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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1873 February 1996 AgLetter 7.5 percent, while Michigan recorded the smallest gain at somewhat over 1 percent. The change in farmland values in each of the other three District states came in near 5 percent for the year. FARMLAND VALUES AND CREDIT CONDITIONS Survey responses from about 400 agricultural bankers show that farmland values in the Seventh Federal Reserve District closed out 1995 by rising 2 percent during the final quarter. For the year, District farmland values were up 5 percent. This marked the ninth consecutive annual gain in District farmland values, with the yearly increases also averaging about 5 percent. The survey also showed that interest rates on new farm operating and real estate loans declined during the fourth quarter. Gains in loan demand moderated while the availability of funds for agriculture lending improved. Furthermore, it appears that relatively strong grain prices have boosted the pace of loan repayments, and will spur another increase in spending by farmers on machinery and equipment this year. Looking ahead, a surprisingly large proportion of respondents expect farmland values to increase during the first quarter of 1996. Nearly 60 percent stated they believe farmland values will post a quarterly gain, while nearly all the remainder anticipate little change. The proportion of respondents anticipating an increase was the largest to come out of our quarterly surveys of District bankers since the mid 1960s. However, the outlook was considerably more moderate in Michigan than elsewhere in the District, as only a third of the respondents from that state foresee an increase in farmland values during the first quarter. The large proportion of bankers that look for an increase in farmland values likely stems from developments in grain markets. As a result of annual production declines and strong demand, the fourth quarter average corn price in central Illinois markets surged to the highest level since 1983 while the average soybean price was the highest since 1988. Furthermore, relatively strong fall futures prices for corn and soybeans and projections of Farmland values rose about 2 percent in each District state except Michigan during the fourth quarter of last year, according to the surveyed bankers. The average rise in Michigan came to a more moderate 1 percent, reversing the slight downward drift in farmland values recorded during the second and third quarters. The variability among District states for all of 1995 was much broader. Illinois registered the largest annual gain at Percent change in dollar value of “good” farmland XII Top: October 1, 1995 to January 1, 1996 Bottom: January 1, 1995 to January 1, 1996 October 1, 1995 to January 1, 1996 Illinois Indiana Iowa Michigan Wisconsin Seventh District January 1, 1995 to January 1, 1996 +2 +2 +2 +1 +2 +2 +8 +5 +5 +1 +5 +5 VI +2 +6 II I +1 +6 +2 +3 +2 +5 V III 0 +7 VII XIV +3 +4 IV +1 +4 X +3 +7 VIII * +2 +6 *Insufficient response. * XV IX +1 +5 XI +3 +8 XVI XVII+2 +3 +4 +5 +1 +6 points below the level of three months earlier. However, it was down over 50 basis points from a year earlier. Among the individual District states, the operating loan rate ranged from a low of 9.59 percent in Illinois to a high of 10.28 percent in Michigan. The farm real estate loan rate was also lowest in Illinois (8.78 percent) and highest in Michigan (9.41 percent). Annual percentage change in Seventh District farmland values percent 14 7 0 -7 -14 1986 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 continued high levels of agricultural exports probably helped fuel the bankers expectations. The higher grain prices probably offset the smaller harvests and added to the liquidity of many District farmers. This in turn helped narrow the year-over-year gains in farm loan demand during the fourth quarter. In line with this, the loan demand index came in at 111, down from 123 the previous quarter. Among the individual District states, the strength in loan demand was more apparent in Illinois than the District as a whole. Relative to deposits, overall lending levels remain strong at District agricultural banks. The average loanto-deposit ratio registered a larger-than-normal seasonal decline, but at 64.9 percent was still above the year-earlier level. In addition, there is significant variation in the average ratios reported for the five District states. The current readings ranged from a low of 58 percent in Illinois to a high of 74 percent in Wisconsin. Yet despite these pressures, the accessibility of funds for agricultural lending improved during the fourth quarter. The fund availability index stood at 123, its highest reading in two years. This benchmark represents the 29 percent of the respondents who reported an increase in the level of funds available for agricultural lending—relative to a year earlier—versus the 6 percent that reported a decline. However, the remaining majority (nearly two thirds) believe there was little change from the prior year. The interest rates charged on new farm loans as of the end of 1995 were down from both three months and twelve months earlier. At 9.89 percent, the average farm operating loan rate was about 30 basis points below the level of three months earlier but only 10 basis points below a year earlier. The average rate charged on new farm real estate loans—8.93 percent—was also about 30 basis The rate of farm loan repayments during the fourth quarter improved considerably when compared to a year earlier. The loan repayment index came in at 119, well above recent readings and the highest level in over five years. This measure reflects the one third of the respondents that saw an improvement in the pace of agricultural loan repayments versus the 14 percent that thought repayments had slipped relative to a year earlier. The remainder—about half—stated there had been no change. Much of the improvement in the District-wide gauge of farm loan repayments was accounted for by the respondents in Illinois and Iowa. About 40 percent of the bankers in those two states indicated that repayments had improved, with a much smaller proportion indicating a decline. The pickup is likely due to higher grain and hog prices relative to a year earlier. A year ago, corn and soybean prices were pressured by record harvests and hog prices fell to a 20-year low. In comparison, the responses from the bankers in Indiana, Michigan, and Wisconsin suggested the pace of farm loan repayments in those three states was similar to a year earlier. The latest survey also asked the respondents to share their expectations regarding capital expenditures by farmers in 1996. The responses clearly indicate a positive outlook, especially for farm machinery, autos, and trucks. Over 60 percent of the surveyed bankers indicated they expect expenditures for machinery and equipment to rise relative to last year, while only a tenth foresee a decline. In comparison, half look for a pickup in spending on Quarterly District farm loan rates percent 13 11 Farm operating 9 Farm real estate 7 1986 ’88 ’90 ’92 ’94 ’96 Credit conditions at Seventh District agricultural banks Interest rates on farm loans Operating Feeder Real loans1 cattle1 estate1 Loan demand Fund availability Loan repayment rates Average loan-todeposit ratio1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 1991 Jan-Mar Apr-June July-Sept Oct-Dec 128 130 113 109 127 122 122 132 98 74 81 69 56.5 58.1 58.5 57.4 11.40 11.19 10.88 10.06 11.37 11.17 10.89 10.08 10.57 10.43 10.15 9.39 1992 Jan-Mar Apr-June July-Sept Oct-Dec 129 123 111 107 128 123 123 127 77 79 90 93 57.3 58.1 59.3 58.7 9.77 9.57 9.18 9.12 9.80 9.56 9.16 9.13 9.19 8.99 8.63 8.59 1993 Jan-Mar Apr-June July-Sept Oct-Dec 108 103 110 125 131 129 122 126 102 95 90 95 58.0 59.2 59.2 59.7 8.85 8.77 8.63 8.50 8.83 8.74 8.59 8.50 8.29 8.16 7.99 7.88 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 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 trucks and autos, whereas 10 percent anticipate a decline. In general, the bankers’ outlook towards capital spending is comparatively brighter in Illinois, Indiana, and Iowa than in Michigan or Wisconsin. In line with the outlook for capital spending, the bankers also look forward to a boost in lending for farm machinery. Nearly half expect an increase in farm machinery loans during the first quarter of 1996 relative to last year, while less than a tenth anticipate a decline. In addition, a significant share of the respondents anticipate a rise in operating loans, which will likely be spurred by an increase in planted acreage this spring as well as a relative shift towards corn acres. In addition, the absence or delay of advance farm program payments this spring and higher feed costs may well add to the need for borrowed funds. The bankers also expect modest gains in farm real estate lending. Our survey also included some questions regarding the use of debt to finance farm real estate purchases in 1995. The respondents indicated—on average—that about two thirds of farm real estate transfers involved some level of debt financing. The incidence of using debt to finance farmland acquisitions ranged from a low of 61 percent in Illinois to a high of 80 percent in Wisconsin. The bankers further noted that most of the debt-financed transfers used only the acquired property as collateral. The down payment in such instances averaged about a third of the purchase price. In situations where additional collateral was used, the loan value averaged about two thirds of the value of the collateral. Either way, District lenders maintain a similar cushion. Mike A. Singer AgLetter (ISSN 1080-8639) is published monthly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Gary L. Benjamin, economic adviser and vice president, 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 SELECTED AGRICULTURAL ECONOMIC INDICATORS Percent change from Latest period 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.) Consumer prices (index, 1982–84=100) Food Value Prior period Year ago Two years ago January January January January January January January January January January January 110 125 3.21 81.70 6.95 4.81 93 42.40 63.00 13.90 79.8 1.9 5.9 4.6 0.4 2.8 –1.4 –3.1 –4.3 –2.6 0.0 –1.5 12 21 47 –2 27 30 0 12 –12 10 29 5 14 19 –5 3 34 –5 –4 –14 2 28 154 150 –0.1 0.3 3 2 5 5 December December 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.) December 1 December 1 December 1 December December January 6,101 1,833 1,338 1.99 1.51 11.3 N.A. N.A. N.A. 4.7 –6.4 1.5 –24 –13 –10 –1 –8 0 3 18 –16 2 –3 3 Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments September September September September 16,748 9,298 7,442 8 11.1 29.7 –5.6 –68.0 7 8 6 N.A. 10 19 3 N.A. Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) November November November November 5,222 201 86 107 1.7 –4.0 10.5 –10.8 12 4 9 –5 34 38 18 –8 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines January January January January 4,974 2,731 2,243 422 –15.3 –6.6 –24.0 –59.2 12 6 19 0 19 14 26 0 N.A. Not applicable *22 selected states. **Includes net CCC loans. AgLetter is printed on recycled paper using soy-based inks Federal Reserve Bank of Chicago Public Information Center P.O. Box 834 Chicago, Illinois 60690-0834 312-322-5111 AgLetter PRESORTED FIRST-CLASS MAIL ZIP + 4 BARCODED U.S. POSTAGE PAID CHICAGO, ILLINOIS PERMIT NO. 1942