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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1905 August 1999 AgLetter FARMLAND VALUES AND CREDIT CONDITIONS either no change or a decline in farmland values during the same period. But no clear trend is suggested by the quarterly readings for Indiana—the last four quarters alternated between an increase and a decline. However, the data for the twelve months ending July 1 shows Indiana firmly aligned with Illinois and Iowa, with each of these three states showing a decline in farmland values (see table). A survey of over 365 agricultural bankers indicated that farmland values rose one percent during the second quarter (April 1 to July 1), the first District-wide increase reported since early 1998. The bankers also reported that farmland values—on average—were unchanged for the twelve-month period ending July 1. In addition, credit conditions failed to improve, with bankers again reporting slower farm loan repayments and an increase in the number of borrower requests for loan renewals and extensions. The bankers also indicated they stepped up their own requests for additional loan collateral during the second quarter, and that there appeared to be a general decline in the overall quality of farm loan portfolios relative to a year earlier. The weakness in farmland values seen in some areas is often attributed to a deteriorating picture for farm income. Therefore, recent projections of net income to the farm sector by the U.S. Department of Agriculture (USDA) may have come as a surprise to many Midwest farmers and lenders. At $53.7 billion, net cash income for 1999 is projected to register a rather modest decline of 2 percent from last year. But closer examination reveals that, for the farm sector as a whole, an increase in cash receipts to producers of vegetables, fruits, and nursery crops will provide a substantial offset to sharp declines in receipts from sales of corn, soybeans, and hogs (as well as wheat, cotton, and tobacco). In addition, the current income projection includes direct government payments to farmers of $16.6 billion, an increase of 36% from last year and the largest since 1987. Direct payments could increase The last several surveys show individual District states following a divergent trend, with farmland values in Michigan and Wisconsin exhibiting greater strength over time than in the other three states. Reflecting the relatively better performance of the local farm economies, the respondents in Michigan and Wisconsin reported an increase in farmland values in each of the last six quarters. In contrast, the bankers in Illinois and Iowa reported Percent change in dollar value of “good” farmland XII Top: April 1, 1999 to July 1, 1999 Bottom: July 1, 1998 to July 1, 1999 Illinois Indiana Iowa Michigan Wisconsin Seventh District VI 0 +9 April 1, 1999 to July 1, 1999 July 1, 1998 to July 1, 1999 –1 +3 –1 +3 +2 +1 –7 –4 –3 +10 +7 0 II I –1 –5 0 –3 –1 –9 V 0 III +2 * VII XIV +2 +8 IV * X +1 –4 VIII * 0 +1 +1 –1 XI –2 –11 XVI XVII *Insufficient response. * XV IX +3 –8 * further, as the U.S. Senate recently passed legislation providing additional aid to farmers; the House is expected to consider this matter in September. The poor income prospects for District farmers are typically attributed to low prices that stem from large meat and grain supplies and weakened foreign demand. Though USDA data indicate a liquidation of hog inventories is under way, the decline is not as large as many had hoped or expected. In addition, while there continue to be reports of many smaller hog producers leaving the industry, there is also speculation that several large producers are expanding. Moreover, current projections call for a large fall harvest (despite dry weather in several areas), which has helped keep a lid on grain prices. Weaker export sales are also tied to lower commodity prices. The value of U.S. agricultural exports (which reflects both price and quantity) are down not only to Asia, but to most regions of the world as well. For example, the value of U.S. agricultural exports to the European Union registered a year-over-year decline of 20 percent during the first eight months of the current fiscal year. The trade situation with the European Union remains a primary concern due to the refusal of its members to allow imports of hormone-fed beef and their attempts to ratchet up concern regarding the safety of products containing genetically-modified material such as herbicide-resistant or pest-resistant grain (and because the region accounts for 15% of U.S. agricultural exports). The outlook for farm income in the District goes hand in hand with weaker farm credit conditions. The measure of demand for nonreal estate farm loans for the spring quarter came in at 115, down from three months earlier. Furthermore, the numbers behind the current measure show a somewhat mixed picture. The loan demand index reflects the 36 percent of the respondents that indicated demand was up, less the 21 percent that stated there was a decline. A larger segment—43 percent— believed there was no change from a year ago. The weaker growth in loan demand represents a decline in farm equipment purchases as well as some additional oldfashioned “belt-tightening” by District farmers. The decline in the demand for new farm equipment is reflected in unit sales for farm tractors and combines. During the first half of the year, farm tractor sales were off 17 percent from last year, nationwide, while combine sales were down nearly 50 percent. The greatest impetus to loan demand at this point probably stems from farmers’ inability to self-finance their operations to the same degree as in the past due to cash flow problems caused by low commodity prices. Quarterly District farm loan rates percent 13 11 Farm operating 9 Farm real estate 7 1988 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 Not surprisingly, District farmers continue to struggle with loan repayments. The index of loan repayments for the second quarter came in below 100 (suggesting an overall decline relative to the prior year) for the ninth consecutive quarter. At 51, the index reflects the 3 percent of the respondents that stated repayments were up from a year ago, less the 52 percent that indicated a decline. Approximately 45 percent indicated there had been no change. Again, the greatest difficulty with loan repayments appeared to occur in Illinois, Indiana, and Iowa, the three District states that are relatively more dependent on corn, soybeans, and hogs. In turn, the problem with loan repayments led to an increase in the number of borrowers requesting loan renewals and extensions. There has also been a rise in the number of lender requests for additional collateral and Farm Service Agency loan guarantees. The survey also asked the bankers to assign shares of their farm loan portfolio to four repayment classifications. The categories were 1) no significant repayment problems, 2) minor problems that can be remedied fairly easily, 3) major problems requiring more collateral and/ or long-term workouts, and 4) severe problems likely to result in loan losses and/or require forced sale of borrower’s assets. For the District as a whole, 78 percent fell into the first category while 14 percent were in the second category. About 6 percent and 2 percent were assigned to the major and severe problem categories, respectively. By these measures, loan quality was down somewhat relative to a year ago, but very similar to that reported at the beginning of this year. The availability of funds for agricultural lending was rather steady, with nearly three quarters of the respondents indicating that funding was similar to last year. In addition, the average loan-to-deposit ratio reported by 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) 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 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 120 115 119 107 40 51 69.9 71.7 9.03 9.11 9.01 9.08 8.06 8.18 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 the bankers registered its typical seasonal increase during the second quarter to come in near 71.7 percent at mid-year. In general, bankers expressed a willingness to increase lending levels further, except in Michigan, where the actual loan-to-deposit ratio was slightly above the desired ratio. In addition, the average interest rates charged on new farm loans as of July 1 rose slightly from three months earlier. The operating loan rate for the District came in at 9.11 percent, up slightly from three months earlier, but still below a year ago. The average farm real estate loan rate (8.18 percent) followed a similar pattern. Among the individual District states, the operating loan rate ranged from a low of 8.81 percent in Illinois to a high of 9.67 percent in Michigan, while the farm real estate loan rate ranged from a low of 8.02 percent in Illinois and Iowa to a high of 8.71 percent in Michigan. Traditionally, the primary lenders to Midwest agriculture have been commercial banks, the Farm Credit System (FCS), and life insurance companies. In recent years, the competitive landscape has been altered by merchants, manufacturers, and other input suppliers that have made serious inroads in providing operating credit to farmers. About 60 percent of the respondents perceived that this latter group increased their lending to farmers (relative to a year earlier) during the first half of the year, while very few saw a decline. Although the response was not as strong, the bankers generally saw themselves and the FCS holding steady or making yearover-year gains in the number of farm operating loans extended to farmers. The situation for commercial banks, however, was clearly different with respect to farm mortgage lending. The responses suggest the bankers perceive themselves and insurance companies to be losing ground in this area, while the FCS increased the number of farm mortgage loans made relative to a year earlier. 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 94 93 1.65 78.40 4.04 2.15 94 31.80 64.60 13.60 57.3 –4.1 –7.0 –16.2 –4.0 –9.0 –14.0 –1.1 –7.8 –3.1 3.8 3.6 –8 –13 –25 –12 –34 –16 –2 –15 6 –4 –2 –12 –18 –32 –20 –46 –33 –5 –47 –1 12 –13 Consumer prices (index, 1982–84=100) Food July July 167 164 0.3 0.1 2 2 4 4 June 1 June 1 June 1 June June July 3,616 850 945 2.32 1.58 11.6 N.A. N.A. N.A. 7.9 11.6 –1.2 19 43 31 3 10 2 45 70 113 9 21 2 Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments April April April April 13,500 6,114 6,820 566 –13.6 –2.1 –21.7 –14.8 –6 –13 –6 N.A. –9 –11 –13 N.A. Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) May May May May 3,649 151 38 87 –5.2 –12.5 –27.8 –2.5 –7 34 37 25 –16 23 –7 75 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines July July July July 5,628 4,537 1,091 355 –17.0 –19.8 –2.9 –18.6 –18 5 –57 –62 2 15 –30 –59 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 on recycled paper 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 PERMIT NO. 1942 AgLetter CHICAGO, ILLINOIS U.S. POSTAGE PAID ZIP + 4 BARCODED FIRST-CLASS MAIL PRESORTED
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