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Farms and Mines Looking Good; Forests, Not so Good

March 30, 2011 By Lee Egerstrom, Economic Development Fellow

Two out of Minnesota’s three great resource-based economic sectors are off to a strong start for 2011, suggesting a genuine economic recovery is underway. Minnesota’s forest industry, however, still has a long way to go before it can hope for improvement.

This quick outlook is offered as April approaches—the beginning of new seasons for agricultural growing and Great Lakes shipping.

With these new seasons, Minnesota is again directly connected to the global economy. While we can intervene in markets and slow the recovery at home, the resource-based portions of Minnesota’s economy are largely dependent on events abroad for continuing economic strength.

Commodity prices for the nearby May futures contracts have fallen for grains and soybeans in recent trading days, as questions about Japan bring downward pressures. Still, prices remain at high, profitable levels for most farmers given tight global supplies.

Analyst Christopher Steinhoff at Country Hedging, the commodity brokerage unit for CHS Inc., said in a market report late Monday that corn prices fell that day because China didn’t make a purchase the grain trade was expecting. And soybean prices fell as traders were engaged in end-of-the-quarter profit taking.

Such market responses can turn on a dime. Probably better news for Minnesota’s farm sector is that livestock and dairy prices have improved. This means the overall economy of the countryside should be better in 2011 for nearly all Minnesota farmers.

Up north, the outlook for the resource industries is split between mines and forests.

The positive news came over the weekend in a report by John Myers of the Duluth News Tribune. It noted Minnesota’s iron ore industry has had an unprecedented turnaround from the 2008-2009 Great Recession.

Minnesota mines and taconite plants are at near capacity for jobs and production, with 2010 production reaching levels last seen in 2000, according to the article.

And now, mining companies are working to expand production capacity, said Ron Johnson, trade development director for the Duluth Seaway Port Authority. Ports and logistics are where multiplier impacts of industry are clearly visible.

This is good news for the Duluth-Superior and nearby Two Harbors’ economy that will handle and ship the taconite from Minnesota’s six operating mines to steel mills on the lower Great Lakes, and part of the grain production from the Upper Midwest to ports in eastern states, Europe and Africa.

In February, the port of Duluth-Superior released 2010 data that showed the ports handled 39.8 million tons of cargo last year, a 28 percent increase from the sluggish 2009 shipping season. The biggest gains came from iron ore shipments as the U.S. steel industry began recovery from the 2008-2009 recession. But grain shipments also jumped 68 percent last year as Russia and neighboring countries experienced crop failures—especially for wheat.

Such a rebound is promising as the 2011 shipping season is underway, Johnson said. At the same time, he said, there are some questions about the market for steel coming out of plants on the lower lakes. Some steel demand was clearly created by federal government stimulus actions, especially road and bridge projects. Yet to be determined is whether the demand will stay strong as federal programs are cut back, and whether the steel mills are simply rebuilding inventories of Minnesota taconite.

Recent reports from the American Iron and Steel Institute (AISI) in Washington, D.C., however, does suggest demand for steel remains strong and that the demand is being met by American mills rather than by imports.

On March 17, the AISI said U.S. mills shipped more than 7.5 million tons of steel, a 5.9 percent increase from December and a 14.4 percent increase from January a year ago. Five days later, AISI used U.S. Census Bureau data to determine that steel imports declined 16 percent in February, meaning that U.S. mills are supplying 82 percent of the nation’s demand.

That still doesn’t mean demand will hold for taconite and for finished steel products through the coming year, but it gives northern Minnesotans around mines and ports reason for optimism.

Unfortunately, this doesn’t extend into the forests.

Demand for paper products held up “fairly well” during the recession, said Wayne Brandt of the Minnesota Timber Producers Association at Duluth. “We’ve had plant closures around the country, but we’ve (Minnesota’s) held on and should be in good position when demand improves.”

Wood products, however, are another matter. Three oriented strand board, or paneling plants, at Bemidji, Grand Rapids and Cook have been permanently closed wiping out about 1,300 jobs. Timber, or lumber products for home and other building construction, has been nearly wiped out with little likelihood of a recovery any time soon.

The huge inventory of existing homes will need to start moving again before new home construction is likely to be revived, Brandt added. The housing market peaked in 2006, well before the recession started, he added, and that took the forestry sector down with housing.

Just as the ports on Lake Superior are extensions of the mining industry, there are other support industry sectors impacted by the weak demand for lumber products.

“We haven’t lost the core infrastructure to support the industry yet, but we are losing it," said Scott Dane with the Associated Contract Loggers and Truckers of Minnesota, a trade group based at Biwabik. "Our members are aging and new blood isn’t coming in. … I worry about this.”

Typical of this problem was Dane recently losing one of his up and coming younger trucking companies. The owner sold his equipment, left the business, and took a job in an iron mine that was adding employment because he could access health insurance and was young enough to start accumulating retirement benefits.

The housing market, meanwhile, and by extension the forest products industry, have almost no chance for a recovery for several years and indeed can only get worse if state and local governments keep laying off schoolteachers and public employees.

Unfortunately, the course Minnesota, Wisconsin and other states are following will only damage the forest industries more and further weaken housing markets. For now, these folks may need to find jobs in mines just to continue living in the north woods.

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