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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1915 February 2002 AgLetter FARMLAND VALUES AND CREDIT CONDITIONS Bankers reported a continued moderation in interest rates on agricultural loans. Rates on operating loans and farm real estate loans declined for the sixth consecutive quarter, to the lowest levels in more than a quarter of a century. Summary Increased farmland values in the Seventh Federal Reserve District in the fourth quarter of 2001 continued the pattern observed throughout the year. According to the Chicago Fed’s end-of-fourth-quarter survey of Farmland Values and Credit Conditions, prices for “good” farmland rose, on average, just under 1 percent between October 1, 2001, and January 1, 2002. The 372 agricultural bankers that responded to the survey also indicated that the increase in farmland values, relative to a year ago, slowed to less than a 5 percent rate. This compares with a year-over-year gain of 6 percent in the fourth quarter of 2000. Farmland values The increase in District farmland values in the fourth quarter of 2001 was the seventh consecutive quarterto-quarter increase of around 1 percent. The year-overyear gain of about 5 percent continued well above the comparable rates reported in the late 1990s (see chart 1), but receded somewhat from the 6 percent year-overyear increase reported at the end of 2000. Variations in farmland price changes across states continued to be fairly broad. Some areas, notably west-central Illinois and south-central Iowa, reported continued weak-to-declining farmland prices. At the other end of the spectrum, increases in farmland prices were observed in regions where population concentration continued to exert demand pressure on land use for residential and commercial purposes and in areas where demand for recreational land use remained strong. Credit conditions in District production agriculture turned somewhat weaker in the fourth quarter of 2001. Summary measures of the rate of loan repayment and the rate of requests for loan renewals or extensions by farmers deteriorated, following two quarters of improvement. Bankers also indicated that additional collateral was being required to secure loans. Nonetheless, the overall demand for farm-related loans increased, after two quarters of declines. Percent change in dollar value of “good” farmland Top: October 1, 2001 to January 1, 2002 Bottom: January 1, 2001 to January 1, 2002 October 1, 2001 to January 1, 2002 Illinois Indiana Iowa Michigan Wisconsin Seventh District +1 0 0 +3 +1 +1 January 1, 2001 to January 1, 2002 +1 +6 +3 +10 +8 +5 XII +1 +9 VI 0 +7 II I +2 +2 –2 +7 0 +3 V III *Insufficient response. XIV +2 +8 IV +4 +11 X +3 +6 VIII * +3 +5 –3 +1 VII –1 –5 +1 +7 XV IX XI +2 +2 XVI –1 +5 1. Annual percentage change in Seventh District farmland values 2. Indexes of District farmland values 1981=100 120 percent 30 90 20 Nominal farmland values 60 10 0 Farmland values adjusted by CPI-U 30 -10 0 1970 -20 1965 ’70 ’75 ’80 ’85 ’90 ’95 Two points stand out. First, the recent appreciation in farmland values was markedly more gradual than that of the 1970s. Second, the paths traced by the nominal farmland prices and the “real” or inflation-adjusted prices (see chart 2) were substantially different. In short, from 1986 to 2001, nominal farmland prices rose 8 percent per year, on average, while “real” farmland prices rose a little over 3 percent per year. Still, at the end of 2001, the “real” price index remained about 15 percent below the District average in 1970. Credit conditions Following two quarters in which agricultural bankers reported improvement in credit conditions, their responses in the latest survey indicated that some deterioration took place in the fourth quarter of 2001. Overall, 8 percent of the respondents indicated that the rate of loan repayment had increased, a slight improvement from the previous quarter. However, 33 percent of the bankers indicated they faced a deterioration in the rate of loan repayment compared with 21 percent who ’80 ’85 ’90 ’95 ’00 Note: Derived from Federal Reserve Bank of Chicago Farmland Value Surveys and BLS consumer price index series (annual average). ’00 Based on bankers’ responses, an index of District average farmland prices rose to a record level at the end of 2001 for the second consecutive year. At the end of the year 2000, District farmland prices (nominal) broke through the previous index high established at the end of 1981 (see chart 2). The 1981 record culminated a threeand-one-half-fold increase in average farmland prices during a single decade. The agricultural recession/restructuring that took place in the 1980s wrung much of the 1970s price increase out of District land values, leaving them at the end of 1986 some 49 percent below the 1981 high. Since 1986, District farmland prices have doubled. Is there a difference in the price structure of the appreciation in the 1970s versus that of the last 15 years? ’75 reported a deterioration in the third quarter. Similarly, 34 percent of the respondents observed a substantial increase in requests for loan renewals or extensions, while only 7 percent reported a decrease—both numbers were less favorable than reported in the third quarter. In an environment where respondents again reported increased availability of funds, 24 percent of the bankers observed that less favorable credit conditions prompted them to increase loan collateral requirements. In a comparable question a year ago, 21 percent of the bankers noted increased collateral requirements. Nonetheless, interest rates on farm loans continued to decline in the fourth quarter of 2001, according to District bankers (see chart 3). On average, operating loan rates declined 60 basis points from the end of September to the end of December and, at 7.41 percent, were 302 basis points below the nine-year peak in the second quarter of 2000. Interest rates on farm real estate loans decreased 26 basis points from the end of the third quarter to 7.21 percent at the end of 2001, and were down 200 3. Quarterly District farm loan rates percent 13 11 Farm operating 9 Farm real estate 7 1990 ’92 ’94 ’96 ’98 ’00 ’02 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 cattle1 Real estate1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 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 July-Sept Oct-Dec 120 115 109 107 119 107 94 104 40 50 63 72 69.9 71.7 72.7 72.7 9.03 9.11 9.32 9.44 9.01 9.08 9.28 9.41 8.06 8.18 8.42 8.59 2000 Jan-Mar Apr-June July-Sept Oct-Dec. 121 109 106 105 95 76 82 92 77 72 77 81 72.9 75.5 76.9 74.9 9.78 10.43 10.17 9.92 9.72 10.14 10.14 9.90 8.89 9.21 9.18 8.90 2001 Jan-Mar Apr-June July-Sept Oct-Dec 118 106 91 101 101 109 127 129 67 73 86 75 75.0 75.1 74.9 72.8 9.16 8.60 8.01 7.41 9.17 8.58 8.07 7.51 8.23 7.91 7.47 7.21 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 basis points from a five-year high at the end of the second quarter 2000. In addition to increased collateral requirements, a higher proportion of bankers reported a general tightening in credit standards. Fifty-three percent of the respondents noted some tightening in standards compared with nearly 47 percent a year ago. However, they indicated that 2.8 percent of their current operating loan customers would not qualify for new loans in 2002, which was down from a 3.5 percent share a year ago. Looking forward The outlook with respect to lending activity during the first quarter of 2002 relative to a year ago might be categorized as subdued. While overall demand for farm lending was expected to be up, the increase was concentrated in operating loans. Demand for category-specific loans such as “feeder cattle loans” or “grain storage construction loans” remained weak. A substantially larger proportion of bankers expected lower loan demand than higher demand. In particular, the bankers expected a continued pronounced weakness in “farm machinery loans.” Nearly 44 percent of the respondents forecast that machinery loans would be lower than a year ago. In an environment of reduced rates of loan repayment and increased rates of loan renewals and extensions, bankers expect to increase their utilization of the USDA’s Farm Service Agency (FSA) farm loan guarantee program.1 Thirty-eight percent of the bankers expect to increase their use of this program in the first quarter of 2002, relative to a year ago, the highest proportion in nearly two years. Jack L. Hervey Senior economist 1 FSA guarantees apply to ownership and operating loans to farmers who do not meet the standards of conventional lenders. Guarantees may apply to up to 90 percent of the loan principal, and lenders may resell the guaranteed portion in a secondary market. AgLetter (ISSN 1080-8639) is published quarterly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Jack L. Hervey, senior 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 AgLetter is also available on the World Wide Web at http://www.chicagofed.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.) February February February February February February February February February February February 99 101 1.93 90.40 4.19 2.85 97 39.00 74.10 13.30 55.9 4.2 9.8 –2.0 –2.8 –0.7 –0.7 0.0 1.8 4.1 –0.7 –10.3 –1 3 –2 4 –6 1 –5 –2 –6 2 –18 8 11 –3 22 –13 12 5 –3 4 13 –19 Consumer prices (index, 1982-84=100) Food January January 177 176 0.2 0.6 1 3 5 6 December 1 December 1 December 1 January January January 8,264 2,276 1,623 2.33 1.72 12.3 N.A. N.A. N.A. 10.4 2.9 2.2 –3 2 –10 6 1 2 3 4 –14 7 9 0 Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments November November November November 20,326 12,019 8,307 N.A. –9.6 –7.7 –12.2 N.A. 13 23 0 N.A. 14 29 –3 N.A. Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) December December December November 4,685 142 133 103 –10.9 –2.7 –18.2 4.6 2 –1 25 16 6 –15 22 12 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines January January January January 4,271 3,069 1,202 184 –28.2 –27.1 –31.0 –69.9 –1 7 –16 –56 11 13 4 –35 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 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 1942 AgLetter CHICAGO, IL US POSTAGE PAID FIRST CLASS MAIL PRESORTED
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