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Agriculture
AN EIGHTH DISTRICT PERSPECTIVE
SPRING 1988

Agricultural Banks Recover After Farm Recession
After two years of abundant harvests and high farm
income, the depression in the farm sector appears to have
bottomed out and the recovery to have begun. Farm lenders
were profoundly affected by the farm crisis and, in turn,
are showing the effects of the recent improvement in the farm
sector.
Agricultural banks are a major source of commercial credit
for agriculture.1 This article documents the decline of
agricultural banks during the farm crisis and the
improvement in operating results caused by the recent upturn
in farm financial conditions in the nation and the Eighth
District.2
The farm crisis of the 1980s had its roots in the boom
years of the 1970s when farm exports, farm incomes and
farmland values all rose sharply. Expectations that food
scarcity would remain a long-term world problem drove
farmland values to ever higher values. By the early 1980s,
however, it became evident that the growth of farm exports
and farm income would fall short of earlier expectations.
Commodity prices tumbled and farmland values fell by more
than 50 percent in some regions to reflect the new, lower
income expectations. Farmers’ ability to repay loans was
hampered by lower income and lower cash flow; as a result,
the condition of agricultural banks deteriorated.

Agricultural Bank Profitability
The primary indicator of bank performance is profitability.
Table 1 indicates that profitability (for agricultural banks)
trended downward between 1980 and 1986.
From 1980 to 1986, the return on assets
declined from 1.27 percent to 0.43 percent
1Agricultural banks are banks with a ratio of farm loans to
total loans greater than the national average. The national
average ratio was 15.7 percent at the end of 1987.
2The Eighth Federal Reserve District includes Arkansas and
portions of Illinois, Indiana, Kentucky, Mississippi, Missouri
and Tennessee.




Table 1
Agricultural Banks Return on Assets
1987

1986

1985

1984

1983

1982

1981

1980

U n ite d S ta te s

.69%

.43%

.50%

.70%

.97% 1.12% 1.220/0 1.27%

E ig h th D is tric t

.83

.71

.80

.80

.95

1.09

1.05

1.15

A rk a n s a s

.94

.82

.82

.82

1.02

1.01

1.04

1.16

Illin o is

.78

.63

.63

.86

1.07

1.05

1.06

1.11

In d ia n a

.81

.70

.65

.77

.75

.70

.89

1.10
1.34

K e n tu c k y

1.03

1.03

1.10

.94

.98

.95

1.20

M is s is s ip p i

.42

.69

.90

.78

1.08

1.11

1.16

1.21

M is s o u ri

.74

.42

.26

.53

.82

1.18

1.19

1.20

1.14

1.24

1.10

.73

.84

.94

.89

1.06

T en n e sse e

in the nation and from 1.15 percent to 0.71 percent in the
District.
Although declining bank profitability can be attributed to
farmers1 inability to repay loans, slumping farmland values
also had an important influence on bank earnings. Farmland
often is pledged as collateral for farm loans, even for nonreal estate purposes such as farm machinery. When loan
concessions to farmers were not offered or were not effective,
many lenders repossessed the farmland collateral to recover
the unpaid balance of the loan. Banks often incurred losses
when they attempted to sell the repossessed land and
discovered that the farmland’s new value was less than the
outstanding loan balance.
Another effect of the farm crisis was the
reduction in farm loan demand. When
commodity prices and farm income fell,
farmers reduced debt by lowering their use
of inputs such as new machinery, fertilizers
and seeds. Less debt was needed for farm real
estate purchases because of lower farmland
prices. Furthermore, government price
support program s mandated acreage

SPRING 1988

FEDERAL RESERVE BANK OF ST. LOUIS

Table 3
Agricultural Banks with Negative Earnings and
Problem Agricultural Banks__________________

Table 2
Farm Loan Delinquency Rate
(Percent of farm loans)
1987

U n ite d S tates

4.0%

1986
6.4%

1985
8.1%

(number of banks)

1984

D is tric t

3.5

5.4

6.6

3.4

A rka n sa s

1.7

3.5

5.4

3.4

Illin o is

3.6

5.5

6.5

2.5

In d ia n a

3.7

5.1

6.0

3.1

K e n tu ck y

2.5

2.9

4.1

2 .2

M iss is s ip p i

4.6

5.0

4.1

4.2

M isso u ri

4.3

6.9

11.4

4.0

Tennessee

1.4

2.1

3.8

4.1

1985

1984

1983

1982

1981

1980

615

983

9 42

682

404

210

119

65

39

73

62

62

48

35

29

24

N e g a tiv e E a rn in g s
U.S.
D is tric t

P ro b le m A g ric u ltu ra l B anks

U.S.
D is tric t

reductions, thereby reducing farmers’ expenses and credit
needs. The volume of debt owed by farmers in 1987 was
26 percent lower than in 1982. Debt owed to banks decreased
by 2 percent over the same period. In contrast, total farm
debt grew by 71 percent from 1977 to 1982; bank debt
expanded by 33 percent over that period.
The current farm recovery began in 1986 when relatively
high livestock prices, record crop yields and high levels of
direct government payments boosted farm income beyond
expectations. Although farmland values continued to decline
in 1986, they did so at a slower rate than in previous years.
In 1987, returns to livestock producers and government
payments remained high while farmland values increased
for the first time in more than five years. Adjusted for
inflation, net farm income in 1986 and 1987 returned to the
levels that prevailed before the boom years of the 1970s.
Farmers used the improved cash flow to repay debt. Many
loans that lenders previously had judged as risky were repaid.
Loan losses at agricultural banks in the nation declined from
2.2 percent of loans in 1985 to 1.2 percent in 1987. As a
result, agricultural bank profitability in 1987 increased for
the first time since 1980, as shown in table 1.
Other indicators also point to improved performance at
agricultural banks recently. Table 2 presents the farm loan
delinquency rates of the past four years for the nation, the
District and the states. The delinquency rate includes farm
loans that are considered past-due or in nonaccrual status
expressed as a percentage of all farm loans outstanding. Loan

1986

1987

3 .7 %

149

291

338

251

141

99

6

11

18

15

18

14

performance improved in all District states.
Table 3 provides data on the number of agricultural banks
with negative earnings and the number of problem
agricultural banks. Nationwide, there were 983 agricultural
banks with losses in 1986; this fell to 615 in 1987. In the
District, the number of agricultural banks with losses fell
from 73 in 1986 to 39 in 1987. Similarly, the number of
problem banks, defined as agricultural banks with delinquent
loans in excess of the bank’s primary capital, has fallen in
the nation and the District during each of the last two years.
The farm sector recovery has led to improved performance
at agricultural banks; however, most indicators of banks’
financial health remain below the levels that prevailed before
the farm sector recession of the early 1980s. Continued
recovery in the farm sector would be needed for agricultural
bank performance to return to the levels of the 1970s.
— Kenneth C. Carraro

Agriculture—An Eighth District Perspective is a quarterly summary of agricultural conditions in the area served by the Federal
Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department,
Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.
2



FEDERAL RESERVE BANK OF ST. LOUIS

SPRING 1988

EIGHTH DISTRICT AGRICULTURAL DATA
Percent Change
Prices and Costs1
CONSUMER PRICE INDEX (% change)
Nonfood
Food

Dec.
1987

0.1%
0.4

Jan.
1988

0.4%
0.3

Feb.
1988

0.3%
-0 .3

Average
for 1987

0.4%
0.3

Year-To-Date
19882

Same Month
Year Ago

0.7%
0.0

4.1%
2.9

PRODUCTION COSTS FOR FARMERS (% change)
Agricultural machinery and equipment
Fertilizer Materials
Agricultural chemicals and chemical products
Gasoline

0.8
0.1
0.2
-6 .3

0.3
3.8
2.1
-5 .6

0.5
1.2
0.7
0.0

0.0
0.9
0.6
1.7

0.7
5.1
2.8
-5 .6

0.8
12.7
9.0
-2 .4

PRICES RECEIVED BY FARMERS (% change)
All products
Livestock
Crops

-3 .8
-1 .4
-5 .8

3.2
4.3
1.8

-0 .8
2.0
-4 .4

0.4
0.0
1.2

2.4
6.4
-2 .7

6.6
4.2
11.1

FEEDER CATTLE
Wholesale price - Kansas City ($/cwt.)

$78.90

$85.00

$83.53

$75.36

5.9

17.0

FEEDER PIGS
Wholesale price - So. Missouri ($/head)

$31.74

$37.47

$46.97

$46.69

48.0

-1 3 .0

BROILERS
Wholesale price - 12-city (<P/lb.)

39.800

43.900

N.A.

47.430

10.3

-1 5 .2

TURKEYS
Wholesale price - New York,
8-16 lb. young hens (<P/lb.)

65.300

52.700

47.100

57.710

-2 7 .9

-1 9 .5

CORN
Wholesale price - No. 2, yellow - St. Louis ($/bu.)

$ 1.97

$ 2.05

$ 2.07

$ 1.76

5.1

31.9

SOYBEANS
Wholesale price - No. 1, yellow - Central Illinois ($/bu.)

$ 5.94

$ 6.17

$ 6.21

$ 5.33

4.6

27.0

WHEAT
Wholesale price - No. 1, hard winter Kansas City ($/bu.)

$ 3.10

$ 3.20

$ 3.30

$ 2.83

6.5

17.9

LONG-GRAIN RICE
Wholesale price - Arkansas ($/cwt.)

$20.20

$21.20

$24.00

$13.89

18.8

102.0

COTTON
Average price received by U.S. farmers (<P/lb.)

64.200

66.600

N.A.

61.070

3.74

30.6

Percent Change
U.S. Exports
Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)
Rice (rough equivalent, mil. cwt.)
Cotton (thou, bales)




Dec.
1987

Jan.
1988

Feb.
1988

Average
for 1987

149.0
76.7
118.5
4.5
721.0

134.0
77.0
147.6
N.A.
733.0

N.A.
N.A.
N.A.
N.A.
N.A.

134.9
65.0
99.9
6.3
547.8

Year-To-Date
19882
-10.1%
0.4
24.6
N.A.
1.7

Same Period
Year Ago
27.6%
8.0
103.3
N.A.
-1 .9

3

Non-Real-Estate Farm Debt Outstanding1
6
5
4
3
2
Banks
Outstanding
($ millions)
United States
Eighth District4
Arkansas
Kentucky
Missouri
Tennessee

$29,088
1,980
393
379
959
242

PCAs3

Percent Change
12/86 - 12/87
12/85 - 12/87
-6 .7 %
-14 .3
-2 .0
-32.6
-10.1
-14.0

-18.1%
-20.2
-3.1
-35.3
-21.8
-25.4

Outstanding
($ millions)

Percent Change
12/86 - 12/87
12/85 - 12/87

$9,927
NA
157
166
103
197

- 11.2%
NA
-15.1
-17.1
-45.5
-6 .6

-30.3%
NA
-3 5 .9
-3 8 .5
-6 2 .0
-2 3 .8

Agricultural Bank Loan Performance5
Percent of Farm Loans
Overdue at
Agricultural Banks
12/87
United States
Eighth District4
Arkansas
Kentucky
Missouri
Tennessee

2.1%
2.3
1.4
3.7
2.3
1.0

12/86

Percent of Net
Loan Losses at
Agricultural Banks
12/85

3.4%
4.5
1.7
4.0
4.5
2.8

4.2%
5.5
5.3
4.7
6.7
6.0

12/87

12/86

12/85

1.33%
1.14
1.00
.76
1.27
1.34

2.51%
1.82
1.41
1.34
2.38
1.73

2.48%
1.98
1.36
.96
3.01
1.65

Agricultural Production Loan Interest Rate6
Banks

Eighth District Average

PCAs

2/88

2/87

10.4%

10.0%

9/87

9/86

11 . 1%

11 . 1%

1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted.
2 Percent change from December of previous year, based on the most recent month available.
3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration.
4 Includes all of AR and parts of IL, IN, KY, MO, MS and TN.
5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans.
6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements.
Source: Farm Credit Banks of St. Louis.




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