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Region's ag economic outlook rosy; impact of ethanol subsidy repeal efforts unclear

With delayed spring planting finally getting under way, rural bankers across the Upper Midwest see lots of reason for optimism.

Farm income is up, interest rates on agricultural loans have declined, corn prices are at all-time highs and land prices are expected to continue to rise, all of which has encouraged lenders on the outlook for the region’s agricultural economy.

In fact, things are so good in some quarters that farmers may up their capital equipment investments to shelter income, according to a first-quarter survey of ag lenders issued by the Minneapolis Federal Reserve Bank.

The report quotes a Minnesota lender, who said: "[M]any farm customers foresee a large tax problem in 2011. Many are making purchases to offset taxes and are not waiting to year-end as they did last year."

Fifty-seven percent of district lenders responding to the survey said farm incomes increased in the first quarter, and fewer than 3 percent reported decreases.

 The Fed’s ninth district includes Montana, the Dakotas, Minnesota the Upper Peninsula of Michigan and western Wisconsin.

The one concern lenders expressed is the late start to the growing season brought on by the wet spring. Crop progress reports from the U.S. Department of Agriculture confirmed that planting was behind average in the region and that crop emergence has been especially slow.

However, ag lenders' outlook remains positive, with more than 57 percent of respondents expecting farm incomes to increase and 40 percent expecting them to stay the same in the second quarter.

Bankers, as a rule, avoid uncertainty, and there is no more uncertain business than farming, heavily influenced by uncontrollable factors such as rainfall, temperature, pests… and politicians.

A case in point: Former Minnesota Gov. Tim Pawlenty launched his presidential campaign in Iowa recently, calling for an end to tax breaks for corn-based ethanol producers. On Thursday, the U.S. Senate voted  73 to 27 to repeal the subsidy.

While congressional action still has a ways to go before the ethanol subsidy disappears, the largely symbolic vote does signal a shift in mood as reducing the budget deficit dominates the current debate.

Minnesota’s two DFL senators, Amy Klobuchar and AL Franken, along with both senators from North and South Dakota, voted against the repeal. Instead, they are backing a measure, co-sponsored by Klobuchar and John Thune (R-S.D.), that would end the 45-cent-per-gallon ethanol blender’s credit, which  is slated to expire at year’s end but maintain a smaller and “variable” blender’s credit for three years.

Shifting corn to ethanol production has been blamed for driving corn prices to an all-time high, raising other food prices and undergirding a boom in ag land prices as well.

While the impact of eliminating the ethanol subsidy on the federal budget may be straightforward, the impact on the ag economy is less clear, according to Joe Mahon, a Fed economic analyst and author of the Fed ag credit report.

Even with an eventual phase-out of ethanol subsidies, Mahon cautioned that the issue of removing ethanol subsidies is complicated, saying it would be “kind of hard to predict how large the impact or the direction of the impact” on the ag economy.

In Minnesota’s ag economy, “corn is king” Mahon observed. With more than 7.8 million acres in corn, Minnesota ranks as the fourth-largest producer state in the United States, Mahon said.

 “One would imagine if the ethanol subsidy were removed, that would result in a reduction in demand for corn production,” he said. Sale and rental prices for farmland are “a function of revenue you can make from that land … so if the value of crops you can produce on land goes down, you’d expect value of land to go down as well,” he added.

But with oil prices remaining high, the demand for alternative fuels likely also will remain high, Mahon said. He pointed out that ethanol producers had argued in the past that high oil prices would allow them to be competitive without the subsidies.

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