View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

The Agricultural Newsletter
from the Federal Reserve Bank of Chicago
Number 1897

February 1998

AgLetter
FARMLAND VALUES AND CREDIT CONDITIONS

payments to farmers (under the 1996 farm program)
and moderating pressures on input prices also contributed
to the favorable earnings of crop farmers. Hog farmers also
enjoyed relatively strong earnings during most of the past
two years, while the picture for dairy farmers was
mixed. Despite considerable fluctuations, milk prices
received by dairy farmers averaged among the highest
on record the past two years. Some dairy farmers prospered, but others struggled with poor quality forage and
high feed prices.

District farmland values registered a large gain again last
year, according to the responses of over 350 agricultural
banks recently surveyed by the Federal Reserve Bank of
Chicago. The bankers indicated that the value of good
farmland, on average, rose more than 2 percent during
the final three months of 1997. The rise for all of 1997
was nearly 10 percent, duplicating the strong gain of the
year before. Adjusted for the moderating inflationary
pressures, last year’s rise translated into the steepest real
increase in farmland values in almost twenty years.

Comments offered by some of the bankers indicate
that other factors contributed to the recent strength in the
market for farmland. Several noted that nonfarmer investor demand for farmland was especially strong. Unusually
large gains in equity markets in recent years and uncertainty about the future performance of those markets may
well have strengthened nonfarmer demand for farmland.
In addition, other bankers suggested that expanding urban/
suburban areas were increasingly a factor in farmland
values, a view seemingly consistent with the past several
years of sustained economic growth and tightening labor
markets. Expanding urban/suburban communities add
to the commercial, recreational, and residential potential—and thus the market value—of farmland that borders growing communities. With the recent revival of

The indicated fourth-quarter gains in farmland
values were fairly uniform among the five District states,
clustering at 2 percent in Illinois, Indiana, Iowa, and
Michigan, and reaching 3 percent in Wisconsin. The
gains for all of last year varied considerably, however.
The bankers from Michigan and Illinois reported the
smallest 12-month increases, 7 and 8 percent, respectively.
At the other extreme, the bankers from Indiana and Iowa
reported the largest gains, 12 and 11 percent, respectively.
Last year’s strong rise in farmland values reflected
several factors. Although grain prices retreated somewhat
in 1997, higher soybean prices helped sustain the earnings
of crop farmers at a fairly high level. Generally favorable
harvests the last two years, coupled with sizable government

Percent change in dollar value of “good” farmland
XII

Top:
October 1, 1997 to January 1, 1998
Bottom: January 1, 1997 to January 1, 1998
October 1, 1997
to
January 1, 1998
Illinois
Indiana
Iowa
Michigan
Wisconsin
Seventh District

+2
+2
+2
+2
+3
+2

January 1, 1997
to
January 1, 1998
+8
+12
+11
+7
+10
+10

VI
+2
+9
II

I
+2
+7

+2
+8

+2
+12
V
+2
III +14

*
VII
XIV

+6
+13

IV

+2
+9

X
0
+10 VIII *

+3
+11
+2
+10

XI
+2
+7

XVI
XVII

*Insufficient response.

+3
+14

XV

IX

+2
+10

*

District farmland values recorded another large gain in 1997
percent
10

8

6

4

2

0
1990

’91

’92

’93

’94

’95

’96

’97

population growth in many rural counties, this phenomenon is apparent in many rural communities as well.
The expanding communities (whether rural or urban)
can trigger rippling affects on farmland in more isolated
areas as farmers sell, or—for tax purposes—exchange,
their “high-priced” land bordering the growing communities for “lower-priced” (and in many respects, more
farmer-friendly) land in more isolated areas.
While the comments of some bankers suggest that
the upward pressures on land prices may ease with the
prospects for lower farm earnings in the months ahead,
a sizable share expected the uptrend to continue. Overall,
36 percent of the bankers felt farmland values would
continue to rise in the current quarter while only 2 percent
were expecting a decline. The remainder felt land values
would be stable this winter. This distribution of expectations is fairly consistent with the views expressed by
bankers in the last five quarterly surveys.
The bankers’ views with respect to credit conditions
varied somewhat across the five District states. The measure of farm loan demand retreated slightly in the most
recent survey. But at 120, the latest reading still implies
that the share of bankers noting a year-over-year gain in
loan demand exceeded the share noting a decline by a net
margin of 20 percentage points. However, the evidence
of a stronger farm loan demand was heavily concentrated
in the responses of bankers from Iowa and, to a lesser
extent, those from Illinois. In contrast, the share of bankers
from Michigan and Wisconsin that noted a decline in
farm loan demand actually exceeded the share noting
an increase.
The measure of funds available at banks for making farm loans turned up in the most recent survey. As
of the end of 1997, some 20 percent of the banks felt fund
availability was up from a year ago while 11 percent indicated fewer funds were available. The highest readings

on fund availability came from the bankers in Indiana
and Michigan, while the lowest reading came from Wisconsin. The modest improvement in fund availability
occurred despite a continued uptrend in loan-to-deposit
ratios. On average, loans absorbed 70.7 percent of deposits
at the surveyed banks as of the end of 1997, up from 67.6
percent the year before. With the continuing uptrend,
some 21 percent of the banks now report that their loanto-deposit ratio is above the level they desire for their
bank while another 36 percent report they are at, or close
to their desired ratio.
Although loan-to-deposit ratios are at, or above
desired levels at many banks, only 11 percent of the respondents felt that slow deposit growth was a major restraint
on their ability to service acceptable loan requests. Another
38 percent viewed slow deposit growth as a minor restraint
while the remaining 51 percent indicated that slow deposit
growth was not a problem in servicing acceptable loan
requests. In conjunction with the relatively slow growth
in deposits, about half of the banks have increased their
use of funding sources other than deposits to make loans.
About 40 percent of the banks characterized their increased
reliance on non-deposit funding sources over the last
two years as “modest” while another 12 percent regarded
the increase as “substantial.” The more common nondeposit funding sources mentioned included borrowings
from the Federal Home Loan Bank and from the Federal
Reserve Bank. Other sources included brokered deposits,
the sale of real estate mortgages or other assets, and
state-assisted programs for farm loans.
Farm loan repayment rates in the fourth quarter
continued at, or somewhat below year-earlier levels in
most areas of the District. The overall reading stood at
95 as the share of bankers noting a year-over-year decline
in farm loan repayment rates (19 percent) slightly exceeded
the share noting an increase (14 percent). This pattern of
views held for all District states other than Indiana. The
lowest readings on farm loan repayment rates (90 to 92)
were reported by the bankers from Illinois, Michigan,
and Wisconsin. On a more favorable note, however, the
latest readings on farm loan repayment rates for Michigan
and Wisconsin were much improved from what was the
case in the previous survey. Apparently, a strong uptrend
in milk prices during the latter part of 1997 helped arrest
the farm loan repayment problems in those states.
The interest rates charged on farm loans by the surveyed banks held steady through the fourth quarter, a
trend that has prevailed since late 1995. The average of
the typical rates reported for farm operating loans as of
the end of 1997 was 9.65 percent while that for farm real
estate loans was 8.69 percent. The lowest farm operating
loan rates, averaging 9.34 percent, were reported by the
banks from Illinois. The lowest rates on farm real estate

Credit conditions at Seventh District agricultural banks
Interest rates on farm loans
Loan
demand

Loan
repayment rates

Average loan-todeposit ratio1

Operating
loans1

Feeder
cattle 1

Real
estate1

(index)2

1992
Jan-Mar
Apr-June
July-Sept
Oct-Dec
1993
Jan-Mar
Apr-June
July-Sept
Oct-Dec
1994
Jan-Mar
Apr-June
July-Sept
Oct-Dec
1995
Jan-Mar
Apr-June
July-Sept
Oct-Dec
1996
Jan-Mar
Apr-June
July-Sept
Oct-Dec
1997
Jan-Mar
Apr-June
July-Sept
Oct-Dec

Fund
availability
(index)2

(index)2

(percent)

(percent)

(percent)

(percent)

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

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

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

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

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

134
134
131
120

110
97
97
109

105
94
93
95

67.6
69.7
70.2
70.7

9.71
9.72
9.71
9.65

9.65
9.68
9.69
9.63

8.77
8.83
8.76
8.69

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

loans, at averages of 8.50 percent, were reported by the
banks from Illinois and Iowa. By a sizable margin, Michigan
banks again reported the highest rates on farm loans,
10.17 for farm operating loans and 9.38 for farm real
estate loans.
In looking ahead, the bankers’ views for 1998 suggest that capital expenditures by farmers may be somewhat
higher again this year. The most widespread expectations
for an increase in expenditures were for farm machinery
and equipment. Overall, 40 percent of the respondents
expected farm machinery and equipment expenditures—
which have trended up the last five years—to increase
again this year. Only 14 percent of the bankers expect a
decline while the remaining 46 percent believe farm
machinery and equipment expenditures will level off
this year. Twenty seven percent of the bankers also suggested that farmer purchases of trucks and autos would
be up this year while only 10 percent expect a decline.
Somewhat smaller net margins are expecting increased
expenditures by farmers for land purchases and for expenditures on farm buildings and other real estate improve-

ments. In general, the net share of the bankers expecting
increased expenditures was highest in Iowa and lowest
in Wisconsin.
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

January
January
January
January
January
January
January
January
January
January
January

103
111
2.57
98.10
6.56
3.33
94
37.00
65.30
14.60
74.0

–1.9
0.0
2.0
0.4
–2.2
–3.5
–3.1
–11.9
–2.2
0.0
–6.0

–5
–4
–4
0
–8
–17
–4
–32
0
9
–2

–5
–8
–17
23
–3
–31
0
–14
4
4
–5

161
159

–0.1
0.1

2
2

5
6

December 1
December 1
December 1
December
December
January

7,230
1,995
1,615
2.03
1.64
11.4

N.A.
N.A.
N.A.
4.6
11.4
2.4

5
9
32
4
15
2

18
9
21
1
9
3

Receipts from farm marketings (mil. dol.)
Crops**
Livestock
Government payments

October
October
October
October

25,061
15,907
7,542
1,612

20.3
64.9
–7.9
–46.4

–5
–5
–7
6

4
12
–3
–20

Agricultural exports (mil. dol.)
Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)

October
October
October
October

5,534
118
170
92

23.3
–17.2
299.9
–24.7

6
–19
78
–9

8
–44
120
–23

Farm machinery sales (units)
Tractors, over 40 HP
40 to 100 HP
100 HP or more
Combines

January
January
January
January

5,282
2,596
2,686
697

–15.2
–21.6
–7.8
–47.0

16
0
37
58

7
–4
20
66

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.)
Consumer prices (index, 1982–84=100)
Food
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.)

December
December

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


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102