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CHANGING SOURCES OF FARM CREDIT
Speech by Darryl R. Francis, President,
Federal Reserve Bank of St. Louis,
At Chemical Dealers’ ’’Independence Day” Meeting
Tan-Tar-A, Lake of the Ozarks,
Osage Beach, Missouri, December 13, 1967
I have been requested to discuss the changing
sources of farm credit and means whereby businessmen
can influence the paying habits of farmers.
It is to
the first item, namely, the changing sources of farm
credit, that I would like to direct most of this discussion.
Then, based on some conclusions relative to farm credit
sources and the changing structural pattern of agriculture,
I shall make some concluding comments on farm debt
repayment.
At the beginning I might say that outside credit
has played a relatively minor role in financing our
agricultural plant.
financed internally.
Most farms have largely been
Much of the physical capital as
land clearing, drainage, fencing, and building was
produced on the farm by the farm family.
Only in the
past few decades has a large portion of farm capital
been acquired through off-farm purchases, and many
of such costs were covered by savings of the farm
family.
CBB:bt
1/9/68
- 2 -
Since 1948 credit used by farmers has not
exceeded 17 per cent of total farm assets, and in the 6
years prior to 1954 the volume of farm credit outstanding
was less than 10 per cent of total farm assets ({Table I).
In comparison, credit used by manufacturing establish
ments has accounted for a much greater portion of total
assets.
During the period 1948 to 1967, inclusive, total
liabilities of all manufacturing corporations, excluding
newspapers, on the basis of book value never fell below
28 per cent of total assets.
Furthermore, in 1967 debt
exceeded 40 per cent of the assets of these firms.
Although the spread in debt-to-asset ratios
of farms and manufacturing firms remains quite wide,
it has declined steadily since 1948.
At that time debts
totaling 31.2 per cent of assets in manufacturing was
4. 3 times the per cent of debts to assets in agriculture.
Since then the per cent of debts to assets in both
industries have risen steadily.
However, the per
cent in agriculture rose at a greater rate than in
manufacturing, and in 1967 the per cent of debts to
assets in manufacturing was only 2. 4 times that in
agriculture.
- 3 -
1/9/68
Internal financing of agriculture has thus
declined substantially since 1948 relative to total farm
capital and credit has played an increasing role in
farm capital accumulation.
As implied in the subject of this discussion,
farm credit sources are changing.
The change, how
ever, has been gradual rather than revolutionary.
It is when we view farm credit over the past half
century that major contrasts appear. Significant
changes have occurred in both number of competitor
groups in the business and the relative portion of
farm credit supplied by each group.
Farm Mortgage Credit
Prior to the 1900's, most farm mortgage
credit in the United States was supplied by individuals
and other non-institutional sources.
A recent study
of farm mortgages recorded in Tippecanoe County,
Indiana, shows that individuals supplied more than
three-fifths of all such credit extended in this county
in each of the years 1865-1880, inclusive.
In the four
years 1865-1868, inclusive, such loans by individuals
- 4 -
1/9/68
1/
accounted for more than 90 per cent of the total.
Similar results were obtained in a study of farm
mortgage credit in Champaign County, Illinois, for
the same period.
Individuals supplied more than
three-fourths of all such credit in this county during
2/
the l6-year period.
Since the turn of the century, a relative
decline has occurred in the per cent of farm
mortgage credit supplied by non-institutional lenders.
Conversely, the per cent supplied by institutional
sources has consistently increased.
For example,
in 1910 institutional lenders supplied only 25 per
cent of the outstanding farm mortgage credit in the
nation, while in 1967 the proportion of farm mortgage
credit supplied by financial institutions had increased
to 60 per cent.
Despite the recent increase in use
of land contracts, which tend to increase seller-
financed farm transfers, the per cent of farm mortgage
debt held by institutions has remained stable since I960.
1/ Jay Ladin, ’’Mortgage Credit in Tippecanoe County,
Indiana, 1865-1880,” Agricultural History, January
1967, pp. 37-43.
2/ Robert F. Severson, Jr. , ’’The Source of Mortgage
Credit for Champaign County, 1865-1880,” Agricultural
History, July 1962, p. 154.
- 5 -
Only two major institutional lender groups,
commercial and savings banks and life insurance
companies, were in the farm mortgage credit business
in 1910 (Table II).
With the creation of the Federal
Land Banks in 1916 a third major credit supplier
entered the field, and in the 1930’s the Farmers Home
Administration (Farm Security Administration) was
created to finance high-risk farm mortgages with
government assistance.
The land bank system
through sale of bonds provided farmers with
another excellent credit pipeline to the nation’s
financial centers.
Each of the three major groups of financial
institutions supplying farm mortgage credit have over
the years either held their relative positions or supplied
an increasing proportion of the total, except during the
Great Depression of the thirties.
The Federal Land
Banks and life insurance companies, which have better
pipelines to financial markets, have supplied relatively
larger portions than commercial banks which rely
primarily on local funds and are often short of mortgage
credit supplies (Chart 1).
The share held by the Land
- 6 -
Banks rose steadily from the date of their organization
through the 1920’s.
With substantial government
assistance they undertook emergency mortgage
financing in the mid-1930's and their share rose
rapidly.
After the liquidation of these loans in the
1940’s and early 1950’s the Land Bank's share again
turned up and accounted for 21 per cent of the total
in 1967 (Chart 1).
The share held by life insurance
companies rose from 12 per cent of the total in 1910
to 22 per cent in 1967.
The share held by commercial
and savings banks rose from 12 to 14 per cent of the
total during the period.
In addition to the expanded role of the three
major institutional suppliers of farm mortgage credit,
the group listed under the heading of "individuals and
others" may have expanded from its composition of
earlier years.
In the late Nineteenth Century this
group was probably composed almost entirely of
individual investors, which included primarily relatives
and acquaintances of borrowers, and a small number of
3/
individual investors.
More recently, however, this
3/ Severson, Ibid.
- 7 -
group consists of a. number of other lenders including
endowment funds of schools, fraternal societies,
4/
cemeteries, hospitals, etc.
The evidence thus indicates that the supply
side of farm mortgage credit markets has increased
in competitiveness.
The number and types of agencies
in the business have increased and the geographic area
covered by some has been enlarged.
Insurance companies
and the Federal Land Banks have tapped the national
financial markets for farmers, greatly supplementing
local sources of farm mortgage funds.
both operate on a nation-wide basis.
Furthermore,
In contrast, prior
to the turn of the century the Federal Land Banks had
not been created, and the relatively small portion of
mortgage credit supplied by insurance companies was
limited primarily to the Corn Belt states.
Indicative
of the more expansive area coverage of insurance loans
during recent years is the data on such loans in specific
areas.
In 1930 insurance companies held less than 0.2 per
4/ William G. Murray and Aaron G. Nelson, Agricultural
Finance, Iowa State University Press, Ames, Iowa,
1961, p. 266.
- 3 cent of the farm mortgage debt in the Northeast
and less than 8 per cent of the total in the Mountain
and Pacific states, while in 19&7 they held 3.4 per
cent of the total in the Northeast and 27. 4 and 17.0
per cent, respectively, in the Mountain and Pacific
5/
states.
Non-Real Estate Farm Credit
Non-real estate farm credit supply groups
have also increased since 1910.
Even to a greater
extent than mortgage lenders, this group was
dominated by local suppliers well into this century.
Local banks, dealers, merchants, and other local
sources were almost the only suppliers of such credit
prior to the beginning of credit extension by the
Federal Intermediate Credit Banks and the Farmers
Home Administration (emergency crop and feed loans)
in the mid-1920’s (Table III). In the mid-1930’s the
Production Credit Associations entered the short-term
farm credit supply market and have become a major
source of such loans.
5j USDA, Agricultural Finance.
- 9 -
It is generally believed that merchants,
dealers, and other non-reporting lenders held at
least 50 per cent of all non-real estate farm credit
prior to the 1940’s.
Since early 1940, however,
the per cent of the total held by this group of lenders
has declined, and by early 1967 it accounted for
only 41 per cent of all non-real estate farm credit
outstanding.
Commercial banks have been the largest
single institutional supplier of non-real estate farm
credit throughout the period since 1910,
It is
generally believed that banks supplied about 50 per
cent of such credit until the 1930’s when the Production
Credit As sociations and the Farmers Home Administration
began operations.
Following this additional competition,
the per cent held by both banks and non-reporting
creditors declined.
The banks’ per cent of such credit
fell sharply in the 1930’s, picked up somewhat in the
1940’s, held about steady in the 1950’s, and has declined
somewhat since I960 (Chart 2).
Similar to movements in farm mortgage
credit, suppliers of non-real estate farm credit have
probably become more competitive in recent decades.
- 10 Since the early 1930’s one major supplier, the PCA's
which can tap the nation’s financial markets through
the Intermediate Credit Banks, has been added to
the credit source group.
The Farmers Home
Administration has been created to finance the high-
risk credit demand with government assistance.
In
addition, numerous agribusiness corporations with
great financial backing have entered the farm
financing field in the merchant-and-dealer category
in order to enhance sales of farm supplies.
These
additions have broadened both the number of oppor
tunities for farmers to obtain short-term credit in
any locality and the areas in which such funds can
be assembled for farm use.
ombination of farm mortgage credit
and non-real estate farm credit further points up
the changes in farm credit supplies.
On the basis
of estimates for merchant and dealer credit, which
probably understate the amount of such credit in
the earlier years, non-institutional credit to farmers
has declined relative to the total, from 63. 7 per cent
in 1910 to 40. 9 per cent in 1967.
This relative
11 -
decline has been fairly consistent, except for a
few years immediately following World War II when
the public had an abundance of liquid assets, and
since I960, a period of rapid expansion in the contract
selling of real estate which tends to enhance seller
financing of real estate transfers.
Despite the rapid
growth of seller-financed farms, which offer sizable
tax advantages to the seller, the long-term downswing
in per cent of farm credit financed by non-institutional
sources has not been reversed.
Farm credit supplied by the major institu
tional lenders has, on the other hand, increased in
most instances.
About 30 per cent of all farm credit
was probably supplied by commercial banks during
the 1910-2 0 decade, a declining proportion during
the 1920’s, and a sizable further decline during the
first half of the 1930’s.
The per cent held by banks
rose from the mid-1930’s to the early 1950's and has
remained about stable at near the 1910-20 proportion
since 1950 (Chart 3).
- 12 -
The agencies of the Farm Credit Admin
istration, with the exception of a major bulge during
the Depression of 1930, followed by a sharp contraction
in the 1940’s, have shown a fairly consistent gain in
per cent of all farm debt holdings.
Also, insurance
companies have increased their proportion of farm
debt during most of the decades since 1910.
Most of the relative gain by insurance
companies was made by the early 1920's when their
holdings exceeded 10 per cent of the total.
Since
then, their share has remained within 10 to 15 per
cent of the total.
Following the establishment of the Farmers
6/
Home Administration in the early 1930's,
its
relative portion of the farm debt gained steadily until
the mid-1940's.
This agency, designed to provide
subsidized credit to low income farmers, held at its
peak over 8 per cent of the total farm credit outstanding.
By 1950, however, its share had declined to 5 per cent
of the total, and it has not exceeded 5 per cent since
that time.
GJ The Resettlement Administration in the early 1930's,
later called the Farm Security Administration.
- 13 -
With these data on farm credit trends
by the various lending agencies as background, we
can summarize farm credit supply developments
as follows:
1.
Farm credit, like farming itself, is
becoming more commercial and less dependent on
relative, friend, neighbor, and merchant relation
ships.
Financial institutions currently supply more
than 60 per cent of the total, and their portion has
generally increased since 1910, with the exception
of a short period following World War II when
individuals, merchants and dealers had excessive
quantities of loanable funds.
2.
With the entry of more financial
institutions into the farm credit business and the
relative decline of non-financial institution lending,
farm credit supplies have become less personal.
This tends toward greater efficiency in the industry.
Credit and credit purchased resources will flow to
the more efficient users as determined by the
impersonal officials of the financial agencies.
Those
users provide the greatest returns to capital and can
more readily repay debts.
14 -
3.
The closer ties of farm credit to the
financial markets, as represented by life insurance
companies, the Farm Credit Administration, and to
a lesser extent, commercial banks through the
correspondent banking system, means a more
stable supply of farm credit but perhaps greater
fluctuations in interest rates.
With such ties, credit
at some price will probably be available to any
farmer in the absence of legal restrictions, provided
he meets the usual credit requirements of the lender.
The same sources of funds, however, reflect relatively
wide interest rate fluctuations, and the credit agencies
which rely on such sources must ultimately reflect
such rate changes in loans to farmers.
In the financial
markets, interest rates are determined by the demand
for and supply of loanable funds nationally.
The rate
is thus determined by the productivity of such funds
in all potential uses.
To gain control of such funds the
farmer must thus pay the wholesale rate plus the cost
of retailing.
- 15 -
4.
Farm credit ties to the nation's
financial markets assures more uniform interest
rates to farmers throughout the nation, given
similar lending costs and risks.
Prior to these
ties, rates paid by farmers may well have been
determined by local supply and demand conditions.
In such isolated markets, rates may have been
greater or less than rates which reflected
national credit conditions.
With national funds
available, however, local areas where rates are
relatively high will attract funds from other
areas until local and national rates are equalized
after allowing for risk and lending costs differ
entials.
5.
I shall also contend that the relative
decline of farm credit by the non-financial
institution groups was not caused by a decline in
competition from this group, but is the result of
increased competition for farm debt on the part
of the farm credit institutions.
As evidence, we
have in the Farm Credit Administration one addi
tional source of farm real estate credit (the FLB's)
- 16 -
and one additional source of non-real estate credit
(the PCA's) available to every potential farm borrower.
In addition, the insurance companies have made avail
able farm real estate credit to most potential users
in the nation.
Evidence also indicates that commercial
banks are more aggressive in the farm credit market
than during the first quarter of the century.
Large
numbers of banks have hired agriculturally-trained
men to head up farm departments.
These men are
especially trained for making credit available to farmers
Also, most banks now have substantial non-farm
deposits to draw on for farm lending purposes.
Such
accounts are more stable seasonally than accounts
originating in primarily farming communities.
Thus,
larger credit supplies are available for farm use
during the seasonal shortage of farm, deposit accounts.
Banks also have better arrangements with city
correspondents and other outside sources such as
insurance companies to draw on for overlines, real
estate credit, or general credit shortages.
What is the meaning of these developments
to merchant and dealer credit suppliers?
I believe
that most farm credit demands are being adequately
- 17 met at competitive rates.
If good credit risk farmers
are already receiving adequate credit supplies,
extensive gains in merchant and dealer credit is
unlikely, except at great risks.
I would suggest that
for such credit to succeed over the longer pull, it
must meet the following tests:
1.
It must be made on a sound basis
through proper credit analysis by a credit expert
and no'f’primarily by sales personnel.
2.
Such credit, if tied to the sale of a
particular farm input, must not create an imbalance
in the farming operation.
Given the fact that most
farms are eligible for a limited amount of credit, if
excessive amounts are used for one purpose, leaving
insufficient amounts for other purposes, the excess
may cause the farm to be inefficient.
Thus, such
credit that causes an imbalance in the farming
operation may ultimately lead to failure.
3.
f
The provision of merchant and dealer
credit must be made on an efficient basis.
If non-
financial groups can supply credit as efficiently as
- 18 the financial agencies, healthy competition can be
maintained.
On the other hand, loanable funds are
a scarce resource and cannot be supplied without
costs by any lender.
Funds must ultimately be
purchased from savers, excluding the small
increments added through monetary actions.
retailing of funds also requires a margin.
The
Such
costs must eventually be covered by rates charged
or absorbed in the price of goods sold.
Thus, the
test for who gets the credit supply business will
be determined by who can purchase and sell funds
most efficiently.
4.
Farming is now being done on
narrower margins than formerly, and risks are
greater.
In 1965 purchased inputs and other expenses
amounted to more than three-fourths of total farm
product sales.
is also greater.
As indicated earlier, debt exposure
With the narrow margin of profit
and the inability of the farmer's own and unpaid family
labor to absorb the losses on modern, high-capacity
farms, attention must be focused on the reliability of
credit analysis.
Under these conditions, success in
- 19 -
the farm credit business is not likely to be
attained through all out exertions to build up
volume alone but through a combination of
sufficient volume of business to achieve efficiency
and wise selection of risk to avoid excessive losses
and collection costs.
In summation, agriculture has historically
been financed internally.
Credit has accounted for
only a small proportion of total capital.
Credit as a
proportion of farm assets has, however, steadily
increased in recent decades.
With the rising demand
for farm credit new specialized farm credit agencies
have been developed, and a further expansion of the
other financial agencies which were already in the
field has occurred.
With these developments credit
supplied by the non-institutional groups such as
merchants, dealers and individuals has declined
relative to the total.
I believe that this decline is
the result of more intensive competition in the farm.
credit business rather than a voluntary withdrawal
of the individual, merchant and dealer group.
- 20 -
Now let’s return to a portion of my
original subject, "How can businessmen influence
the paying habits of farmers?” First, I shall
reiterate there is no substitute for good credit
analysis. The soundness of the credit extended is
the most important factor in determining whether
or not it will be repaid.
I believe that the repay
ment habits of farmers or any other group are
more likely to be associated with the individuals
selected and the soundness of their business
operations than with other means which may be
devised.
Second, farm credit customers are
not operating in isolation of financial markets. .
The good credit risk farmers could probably
obtain credit from several sources prior to
becoming customers of merchants and dealers.
Third, I suggest again the possibility of over
selling some inputs to some farmers and thereby
causing a profitable farm to become unprofitable.
Such a condition is beneficial to neither lender or
borrower.
- 21 If merchants and dealers adhere to
these credit principals, they will probably continue
to be a major competitor in supplying farm credit.
Now that most merchants and dealers represent
corporations which have connections with the
major money markets, they can become a major
vehicle for moving funds from surplus to deficit
areas, thereby performing a valuable service for
farmers and the financial markets.
In addition,
if the credit is profitable to both lender and
borrower, more efficient use of resources is
achieved and total welfare is enhanced.
TABLE I
Total Debt as Per Cent of Total Assets
Agriculture and Manufacturing
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
A
Ag ri culture
B
All Manufacturing
Corporations -L'
Ratio of B to A
7.3
8.5
9.4
8.6
8. 8
9.8
10. 5
10.7
11. 1
10. 9
11.0
11.7
12. 2
12. 8
13. 5
14.4
15. 2
15.7
16.3
17. 0
31.2
30. 2
28. 0
33,6
36. 1
36. 2
34. 9
33. 9
35.035. 8 •
33. 9
33.7
34.4
34. 2
35.2
35. 8
36. 1
37. 8
39.7
41. 1
4.27
3. 55
2.98
3. 91
4. 10
3.69
3. 32
3. 17
3. 15
3. 28
3.08
2. 88
2. 82
2.67
2. 61
2.49
2.38
2.41
2.44
2.42
2_/ Data as of the first quarter of each year.
Source:
Balance Sheet of Agriculture, USDA; Quarterly Financial Report
for Manufacturing Corporations, Federal Trade Commission Securities and Exchange Commission.
Table II
Farm. Mortgage Debt Held by Principal Lenders
(Millions of Dollars)
Federal Land
Banks and
FFMC
...
—
293. 6
923. 1
1,201.7
2, 564.2
2,723. 1
1, 557.0
964. 7
1,279. 8
2, 335. 1
3,686.8
4, 914.5
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
I960
1965
1967
USDA.
F. H. A.
...
—
—
—
—
32. 2
195. 5
193. 3
287. 2
439. 3
619. 5
585.4
Life
Insurance
Companies
387. 0
670. 0
974. 8
1, 942. 6
2, 118.4
1, 301. 6
984. 3
938. 3
1, 172. 3
2,051.8
2, 819. 5
4,287.7
5, 219. 7
Joint-Stock
Land Banks
—
60. 0
446.4
637. 8
277. 0
91.7
5. 5
0. 3
—
---- ■
—
—
All
Operating
Banks
406. 2
746. 1
1,204.4
1,200. 5
997. 5
498. 8
534. 2
449. 6
937. 1
1,210.7
1,631.3
2, 668. 5
3, 169. 5
Individuals
and Others
2,414.7
3, 574.7
5,915.9
5, 400. 1
4, 675. 3
2, 942.9
2, 220. 9
1,795. 1
2, 311. 5
3,415.8
4,857.2
7,631. 8
9,421. 9
Total Debt
3,207.9
4,990.8
8,448.7
9, 912.7
9, 630. 7
7,584.5
6, 586.44,941.0
5, 579. 2
8, 245. 3
12,082.4
18, 894. 3
23,311.0
Table III
Non-Real Estate Farm Debt Held by Principal Lenders
(Millions of Dollars)
All
Operating
Banks
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
I960
1965
1967
Sour*
1, 350. 0
1,606.0
3,453. 8
2,674.2
2,490. 7
627. 9
900. 1
948. 8
2, 048. 8
2, 933.9
4, 819. 3
6, 990. 0
8,533.5
PCA
—
—
—
—
60. 5
153.4
188. 3
387. 5
577. 0
1, 361.2
2,277.5
3,015.6
FICB
—
—
18. 8
47.3
55. 1
32. 3
29. 8
50. 8
58. 3
89.6
124.7
156. 9
FHA
NonReporting
Creditors
Total
—
—
2. 5
8. 0
203. 9
418. 0
452.6
346. 7
417. 2
397. 6
643. 9
737. 5
1,350.0
1,606. 0
3,453. 8
2, 695. 5
2, 546.0
947.4
1,500. 0
1, 100. 0
2, 300. 0
3, 200. 0
4, 900. 0
7, 100. 0
8, 800. 0
2, 700. 0
3, 212.0
6,907.6
5,391.0
5, 092.0
1, 894.8
3,003.8
2,719.5
5,133.8
7, 186.4
11,567.7
17,136.1
21,243.5
USDA, except for loans by non-reporting creditors prior to 1940, Credit by this
group before 1940 estimated on the basis that such credit equaled that provided
by banks and the Federally sponsored agencies. For further discussion see:
Alvin S. Tostlebe, Capital in Agriculture, A Study by the National Bureau of
Economic Research, Princeton University Press, Princeton, 1957, p. 160.
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