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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1894 November 1997 AgLetter be steady-to-higher. Overall, 38 percent of the bankers expected an uptrend during the fourth quarter while 60 percent expected land values to be stable. Only 2 percent of the bankers projected a decline in farmland values this fall. The expectations for a fourth quarter uptrend in farmland values were apparent for all District states, but much less so for Illinois than elsewhere. FARMLAND VALUES AND CREDIT CONDITIONS District farmland values continued to trend upward this summer, according to the Federal Reserve Bank of Chicago’s latest survey of agricultural banks. The 375 respondents indicated that, on average, the value of good farmland rose 1.6 percent during the third quarter and 7 percent during the 12 months ending in September. The third quarter rise was slightly larger than that of the previous quarter and about comparable to the average quarterly rate of increase experienced over the last three years. However, the rate of increase this summer varied considerably among the five states comprising the Seventh Federal Reserve District. The bankers from Iowa reported the largest increase, nearly 3 percent, while those from the District portion of Wisconsin reported that farmland values were essentially unchanged in the third quarter. Elsewhere, the third quarter rise approximated 1 percent in Indiana and Michigan and 2 percent in Illinois. For the 12 months ending with September, the gains ranged from 6 percent in Illinois to 8 percent in Indiana. In assessing likely land market developments for the fall and winter quarters, the bankers indicated they were expecting the demand to acquire farmland would be stronger and that the number of farmland transfers would be higher. Overall, about half of the bankers felt that the demand among both farmers and nonfarmer investors to acquire farmland would be stronger than a year ago while only a tenth projected a decline. The rest of the bankers felt the demand for farmland would be about the same as the year before. With respect to the number of farmland transfers, 36 percent of the bankers projected an increase while only 10 percent forecast a decline. The source of the anticipated strength in demand for farmland varied considerably among the District states. For example, the view that nonfarmer investor The bulk of the bankers felt that the trend in farmland values during the final months of this year would Percent change in dollar value of “good” farmland XII Top: July 1, 1997 to October 1, 1997 Bottom: October 1, 1996 to October 1, 1997 Illinois Indiana Iowa Michigan Wisconsin Seventh District July 1, 1997 to October 1, 1997 October 1, 1996 to October 1, 1997 +2 +1 +3 +1 0 +2 +6 +8 +7 +7 +7 +7 VI 0 +8 II I +1 +5 +1 +5 +3 +9 V +2 III +11 * VII XIV 0 +5 IV 0 +6 X +3 +8 VIII * +5 +9 +3 +8 XI +1 +4 XVI XVII *Insufficient response. 0 +10 XV IX +2 +5 * demand would be stronger than a year ago was noted by an especially large share (about 67 percent) of the bankers from Indiana and Wisconsin. Conversely, a comparatively large share (64 percent) of the bankers from Iowa were expecting a pickup among farmers in the demand to acquire farmland. By far, the weakest farmer component in the demand for farmland may be in Wisconsin where the share of bankers projecting a decline in farmer demand (29 percent) nearly matched the share anticipating an increase (31 percent). As noted below, the bankers from Wisconsin were much more pessimistic about farmer earnings in the months ahead than were those from the other District states. Differences also surfaced in the bankers’ views on credit conditions and prospects. In general, however, the measure of farm loan demand for the third quarter stood at a relatively high level of 131. Although down marginally from the previous two surveys, the latest reading still denotes that the share of bankers reporting a year-over-year rise in loan demand (42 percent) substantially exceeded the share reporting a decline (11 percent). However, the strength in farm loan demand varied widely. It was strongest in Iowa where 60 percent of the banks reported an increase and only 5 percent reported a decline. In Michigan and Wisconsin, conversely, the share of bankers reporting an increase in farm loan demand only matched, or marginally exceeded, the share reporting a decline. The third-quarter measure of funds available at the banks for making farm loans held at 97. This composite measure implies that the share of banks that reported a year-over-year decline in fund availability (17 percent) slightly exceeded the share that reported an increase (14 percent). The lowest readings on fund availability (the low 90s) were reported by the bankers from Iowa, Michigan, and Wisconsin. Banks consider numerous factors when deciding how to allocate funds among alternative investments. But tightening liquidity conditions from slow deposit growth appears to be a key factor in the modest scaling back in funds made available for farm loans at banks. Reflecting this, the average loan-todeposit ratio among the surveyed banks edged higher again in the third quarter. On average, loans now absorb 70.2 percent of deposits at the surveyed banks, up 2 percentage points from the high year-ago level. With the rising ratios, the gap between the actual and the desired ratios reported by the surveyed banks is narrowing and a growing share of the banks are operating with a higherthan-desired ratio. The gap between the averages for the desired and actual ratios retreated to 2.3 percentage points in the most recent survey, down from 3.4 percentage points a year ago and the lowest third-quarter gap since 1980. Similarly, the share of responding banks that are operating with a “higher-than-desired” loan-to-deposit ratio rose to 23 percent, up from 17.5 percent a year ago and the highest third-quarter share since 1979. Based on these measures, the tightest liquidity conditions appear to be among banks in Iowa and Michigan and, to a lesser extent, in Indiana and Wisconsin. The overall measure of farm loan repayment rates, for the second consecutive quarter, signaled a slight decline from the relatively favorable performance of a year ago. But the responses varied considerably by state. In Illinois, Indiana, and Iowa, third-quarter farm loan repayment rates apparently held close to the year-earlier level. Alternatively, the share of bankers from Michigan and Wisconsin that reported a decline in farm loan repayment rates exceeded the share noting an increase by a rather sizable margin of 24 percentage points. Financial stress in the dairy sector—which is more prevalent in Wisconsin and Michigan than elsewhere in the District—may account for the slower loan repayment performance in those two states. Interest rates charged on new farm loans at banks held steady again in the most recent survey. The average of the typical rates charged on farm operating loans as of the end of the third quarter was 9.71 percent while that for farm real estate loans was 8.76 percent. This marks the sixth consecutive quarter of virtually no change in the average rates charged on farm loans. Illinois banks continued to report the lowest rates, 9.46 and 8.61 percent for farm operating and farm real estate loans, respectively. Michigan banks reported the highest rates, 10.0 and 9.39 percent, respectively. In looking ahead to likely fourth-quarter trends in farm loan demand, bankers from most areas anticipate continued strength in the demand for farm operating loans. This was especially true among the banks in Iowa. And except for Wisconsin, the bankers responses indicated fairly strong expectations for continued growth in the demand for loans to finance farm machinery and equipment. (The Wisconsin bankers expected a decline in farm machinery financing this fall). And in most areas of the District except Wisconsin, the bankers felt the demand for loans to finance crop storage would be up from a year ago. In judging the income picture of their farm customers for this fall and winter, the bankers’ views were somewhat mixed. In general, earnings of both crop farmers Credit conditions at Seventh District agricultural banks Interest rates on farm loans Loan demand Fund availability Loan repayment rates Average loan-todeposit ratio1 Operating loans1 Feeder cattle 1 Real estate1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 1992 Jan-Mar Apr-June July-Sept Oct-Dec 129 123 111 107 128 123 123 127 77 79 90 93 57.3 58.1 59.3 58.7 9.77 9.57 9.18 9.12 9.80 9.56 9.16 9.13 9.19 8.99 8.63 8.59 1993 Jan-Mar Apr-June July-Sept Oct-Dec 108 103 110 125 131 129 122 126 102 95 90 95 58.0 59.2 59.2 59.7 8.85 8.77 8.63 8.50 8.83 8.74 8.59 8.50 8.29 8.16 7.99 7.88 1994 Jan-Mar Apr-June July-Sept Oct-Dec 136 139 132 112 121 107 96 102 94 90 94 111 59.9 62.5 64.5 63.8 8.52 8.98 9.38 9.99 8.48 8.95 9.30 9.93 7.97 8.48 8.86 9.48 1995 Jan-Mar Apr-June July-Sept Oct-Dec 122 124 123 111 96 104 104 123 98 93 98 119 64.8 66.1 67.3 64.9 10.33 10.24 10.16 9.89 10.26 10.20 10.14 9.88 9.68 9.64 9.27 8.93 1996 Jan-Mar Apr-June July-Sept Oct-Dec 125 116 122 122 125 114 113 110 117 108 112 94 65.0 65.8 68.2 67.6 9.62 9.69 9.70 9.64 9.63 9.69 9.68 9.61 8.66 8.81 8.80 8.73 1997 Jan-Mar Apr-June July-Sept 134 134 131 110 97 97 105 94 93 67.6 69.7 70.2 9.71 9.72 9.71 9.65 9.68 9.69 8.77 8.83 8.76 1 At end of period. Bankers responded to each item by indicating whether conditions during the current quarter were higher, lower, or the same as in the year-earlier period. The index numbers are computed by subtracting the percent of bankers that responded “lower” from the percent that responded “higher” and adding 100. 2 and livestock producers were expected to hold close to year-ago levels while dairy farmer earnings were widely expected to decline. However, several departures from these general expectations were apparent. For example, Wisconsin bankers, by a sizable margin, were projecting declines in earnings of both crop and livestock farmers, as well as dairy farmers. Alternatively, better harvests presumably underlay the expectations for higher cropfarmer earnings in both Indiana and Michigan. The bankers’ views with respect to the amount of financial stress among farmers and the relative level of forced sales of farm assets this fall and winter also differed. The share of bankers from Wisconsin expecting an increase from year-earlier levels in forced sales of farm assets exceeded the share projecting a decline by 39 percentage points. In Iowa, conversely, the share of bankers expecting a decline in forced sales of farm assets outweighed those projecting an increase by a margin of 17 percentage points. Elsewhere, the share expecting an increase in forced sales were about evenly matched with those projecting a decline. Gary L. Benjamin AgLetter (ISSN 1080-8639) is published monthly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Gary L. Benjamin, economic adviser and vice president, Mike A. Singer, economist, and members of the Bank’s Research Department, and is distributed free of charge by the Bank’s Public Information Center. The information used in the preparation of this publication is obtained from sources considered reliable, but its use does not constitute an endorsement of its accuracy or intent by the Federal Reserve Bank of Chicago. To subscribe, please write or telephone: Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690-0834 Tel. no. 312-322-5111 Fax no. 312-322-5515 Ag Letter is also available on the World Wide Web at http://www.frbchi.org. SELECTED AGRICULTURAL ECONOMIC INDICATORS Percent change from Latest period Value Prior period Year ago Two years ago Prices received by farmers (index, 1990–92=100) Crops (index, 1990–92=100) Corn ($ per bu.) Hay ($ per ton) Soybeans ($ per bu.) Wheat ($ per bu.) Livestock and products (index, 1990–92=100) Barrows and gilts ($ per cwt.) Steers and heifers ($ per cwt.) Milk ($ per cwt.) Eggs (¢ per doz.) October October October October October October October October October October October 108 116 2.63 103.00 6.74 3.55 95 47.40 65.70 13.60 65.8 0.9 1.8 4.4 2.0 0.3 –3.3 –4.0 –6.9 –1.9 3.0 –5.5 –4 –3 –9 10 –3 –15 –8 –15 –4 –17 –11 3 2 –6 26 9 –25 3 3 5 1 –1 Consumer prices (index, 1982–84=100) Food October October 162 158 0.2 0.2 2 2 5 6 September 1 September 1 September 1 September September October 884 132 2,073 2.13 1.49 11.0 N.A. N.A. N.A. –4.3 10.1 3.2 108 –28 20 10 6 2 –43 –61 10 –4 4 2 June June June June 13,382 5,738 7,618 26 0.8 0.2 1.2 30.0 –10 –11 1 –97 1 –8 10 –84 Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) August August August August 4,427 143 38 125 10.7 46.4 61.6 30.9 –4 30 –29 –15 1 –32 –20 –2 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines October October October October 7,158 4,143 3,015 1,376 13.5 1.6 35.3 17.2 –5 –2 –9 25 18 12 27 40 Production or stocks Corn stocks (mil. bu.) Soybean stocks (mil. bu.) Wheat stocks (mil. bu.) Beef production (bil. lb.) Pork production (bil. lb.) Milk production* (bil. lb.) Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments N.A. Not applicable *20 selected states. **Includes net CCC loans. AgLetter is printed on recycled paper using soy-based inks Return service requested Federal Reserve Bank of Chicago Public Information Center P.O. Box 834 Chicago, Illinois 60690-0834 312-322-5111 AgLetter PRESORTED FIRST-CLASS MAIL ZIP + 4 BARCODED U.S. POSTAGE PAID CHICAGO, ILLINOIS PERMIT NO. 1942
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