Is the sun rising or setting on rural America?
By Alan Newport

This Kansas City-based think tank says the glass is half full.

The Federal Reserve Bank’s Board of Governors, by its control of monetary policy, has the single most important governmental influence on this nation’s economy, whether urban or rural.

A few years ago the 10th district of the Federal Reserve Bank, headquartered in Kansas City, created a separate research unit called the Center for the Study of Rural America. This creation is important because the Center monitors economic conditions in rural regions throughout the nation and also analyzes ways rural regions can build new economic engines, thereby assuring a rural input to the nation’s overall monetary policy.

Today’s Farmer sat down with the Center’s director and vice president of the Kansas City Federal Reserve Bank, Mark Drabenstott, to discuss the Center’s outlook for rural America. Drabenstott and the economists who work with him think our times represent the dawning of a new rural economy. Here are some of his thoughts.

T.F. – What is the role of the Federal Reserve Bank, particularly in relation to how it can affect rural economies?

Drabenstott – As you know, the Federal Reserve System is a regional central bank. That was one of its principal characteristics when it was founded back when Woodrow Wilson was president. It was very much the view at the time that central bank decisions on monetary policy ought to reflect the interests of all corners of the nation’s economy. That was the principle by which all the reserve banks were established.

Obviously in our seven-state Federal Reserve district we have a lot of rural territory. And in 1999 the Bank established the Center for the Study of Rural America with great leadership from our bank president to provide a critical mass of researchers someplace in the Federal Reserve System to track the unique performance and dynamics of the rural economy.

So, to get back to your original question, I think the principle value we add is understanding the forces shaping the rural economy and more importantly identifying emerging opportunities for rural regions to reinvent their economies in a globalizing market.

T.F. – Does that feed back into monetary policy?

Drabenstott – Part of our mission at the Center for the Study of Rural America is to keep track of what’s going on in the rural economy, so we always provide information to our bank president, Tom Hoenig, about what’s going on in the rural economy and the farm sector before he goes to FOMC (Federal Open Market Committee) meetings in Washington.

And, from time to time, we analyze special issues that are affecting the rural economy. For instance, when the mad cow issue hit, we developed a memo for members of the FOMC on the potential impacts of that issue.

T.F. – How can the Fed make policy to specifically affect rural policy?

Drabenstott – The United States is a national financial market and the interest rate that someone pays in Oklahoma is going to be essentially the same as someone pays in New York. So the Federal Reserve has never been in the business of differentiating financial flows or credit flows to rural areas.

I think our greatest value that we add is that when the FOMC makes a monetary policy decision the president of this bank is one of the voices around the table saying here’s what’s happening in our region—and we try to keep him well informed on what’s happening to the rural economy. In short, when the FOMC gets together to make monetary policy decisions, the information we supply is part of the mix and the decision that they make.

T.F. – Among other things, the Center has called for greater entrepreneurialism in rural places and yet our national policy has been, for the most part, to get people off the farm. Surely that has been a brain drain on rural areas. How does that affect entrepreneurialism?

Drabenstott – I think there is an entrepreneurial spirit in rural America and there always has been. But to be sure, where you find out-migration in rural areas, it makes your outlook tougher when you’re in an entrepreneurial economy. Historically, a lot of rural areas have relied on a recruitment strategy—sort of a smokestack-chasing strategy to essentially give away the farm to get a factory at the edge of town.

In a globalizing economy, however, where there are lots of places around the world that have even cheaper labor and even cheaper land than you find in rural America, that strategy gets tougher and tougher. That’s one of the reasons why we think a lot of rural regions have to think about a homegrown approach to economic development. And that means you’ve got to grow more businesses in your own backyard.

Human capital is one critical ingredient. There are others, of course, but I think how we hang onto our talent in rural America is going to depend for one on economic opportunity and second on the quality of life that people find in those places.

T.F. – One probable outcome of the World Trade

Organization appears to be the elimination or significant alteration of our current farm subsidy program. Has the Center studied that issue and do you have any possible outcome for how that may affect the rural economy?

Drabenstott – There will be many implications, one of the biggest being the effect on land values. It’s long been known by economists that federal farm subsidies are very quickly capitalized into farmland values. Thus, if we see a decrease in the stream of those federal payments in the future or a phasing out of those payments, that’s clearly going to have an impact on land values.

It’s not going to have an equal impact across the board, however. Some regions are going to feel the impact much more than others. But probably the Great Plains—from the Texas Panhandle up through the Dakotas—is going to be the portion of the country where the impact is the greatest, because farm payments represent a bigger share of farm income in that region. Moreover, because of the economic topography, a lot of that land’s highest and best use is in agriculture—that is, there are fewer competing uses for the land.

T.F. – If our society decides to continue some kind of subsidy system to pump money into the rural economy, how can we make those decisions have the greatest efficacy? Who gets it? What kinds of programs give the best results? Which “public goods” sustain the new economies?

Drabenstott – There’s no hard-and-fast answer to that question, but I think there are some guiding principles that ought to be at play. The first is that there’s no longer a one-size-fits-all solution.

That’s a dilemma for state and federal policy officials because they can’t simply write one policy and say, “This is going to help every region in the country.” That’s one issue.

The second principle is that most of the people who are analyzing these policies would say that there are two policy shifts that are important to helping rural regions build new economic engines. We need to shift away from subsidies toward investments in a region’s economic future. We have relied so much on commodity subsidies to sustain rural America that many rural residents have come to depend heavily on them.

We have to figure out what’s a subsidy and what’s an investment. Sometimes that may lie in the eye of the beholder, but I think there is a sense that we need to move away from transfer payments toward more investments. We ought to shift our focus away from attention paid to one sector like agriculture and instead think about what works for specific regions. So we’re shifting from a focus on sector to one on place, and from subsidy to investment.

Those are the two shifts the people who have been studying this the longest say you ought to pay attention to.

T.F. – Why do some towns die, some just hold on and some prosper?

Drabenstott – Part of it is location. Another huge element is probably leadership. No matter how you slice the economic data you’re going to find some communities that have great leadership and others less than great. If you look at the economic history of major cities as well as small towns, I suspect that’s a very important factor in deciding how that place does economically over time.

T.F. – To use the Center’s language, what engines are driving the rural economy right now? Give us some examples.

Drabenstott – There are a variety of what we consider exciting new opportunities on the horizon. Value-added agriculture; I would put biofuels in that category. If oil prices stay where they are I think the biofuels industry may have some legs under it for awhile. The question will be what size of plants will be required to capture the economies of scale.

Product agriculture is another category where we see some exciting opportunities. That runs the gamut from fresh foods all the way to pharmaceutical crops, which have been getting some serious attention not far from here in northwest Missouri. This is focusing on very narrow niche products that have a much higher value proposition than growing commodities. Farmers who are within striking distance of a city like Kansas City have a potential marketplace for farm-fresh foods that probably isn’t fully exploited.

Advanced manufacturing would be another area where we see promise. In much the same way that product agriculture represents farmers moving up a technology ladder, advanced manufacturing represents a set of processes and protocols that allow factories to become much more focused on high-quality niche products. There are examples of factories out there making that transition—ISO-9000 protocols for instance, which is essentially a quality audit process that provides a guarantee to the buyer of exactly what they are buying.

We also see places that have scenic and/or heritage and cultural amenities emerging as places that have new opportunities to figure out ways to bundle that attraction—either in attracting new residents, new entrepreneurs, or in becoming retirement or recreational destinations. That’s a strategy that is working in some parts of the country.

T.F. – You’ve suggested a new emphasis on “regionalism” in recent publications from the Center. How do we develop more regionalism as you’ve described?

Drabenstott – First, I think the evidence increasingly shows that some places have what we economists would call agglomeration or what the man on the street would call synergy. Places have some level of critical mass. These are becoming the growth magnets of our U.S. economy. For instance, we looked over the last 10 years at the fastest growing 10 percent of U.S. counties. There are about 3,100 counties. The top 310 control about three-fourths of the nation’s growth in jobs and income over the past decade. Of those top 310 counties, basically 10 or fewer counties are in non-metropolitan areas. That tells me that a city like Kansas City, which does show up in the top tier, has some level of critical mass which appears to matter in the new economy.

Given this growth pattern, it seems a critical question is this: How do rural places, which are by definition small, begin to assemble the critical mass needed to be competitive in this new economy?

I think the answer is that they have to look at partnering across jurisdictional lines that were laid down for a very different economic era. County lines in much of this part of the country were designated on the basis of horse-and-buggy technology. It was the distance you could drive and get back before sundown.

In the 21st century economy, by contrast, I think economic regions matter much more than political boundaries. Rural regions that are becoming successful are figuring out ways to create that critical mass by crossing the political boundaries that in an earlier era were the basis for Friday night football.

Now, there’s no one way to get there, and there are a variety of models emerging. In some cases it’s a non-profit or a philanthropy that serves as the catalyst to doing that. In other cases it’s a regionally based community college or regional university. Regions are figuring out how to create a round-table at which leaders come together and create a new vision for that region’s economy.

T.F. – So it sounds like a process that’s very dependent on self-starting.

Drabenstott – It very much depends on self-starting, but somebody has to supply the round-table. Somebody has to play King Arthur, if you will.

It tends not to come from the private sector, nor does it tend to come from local government. Based on our observations to date, non-profits and higher education have been the primary catalysts for that kind of regional dialogue.

But I would regard this as somewhat of a frontier for the new rural economy. Nobody has written down the definitive guidebook that answers your question.

T.F. – Would you list some great examples where this sort of new entrepreneurialism, new regional enterprise like you have proposed is going on?

Drabenstott – One of the best examples is northeast Minnesota—the Arrowhead region of Minnesota. They’ve been very successful in creating a regional dialogue that has coalesced around a regional community college. They had seven community colleges and they turned them into one, with one governing structure for the entire region. The president of that college has been a very strong champion for a new economic vision for that region.

Historically they were very dependent on timber and taconite—two industries that were in long-term decline, and they’ve made a very deliberate attempt to grow more businesses and put more technology into their economic future.

In Missouri, although it hasn’t all panned out, the northwest Missouri effort to create a pharmaceutical crop industry is certainly an interesting exercise that clearly demonstrates both regional thinking and explores how to build new economic engines.

The other one I would mention is the Prairie States Regional Center for Entrepreneurial Leadership. It grew out of an effort to preserve the lesser prairie chicken in northwest Oklahoma and southeast Colorado and northeast New Mexico.

T.F. – Talk to us about sprawl and what the economic impacts of urban sprawl are, both positive and negative. Also is there a net gain from sprawl?

Drabenstott – That depends on which lens you look at it through. Obviously a lot of the economic growth in our nation has happened at the outer edge of metropolitan areas. You can see that if you drive around Kansas City. Here as elsewhere, sprawl has added a lot of development, a lot of retail activity, a lot of jobs. The other side of it is that sprawl doesn’t always bring growth back to the center of the city. And there are social costs associated with the development that comes with sprawl that sometimes fall to other people to pay.

I’m not sure anyone has tried to net this out in the way that you’ve asked. What we would say is when you have sprawl you’re at the front lines of where metropolitan America meets rural America and there are a whole host of land use issues which sprawl creates but don’t always get answered.

T.F. – Generally speaking, your most recent reports are fairly positive about the overall rural economy and credit conditions. Can you summarize what factors have played into that?

Drabenstott – One of the things we track is agricultural credit conditions. We do a survey of farm bankers throughout our seven-state region. If you look at those results it points to a very positive farm financial picture right now. I think that’s the result of very strong farm incomes the last couple of years. 2004 was the best farm income year ever. 2005 was the second-best farm income year ever. In our region, 60 percent of the cash receipts come from livestock, and the livestock sector has been very strong, so the income side of the picture has been bullish. Interest rates have been low. Land values have been moving up smartly, which leaves most farmers with healthy balance sheets. So, you add all that up, and I think it’s a pretty positive farm financial picture.

We’ve seen double-digit percentage increases in farmland values pretty much across the board throughout our region. Part of that is driven by off-farm investor interest. A big part of it is driven by a very sustained demand for recreational use of rural real estate. People are buying 160 acres for the hunting rights, for instance.

So, with all of that added together we hear a pretty sanguine view right now from the country bankers.

Last, but certainly not least, the last time we saw this kind of farmland market was the early 80s. A huge difference between then and now is that today a very sizable number of these transactions are happening with big down payments. There simply is a lot more cash on the table than was the case during the high-leverage era of the 1980s. That speaks to the generally good income situation out there.