Will prosperous farm and mining sectors help Minnesota weather the economic storm? Perhaps, but we should not count on it. While it is always better for important sectors to thrive rather than stagnate, it is not clear that good times for these two capital-intensive but low-employment sectors will offset declines in services and manufacturing. Moreover, the health of natural-resource-based sectors is not as insulated from the general economy as one might think. And, as elsewhere, irrational exuberance can lead to mistakes.
Times are pretty good for farming and mining. Corn, soybean and wheat prices are at their highest nominal levels ever. (Adjusted for inflation, they do remain below peaks reached decades ago.) But high grain prices don’t mean all farm enterprises are equally profitable. Dairy, beef and pork producers note that while livestock prices have risen, they lag grain prices. Livestock producers who depend on purchased feedstuffs thus feel squeezed. But in general, farm revenue is strong.
So are prices for iron ore and non-ferrous metals. Mines that long stood dormant are seeing new activity. New copper-nickel projects are under way even though the regulatory process is a long one.
Farming and mining thus seem in enviable shape compared with much of the past decade or two. Will that make much difference for the state as a whole?
Historically, it did. For decades, agriculture and mining were vital components of the state economy. When prices were low or outside factors lowered production, the rest of the state suffered, particularly when it was agriculture that experienced hard sledding.
Lower farm incomes meant less spending on Main Street, less construction, less investment in new machinery. Short crops due to bad weather reduced business for elevators, railroads, truckers and various processors. The effects stretched back to Minneapolis and St. Paul.
These linkages still exist. Furthermore, output from farms and mines has not dropped in absolute terms. Production of nearly every major farm product is well above the levels common in the past. Total mining output, even adjusted for the iron content of the ore shipped, has not increased, though it is close to the levels common in the 1950s.
But while these sectors are as large as ever in terms of output, their relative importance in the state economy has slipped. Farm and mine output make up a smaller proportion of total state production because output in manufacturing, and especially in services, has risen much faster.
Moreover, technological advances in both sectors mean that the same or higher levels of output are achieved with many fewer workers. Iron mines employment is 1/10th its level 50 years ago. Similarly, the number of full-time farmers has fallen dramatically. New mining ventures may employ a few hundred or even thousands of workers, but these are small numbers in comparison to the total labor force.
Yes, high profits in farming increase both consumption and investment spending in rural counties. But even in most such counties, the importance of agriculture and farm spending has decreased in relative terms.
The degree to which commodity prices remain high as the U.S. economy softens is another issue. Much of the strength in farm and mining commodity prices in recent years has come from economic growth in Asia, especially China and India. Whether strong Asian growth will continue unabated as the U.S. economy slows is an open question.
For agriculture, there is a third uncertainty. Strong farm profits inevitably lead to rising land prices. That was true in the 1970s export boom that followed the demise of the Bretton Woods international payments system. It is true now in response to strong Asian demand and the multiplying effects of government-mandated increases in ethanol use.
Surveys show Midwestern farmland prices have doubled since 2000 and increased by some 20 percent in 2007 alone. Irrational exuberance is as much fun on the upside in farmland markets as it is in stock markets. But as the 1980s demonstrated, the popping of bubbles in land prices can be a scourge on rural counties.
Let’s hope agriculture and mining stay strong, even as the urban economy slows. But we should not expect such strength to offset broader problems.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.