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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 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 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 Return service requested Federal Reserve Bank of Chicago Public Information Center P.O. 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