This Week’s Economic Update, April 12, 2021

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April showers bring May Flowers, and May Flowers bring Pilgrims of course.  But let’s not push the season.  This past week, at least here in Minnesota, we saw near record levels of rain.  This is great for our farmers who have their potatoes in already.  It should not delay the corn or soy beans that have yet to be planted.  The alfalfa crop needed the soil moisture which was lacking due to a dry Fall and snowfall this past winter that was sand dry for the most part.

After over six years of tough times, 2020 was the best in a long time for the farmers.  Weather conditions, outside of Iowa, were great.  Plenty of rain and sun in balance.  Markets worldwide grew in a number of areas, wiping out the oversupply of virtually all excess inventory.  Prices were boosted due to strong demand in spite of the pandemic. 

The US Government assisted the farmers with cash subsidy programs through the stimulus programs.  These programs allowed farmers who were behind on payments or were overburdened with debt to catch up.  The boost to the farmers provided a reprieve for many rural banks that were struggling with troubled loans in the agriculture credit portfolio.  The banks performance in 2020 is continuing this year with stronger demand for crop input loans as well as new equipment financing. 

Farming in general is changing.  Societal tastes have shifted in the past two years that will provide astute farmers a strong income for a number of years.  Consumers desire fresh and more healthy products from the farm.  They have shunned canned foods for items picked up from farmers markets or directly from the farms.  Many farmers are now becoming more vertically integrated, producing the product, processing it, then selling direct.  This is not just limited to vegetables.  The closing of the meat processing plants in 2020 due to Covid outbreaks, opened the door for farmers to either link with a butcher locally or butcher at the farm and sell to the end user.  Overall, forward thinking farmers with the expertise to adapt to the new environment will do well.

The inflation numbers this past week should not have been unexpected.  First, the year over year number at 4%.  March of 2020 was the start of a short period of deflation due to the beginning of the pandemic.  Because of the low starting point of last March, any strength is going to look high.  For 2021, the overall inflation outlook is still between 3.0 and 3.5%. 

For March 2021, the Producer Price Index was 1%.  This was impacted by energy price increases as well as by supply chain issues that drove inventory prices up.  Energy prices in March rose at a 5.9% annual rate.  As supply continues to rise and demand barely moves, the energy prices should abate.

Commercial real estate concerns continue to rise.  Shopping malls in particular are hemorrhaging cash as vacancy rates continue to remain high.  The Mall of America in Minnesota is now 49% owned by the creditors after the ownership defaulted on the existing debt.  On average, regional malls are at a record 11.4% vacancy rate. The issue is not just major national brands filing bankruptcy, but locally owned stores and restaurants that are not reopening.  This is where the trickle effect is hitting the banks. Beyond loan defaults, the banks lose the deposits as well as the fee income from the deposit accounts.

Outside the malls the story is no better.  Vacancy rates for local retail locations are at 10.6%. Building owners are struggling with keeping existing tenants without offering incentives such as rent discounts. Banks that have significant credit exposure to commercial real estate should be proactive in updating the rent rolls as well as doing site inspections on a regular basis.  An updated appraisal may also be a prudent measure as CAP rates are rising in all markets.

Have a great week.

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