of Rural America, FRBKC
Photo courtesy of USDA
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As a result, the rural economyis highly uneven.
Rural Employment Growth 1990-2000
MSA
High Growth
Low Growth
Calculations based on BEA, REIS data
Center for the Study of Rural America, FRBKC
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2. May the demographic force be with you.

• Consolidation means exodus
• Mountains mean growth
• And more diversity everywhere.

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Big swings in rural population.
Source US Census Bureau
Center for the Study of Rural America, FRBKC
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New demographics mean

• Shifting market opportunities.
• New staffing challenges.
• Potentially serious leadership vacuums.

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• A New Economy,
• A New Balance Sheet

The number one issue in rural America is
reinventing the economy. How to go beyond
commodities? How to grow from within?
Center for the Study of Rural America, FRBKC
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New Technologies Beckon

• Genomics
• Farmaceutical crops
• Advanced Manufacturing Technologies
• Precision products
• Telecommunications
• Branding new rural products servicesKansas
  Cabelas

Center for the Study of Rural America, FRBKC
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Big Issue 1 for the FCS

• Most of the new rural economy lies beyond your
  lending authority.
• Is there a market justification for changing the
  authority?
• Or, is Rabobank a sign of things to come?

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A New Economy, A New Geography

• Rural development is no longer about single
  firms or communities Its about regions.
• Being world class means critical mass
• And partnering across communities.

Research triangle not Lake Wobegon
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Regional efforts now spreading
Appalachian Ohio
Center for the Study of Rural America, FRBKC
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What is a region?

• Region is defined by the economic opportunity.
• For some a few counties.
• For others a score of counties.
• For yet others a few states.

21st century economic regions are no respecters
of 19th century surveyors.
Center for the Study of Rural America, FRBKC
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Big Issue 2 for the FCS

• Your focus is mostly single firms, yet the new
  rural economy belongs to regionsregions with
  strong partnerships.
• How can the FCS be a catalyst in regional
  development strategies, drawing on the best
  wisdom of your cooperative roots?

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5. Banking on entrepreneurs.

• The most successful regions will grow
  entrepreneurs LOTS of them.
• That puts a premium on e-coaching
• And equity capital.

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Rural Areas Have More Entrepreneurs
Percent of Labor Force Employed in Small Firms
(Less than 10 Employees), 2001
Percentage of Labor Force
Rural
Metro
Source Current Population Survey
Center for the Study of Rural America, FRBKC
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But Owners Earn Less
Average Income of Small/Large Firm Owners, 2001
Income (1000)
Metro
Rural
Source Current Population Survey
Center for the Study of Rural America, FRBKC
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And rural areas lag in high-growth
entrepreneurs.
High-Growth Company Index (1991-1997)
Index
Source National Commission on Entrepreneurship,
2002
Center for the Study of Rural America, FRBKC
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Big Issue 3 for the FCS

• Today, the FCS is a lender.
• Will you become capital coaches for
  entrepreneurs?
• Or a source of equity capital yourself?

Center for the Study of Rural America, FRBKC
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6. Ups and downs in land values.

• Rural land values under new pressures
• Helping some regions but hurting others.
• Farm subsidies headed down
• But recreation areas boom.

Center for the Study of Rural America, FRBKC
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Land Values surging in the Great Plains.
Non-Irrigated Land ValuesTenth Federal Reserve
District
Percent change from a year ago
Source Federal Reserve Bank of Kansas
City Note the Tenth Federal Reserve District
covers the states of Nebraska, Kansas, Oklahoma,
Wyoming, Colorado, western Missouri, and
Northern New Mexico.
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Government Payments and Wildlife
RecreationDollars Spent on Land
Farm subsidies are big But so is recreation
spending
Billion dollars
Sources USDA and US Fish and Wildlife Service
Center for the Study of Rural America, FRBKC
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Big cuts ahead for farm subsidies?

• Big budget deficits
• The last Farm Bill written just before surpluses
  ended.
• WTO
• New limits in the Doha Round expected
• But the WTO Cotton Ruling a bigger problem.

Center for the Study of Rural America, FRBKC
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Land values and rural lending

• Cash flows never more important.
• Underscores the need for a non-commodity economy.
• Whats the market in a destination market?

Center for the Study of Rural America, FRBKC
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7. The split personality lending market.

• Can you build a banking relationship with a split
  personality market?
• Intense competition for prime business customers.
  
• Commoditization of scorable credits.
• Deere Co. has mastered serving two markets.
• Can the FCS?

Center for the Study of Rural America, FRBKC
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8. Growing challenges in financing rural
infrastructure.

• How to finance 21st century rural infrastructure
  needs?
• Broadband quality of life infrastructure
  needs are great.
• Public and private sources of capital will be
  needed.
• What role will the FCS play?
• Will you be champions for growth on both fronts?

Center for the Study of Rural America, FRBKC
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Public research dollars can be a powerful source
of leverage.

• In the past, public research has been aimed at
  sectors, such as agriculture.
• In the future, it will be more about regions.
• What new technologies most advantage a
  particular region?

Center for the Study of Rural America, FRBKC
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Purdue Universitys Innovation

• A new V8 engine for the Hoosier state
• Discovery Park
• And a new overdrive transmission
• Office of Engagement
• Center for Regional Development

Center for the Study of Rural America, FRBKC
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9. New ventures, new risks.

• As industrial recruitment fades, growing new
  ventures becomes paramount.
• In a global economy, industrial recruitment is
  high cost AND high risk. Still, it remains the
  800 pound gorilla.
• More and more regions now moving to grow your
  own.
• This means new kinds of business, and probably
  more small businesses.

Center for the Study of Rural America, FRBKC
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How to develop product ag opportunities?
Three models for innovation 1. Value-added
agriculture 2. Consumer product
marketing 3. High-value marketing
Center for the Study of Rural America, FRBKC
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Type 1 Value-Added MarketingU.S. Premium Beef

• GOALS
• Expand market opportunities for the regions
  production
• New uses for agricultural products
• Generate higher returns than commodity markets
• Move up the value chain
• Business coordination
• Low, but more stringent than bulk commodity
  markets
• Value added
• Significant, but low overall.

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Type 2 Consumer Product MarketingHome Grown
Wisconsin

• GOALS
• Expand market opportunities for the regions
  production
• Provide customers with high quality products
• Receive premium prices for quality
• Business coordination
• Moderate, must meet customer specifications
• Added value
• Moderate

Photo Courtesy of USDA
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Type 3 High-Value Product Marketing A New
Frontier!

• GOALS
• Tap into new agricultural technologies
• Pharmaceutical/Nutraceutical crops
• Satisfy appetite for advanced products with
  agricultural processes
• Achieve much higher returns to capital
• Business coordination
• High, must meet consumer safety specifications
• ISO 9000 focus on quality and traceability
• Value added
• High

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Big Issue 4 for the FCS

• Product ag offers big upside for rural America
  and the FCS.
• A new golden era for cooperative business models?
• How to use your understanding of cooperatives and
  be a catalyst in new ventures?

Center for the Study of Rural America, FRBKC
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10. A bigger role for financial institutions in
regional development.

• To date, FCS largely missing in action.
• Current leaders of new development efforts
• Regional utilities
• Community colleges
• Regional universities
• Regional foundations

Center for the Study of Rural America, FRBKC
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The ArrowheadAn Emerging Model for Regional
Development
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A bigger role for the FCS?

• Form an economic development academy for
  cooperatives (State and local officials already
  doing this).
• Partner on entrepreneurship programs with higher
  education.
• Help business clusters to form.

Center for the Study of Rural America, FRBKC
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Conclusions

• Consolidation characterizes the old rural
  economy.
• There are bright horizons for a new rural
  economy
• Regional in scope
• Built on new technologies
• And local entrepreneurs

Center for the Study of Rural America, FRBKC
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What role will the FCS play in the New Rural
Economy?

• 1. Is there a market justification for changing
  your authority?
• 2. How to be a catalyst in regional development
  efforts?
• 3. Will you be a capital provider, or a lender
  only?
• 4. How to use your coop wisdom in sparking
  new product ag ventures?

Center for the Study of Rural America, FRBKC
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For further reading
www.kansascityfed.org