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The Agricultural Newsletter
from the Federal Reserve Bank of Chicago
Number 1901

August 1998

AgLetter
VALUES
FARMLAND VALUES AND CREDIT CONDITIONS

Several factors contributed to the slowing in the
rate of increase in farmland values. The income outlook for many District farmers has worsened. Lower
commodity prices are expected to cause net farm income to fall this year and a recovery is unlikely next
year. Corn and soybean prices have been pulled lower
by lackluster demand and the potential for a large fall
harvest. Foreign sales—an important swing factor in
grain markets—have been sluggish. The export prospects of bulk commodities have further deteriorated as
the extent of the financial problems afflicting many
Asian nations have become more obvious. Livestock
prices are also under considerable pressure from large
current and prospective supplies of red meat and poultry. Moreover, the decline in the value of hog and grain
inventories has an adverse impact on farmers’ balance
sheets that acts as an additinal drag on capital spending.

Our quarterly survey of over 350 agricultural bankers
indicated that farmland values were unchanged during
the second quarter in the Seventh Federal Reserve
District. Weakness in farmland markets in Iowa and
Illinois offset gains in the other three District states.
However, farmland values were still 8 percent above
the year-earlier level as of July 1. In addition, the demand for new farm loans remained firm throughout
most of the District in the second quarter, although
some weakening was noted in Indiana. Loan repayment
rates slowed relative to the previous year, and the
bankers noted increased activity by their competitors.
The second-quarter movement in farmland values was somewhat mixed among the five District
states. Michigan and Wisconsin each registered a gain
of two percent, while Indiana showed a slim rise of
one percent. Farmland values in Illinois held steady
in the second quarter, and a 1-percent decline was reported by the bankers in Iowa. For the twelve-month
period ending July 1, farmland values were up 11 percent in Indiana, 10 percent in Michigan and Wisconsin, and a more modest 7 percent in Illinois and Iowa.

Further complicating the situation, concerns over
the change in the farm “safety net” stemming from the
1996 farm legislation have been brought to the forefront
by the drought in a few southern states and the low
grain prices. These concerns may have further tempered buyers’ optimism, despite the fact that subsidy

Percent change in dollar value of “good” farmland
XII

Top:
April 1, 1998 to July 1, 1998
Bottom: July 1, 1997 to July 1, 1998

VI
+2
+9

April 1, 1998
to
July 1, 1998
Illinois
Indiana
Iowa
Michigan
Wisconsin
Seventh District

July 1, 1997
to
July 1, 1998

0
+1
–1
+2
+2
0

+7
+11
+7
+10
+10
+8

II

I
+1
+6

+1
+8

+2
+7
V
–3
III +1

*
VII
XIV

+2
+11

IV

*

X
+2
+12 VIII *

–2
+11
–2
+6

XI
0
+5

XVI
XVII

*Insufficient response.

0
+10

XV

IX

+1
+10

*

payments are still being made and will continue
through 2002. In addition, recent media reports of expected rail transportation problems this fall and the
specter of grain stored on the ground have also dimmed
expectations. Furthermore, the possibility that a significant amount of corn will be released from the government loan program this fall suggests that there
may be even more pressure on corn prices in the near
term. Reflecting this environment, fewer District agricultural bankers expect gains in farmland values in
the near future. Only 16 percent anticipate an upward
trend in the third quarter, about half the number of
three months earlier. Two thirds of the respondents
believe that farmland values will be flat.
The changing outlook did not diminish the demand for new nonreal estate farm loans during the
second quarter. About 42 percent of the surveyed
bankers indicated that loan demand was up from the
prior year, while 15 percent stated there had been a
decline. The remaining 43 percent stated there was
no change from last year. The pattern of stronger yearover-year gains in Illinois and Iowa (relative to other
District states) continued to hold from the prior survey.
About half the respondents in these two states saw an
increase in loan demand from last year, while less than
a tenth experienced a decline. In contrast, loan demand
appeared to moderate in Indiana.
The strength in loan demand is partly attributable
to the expansion of the pork sector in District states.
A report released by the U.S. Department of Agriculture
at the end of June indicated that the pace of expansion
in hog numbers in Illinois, Indiana, and Iowa exceeded
that for the U.S. as a whole. However, part of the increase
in loan demand in District states stems from slower
repayments and an increase in requests to renew or
extend existing loans. While a large proportion of the
surveyed bankers indicated the pace of loan repayments
was steady relative to a year earlier, nearly all the rest
believed that a decline had occurred. The measure of
loan repayments (see table) came in at 74, which reflects
31 percent of the respondents who saw a decline and
4 percent who noted an increase. About two thirds
believed the rate of farm loan repayments to be unchanged from a year ago. Continuing the pattern of
the previous survey, the most significant deterioration
in loan repayments occurred in Illinois and Iowa.
Approximately half of the respondents in Iowa indicated a decline, compared to a third in Illinois. The survey also showed a stronger tendency towards requests
for loan renewals and extensions. About a third of the
bankers reported an increase, while nearly all the rest

indicated there was no change from a year earlier. The
largest increase in these requests occurred in Iowa and
Illinois. It is likely that some of this increase in extensions and renewals simply reflects the reluctance of
farmers to sell grain in the face of declining prices.
Liquidity tightened at District agricultural banks
during the second quarter. The average loan-to-deposit ratio for all respondents edged higher to reach 72.7
percent as of July 1. Among the individual District
states, the ratio ranged from a low of 65.5 percent in
Illinois to a high of 83 percent in Michigan. In four
states, the mean loan-to-deposit ratio was still below the
desired level reported by the bankers. However, lending—relative to deposits—was slightly higher than the
desired level in Michigan.
The relatively high lending levels of recent months
would normally be expected to dampen the flow of
loanable funds from commercial banks to agriculture.
However, the amount of funds available for nonreal
estate farm loans was quite stable relative to a year
earlier. Over 70 percent of the respondents indicated
that fund availability was unchanged from a year earlier, while the remainder were nearly evenly split between an increase and a decline. It may be that the
availability of funds from non-deposit sources such as
the Federal Home Loan Bank and the Federal Agriculture Mortgage Corporation may make the loan-to-deposit
ratio less meaningful as a true measure of liquidity
than in the past. There was little variation in fund
availability across District states, though funding
growth for agricultural loans appeared to be relatively
stronger in Indiana.
The interest rates charged by agricultural banks
on new farm loans as of July 1 showed little change from
three months earlier. The average rates for operating
loans and real estate loans came in at 9.54 percent and
8.52 percent, respectively. The operating loan rate was
down 18 basis points from a year earlier, while the real
estate rate was 31 basis points below the year-earlier
level. Among the individual District states, the operating
loan rate ranged from a low of 9.24 percent in Illinois
to a high of 10.26 percent in Michigan, and the real
estate loan rate ranged from a low of 8.36 percent in
Illinois and Iowa to a high of 9.24 percent in Michigan.
The adversity experienced by the farm economy
will likely be translated into problems within the
banks’ loan portfolios. Yet the seriousness of these
problems is difficult to judge at the present time. The
bankers reported that, on average, 86 percent of their
loan portfolios are experiencing no significant repay-

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
estate 1

(index)2

(index)2

(index)2

(percent)

(percent)

(percent)

(percent)

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
Oct-Dec

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

1998
Jan-Mar
Apr-June

134
127

113
102

84
74

70.6
72.7

9.52
9.54

9.51
9.55

8.50
8.52

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

ment problems. This is comparable to the 88 percent
reported last year and the 87 percent reported two
years ago. However, averages can mask a change in
the underlying distribution. Specifically, the number
of banks that cited the existence of either major or serious
repayment problems increased from a year earlier.
About 26 percent indicated that at least some of their
borrowers were experiencing major or severe repayment problems, an increase from the 20 percent that
reported such problems last year.
Commercial banks remain by far the most important providers of credit to production agriculture.
Data from the U.S. Department of Agriculture show
that commercial banks account for nearly 40 percent of
all farm lending nationally, compared to 26 percent for
the Farm Credit System (FCS). Individuals and others
account for 23 percent, while life insurance companies
hold 6 percent of farm loan volume. Though the FCS
maintains a small lead in market share over commercial banks in real estate lending, the banks more than
make up for this with approximately half of the nonreal
estate farm loan volume.
Despite the strength of commercial banks in farm
lending, the surveyed banks indicated that the District
farm loan market is very competitive. Half the bankers

indicated that the FCS increased its mortgage lending
during the second quarter—relative to normal—while
over a third stated the FCS had increased its operating
lending. Very few respondents indicated the FCS had
reduced its lending activity. A large proportion of the
respondents stated that input suppliers increased their
extension of credit to farmers as well. Finally, a modest
increase in the activity of life insurance companies
was also noted.
Mike A. Singer
AgLetter (ISSN 1080-8639) is published quarterly by the Research
Department of the Federal Reserve Bank of Chicago. It is prepared by 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:
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Federal Reserve Bank of Chicago
P.O. Box 834
Chicago, IL 60690-0834
Tel. no. 312-322-5111
Fax no. 312-322-5515
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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.)

July
July
July
July
July
July
July
July
July
July
July

102
107
2.11
88.60
6.13
2.57
96
36.70
60.70
14.30
58.3

0.0
0.0
–7.5
–3.5
–0.3
–7.2
–2.0
–14.8
–5.9
2.1
–2.8

–5
–6
–13
–10
–18
–20
–3
–39
–7
18
–11

–14
–21
–52
–4
–20
–46
–6
–38
–2
–7
–16

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

July
July

163
161

0.1
0.2

2
2

4
5

June 1
June 1
June 1
June
June
July

3,039
593
723
2.25
1.44
11.3

N.A.
N.A.
N.A.
5.9
1.7
–0.9

22
19
63
5
10
–1

77
–5
92
3
20
3

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

April
April
April
April

14,404
6,864
7,465
75

–9.3
–3.2
–14.5
44.2

–3
–1
–5
168

1
0
2
36

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

May
May
May
May

3,928
113
28
70

–7.6
6.9
–23.6
5.5

–10
–8
–32
40

–19
–43
–34
–13

July
July
July
July

6,918
4,381
2,537
938

–9.8
–21.4
20.7
2.2

26
11
64
8

55
30
130
77

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.)

Farm machinery sales (units)
Tractors, over 40 HP
40 to 100 HP
100 HP or more
Combines
N.A. Not applicable
*20 selected states.
**Includes net CCC loans.

AgLetter is printed on recycled paper
using soy-based inks

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Chicago, Illinois 60690-0834
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