Economic Forecast: Money Doesn’t Grow on Trees?

North Dakota 2013 Economic ForecastIt’s not necessarily a problem – finding ways to spend billions of dollars.

It’s a question North Dakota’s legislators aren’t taking lightly, though. And the swelling Legacy Fund is certainly the most obvious evidence of the state’s super-charged economy – and the reason economic forecasters see nothing but blue skies ahead.

From energy to agriculture, manufacturing, hi-tech and more, North Dakota is poised to keep its meteoric fortunes stratosphere-bound for years to come.

Indeed, the state’s economic future, according to Delore Zimmerman, President of the Praxis Strategy Group, “looks pretty bright. I think you’ve got to look at the Western part of the state with the energy growth, and then you’ve got to look at what’s happening in agriculture. The prices are high, interest rates are low, and production is going full steam ahead here, so we’re on pretty good shape on that front, too. At the end of the day, agriculture is still the central pillar of the economy, and that’s a pretty good thing.”

“Given the fact that the two largest industries in the state look very healthy, I think there is a lot of potential,” suggests Doug Goehring, Commissioner of the state’s Department of Agriculture. “They both play a significant role in national security; that’s why I believe we’ve got a pretty bright future.”

Statewide, the infrastructure is “fair to good,” Goehring adds. “I believe some of the resources and revenue that have been generated will be put towards continuing to build on and enhance that infrastructure as we go forward — which continues to prop up and create a great foundation for agriculture, manufacturing and energy in the state.” Goehring has been North Dakota Agriculture Commissioner since April 2009 and was elected to a full, four-year term in November 2010.

Eric Hardemeyer, President and CEO of Bank of North Dakota, thinks his state’s forecast is about as positive as it can be. “And I think most people will see the same thing.” Energy, for example, continues to be positive.

“The numbers are strong,” Hardemeyer points out. “Of course, everything is dependent upon the price of oil and government regulations. So barring some unforeseen events of black swan-type, things we continue to be very bullish and positive on the energy sector in North Dakota. We continue to see major announcements on things that are happening.”

“I think the outlook for oil production is 20 years,” Zimmerman says and agriculture’s lifespan is “much longer than that because of the growing world population. There is always going to be a big demand for food, and we’re always improving on growing it.” The state also boasts a strong manufacturing sector, “which is also not the case in other parts of the country. A lot of them stems from our capabilities in agriculture, so there’s a good tie there.”

Indeed, he adds, many of the state’s manufacturers of machinery, equipment and even electronics “really evolved out of farming because farmers wanted more sophisticated equipment and instrumentation.” Beyond that, many universities have become adept at research and development of new technologies.

Legacy Fund

In late November, a state board said it would call in a consultant to advise on how best to invest the expanding North Dakota oil tax fund, which was voted into existence nearly two years ago. The fund gets nearly one-third of the state’s oil tax revenue. As the Associated Press recently noted, “Since oil revenues began pouring into the fund last September, the money has been parked in bonds, its least risky investment option but also the choice that provides the stingiest earnings. The fund, which now totals $489.8 million, has had an investment return of just over 1%.”

By law, the state’s legislature cannot spend any of the fund’s monies until June 2017; nor can legislators withdraw more than 15% of its principal over any two-year period.

“The Legacy fund is the fund that was set up to assist with the next generation,” Hardemeyer explains. “Those numbers are positive. I sit on the advisory board, so I look at it frequently. The last month’s run showed that there was about $55 to $60 million that had been put into it, so now it’s got a balance of about $590 million.” He estimated the total will reach about $1 billion by next June 30th.

“All indications would be that by 2017,” says Hardemeyer, “which is the first opportunity to spend any of the money, there should be close to $5 billion in there.” Aside from Hardemeyer, the board includes state Sen. Randy Christmann, Tax Commissioner Cory Fong and state budget director Pam Sharp.

“I’m sure there is going to be a lot of demand for that [state fund],” says Zimmerman. “I’m hoping that at least some of it is used for investing in some of the things that are coming out of universities and some of our technology companies.” That said, he acknowledges that the state’s energetic growth has brought with it tremendous infrastructure needs “and tremendous quality of life needs for housing, services and all those things. I’m sure there will be plenty of demands for the legacy fund as we go forward.”

“Many are going to want to treat it and think about it as a rainy day fund,” says Goehring. “Others are going to be looking at tapping it specifically for various projects and programs.”

Based on what he’s been hearing across the state, Goehring believes the purse strings will remain tightly tied. “It’s going to have to be something pretty darned important if you’re going to tap it.” Money already in the state’s coffers will be used for what he calls “those most basic issues that we have to deal with.”

The state is also poised to take on more responsibility in certain programs in which it has partnered with the federal government, Goehring points out. “As we’ve had more dollars available our portion grows as to what we pay, so the federal government actually pays less toward them. So I know some dollars are going to be spent there.”

Property tax relief is sure to be discussed, Goehring adds, “and to some degree that actually spills over into providing some of that support and relief for education. Will there be more done in education? I’m not sure; possibly. But again, this is speculating. I’m just giving you my best guess given the feel and the pulse of what I’m hearing out here.”

“There is a lot of discussion now, a lot of folks thinking about what we do with the Legacy money,” Hardemeyer adds. “That’s just beginning to happen; those conversations are just starting.”

One of the benefits accruing along with the Legacy Fund is a healthy dose of self respect among North Dakotans, as evidenced by Zimmerman’s observation that “we used to be a flyover state, and I don’t think that’s the case anymore. In fact, the way I look at it, we’re probably going to fly over some of the places that we used to do business with, like the West and East Coasts.”

What’s on the Horizon?

Predicting the future should be fairly simple, with billions of dollars rolling in. Should be, however, isn’t the same as is.

“I certainly cannot foretell the future,” Goehring admits, “but I will tell you this much: agriculture in North Dakota has always been a very diverse industry. It grows 46 different commodities, many of which are utilized globally.” As markets around the world find out from where a host of commodities — peas, lentils, various beans, barley, spring and durum wheats and more — have been sourced, trade will only increase, ensuring that local firms “have a future in the global economy in the years ahead. So yes, I believe they are going to continue to grow.”

Augmenting that is the increase in the number of processing facilities in the state. “We also have an intermodal hub that is being utilized more and more,” Goehring notes. “We have to do more identity-preserved sourcing and marketing of commodities here in North Dakota — right out of North Dakota to those national and overseas markets.”

When it comes to the energy sector, Goehring explains, North Dakota can look forward to developing the Bakken/Three Forks geological formation for something on the order of the next two decades, and then embark on enhanced oil recovery. “As a matter of fact, we’re probably going to be starting with some enhanced oil recovery prior to that.”

The thing that few, if any, have come to realize about the state’s prospects, Goehring insists, is that there are between 13 and 17 additional formations that have been identified. “Although we don’t know specifically what the amount of oil is in those formations, we have some idea, and at some point in time they’re going to be developing those, too.” The Bakken formation, he adds, is “only the low-hanging fruit. It’s not to say that the other formations aren’t as easy; they’re just not the target right now.”

The coal industry’s prospects look similarly bright. “We’ve got over 800 years of coal in our state,” says Goehring. “We’ll continue to utilize clean coal technology, create more efficiencies, and be more effective in delivering cheap power to the rest of the consuming country.” Other resources involving renewable fuels are also playing a role in “putting us a step closer to energy independence.”

The native work ethic and the culture will also draw businesses, as will solid infrastructure and an abundance of space, Goehring feels. “We have the space in which to expand, enhance and provide more value, ultimately, at the end to the consumer. Whether we’re talking about egg equipment, construction equipment, livestock handling equipment, technology, hardware, software, we have this up here.”

There are, Zimmerman says, great strides to be made on the international front, a process that is already off and running. “North Dakota has a pretty strong trade office, which is helping companies to build new markets around the world. They’re doing a great job of that.”

Nor does Zimmerman expect the state’s pro-business, pro-growth governance to suddenly reverse itself any time soon. “I do work in California and Oregon. First of all, there is a lot going on here. Second of all, it’s just a lot easier to do things here than there. We have a pretty strong pro-growth orientation, which is not universally common throughout the United States. It makes a big difference.”

Legislators have shared some insights, Goehring reveals, “but they’re also sitting there with a little bit of tension because they know that wish list is growing amongst the population, and they’re concerned.” The most prudent decision, he concludes, would be to “develop something in a sustainable manner — which means if all this dried up in two years, my God, what are we going to be obligated to continue to fund and pay for?”

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