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 1914

November 2001

AgLetter
FARMLAND VALUES AND CREDIT CONDITIONS

and at the end of the third quarter were at their lowest
levels in more than 25 years. Finally, bankers indicated that
they expect the incidence of forced sale or liquidation of
farm assets by financially stressed farmers during the next
three to six months to be less than was the case a year ago.

Summary
Farmland values in the Seventh Federal Reserve District
increased a little less than 1 percent, on average, between
the end of June 2001 and the end of September. Data provided by 408 banks that responded to the Chicago Fed’s
quarterly survey of farmland values and credit conditions
also indicated that as of the end of the third quarter the
value of “good” farmland had increased by nearly 5 percent, relative to a year ago. Both the quarter-to-quarter and
year-ago-quarter changes were similar to those reported
in the five previous surveys.

Farmland values
Farmland values in the District continued to increase in
the third quarter with the District average up about 1 percent from the previous quarter and up 5 percent from a
year ago. As one would expect, however, given the agricultural diversity and the mix of land-use, substantial variability in price changes was reported across the region.
During recent quarters, bankers in Illinois consistently reported the weakest farmland market among the five
states. The October survey indicated this pattern continued. Respondents in Illinois reported a 1 percent decline
in farmland values, on average, from the second quarter.
On a year ago basis, prices were reported up 2 percent.

Credit conditions, on balance, improved during
the third quarter according to the survey respondents.
Although the bankers reported a slight increase in their
requirements for collateral on agricultural loans relative
to a year ago, they also reported that the rate of loan repayment increased and that farmers’ requests for loan
renewals or extensions decreased. The respondents also
indicated that the overall demand for agricultural loans
decreased and the availability of funds to banks increased.
Interest rates on farm related loans continued to decline

Bankers in Michigan also reported a decline in farmland prices in the most recent period, down 2 percent, in
contrast with a sharp increase relative to a year ago, up
8 percent. While the broad disparity in the Michigan

Percent change in dollar value of “good” farmland
XII

Top:
July 1, 2001 to October 1, 2001
Bottom: October 1, 2000 to October 1, 2001
July 1, 2001
to
October 1, 2001
Illinois
Indiana
Iowa
Michigan
Wisconsin
Seventh District

–1
+1
+2
–2
+1
+1

October 1, 2000
to
October 1, 2001
+2
+5
+5
+8
+6
+5

VI
+3
+6
II

I
+2
+4

+3
+8

0
+3
V
III

*Insufficient response.

VII
XIV

0
+6

IV

–7
+2

X
–1
+6 VIII *

+3
+4

+2
+5

*

–1
–1

+1
+4

XV

IX
XI
–1
+1

XVI
+1
+6

shorter-term and longer-term data is somewhat problematic, climatic and land-use developments in that state may
provide some insight into that market. In the shorter-term,
Michigan agriculture suffered severe drought conditions
during the 2001 crop season. (Such conditions tend to locally depress farmland prices, a pattern observed in the western and southern portions of Illinois and Iowa in recent
years.) In the longer term, Michigan’s respondent bankers (and Wisconsin bankers) have repeatedly noted in recent years the upward price pressure on farmland values
that stem from nonagricultural demand for farmland—
responses in the latest survey continued that pattern.
Elsewhere in the District, the third quarter change
in farmland values (relative to the second quarter) generally ranged from up 1 percent to up 2 percent, while the
change relative to the third quarter of 2000 ranged between
up 5 percent and up 6 percent. (Ranges within states were
broader—see map.) However, bankers’ expectations of
the fourth-quarter trend in farmland prices suggested some
softening in the land market. Overall, nearly twice as many
respondents in the District thought farmland values would
decline during the last quarter of the year (relative to a
year ago) than those who expected an increase. This expectation was most prevalent in Illinois where less than
1 percent of the bankers expected a fourth-quarter increase,
against 15 percent who thought farmland prices would
decline (the remainder expected no change). A similar
pattern, although less pronounced, was observed in the
responses of Iowa bankers. Respondents in Indiana and
Michigan were about evenly split on this issue.
Wisconsin bankers leaned toward an expectation
of higher farmland values, as they looked forward three
months. Their modestly contrarian outlook likely reflected the marked improvement in the financial condition of
the dairy industry during 2001, which, no doubt, contributed to the generally improved agricultural credit conditions Wisconsin bankers reported.
Credit conditions in the District
Credit conditions reported in the October survey were generally more favorable than has been the case for some time.
This was reflected in several measures. Bankers reported,
for example, that on average the rate of loan repayment
improved substantially. A summary measure of that indicator rose to its highest level since the fourth quarter of
1997. In addition, farmers’ requests for loan renewals or
extensions of existing loans were at their lowest level
since the fourth quarter of 1997. For the District overall,
an index that reflects the proportion of bankers who
observed an increase in loan demand (relative to a year

Quarterly District farm loan interest rates
percent
13

11

Farm
operating
9

Farm real
estate
7
1990

’92

’94

’96

’98

’00

’02

ago) as compared to those who observed a decrease, declined sharply in the latest survey—to the lowest level in
more than ten years. At the same time, bankers reported
that the availability of funds increased sharply. The index for this measure rose to its highest level since 1993.
Interest rates on farm related loans continued their recent downward trend. Since peaking in the second quarter
of 2000, the District average rate on real estate loans declined 174 basis points to 7.47 percent at the end of the third
quarter 2001. Over the same period, the average rate on
farm operating loans dropped 242 basis points to 8.01 percent. In turn, the interest rate differential/spread between
operating and real estate loans continued to narrow. From
its recent peak in the second quarter of 2000, the differential
narrowed by 68 basis points, standing at 54 basis points at
the end of the third quarter 2001. This constituted the smallest differential recorded since the end of 1994. Narrowing
of the spread may reflect a reduction in the risk premium
on less-well-secured operating loans and represents another
indication of improved credit conditions in this market.
Having noted an improvement in credit conditions
in the District overall, it remains the case that a larger proportion of the respondent bankers reported a “lower” rate
of loan repayment than the proportion who reported a
“higher” rate of loan repayment (see footnote 2 in the table
on page 3). Likewise, a larger proportion of bankers reported “higher” loan extensions or renewals than those
who reported “lower” extensions or renewals. Thus, even
with improving credit conditions, it is not surprising that
a substantial proportion of District’s reporting bankers (22
percent) noted that they required higher levels of collateral on agricultural loans than was the case a year earlier.
Looking forward
In addition to obtaining information about the present state
of the agricultural credit market, the survey also asked the

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
Oct-Dec.

121
109
106
105

95
76
82
92

77
72
77
81

72.9
75.5
76.9
74.9

9.78
10.43
10.17
9.92

9.72
10.14
10.14
9.90

8.89
9.21
9.18
8.90

2001
Jan-Mar
Apr-June
July-Sept

118
106
91

101
109
127

67
73
86

75.0
75.1
74.9

9.16
8.60
8.01

9.17
8.58
8.07

8.23
7.91
7.47

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

bankers to indicate their short-term expectations for the
likely pattern of lending activity. The frame of reference
was for fourth quarter 2001 relative to fourth quarter 2000.
For the District overall, 23 percent of the respondents expected lower demand for all non-real-estate loans,
and 18 percent thought they would experience increased
demand. Operating loans were the one category that reported a pattern that was contrary to that of the total. For
such loans, 27 percent of the bankers expected increased
lending while only 13 percent expected a decline. The most
dramatic of the non-real-estate farm loan categories continued to be the depressed expectations for new loans on
machinery purchases. More than 42 percent of the respondents expected lower machinery loans. Only 11 percent
of the bankers indicated they expect an increase in machinery loans in the fourth quarter. Given these responses,
the sluggish state of the agricultural machinery industry
should not be a surprise.
Despite the improvement in credit conditions for
agriculture, lenders expect to continue to increase their
reliance on loan guarantees. Thirty percent of the bankers indicated they intend to rely more heavily on the
USDA’s Farm Service Agency (FSA) farm loan guarantees during the October to December period than they did
during the same period a year ago.1
Finally, District bankers continued to expect a weakening in real estate loan demand by farmers. Thirty

percent of the respondents expected that farmers’ demand
would be lower in the fourth quarter than a year ago while
only 15 percent expected it would be higher. However,
41 percent of the bankers expected demand by non-farm
investors to be higher in the fourth quarter while 23 percent of the respondents expected it would decline.
Jack L. Hervey
Senior Economist
1
FSA guarantees apply to ownership and operating loans to farmers
who do not meet the standards of conventional lenders. Guarantees
may apply up to 90 percent of the loan principal, and lenders may resell the guaranteed portion in a secondary market.

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
AgLetter is also available on the World Wide Web at
http://www.chicagofed.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

95
87
1.79
99.40
4.10
2.86
106
41.40
70.80
16.20
62.6

–9.5
–13.9
–6.3
0.8
–9.5
0.4
–3.6
–9.4
–1.8
–4.7
10.4

2
–4
3
17
–8
7
9
–1
0
30
–6

4
0
6
31
–8
11
10
19
1
9
19

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

October
October

178
175

–0.3
0.5

2
3

6
6

September 1
September 1
September 1
October
October
October

1,899
248
2,155
2.39
1.84
11.8

N.A.
N.A.
N.A.
12.6
21.5
3.5

11
–14
–8
2
7
0

6
–29
–12
5
8
2

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

August
August
August
August

15,390
7,598
7,792
N.A

–10.6
–0.3
–18.8
N.A.

–4
4
–11
N.A

0
6
–5
N.A

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

August
August
August
August

4,468
220
43
92

13.4
20.2
31.1
39.7

5
17
–26
–14

13
19
–25
–18

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

October
October
October
October

7,588
5,006
2,582
821

37.7
14.5
126.3
–10.1

1
–4
12
–2

26
28
22
–9

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.)

N.A. Not applicable
*20 selected states.
**Includes net CCC loans.
AgLetter is printed 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

PERMIT 1942
CHICAGO, IL
US POSTAGE PAID
FIRST CLASS MAIL
PRESORTED

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