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• AGRICULTURAL LETTER FRB CHICAGO FEDERAL RESERVE BANK OF CHICAGO May 10, 1985 Credit trends at District agricultural banks Measures of credit conditions at agricultural banks in the Seventh Federal Reserve District continued their recent trends during the first three months of the year. The April 1 survey of almost 550 banks suggests that first quarter farm loan demand across the District was near last year's level. Loan-to-deposit ratios averaged higher than a year ago but were little changed from the ending 1984 level. Thus, fund availability does not appear to be constraining these institutions from lending to farm borrowers. However, further declines in the measure of farm loan repayment rates shows the continued presence of financial stress among many farm borrowers and the difficulties facing agricultural lenders. After growing through much of last year, farm loan demand appears to have leveled off during the past two quarters. The measure of first quarter farm loan demand, at 107, suggests that there was little difference from the conditions in the same period a year ago (see table on page 2). The measure represents a composite of the 33 percent of the survey respondents who noted a year-to-year rise in farm loan demand, less the 26 percent who reported that farm loan demand was below a year ago. The remaining 41 percent of the bankers noted no change in the level of farm loan demand from last year. • Although growth in farm loan demand appears to have leveled off across the District, some variability is exhibited among the five states. Bankers in Indiana and Michigan indicated that demand was considerably stronger than a year ago. In contrast, Wisconsin bankers suggested that farm loan demand in the first quarter was down from last year. op An adequate supply of funds appeared to be available at District agricultural banks during the first quarter for lending to farmer borrowers. The measure of fund availability remained at a high level as the proportion of bankers reporting a year-to-year gain in funds available for loans to farmers again exceeded the proportion noting a decline by a substantial margin. About 31 percent of the respondents reported a year-to-year increase in fund availability during the first quarter, while only 11 percent noted a decline. The remaining 58 percent of the surveyed bankers indicated that funds available for lending to farmers remained at the previous year's high level. Among the five District states, the measure of fund availability ranged from 132 in Michigan to 109 in Indiana. Loan-to-deposit ratios at District agricultural banks held fairly steady during the first three months of 1985, but at 56 percent at the end of the period were up from the year-earlier level of about 54.5 percent. Average loan-todeposit ratios of agricultural banks in each District state were up from a year ago, and ranged from almost 52 percent for surveyed banks in Illinois to almost 63 percent in Wisconsin. Number 1655 Although up, the average loan-to-deposit ratio at District agricultural banks is well below the desired level. At about 61 percent, the average of desired loan-to-deposit ratios of these banks was 5 percentage points above the current ratio. About 55 percent of the surveyed bankers indicated that their actual loan-to-deposit ratio at the end of March was below the desired level. In contrast, only 17 percent of the respondents expressed a preference for a lower ratio. The remaining 28 percent of the bankers were satisfied with their current level of lending. These sentiments were roughly comparable across the five District states. Interest rates on farm loans at District agricultural banks fell during the first three months of 1985, continuing the downward trend that began last fall. At the end of the first quarter, the typical interest rates charged on new feeder cattle loans and farm operating loans averaged about 13.5 percent, while the average rates on new farm real estate loans at surveyed banks fell to about 13.2 percent. These levels mark declines of 13 to 16 basis points from the previous quarter, and declines of 20 to 35 basis points from the averages of a year ago. Interest rates on loans at Iowa and Indiana banks tended to exceed the District average in each category of loan while rates charged by surveyed banks in the other District states were below the five-state average. The financial stress being experienced by many of the District's farm borrowers remains evident in the responses of the surveyed bankers. Declines in repayment rates on farm loans and increases in loan renewals and extensions during the first three months of the year continued to characterize the bankers' responses. The measure of farm loan repayment rates during the first quarter dropped to 47. After plateauing in 1983 when the PIK program boosted farm liquidity, the measure of loan repayment rates has been trending down. The bankers reporting improvement in the repayment rates of their farm borrowers compared to a year ago accounted for only 4 percent of the survey respondents. In contrast, 57 percent noted a year-to-year decline in the repayment rates of farm customers. The remaining 38 percent of the bankers noted that farm loan repayment rates were stable. Repayment difficulties among farm borrowers were also indicated by bankers' responses concerning increasing renewals and extensions on farm loans. Among all five District states, the measures of loan repayment rates and of renewals and extensions indicate that, for the most part, bankers in each state have been facing a deteriorating situation. Responses from Iowa bankers, with more than two-thirds reporting a decrease in the rate of farm loan repayment, suggest that institutions in that state are faring worse than in other District states. On the other hand, a majority of agricultural bankers in Michigan reported that NAITE MEMORIAL BOOK COLLECTION DEPT. OF AGRIC. AND APPLIED ECONOMICS Selected measures of credit conditions at Seventh District agricultural banks Banks with loan-to-deposit ratio above desired levels Loan demand Fund availability Loan repayment rates Average rate on feeder cattle loans.' Average loan-to-deposit ratios (index) 2 (index)2 (index)2 (percent) (percent) 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 46 52 50 1979 Jan-Mar Apr-June July-Sept Oct-Dec 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 1980 Jan-Mar Apr-June July-Sept Oct- Dec 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 1981 Jan-Mar Apr-June July-Sept Oct-Dec 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 1982 Jan- Mar Apr-June July-Sept Oct- Dec 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 15 11 1983 Jan-Mar Apr-June July-Sept Oct-Dec 69 85 81 101 158 157 156 153 66 78 78 78 13.66 13.49 13.70 13.65 53.3 54.0 54.8 53.6 6 6 8 8 1984 Jan- Mar Apr-June July-Sept Oct- Dec 131 138 120 103 135 128 122 124 62 64 59 49 13.82 14.32 14.41 13.61 54.4 55.7 57.2 55.9 12 14 17 19 1985 Jan-Mar 107 120 47 13.48 56.1 17 • (percent of banks) • 1 At end of period. 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. farm loan repayment rates during the first quarter were unchanged from a year ago. The deteriorating repayment situation has coincided with a trend toward greater collateral requirements. Across the District, about 70 percent of the surveyed bankers reported that during the first quarter the amount of collateral required on farm loans was higher than during the comparable period of a year ago. None of the respondents noted a year-to-year decline in collateral requirements. Increasing collateral requirements have been noted by an unusually large proportion of bankers in the last several quarterly surveys, reflecting the declines in land and machinery values and the mounting repayment problems. Financial stress in the agricultural sector contributed to a significant level of farm loan charge-offs at banks last year. Based on reports filed by most banks involved in farm lending, it appears that charge-offs of farm loans, net of recoveries, at banks nationwide ranged somewhere between $850 and $900 million last year. Among the banks that report this information, net charge-offs of farm loans in 1984 represented 2.2 percent of the year-end outstanding portfolio of farm loans held by those banks. Reporting banks from District states indicated that net charge-offs of farm loans in 1984 represented about 2.0 percent of outstandings. The proportion of farm loan charge-offs in 1984 varied widely among the five District states. Net charge-offs at banks in Indiana, Michigan, and Wisconsin represented about 1 per- • Michigan, but were more evenly distributed in Illinois and Indiana. Wisconsin bankers, on the other hand, reported the rate of acceptance was only about half that of rejections. Use of FmHA debt adjustment program by surveyed banks Percent of banks applying Percent of applications: Applications pending accepted rejected per bank 38 32 31 32 37 51 Illinois 18 2 30 Indiana 20 1 Iowa 54 5 36 13 Michigan 37 5 45 7 48 Wisconsin 20 2 17 36 47 District states 31 4 35 17 48 cent of farm loans outstanding, falling considerably below the District and national averages. On the other hand, chargeoffs of farm loans at banks in Illinois, at 1.9 percent, approached these averages, while charge-offs at Iowa banks were considerably higher. The 2.9 percent of farm loans charged off at Iowa banks in 1984 stands out among the District states, and ranks Iowa third behind California (at 6.1 percent) and Missouri (at 3.0 percent) in the proportion of farm loans written off by banks last year. Mounting repayment problems in the agricultural sector spurred fears earlier in the year that a significant proportion of farmers would be denied operating credit this season. However, responses from a recent bank survey indicate that less than 5 percent of the farm loan customers that received •credit from a District agricultural bank in 1984 did not receive operating credit from that bank this year. The proportions of farm loan customers that did not receive credit was at or below the District average among responding banks in Illinois, Indiana, and Wisconsin, while banks in Iowa and Michigan reported an above average proportion. While there may be a variety of reasons for a bank's farm loan customer not to receive credit, it seems likely that the responses largely reflect the eroding creditworthiness of farmers under financial stress. In response to the financial stress in the agricultural sector and to help assure the flow of credit to farmers, the Farmers Home Administration (FmHA) instituted a debt-adjustment program this spring. The program allows 90 percent guarantees on problem farm loans in exchange for a reduction in loan principal or interest charges. About 31 percent of the District banks surveyed have applied for loan guarantees under the debt-adjustment program, averaging 4 applications per institution. Of the applications submitted, bankers indicated that about half were still pending as of late April. Of the remaining applications, acceptance for loan guarantees outstripped rejections by a two-to-one margin. Use of the debt adjustment program by agricultural banks varies across the District states. About a fifth of the surveyed institutions in Illinois, Indiana, and Wisconsin applied for farm loan guarantees under the program, averaging about 2 applications per institution. In contrast, about 54 percent and 38 percent of surveyed banks in Iowa and Michigan, respectively, applied for an average of 5 guarantees. Moreover, acceptance of applications far outpaced rejections in Iowa and During the second quarter of this year, bankers' responses suggest that nonreal estate farm lending will remain near the year-ago level, while farm real estate loans will show further weakness. About 47 percent of the bankers surveyed expect that the volume of their nonreal estate farm lending will be unchanged from last year, while 23 percent reported an expected increase. However, about 30 percent of the respondents expect second quarter farm loan volume to be lower than a year ago. In contrast to the expected changes in nonreal estate farm loan volume, almost half of the bankers reported an expected drop in the volume of farm real estate loans. Of the remainder, 14 percent expect their bank's volume of farm real estate lending to be higher than a year ago and 38 percent expect the volume to be unchanged. The volume of nonreal estate farm lending will be maintained largely by operating loans. Across the District, 41 percent of the respondents expect a year-to-year increase in farm operating loan volume, while 23 percent expected a decline. In contrast, fewer than 10 percent of the banks surveyed expected to increase lending for feeder cattle, dairy, or crop storage from the level of a year ago, while 30 to 40 percent foresee declines during the second quarter. Only 5 percent of the survey respondents expect to increase the volume of farm machinery lending, while 65 percent indicated that second quarter farm machinery loans would be lower than last year's volume. Peter J. Heffernan AGRICULTURAL LETTER (ISSN 0002-1512) is published bi-weekly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Gary L. Benjamin, economic adviser and vice-president, Peter J. Heffernan, 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 Tel.no. (312) 322-5111 • Selected Agricultural Economic Indicators Percent change from Latest period Prices received by farmers (1977=100) Crops (1977=100) Corn (Sper bu.) Oats (Sper bu.) Soybeans (Sper bu.) Wheat (Spel. bu.) Value Prior period Year ago Two years ago April April April April April April 132 126 2.68 1.63 5.86 3.40 -1.5 -0.8 0.8 -3.6 -0.3 0.6 -10 -10 -19 -10 -25 -6 -2 1 -9 6 -4 -9 Livestock and products (1977=100) Barrows and gilts (Spier cwt.) Steers and heifers (Spel. cwt.) Milk (Spel. cwt.) Eggs (Cper doz.) April April April April April 137 41.80 59.70 13.00 53.0 -2.8 -4.6 -1.6 -2.3 -8.0 -9 -13 -8 -1 -42 -6 -12 -8 -4 -8 Prices paid by farmers (1977=100) Production items Feed Feeder livestock Fuels and energy April April April April April 164 153 120 161 201 0 0 -0.8 -1.8 3.1 -1 -3 -16 2 -1 3 0 -8 -6 2 Producer Prices (1967=100) Agricultural machinery and equipment Fertilizer materials Agricultural chemicals April April April April 293 339 232 458 0.2 0 0.2 0.2 1 1 -5 2 4 4 1 -1 Consumer prices (1967=100) Food March March 319 310 0.4 0.1 4 3 9 7 Production or stocks Corn stocks (mil. bu.) Soybean stocks (mil. bu.) Beef production (bit lbs.) Pork production (bil. lbs.) Milk production (bd. lbs.) April 1 April 1 March March March 3,961 898 1.86 1.23 11.9 N.A. N.A. 5.0 11.5 12.2 22 14 -4 -8 1 -36 -22 -2 -5 -2 • A: N.A. Not applicable u4 O '64 (3<+, C AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Public Information Center P.O. Box 834 Chicago, Illinois 60690 1312) 322-5112 11tlY31.85 7/41b-S 1 8 : I: 682692 L AG001 LOUISE LETNES,LIBMIRK DEPLOF AGR1CA PPPLIEb ECOV :121 CIASMM 0;FICS nt.ntRS 1.991.1 UFORD PUBLIE ET,PRUL Mk SEM 10
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