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