U.S. rural economy holds fast in recession

CHICAGO Tue Mar 17, 2009 6:55pm EDT

1 of 5. CHS Inc Executive Vice President Mark Palmquist speaks during the Reuters Food and Agriculture Summit in Chicago March 17, 2009.

Credit: Reuters/John Gress

CHICAGO (Reuters) - The U.S. rural economy has weathered the global recession better than most sectors due to steady demand for agricultural products, stable land prices and healthy credit lines for farmers, executives at the Reuters Food and Agriculture Summit in Chicago said on Tuesday.

"When you consider the impact to the rest of the economy, agriculture has (had) very little impact in comparison," said Jim Borel, group vice president, agriculture, of DuPont Co (DD.N). "Fundamentally, food demand is there. People need to eat, so that helps to stabilize things."

Prices for agricultural commodities have fallen sharply from highs reached during the summer of 2008 but are still well above historical trends.

This allows producers to maintain profits even as the global economy has soured.

"We have found that food demand, grain demand, oilseed demand tends to be pretty insensitive to what the global economy is doing," said Mark Palmquist, chief operating officer at CHS Inc (CHSCP.O), an energy, grains and food company.

"It is really driven by demographics. We keep adding mouths to feed."

Prices for agricultural commodities have risen during the past few weeks as U.S. farmers finalize their planting decisions for this year.

Demand for U.S. commodities was also receiving a boost as the dollar has weakened during the past few months. A weak dollar makes U.S. supplies more attractive to overseas buyers.

Most farmers were not finding it difficult to obtain loans to fund their operations, as local agricultural banks avoided becoming ensnared in the risky credit market facilities that ruined many larger financial companies.

"The farmers themselves were able to get operating loans last year and it looks like this year will be pretty much the same," said David Oppedahl, business economist for the Federal Reserve Bank of Chicago.

"The smaller, rural and ag banks have remained pretty strong throughout this time of financial turmoil. In agriculture, the financial wherewithal is there for a good operator who wants to finance this year," he said.

Producers have received support as sales at grocery stores and other outlets have picked up even as restaurant sales have faltered during the recession, said Joe Sanderson, chief executive at No. 4 U.S. chicken producer Sanderson Farms Inc. (SAFM.O)

HEDGING HEADACHES

Although the agricultural sector was weathering the economic storm well, food companies were struggling as the extreme volatility in the commodities market was making hedging costs a difficult proposition.

"One of the misconceptions that I think people have about cost in the food industry is that it is dropping like a rock," said David Wenner, chief executive of B&G Foods Inc (BGS.N). "It's not."

Campbell Soup Co (CPB.N) was not likely to cut prices as its margins were still under pressure despite the downturn in commodity prices during the past six months, CEO Douglas Conant said.

Additionally, economic weakness has brought a shift in consumer practices that food companies were still working through.

Hormel Foods Corp (HRL.N) was seeing increased demand for some of its products such as Spam processed meat as consumers try to save money but its food service business was soft, Chief Executive Jeffrey Ettinger said.

(Reporting by Mark Weinraub, editing by Matthew Lewis)