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The Agricultural Newsletter
from the Federal Reserve Bank of Chicago
Number 1910

November 2000

AgLetter
FARMLAND VALUES AND CREDIT CONDITIONS

states, following a brief acceleration in land prices in the
fourth quarter of 1999 and the first quarter of 2000. Furthermore, a divergence in the pattern of change in farmland values across the five states that reappeared in the second
quarter became more pronounced in the latest survey.

Summary
Farmland values in the Seventh District inched upward
during the third quarter of 2000, according to a survey of
368 agricultural bankers. An increase of 1%, on average,
in the third quarter (July 1-October 1) compared with a
similarly modest gain in the second quarter. On a year-toyear basis, however, farmland values were reported up 7%
from the October 1, 1999, survey. This constituted the
largest year-to-year increase since the 8% gain in the second
quarter of 1998.

During the fourth quarter 1999 and first quarter
2000 surveys, quarter-to-quarter changes in farmland values in Illinois and Iowa turned to comparatively strong
positive numbers from the declines reported for most of
1998 and 1999. However, the second quarter 2000 survey
indicated that farmland values in Illinois “weakened,”
quarter-to-quarter, to “unchanged,” on average, and in
Iowa the gains slowed to 1%. In the most recent survey,
quarter-to-quarter farmland values in Illinois remained
unchanged and Iowa farmland values slipped to “no
change.” Quarter-to-quarter gains continued in the 2% to
3% range for Indiana, Michigan, and Wisconsin. On a
year-over-year basis farmland values gains were comparatively strong in District states, ranging from 4% in Illinois
to 10% in Indiana.

Bankers reported that, on average, loan demand in
the third quarter of 2000 was a little weaker than a year
ago, but that loan-to-deposit ratios continued to increase.
Repayment patterns for non-real-estate loans stabilized
with 70% of the respondents noting that repayment rates
were about the same as a year ago. Bankers reported
some moderation in recent rapid increases in interest
rates on agricultural loans. Operating loan rates backed
off slightly, although rates on real estate increased somewhat, relative to the July 1, 2000, survey.

Many bankers noted that weakness in farmland values in some areas of the District, especially in the heart of
the Corn Belt, was attributable to continued low prices
for corn and soybeans. In addition, low milk prices were
cited frequently by respondents in dairy producing areas
as contributing to weak demand for land by farmers.

Farmland values
The October 1 survey confirmed the result of the July 1,
2000, survey that showed a slowing in the quarter-toquarter appreciation of farmland values in Seventh District

Percent change in dollar value of “good” farmland
XII

Top:
July 1, 2000 to October 1, 2000
Bottom: October 1, 1999 to October 1, 2000
July 1, 2000
to
October 1, 2000
Illinois
Indiana
Iowa
Michigan
Wisconsin
Seventh District

0
+3
0
+2
+2
+1

October 1, 1999
to
October 1, 2000
+4
+10
+6
+8
+8
+7

VI

*

+3
+5
II

I
0
+6

+1
+10

–1
+8
V
III

*Insufficient response.

XIV

+2
+11

IV

–3
+1 VIII

+1
+7

–3
0

VII

*

X

*

–1
+6

+4
+8

XV

IX
XI
+1
+3

XVI
&
XVII

+3
+12

At the same time, numerous respondents observed that
there was considerable demand for farmland for residential/commercial use near population centers and recreational use near population centers and elsewhere.

Low commodity prices
Low commodity prices were commonly cited as contributing to adverse pressure on farmers’ balance sheets.
Nonetheless, according to U.S. Department of Agriculture
(USDA) estimates, net income for the nation’s farmers is
expected to total $45.6 billion in 2000, up about 5% from
1999, which would be the highest level since 1997. And,
as many bankers observed, payments to farmers through
government support and emergency aid programs were
key to the ability of many farmers to remain current on
the service of their financial obligations. Indeed, while net
farm income (nationally) is estimated to be up $2.2 billion
in 2000, government payments to farmers are estimated
to be up $2.7 billion.
Recent data from the USDA support the gravity of
this concern. As shown in the chart, in 1999 payments
from government programs to farmers in Seventh District
states exceeded estimated net farm income in three of the
five states. For the five states in sum, government payments were equivalent to 109% of net farm income and
ranged from a high of 193% in Indiana to a low of 1% in
Wisconsin. As a number of bankers observed, many farmers are surviving on the land because of government payments, off-farm income, the diminution of their capital
stock, or some combination of the three. They are concerned about the long-term viability of this environment
for farmers and, implicitly, for rural banking operations.

Credit conditions in the District
Credit conditions reported by agricultural bankers in the
District suggest that low prices for agricultural commodities may be causing farmers and bankers to become more
conservative in their borrowing and lending activity in
order to moderate the risk of over-extension. For example,
only 25% of the banker respondents reported increased
demand for non-real-estate loans (relative to a year ago)
compared with 32% in the second quarter. At the same
time, the proportion of bankers that reported a reduction
in non-real-estate loan demand also declined from that
reported in the second quarter—from 23% to 19%. Thus,
the bankers that observed “no change” in non-real-estate
loan demand, relative to a year earlier, rose to 56% from
45% in the second quarter.
Interestingly, the above-noted increase in the “no
change” category from a year ago (relative to the second
quarter) carried through to other credit condition measures. Most importantly, measures of loan repayment and
loan renewals or extensions appeared to be more positively oriented in the latest survey. In particular, only 26%
reported that loan repayment rates declined, compared
with 31% in the second quarter. In addition, the proportion
of bankers who reported a higher incidence of loan renewals

Net farm income and government payments, 1999
billions of dollars
2.0
Net farm income
Government payments

1.5

1.0

0.5

0.0
Iowa

Illinois

Wisconsin

Michigan

Indiana

or extensions declined to 27% in the third quarter from
35% in the second quarter.
While data from the reporting bankers suggested
some improvement in credit conditions for the District
overall, nevertheless, the responses indicated substantial
diversity in credit conditions across the five states. Informal comments from many respondents appeared to reflect
continued distress from low milk prices in the dairy industry. Given the relative importance of the dairy industry to Wisconsin agriculture it is not surprising that credit
conditions, as reflected by the “loan repayment” and “loan
renewals or extensions” measures reported by Wisconsin
bankers, showed the least favorable conditions of the five
District states. Forty seven percent of the Wisconsin bankers
reported lower loan repayment rates, compared with a
range for the other states of 16% in Indiana to 27% in Illinois.
Similarly, the percentage of bankers facing a higher
incidence of loan renewals or extensions was 37% for
Wisconsin, compared with a range of 15% in Michigan to
29% in Illinois. To some degree this may reflect the relatively lower farm income support from government payments to Wisconsin farmers—see chart.
District bankers reported a break in the recent upward trend in interest rates on farm loans. On average,
operating loan rates declined 26 basis points to 10.17%, as
of the October 1 survey, following five consecutive quarters
of increased rates. However, the average loan rate for
farm real estate loans increased for the sixth consecutive
quarter, up 21 basis points to 9.42%. Consequently, the
rate spread between farm operating and farm real estate
loans narrowed sharply to 75 basis points in the October
1 survey from 122 basis points in the July 1 survey.

Looking ahead
In addition to responding to current loan demand conditions, bankers were asked to report on their expectations
for several categories of farm loan demand during the
fourth quarter of 2000 (relative to a year earlier). Their pattern of responses with regard to near-term outlook for nonreal-estate loan volume tended to mirror their responses
during the third quarter, but they also indicated increased

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
cattle1

Real
estate1

(index)2

(index)2

(index)2

(percent)

(percent)

(percent)

(percent)

1998
Jan-Mar
Apr-June
July-Sept
Oct-Dec

134
127
117
113

113
102
104
121

84
74
60
57

68.9
72.7
72.0
70.3

9.52
9.54
9.43
9.09

9.51
9.55
9.41
9.07

8.50
8.52
8.33
8.06

1999
Jan-Mar
Apr-June
July-Sept
Oct-Dec

120
115
109
107

119
107
94
104

40
50
63
72

69.9
71.7
72.7
72.7

9.03
9.11
9.32
9.44

9.01
9.08
9.28
9.41

8.06
8.18
8.42
8.59

2000
Jan-Mar
Apr-June
July-Sept

121
109
106

95
76
82

77
72
77

72.9
75.5
76.9

9.78
10.43
10.17

9.72
10.14
10.14

8.89
9.21
9.42

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

stability in loan demand. For example, an unusually high
(historically) 60% of the respondents indicated that they
expected demand during the October to December period
to remain the same as in the fourth quarter of 1999. In
addition, an unusually low 24% of the bankers thought
they would face a seasonal increase in demand for nonreal-estate loans, while 16% expected a decrease in demand. Within this broad category of lending the most
volatile type of lending appeared to be for farm machinery—a category that is closely associated with the farmderived income cycle. Only 9% of the bankers reporting
expected an increase in lending for farm machinery in the
fourth quarter while 43% expected a decrease. By comparison, for example, in the third quarter of 1997, prior to
the current agricultural downturn, 36% of banker respondents expected an increase in machinery lending in the
next quarter while only 12% foresaw a decrease.
The proportion of bankers expecting increased demand for operating loans in the next quarter was only
slightly lower (35%) than in the second quarter. However,
these proportions are substantially below those reported
during the early stages of the current cycle in 1998 and
early 1999 (56% in both the fourth quarter of 1998 and the
first quarter of 1999).
Bankers were also asked to evaluate the outlook
for farm income, by enterprise, and to assess farm asset
stability during the next three to six months, as compared
to the fall and winter period of 1999-2000.
Not surprisingly, given current price levels, a large
proportion of the respondents expected farmers’ cash
receipts from field crops and dairy to be down, 55% and
61%, respectively. Only 12% and 5% of bankers, respectively, expected receipts from crops and dairy to increase.
Given the more favorable prices for fed beef and hogs, the
bankers were evenly split in their outlook for earnings by

cattle and hog farmers at one-third each for up, down,
and unchanged.
Finally, bankers remained concerned about the
financial situation of farm customers. When asked about
the expected incidence of forced liquidation of assets,
relative to a year ago, 39% of the bankers foresaw an increase. A year ago, 56% of the respondents thought asset
liquidation would increase. Also, in the October 1, 1999,
survey 60% or more of the respondents in Illinois, Indiana, and Iowa expected increased liquidations. However,
in the October 1, 2000, survey, only Wisconsin bankers
approached that level, with 58% expecting an increase in
liquidations. In the remaining four states, between 30%
and 42% of the bankers expected an increase in the
incidence of asset liquidation.
Jack L. Hervey
Senior economist
AgLetter (ISSN 1080-8639) is published quarterly by the Research
Department of the Federal Reserve Bank of Chicago. It is prepared
by Jack L. Hervey, senior economist, and members of the Bank’s
Research Department, and is distributed free of charge by the Bank’s
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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.
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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.)

October
October
October
October
October
October
October
October
October
October
October

92
89
1.74
85.20
4.36
2.70
96
43.20
69.80
12.60
68.5

–6.1
–9.2
8.1
3.0
–4.6
10.7
–2.0
2.6
1.7
–1.6
13.6

1
1
3
12
–2
5
0
24
0
–15
30

–7
–11
–9
2
–16
–3
–2
53
14
–29
3

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

October
October

174
169

0.2
0.1

3
2

6
4

September 1
September 1
September 1
September
September
October

1,715
288
2,366
2.28
1.55
11.9

N.A.
N.A.
N.A.
–6.6
–5.4
3.4

–4
–17
–3
0
–4
3

31
44
–1
4
–2
7

July
July
July
.July

15,479
6,680
8,404
396

5.7
10.3
6.5
–43.4

2
3
5
–39

–2
–11
3
N.A.

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

August
August
August
August

4,259
188
58
107

11.1
23.0
16.2
23.1

8
2
2
–4

15
37
120
8

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

October
October
October
October

7,597
5,289
2,308
846

50.3
37.9
89.6
14.5

26
35
9
–6

16
16
16
2

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

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