♪♪ What is the condition of Iowa's rural economy?

We'll get analysis from Chad Hart, Professor of Economics at Iowa State University and Ernie Goss, Regional Economics Chair at Creighton University on this edition of Iowa Press.

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♪♪ For decades, Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond.

Celebrating 50 years of broadcast excellence on statewide Iowa PBS, this is the Friday, June 23rd edition of Iowa Press.

Here is Kay Henderson.

♪♪ Henderson: Our guests on this edition of Iowa Press track the data and the issues percolating through Iowa's Main Streets and its rural economy.

Chad Hart is an Economics Professor at Iowa State University and Ernie Goss is an Economics Professor at Creighton University.

Gentlemen, welcome back to Iowa Press.

Goss: Good to be here.

Hart: Thank you.

Henderson: Also joining the conversation, Donnelle Eller, she is the Farm, Environment and Energy Reporter for the Des Moines Register and Erin Murphy of the Gazette in Cedar Rapids.

Murphy: Gentlemen, we're seeing dry conditions throughout Iowa right now.

We're at varying levels of drought across the state.

Chad Hart, we'll start with you here.

At what point if this continues do we start to become concerned that this could impact Iowa's ag and greater economy?

Hart: Well, arguably, the markets have already reacted to it.

We've seen strong runups in corn and soybean prices over the past week, showing the concern that we have in the drought conditions not only here in Iowa but across the nation, especially as we look towards the Eastern Corn Belt.

The challenge here is really that the drought we're seeing right now, while it doesn't look good, it's not necessarily impacting our agricultural production yet.

We'll need to go a little bit deeper into the season.

If we still continue to be dry say three or four weeks from now, that will be a main pressure point that will have some significant yield impacts.

But right now it doesn't look pretty, but the productive capacity of the crops are still out there.

Murphy: So, what I'm hearing is the next few weeks, month or so, are pivotal?

Hart: Yep.

We're typically looking for that pollination time within corn.

So, think about when we get towards detassling, get there deep into July, that is where this drought could really have an impact in terms of agricultural production.

Murphy: And Ernie Goss, if it does continue to go in that direction, is there potential for a trickle-down effect, and not just to the ag economy but to Main Street and manufacturing?

Goss: Absolutely.

We're already seeing some of that, Erin.

For example, cutbacks in purchases of agriculture equipment.

We saw that just this month in June.

And that is also because of higher interest rates, of course.

But then weather.

Particularly according to the bank CEOS, we survey bank CEOS in rural areas of 10 states, particularly in Nebraska and Kansas, not as much in Iowa, and then Illinois as well, Southern Illinois seeing some fairly significant impacts.

And yes, it will impact the businesses, Erin.

It has already begun to, although the numbers are still pretty good.

We keep -- nationwide we're seeing this, we economists keep being pessimistic and saying, the sky is falling, the sky is falling, and it doesn't fall luckily for all of us.

Eller: Chad, obviously Iowa leads the nation in pork production, but they are facing some challenges.

Could you outline some of those issues for us?

Hart: Yeah, I think when we're looking at the pork industry, if I'm looking at it from a market perspective, the challenge is really within the domestic market.

Pork exports have been holding up actually fairly well.

But that is because we've had a discounted price for pork that has been incentivizing some international sales.

The challenge has really been building up our domestic demand for pork and we just really haven't been able to build a fire underneath that.

You combine that with some of the challenges that the industry is seeing on the production side, especially as we look at changing policies, things like a Prop 12, that would increase costs at a time when the industry itself can't cover the costs that they already have right now.

Eller: Speaking of that, California said that they're going to delay Prop 12, which will change how pigs are raised.

What impact do you think that will have in Iowa??

Hart: Well, I think it really depends upon how the packing industry itself responds to this.

How many of our packers turn around and tell their producers, hey we need you to change your production practices to fit California, versus those that are going to concentrate, if you will, on the other 49 states and say we're going to stick with and keep our cost structure the way it is now and know that we're going to lose out on that California market.

So, that is going to be the lynchpin that determines how much this, if you will, cost flows back to Iowa producers.

Eller: Ernie, do you think that bankers will issue loans for that kind of change given the market conditions now?

Goss: That in addition to what is going on in China and what's going on in China is not going on in China.

In other words, it's weakening, weakening, weakening and it's being telegraphed back here and of course that is an important market for agricultural production in Iowa and for this part of the nation.

And that is a real concern.

And I don't know sort of from high school if you remember Animal Farm by Orwell.

Now, that is his less well-known book.

But anyway, he talked about when things really get tough what happens is the nation reaches out, in this case reaches out to Taiwan.

And that is the real concern -- I'm not answering directly your question -- but the real concern is how this is affecting all of the globe.

And the concern is, in my judgment, is what happens as -- we remember when Japan was just the real tiger and then China became the economic tiger and now it is being flipped.

Japan is now becoming more of a tiger and less so.

For China in terms of pork and exports to China that is very important, Vietnam and other nations, so that's a real concern.

But, to the Prop 12 you talked about there, Chad, I don't argue, I'm not an ag economist so I don't know how much space a pig needs, but it's pretty good when you've got a space larger than my bedroom.

I don't know, maybe they deserve it.

I know that it is -- is it 10x10 that's the requirement?

Hart: Well, they're going to I think it's 24 square feet.

So, it's not 10x10.

Goss: My bedroom is larger than that.

Hart: I was hoping you would say your bedroom is a little larger than that.

We've learned a little bit about Ernie here.

No, I think as you're looking at the Chinese market the idea is that it is one that we are concerned about as we look there.

But it's interesting to see where are we seeing China pull back versus where have we seen some growth?

For example, on the pork side right now actually our sales are a little up there.

When we're looking at soybeans right now sales are a little up.

Where we've seen the pullback are things like cotton and corn and a little bit on the wheat side.

So, we're seeing sort of a mixed bag when it comes to the Chinese -- Goss: But looking forward you'd have to be a little concerned.

Hart: You're worried as you look out there.

Goss: Yeah, we always see the gray lining around the silver cloud and that is, I think that is what you brought us here for, right?

Henderson: Chad, just circling back a little bit, you mentioned that producers may choose to ship to not California.

How do you do that in a distribution chain that already exists?

You're going to have to make huge logistical changes, right?

Hart: In this case it's not the producers that do it.

Henderson: Right, exactly.

Hart: It would be the processors themselves.

And so, the processors have the control of which markets they're going into.

As a producer I'm hooked to a process and that will make that determination of whether I need to adjust or not.

And so, what we've seen out of the industry thus far is we had some processors that were being very proactive, even before Prop 12 was decided they were already adjusting, others that held back and, like I say, they're the ones I'm watching now to see do they adjust or not or, like I say, do they sort of hold the camp and say, we're going to concede the California market to another processor?

Henderson: Ernie, you sort of mentioned the Chicken Little argument that some economists have been having.

Recession, recession, recession and then it never happens.

What are the factors that have led the U.S. economy not to slip into a recession?

Goss: Well, it's a real question, are we in a recession?

If you look at gross domestic income now has dropped two quarters in a row.

Now, gross domestic product has not.

So, it depends on which measure you look at.

But nonetheless, of course, higher interest rates are pushing things up.

And back to the agricultural economy, what I'm fearful of is that the Fed pushes up rates another half percent, and that is what they've almost guaranteed, at least as we talk today, a half a percentage point.

And what these community banks are seeing, and they provide liquidity for the farms, for the Main Street businesses, very important.

What happens is when the rates go up they have to pay more and more for the deposits and unfortunately, fortunately for us but unfortunately for them their lending rates are remaining fairly low.

Well, you don't have to be an economist to figure out you're losing money there.

And what happens is it is causing real problems.

And what the Secretary of the Treasury Janet Yellen says, you pose a systemic risk to the economy.

Well, it's not a systemic risk to the U.S. economy, but it is a systemic risk to the local economy, to the regional economy and that is the concern I have regarding you could have some real problems on what we call rural Main Street at the same time you see, I won't say booming, but the U.S. economy is definitely slowing down but the regional economy is likewise slowing down and the banking is a real important issue.

And I think the reason the Fed did not raise rates at their last meeting was because of the banking issue, not because of the other, but the Fed, it's not unusual for the Fed, the Federal Reserve, a group of economists and lawyers, have normally push us into a recession by raising rates too high and too fast and not seeing, not understanding the lag that is in place.

So, that's a real issue going forward.

And the global economy is slowing down, whether it's China, Japan is not, and Europe is slowing down, we're seeing higher interest rates in Great Britain, and all this comes back because obviously food is in a global market.

Henderson: Erin?

Murphy: Ernie, I wanted to ask you about workforce.

In Iowa we have low unemployment, just 2.7%.

But we also have slow population growth and businesses are saying they're still in need of workers out there.

Where are those folks going to come from?

Goss: You're right, that's one of the big issues going forward.

When we asked the bankers about what's an issue for rural Main Street, it's shortage of workers.

Where are those workers going to come from?

And we already have labor force participation rates pretty high, low unemployment rates.

So, we need to see some individuals moving into the area.

And in my judgment, we have to consider immigration and that's an important source, has been an important source for Iowa's growth in the past.

Now, it has been a while since Governor Branstad was, in fact, encouraging Vietnamese and others to come to this state.

Now, I'm talking about legal immigration.

I won't touch the subject of -- well, I won't even use the word, how's that?

Murphy: That's for another show.

Goss: For academics, we're trying to not use certain words.

I'll just not use the word, how's that?

Murphy: Chad Hart, 67 out of 99 counties in Iowa are actually seeing population decline.

Is this problem that we're talking about even more protracted in the rural pockets of the state?

Hart: It is and it has been.

Let's face it, those trends have been around before COVID.

This has been something we've been watching roll in for the past 30, 40 years.

And I'd say within our agricultural communities what we've seen is we have been increasingly relying on technology to, if you will, replace the labor we do not have and that is just accelerating as we look over time.

And I would say what ag has been doing for a few decades now, the retail space has been doing over the last few years.

Let's face it, when you go to the grocery store anymore, how many lines are full checkout versus self-checkout?

You're seeing us look at technology as a way to replace the labor we cannot find.

Goss: And on that issue, and again I'm not to dwell on the negatives, but labor productivity the last year has been the worst year since 1947 in terms of labor productivity.

And is it because workers working from home, remote work?

Is it because -- what is the reason we're seeing this labor productivity issue?

So, not only do we have a labor shortage, those workers that are working are not producing as much.

It is quiet quitting as it's sometimes called?

What is the reason of such lousy productivity growth?

Eller: Chad, farmers have been really unhappy with the EPA's decision on the Renewable Fuel Standard, which mandates how much ethanol and biodiesel, renewable diesel goes into the nation's fuel supply.

Does that have a real impact on corn or soybean prices?

Hart: It can.

But I'll describe it this way.

So, a lot of what we're discussing here, especially with the conventional biofuels part of the RFS, originally EPA had suggested maybe 15.25 billion gallons.

In conventional biofuels looking forward they came back down to 15, which matches what the standard has been basically since it reached its end in 2022.

And so, that extra 250 million gallons, it could have a little bit of an impact, but probably not because we've been producing over 15 billion gallons for the past several years within the industry.

And so, in essence we're already beyond those levels and we're likely to stay beyond those levels no matter where that was going to be set.

Eller: They also see it as sort of having a chilling impact on future investment in the sustainable aviation fuel for marine, sort of those more advanced fuels.

Do you see that as being a problem, especially on the biodiesel, renewable diesel?

Hart: I guess I see less there because that's a separate part of the RFS.

And that's a part in the RFS that EPA has continued to grow those levels up.

And I expect them to continue to do that.

There it's more of a case of we don't necessarily produce as much as what the levels indicate.

So, it's sort of a flip argument from what is happening with ethanol.

With ethanol we already exceed the mandate, in these other types of biofuels we don't.

Goss: What about the threat, though, of the CO2 emissions from ethanol, the Biden Inflation and Deficit Reduction Act calls for a 30% cut in CO2 emissions and that includes ethanol plants?

What is going to happen?

And how does that telegraph back to the producers of corn and to the Iowa economy?

Eller: That kind of feeds into my next question for you folks, and that is, ethanol producers say we need these carbon capture pipelines to meet California and other state's low emission standards.

I guess my question for you is, are these pipelines critical to the ag economy?

Ernie?

Goss: Well, I would say they're critical if the Inflation and Deficit Reduction Act, those requirements are enforced.

If they're enforced, you're talking about the economy, the ethanol economy collapsing.

30% reduction in CO2 emissions, so in that regard if they are enforced, I'm not part of the administration and don't know what is going to happen, but if they're enforced you're going to have some closures, cutbacks, significant cutbacks in ethanol production or they're going to move away from corn as a source of an input source.

Hart: I'll play off of Ernie's comment there, though.

I wouldn't say it necessarily has to collapse, but what it forces, it forces the industry to change.

And if you will, the pipelines are the first step to that.

They recognize that the carbon footprint is larger than what it looks like rules were going to allow in the future.

How do we build this industry out to fit within those guidelines?

And so, the first thing to do is capture the carbon that is being released by the industry now and be able to say that that's not being released anymore.

That is how you fit within the standard and continue to build.

Henderson: Chad Hart, this week people may have seen this news about lab-produced meat.

In a state where we're producing beef and pork and chicken and eggs from animals, what impact would that kind of a change have in the rural ecosystem?

Hart: Well, I'll put it this way, it's sort of like the discussion we had with plant-based meats six, eight years ago.

This is an alternative that some may wish to pursue that is going to be at a substantially higher cost for quite some time and may not have as big an audience as a lot of folks think.

I think as we're looking here it offers up some opportunities for development.

But it's going to fit a certain segment of our population, just like as you look at plant-based proteins now.

The Impossible Burger is not as hot as it once was.

It does have an audience, it does have a core group that are looking for it, but for the most part those that want to eat meat find the meat that they have traditionally ate.

Henderson: Erin?

Murphy: Gentlemen, there are Iowa farm landowners that include people like Bill Gates and Superbowl quarterback Joe Burrows of the Cincinnati Bengals, and not certainly for that reason alone, but we've seen record prices for farmland in Iowa in the last year.

How does -- Chad, we'll start with you on this -- how does a 22-year-old Iowan who wants to farm compete with all of that?

Hart: It's a lot more difficult than it once was.

And it goes back to something we were discussing earlier, this tradeoff between technology and labor.

The cost of farming is much higher than it was in the past and it is harder for beginning farmers to get that foothold in the door.

And we oftentimes look and say, okay, the reason of high land values, you brought up these outside investors coming in, where actually the individuals, if you will, that are driving most of the price increases that we're seeing, for example, for agricultural land, I tell folks no, we need to look in the mirror.

It's typically our existing farmers that are the ones that are offering the best bids for that land that are capturing that.

What it does, though, is it means that our land base continues to sort of consolidate in older farm, larger farm families, and therefore it is more difficult for that new beginning farmer to get in there.

That's why you're seeing some of the programs, for example, that USDA has been running where, especially on the beginning farmer grant and loan programs, trying to help farmers get established and be competitive at least in leveraging some land.

But otherwise, what farmers have to do is you have to think outside the box, look at niche opportunities.

Eller: I guess piggybacking on that, some of those high land prices are trickling into record high rental prices for farmers.

I'm just curious, how high do you think those rents will go?

Have we peaked or do you think they'll keep going up?

Goss: According to our surveys -- this is a survey of bank CEOs, not the farmer -- but the bank CEOs say they're flattening out.

They expect them to flatten out.

They have been much stronger over the past year, they are going to get -- the growth is going to get weaker.

Now, that doesn't mean it's going to come down.

You're going to see the growth weaken in this next 12 months.

But, that said, our survey for June showed growth is continuing.

So, thus far the bankers have been wrong regarding farm land prices, they continue to move up.

Even as a farmer cuts back on the purchase of equipment, they continue to put money into farmland.

And as Chad said, it's us, it's the farmers buying up the next-door neighbor's property as they retire and that's the big issue going forward.

Hart: And one thing, with our cash rents they have went up more slowly than we've seen ag land values go up over the past couple of years.

So, you could argue they still have some room to grow to catch up with what has been happening on the value side.

Goss: And they likely will continue -- the cash rents -- Eller: You're making farmers cry right now.

Hart: I know.

Henderson: Ernie Goss, you've done some consulting for the Iowa Racing and Gaming Commission.

And now, in Nebraska, there is the advent of gambling in a new form of gambling over there.

What impact will that have on the regional industry in Iowa?

Goss: Well, it's going to cannibalize some of Iowa's casino revenues.

There's little doubt about that, particularly, of course, in Council Bluffs and we're going to see that likewise in South Sioux City at some point in time.

But also, they've actually now okayed -- that's they being Nebraska -- okayed sports betting.

But they're requiring the sports better to be in the casino and the sports better at this point in time has to use cash.

Now, that's a non-starter.

That is not going to last.

So, Iowa's sports betting which is -- I did a study that was in the Illinois Law Review looking at this very issue of sports betting and what it does to casinos.

You'd think it's going to pull away from the slot player.

No, it's a different person, it's a different individual, it's a younger person.

And they are typically remote and now they're remote in Iowa for sure and they're going to be remote in Nebraska.

So, the point here is there's so much more competition.

This is a competitive industry.

Most people think well these are monopolies, they've got market power.

Well, they have to respond to a market and they are responding with competition whether it's larger payouts and sports betting and so on.

So, it's very competitive and Iowa is going to have to compete with Illinois, of course, then Missouri and now Nebraska.

Henderson: So, Ernie, we've got about 90 seconds left.

How solid is this industry?

Or do you foresee any point in the near future when the pendulum swings and people say okay, let's pull back on gambling?

Because if you watch the NCAA tournament, the NBA finals, whatever, there's talk about sports betting, it's just ubiquitous.

Goss: And sports betting I see a pullback there, more legislation.

What's happening in sports betting, it's the loser right now because the cost of getting customers exceeds what the customer, you get from that customer.

So that's, you're going to see a pullback there.

But in terms of the industry, it's going to continue to expand, there will be more and more government regulation.

We're seeing more and more competition absent Utah and a few other states that don't have it.

But Iowa right here, we've already seen what I call the optimum level of casinos.

You've got 19 commercial casinos in Iowa.

That is, in my judgment, beyond the optimum.

Probably 17 would have been optimum.

And will you get another one?

I don't think Iowa's going to push the envelope and go to 20.

I don't think so.

Murphy: Now you're making Cedar Rapids cry.

Hart: It's what economists do.

Goss: Yeah, that's what we do, believe me.

No, there's little doubt that Cedar Rapids will not find this pleasing to hear.

Henderson: Well, I have to tell you all that our time here at this discussion point is done.

Thanks to both of you for joining us on this edition of Iowa Press.

Hart: Good to be here.

Goss: Thank you.

Henderson: You can watch every episode of Iowa Press online at iowapbs.org.

For everyone here at Iowa PBS, thanks for watching.

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