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FEDERAL RESERVE BANK OF CH ISSN 0002 - 1512 \I‘C. es (, . CREDIVO4ZITIONS AT DISTRICT AGRICULing the fourth quarter of 1982 were TURAL BANK characterized by continuing soft demand for loans and ample availability of funds for lending. The January 1 survey of agricultural banks in the Seventh Federal Reserve District indicated that interest rates on farm loans edged lower in the fourth quarter, as did loan-todeposit ratios. Farm loan repayment rates improved somewhat, but remained at relatively low levels. February 18, 1983 Gj •• • A sharp rise in bank liquidity highlights the latest survey, as reflected in both the loan-to-deposit ratio and an index of availability of funds for lending. The loan-todeposit ratio at the end of the fourth quarter was 55.2 percent (see table on page 2). This was down seasonally from the previous quarter, 2.9 percentage points below a year ago, and down significantly from the peak of three years ago. Among District states, average loan-to-deposit ratios ranged from 49.3 percent in Illinois to 63.4 percent in Wisconsin. The biggest declines in average loan-todeposit ratios occurred among agricultural banks in Illinois and Michigan. Not only were loan-to-deposit ratios down from earlier periods, but almost 70 percent of the rural bankers responding to the survey viewed their ratios at the end of the fourth quarter as being lower than desired, while only about a tenth indicated that they were higher than desired. The improvement in liquidity was also evident in the measure of the availability of funds for lending. In the fourth quarter, the index of fund availability, at 152, reached a new high and was up considerably from the year before. Almost 60 percent of the rural bankers reported that fund availability exceeded year-earlier levels compared with only 6 percent who reported it lower. This occurred despite only modest growth in deposits at rural banks, based on information compiled from weekly reports of loans and deposits at agricultural banks that are members of the Federal Reserve System. Total deposits at these banks rose 2 percent in the fourth • quarter, compared with an average of 3 percent historically. Relative to the year before, total deposits at agricultural banks were up 8 percent, one of the smallest annual increases in over 10 years. In addition, the availability of funds for lending was enhanced by much lower Number 1597 yields on other investments—such as Fed funds and government securities—relative to yields on loans. Liquidity also was increased by a decline in loans. At District agricultural banks that are members of the Federal Reserve System, loans outstanding declined nearly 1 percent in the fourth quarter. Historically, loans outstanding have increased in the fourth quarter by an average of nearly 3 percent. The downturn in total loans apparently reflects softer demand for all types of credit, including farm loans. In the most recent survey, the measure of farm loan demand dropped to 74,13 percentage points below the level of the previous quarter. Over twice as many banks reported lower farm loan demand in the third quarter on a year-to-year basis than reported higher loan demand. Interest rates charged by District agricultural banks on feeder cattle and farm operating loans averaged slightly above 141/4 percent at the end of the fourth quarter. This was about 11/4 percentage points below the average rate three months earlier and down 41/4 percentage points from the peak in the fall of 1981. Interest rates on farm real estate loans averaged 141/4 percent, down about 11/4 percentage points from three months ago and 31/4 percentage points below the peak of two years ago. Among District states, average rates did not vary significantly. Lower rates on farm loans partially reflect the declining cost of funds at rural banks. This decline occurred despite the introduction of new, largely unregulated deposit accounts and the resulting restructuring of deposits at rural banks. For example, commercial banks can now offer money-market deposit accounts—which have a $2,500 minimum, a limited transfer or withdrawal option, and are not subject to interest rate ceilings. Though possibly raising the cost of funds in the short run, the offering of such accounts may accelerate the decline in the cost of loanable funds as market rates continue to fall. This is because many of these accounts have shorter maturities and, therefore, roll over faster than most existing accounts at rural banks. In the latest survey, 93 percent of the rural bankers indicated that they were offering the newest ceiling-free account, the 2 Selected measures of credit conditions at Seventh District agricultural banks Loan demand Fund availability Loan repayment rates (index)2 (index)2 (index)2 Banks with loan-to-deposit ratio above desired lever Average rate on feeder cattle loansl Average loan-to-deposit (percent) (percent) (percent of banks) ratios 1978 Jan-Mar Apr-June July-Sept Oct-Dec 152 148 158 135 79 73 64 62 64 81 84 93 8.90 9.12 9.40 10.14 63.7 64.5 65.8 65.4 44 156 147 141 111 51 62 61 67 85 91 89 79 10.46 10.82 11.67 13.52 67.3 67.1 67.6 66.3 58 55 52 48 85 65 73 50 49 108 131 143 51 68 94 114 17.12 13.98 14.26 17.34 66.4 65.0 62.5 60.6 51 31 21 17 70 85 66 66 141 121 123 135 90 70 54 49 16.53 17.74 18.56 16.94 60.1 60.9 60.9 58.1 17 20 21 17 76 85 87 74 134 136 136 151 36 41 36 47 17.30 17.19 15.56 14.34 57.8 57.3 57.8 55.1 18 14 46 52 50 1979 Jan-Mar Apr-June July-Sept Oct-Dec 1980 Jan-Mar Apr-June July-Sept Oct-Dec 1981 Jan-Mar Apr-June July-Sept Oct-Dec 1982 Jan-Mar Apr-June July-Sept Oct-Dec 15 11 At end of period. 1 2 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. money-market deposit account. The same percentage planned to offer the Super-NOW accounts in January. Banks offering the money-market deposit accounts indicated that, on average, about 80 percent of the funds in those accounts have been transferred from other 131/4 percent for farm ownership loans. Rates charged by the CCC on regular, reserve, and storage facility loans were 91/8 percent at the end of the year, and have since fallen to 81/4 percent. deposit accounts in their banks. As the cost of funds becomes more responsive to market rates as a conse- Farm loan repayment rates improved marginally. At 47, the measure of loan repayment rates was above levels quence of the deregulation and restructuring of accounts, loan rates at rural banks may be less sticky than they have been in the past. earlier in the year. Renewals and extensions of farm loans slowed somewhat. The measure of renewals and extensions, at 160, was improved from levels in the previous three quarters of this year. Rural banks remained at a disadvantage with respect to interest rates charged on farm loans by other lenders. At the end of the fourth quarter, rates charged by production credit associations-banks' major competitor for nonreal estate loans-averaged about 131/2 percent. Federal land bank rates on farm mortgages averaged 12 percent. Rates charged by the Farmers Home Administration were 111/2 percent for farm operating loans and Trends in farm loan repayment rates and in renewals and extensions mirror conditions in the agricultural sector. Crop prices declined sharply in 1982, averaging a tenth below the year-earlier level. Although livestock prices were up from the year before, most producers were coming off two years of sustained losses. For the year, net farm income after inventory adjustment was 3 estimated at $20.4 billion, down nearly a fifth from a year ago and nearly 40 percent below the near-record level of 1979. • I II Some of the recent improvement in farm loan repayment rates and the slowing in renewals and extensions may be tied to use of CCC price support loans by crop farmers. In the last quarter of 1982, CCC commodity loans increased by about $5 billion, indicating that despite low participation in the 1982 loan programs more crops may be going under loan than was the case a year ago. The 1983 programs also provided for advances on both deficiency and acreage diversion payments in the fourth quarter. As a result, the CCC provided cash to farmers to cover operating expenses or pay down loans with other lenders during this period. Activity at other commercial farm lenders slowed considerably last year. Farm loans made by production credit associations in the fourth quarter were down 8 percent from the year before. This was the fifth consecutive quarterly decline, making last year an unprecedented departure from the previous 25 years of growth. As a result, loans outstanding at PCAs at the end of 1982 were down 4 percent from the year earlier and at their lowest level in two years. • Similarly, lending activity in the farm mortgage arket was sharply lower last year. In the fourth quarter, new money loaned by federal land banks was less than half the year-earlier level and the smallest amount since the fourth quarter of 1976. With the significant slowdown in new lending, the year-to-year gain in the portfolio of loans held by FLBs narrowed from 21 percent in 1981 to only 8 percent last year. In addition, acquisitions of farm mortgages by life insurance companies in October and November were down a fourth from the year earlier. For the first 11 months of 1982, farm mortgages acquired by life insurance companies were half the low year-earlier level. ion • Lending activity at the Farmers Home Administration also was down in the fourth quarter. Only 7,700 loans were made in the fourth quarter in comparison with 10,800 a year ago. However, loans made under the Farm Ownership Loan Program in the fourth quarter were up 3 percent from the same period a year ago, while loans made under the Farm Operating Loan Program increased a fifth. Lending under the FmHA's Emergency (Disaster) Loan Program in the fourth quarter was off two-thirds from the year earlier. The net result was at loans outstanding at the FmHA at the end of 1982 were up only 3 percent from the year-earlier level. For fiscal 1983 (October-September), the FmHA farm program lending is expected to total $4.3 billion—$1.5 billion for the Farm Operating Loan Program, $775 million for the Farm Ownership Loan Program, and $2 billion for the Emergency (Disaster) Loan Program. This compares with $4.1 billion in fiscal 1982—$1.3 billion for the Farm Operating Loan Program, $660 million for the Farm Ownership Loan Program, and $2.2 billion for the Emergency (Disaster) Loan Program. The outlook for agricultural credit conditions depends on a number of factors including interest rate trends, future commodity prices, farm income prospects, and spending patterns of farmers. Market rates of interest have been fairly stable in recent weeks. If rates continue to hold at current levels or decline further, rates on bank loans to farmers will no doubt trend lower. The recent rise in prices of some commodities may help to alleviate some of the concern over farm income prospects for 1983. Particularly for corn, the price rise has provided farmers with some unexpected opportunities. For the year, corn prices will average higher than in 1982 if participation in the government programs is heavy or export demand strengthens. Since meat production in 1983 is expected to hold close to year-earlier levels, livestock prices may not average above yearearlier levels. Lower production expenses are likely to be recorded in 1983. Along with some break in prices of inputs, the amounts of inputs used in 1983 are expected to be down roughly in proportion to the acreage withdrawn from production under the farm programs. The first estimate of planting intentions indicated that corn plantings may be down 15 percent and soybeans down 5 percent from last year. Consequently, purchases of fertilizer, seed, chemicals, and fuel could be comparably lower. Overall it seems possible that net farm income, though likely to be low for the fourth straight year, may rise above 1982's $20.4 billion. Borrowing to finance operating capital may not register its normal spring growth if farmers comply with the acreage reduction programs and input use is trimmed. Farmers who participate in PIK can simply avoid the expenses of planting and the risks of production on those PIK acres. Borrowings by livestock producers could strengthen in the near term if more cattle continue to move into feedlots and hog production expands. Nonetheless, rural bankers expect demand for operating loans to pick up in the months ahead, perhaps as a result of reduced lending by other commercial farm lenders. But they expect the demand for feeder cattle loans, dairy loans, crop storage loans, farm machinery loans, and farm real estate loans to trail the year-earlier level. Jeffrey L. Miller 4 Selected agricultural economic developments Percent change from Value Prior period Year ago Unit Latest period Index of prices received by farmers Crops Livestock 1977=100 1977=100 1977=100 January January January 128 113 142 + 0.8 - 0.9 + 2.2 - Index of prices paid by farmers Production items 1977=100 1977=100 January January 157 150 + 0.6 + 1.4 +2 +2 Producer price index* (finished goods) Foods Processed foods and feeds Agricultural chemicals Agricultural machinery and equipment 1967=100 1967=100 1967=100 1967=100 1967=100 January January January January January 284 258 252 283 321 - 0.5 0 + 0.5 - 1.2 + 0.5 +2 +1 +2 - 4 +7 Consumer price index** (all items) Food at home 1967=100 1967=100 December December 292 278 - 0.4 - 0.2 +4 +2 dol. per bu. dol. per bu. dol. per bu. dol. per cwt. dol. per bu. dol. per cwt. dol. per cwt. dol. per cwt. cents per lb. cents per doz. January January January January January January January January January January 2.32 5.56 3.54 4.14 1.47 59.20 54.90 13.90 25.8 52.6 + 2.7 + 1.8 + 0.9 + 4.3 + 2.1 + 3.1 + 2.4 0 + 6.2 - 5.1 - 9 - 9 - 6 +1 -25 +2 +26 0 - 5 -17 bil. dol. bil. dol. bil. dol. 4th Quarter 4th Quarter January 141 24 2,587 - 1.8 +35.8 + 0.4 - 1 - 8 +6 Subject Cash prices received by farmers Corn Soybeans Wheat Sorghum Oats Steers and heifers Hogs Milk, all sold to plants Broilers Eggs Income (seasonally adjusted annual rate) Cash receipts from farm marketings Net farm income Nonagricultural personal income 3 -10 +4 *Formerly called wholesale price index. **For all urban consumers. AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Public Information Center P.O. Box 834 Chicago, Illinois 60690 FIRST-CLASS MAIL U.S. POSTAGE PAID Chicago, Permit No. 1942 Tel. no. (312) 322-5112 RGEOI HERD-,DEFT,OF EGRIC,'ECON. • INSTITUTE OF FIGRICULTURE UNIUESITY OF MINNESOTA ST.RAUL,MN SE 1 0 1
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