The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1885 February 1997 AgLetter LAND VALUES AND CREDIT CONDITIONS rise for that state was over 4 percent, capping a 15 percent gain for all of 1996. Among the other four District states, however, the fourth-quarter trend in farmland values ranged from no change (Illinois and Iowa) to up only a little over 1 percent (Michigan). The flat fourth-quarter performance indicated for both Illinois and Iowa encompassed some areas that reported declines while other areas within those states noted gains. The factors behind the divergent trends are not clear, but may possibly reflect a combination of such things as an unexpectedly good—or bad— harvest, differing assessments of the land market in light of the sharp decline in grain prices last fall, or differences in the supply of farms available for sale and/or the interests of buyers seeking to acquire farmland. Our latest survey of agricultural banks in the Seventh Federal Reserve District found that the rise in farmland values slowed in the fourth quarter while credit conditions were little changed. The nearly 400 responding banks indicated that fourth-quarter farmland trends varied considerably and, on average, rose less than 1 percent. The latest quarterly rise was less than a third of the gain reported earlier for the third quarter. Despite the slowing, strong gains in the earlier quarters boosted the rise in District farmland values for all of last year to 10 percent, double the rise of the year before. Credit conditions were little changed, with the latest measures of farm loan demand, fund availability and farm loan interest rates holding close to previous levels. However, the measure of farm loan repayment rates declined, reversing the pattern of year-over-year gains noted since the fall of 1995. The evidence of a slower rise in farmland values is also suggested by the bankers’ expectations for trends during the first quarter of this year. Less than a third of the bankers projected an uptrend in farmland values for this winter. Another 61 percent felt that land values would be steady in the first quarter. The share expecting an uptrend was only about half the share that held similar views in the four preceding quarterly surveys. Among individual District states, the share expecting a The bankers responses to the question about the current value of “good” farmland—defined as land with above-average productivity within the bank’s market area—indicate that fourth-quarter trends varied considerably. Bankers from all District portions of Indiana reported continued strong gains. The average fourth-quarter Percent change in dollar value of “good” farmland XII Top: October 1, 1996 to January 1, 1997 Bottom: January 1, 1996 to January 1, 1997 October 1, 1996 to January 1, 1997 Illinois Indiana Iowa Michigan Wisconsin Seventh District 0 +4 0 +1 +1 +1 January 1, 1996 to January 1, 1997 +8 +15 +11 +7 +6 +10 VI +1 +4 II I +4 +15 +1 +14 –1 +12 V III –5 +5 * VII +3 +9 VIII –1 +7 XIV +1 +7 IV * X * +2 +12 XI –2 +6 XVI XVII *Insufficient response. +4 +14 XV IX +4 +16 * first quarter uptrend in land values ranged widely. The proportion of bankers from Illinois, Iowa, Michigan, and Wisconsin expecting an uptrend were tightly clustered around 30 percent, while the share in Indiana, at 55 percent, was substantially higher. The underlying credit conditions portrayed by the responding bankers show a continuation of recent trends for most measures. Nevertheless, the views varied widely across the District states. The overall measure of farm loan demand for the fourth quarter was unchanged at 122 (see table on page 3). That reading represents a composite of the 36 percent of the bankers that noted loan demand was up from the same year-ago period, less the 14 percent that noted a decline. The remaining bankers felt fourth-quarter farm loan demand was unchanged from a year ago. The indicated strength in farm loan demand was centered in Illinois, Indiana, and especially Iowa. Conversely, the share of bankers in Michigan and Wisconsin that noted a decline in fourth-quarter farm loan demand slightly exceeded the share noting an increase from a year ago. The measure of the amount of funds available for making nonreal estate farm loans edged slightly lower. Nevertheless, it shows that the share of banks (19 percent) noting year-over-year improvement in fund availability still exceeds the share (9 percent) noting a decline. This pattern held for all five District states, although the margin, or net share, noting an increase was considerably smaller in Indiana and Michigan. Loan-to-deposit ratios represent a related measure that helps gauge the overall lending capacity at banks. The average loan-to-deposit ratio among the surveyed banks retreated slightly during the fourth quarter, but still held well above the year-ago level. Except for Michigan, however, actual loan-to-deposit ratios still average below the bankers’ desired ratios. The farm loan interest rates charged by the responding bankers held steady over the fourth quarter. The simple average of the reported typical rates charged on farm operating loans was 9.64 percent, virtually unchanged from three months earlier but 25 basis points (one-fourth of one percentage point) lower than a year ago. Among the five District states, the range in the average operating loan rates stretched from a low of 9.34 percent (Illinois) to a high of 10.05 percent (Michigan). The overall average rate reported for farm real estate mortgages was 8.74 percent, with a range in state averages stretching from 8.54 percent (Illinois) to 9.15 percent (Michigan). The special questions in the most recent survey focused on farm real estate transfers and the financing practices associated with those transfers. The bankers indicated that a sizable share of the farm real estate transfers are made without the use of debt financing. Among all respondents, the reported share of 1996 transfers that used debt financing averaged 71 percent. The average shares among District states clustered in a narrow range, from a low of 66 percent in Illinois to a high of 75 percent in Indiana. The typical debt-to-collateral value ratio on all debt-financed farm real estate transfers averaged 68 percent, ranging from 65 percent (Illinois and Iowa) to 73 percent (Michigan and Wisconsin) among individual District states. The typical loan-to-collateral value ratio associated with the farm mortgage loans extended by the responding banks in 1996 was very similar to the average ratio noted above for all lenders. Moreover, there was very little difference between District states in the typical ratios reported for farm mortgages made by the responding banks. However, the typical maturities on the farm mortgages made by the banks varied widely. Three-fourths of the responding banks mentioned one of four time periods as the typical maturity on their farm mortgage loans. Some 27 percent of the banks indicated that five years was the typical maturity of the farm real estate loans made by their bank in 1996. Another 23 percent indicated a typical maturity of 20 years. The third-most frequently cited (by 16 percent of the banks) maturity was three years, followed by another 10 percent of the banks that mentioned 15 years. This overall distribution of the most common maturities masks some interesting differences among District states. The typical maturities of farm real estate loans made by banks in Illinois, Michigan, and Wisconsin tend to be short. Among those three states, typical maturities of five years or less were noted by more than two-thirds of the banks (81 percent of the banks in Wisconsin). Among Iowa banks, about half noted a typical maturity of five years or less while the vast bulk of the remainder reported typical maturities of 12 to 25 years. And among Indiana’s bankers, only 18 percent reported typical maturities of five years or less while nearly 70 percent reported typical maturities of either 15 or 20 years. The reasons for the wide geographical differences in typical maturities are not clear. It may be partially tied to other loan terms that might differ, such as fixed versus variable interest rates. It could also reflect different practices among banks in funding their farm mortgages. It may also be due to differing practices with respect to holding those loans in portfolio or selling the mortgages to someone else. For example, banks that make farm loans with long maturities may be more inclined to sell those loans to life insurance companies, Farmer Mac, or Credit conditions at Seventh District agricultural banks Interest rates on farm loans 1992 Jan-Mar Apr-June July-Sept Oct-Dec 1993 Jan-Mar Apr-June July-Sept Oct-Dec 1994 Jan-Mar Apr-June July-Sept Oct-Dec 1995 Jan-Mar Apr-June July-Sept Oct-Dec 1996 Jan-Mar Apr-June July-Sept Oct-Dec Loan demand Fund availability Loan repayment rates Average loan-todeposit ratio1 Operating loans1 Feeder cattle1 Real estate1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 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 8.59 108 103 110 125 131 129 122 126 102 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 7.88 136 139 132 112 121 107 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 9.48 122 124 123 111 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 8.93 125 116 122 122 125 114 113 110 117 108 112 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 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 other lenders. However, the latter argument is partially countered by the fact that over half of all farm loans held by banks in Indiana (where farm mortgages tend to have long maturities) are secured by real estate, well above the 42 percent share among banks in other District states and the 37 percent applicable for banks nationwide. While the typical maturity of the farm real estate loans made by the surveyed banks differed considerably, the amortization (repayment) schedules on those loans were much more uniform. The two most frequently cited amortization periods were 20 years (by 59 percent of the banks) and 15 years (by 21 percent of the banks). The same two amortization periods in the same rank ordering were noted by a large majority (75 percent or more) of the banks in all five District states. In looking ahead, it appears that the bankers see considerable strength within the farm sector. But that optimism is all concentrated in Illinois, Indiana, and Iowa. Reflecting the divergent views, about a third of the bankers in Illinois, Indiana, and Iowa are expecting capital expenditures for farm real estate purchases and improvements to increase this year while only 14 percent expect a decline. In Michigan and Wisconsin, the views are decidedly reversed, with only a tenth expecting an increase while over 40 percent expect a decline. Similarly, nearly two-thirds of the bankers from Illinois, Indiana, and Iowa expect increased expenditures for farm machinery and equipment while less than a tenth project a decline. The net margin of the bankers from Michigan projecting an increase was much smaller, while the responses from Wisconsin point toward a decline in farm machinery and equipment expenditures. Gary L. Benjamin 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 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.) January January January January January January January January January January January 108 115 2.63 99.70 7.16 3.97 99 53.90 65.80 13.60 75.8 –1.8 –0.9 0.0 4.0 3.6 –2.2 –3.9 –3.9 0.5 –3.5 –13.6 0 –5 –15 25 6 –18 5 25 5 –3 –5 10 12 20 19 31 8 6 43 –8 8 22 Consumer prices (index, 1982–84=100) Food January January 159 157 0.3 0.1 3 4 6 6 December 1 December 1 December 1 December December January 6,906 1,823 1,219 1.95 1.43 11.1 N.A. N.A. N.A. –0.3 –0.1 0.4 13 –1 –9 –2 –5 0 –15 –13 –18 –3 –13 0 August August August August 16,254 8,295 7,600 359 –5.8 –3.8 –1.7 –59.8 9 6 7 1,336 16 35 –2 379 Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) November November November October 5,895 242 152 101 12.7 66.9 59.2 –21.8 13 20 78 –16 27 25 94 –4 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines January January January January 4,442 2,470 1,972 442 –12.8 –21.5 1.2 –64.9 –10 –8 –12 5 0 –4 5 5 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.) Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments N.A. Not applicable *20 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