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WAITE MEMORIAL BOOK COLLECTION
DEPT. OF AGRIC. AND APPLIED ECONOMICS
FEDERAL RESERVE BANK OF CHICAGO
ISSN 0002 - 1512
IMay 15, 1981
iNatite
Memorial Book Collectiou
Division of
Agricultural Economics
CREDIT CONDITIONS at District agricultural banks
during the first quarter were characterized by a continuation of the soft demand for loans and an adequate
availability of funds for lending. The April 1 survey of
more than 550 agricultural banks in the Seventh Federal
Reserve District also indicates that interest rates on farm
loans edged lower in the first quarter, as did loan/ deposit ratios. Despite the decline in interest rates, rates on
bank loans to farmers remain above rates charged by
other farm lenders. Differentials in interest rates overshadowed the improved liquidity at agricultural banks,
resulting in a further decline in banks' share of the farm
credit market in 1980.
Improving liquidity conditions have highlighted the
developments at agricultural banks for the past year. In
the early part of 1980, the improvement reflected a falloff in loan demand in response to record-high interest
rates, a plunge in farm earnings, and the depressed economic conditions overall in rural areas. Since about mid1980, an unusually rapid growth in deposits has further
bolstered liquidity at agricultural banks. During the
second half of 1980, total deposits at District agricultural
banks that are members of the Federal Reserve System
rose at a rate unprecedented in the 1970s except for the
latter half of 1972. This unusually rapid growth in deposits continued in the first quarter. As a result, total deposits at these banks are now 15 percent higher than a year
ago.
The much improved liquidity conditions at agricultural banks is perhaps best reflected in their assessment
of the availability of funds for lending and in their loan/
deposit ratios. The latest measure of fund availability
(see table on page 2) nearly equaled the unprecedented
high recorded in the previous survey and contrasts strikingly with the unprecedented low recorded in the survey taken just one year ago. Similarly, the average loan/
deposit ratio—which has been declining since late
1979—edged lower again in the first quarter and is now
at a four-year low. The first-quarter decline, while fairly
small, represents a significant departure from the normal seasonal rise during the first three months of the
Number 1551
=IN
Nonreal estate farm debt outstanding by lender
billion dollars
10
_ individual
and others
government
agencies•*
— PCAs*
— banks
01,14
1970
'75
'77
'78
79
'90
year-ending December 31
• Includes small amount of OF! financing by FICBs.
• 'Farmers Home Administration, Commodity Credit Corporation
and Small Business Administration.
year. In conjunction with the lower ratios, 47 percent of
the bankers view their current loan/deposit ratio as
being lower than desired, while only 17 percent consider their ratio too high. The remaining 36 percent
consider their ratio is at the desired level.
The measure of farm loan demand, while up from
the last quarterly survey, is still indicative of a very sluggish demand at rural banks. The sluggish loan demand
reflects a number of factors. After falling sharply in 1980,
farm income is expected to bounce back this year. The
extent of the recovery, however, will be considerably
less than had been forecast. A drought-related spurt
pushed crop prices to a peak in late 1980. Since then,
crop prices have drifted lower and prospective spring
and summer price levels have been undermined by the
huge harvest now winding up in the Southern Hemisphere, the weaker-than-anticipated foreign demand for
U.S. grains, and recent evidence of a substantial fall-off
in domestic utilization for feed. More importantly, farm
earnings so far this year have been undermined by huge
financial losses on livestock marketings. With these
2
Selected measures of credit conditions
at Seventh District agricultural banks
Average rate
on feeder
cattle loans.'
Average
loan-to-deposit
ratio'
Banks with
loan-to-deposit
ratio above
desired levels
Loan
demand
Fund
availability
Loan
repayment
rates
(index)2
(index)2
(index)2
(percent)
(percent)
(percent
of banks)
1975
Jan-Mar
Apr-June
July-Sept
Oct-Dec
134
142
133
134
108
120
131
130
65
130
105
100
8.84
8.76
8.81
8.80
56.4
56.3
57.0
56.6
28
22
22
23
1976
Jan-Mar
Apr-June
July-Sept
Oct-Dec
142
147
140
150
130
134
124
130
101
102
93
81
8.74
8.79
8.76
8.71
56.2
57.3
59.2
58.8
20
24
25
26
1977
Jan-Mar
Apr-June
July-Sept
Oct-Dec
161
169
161
147
115
103
77
86
79
66
52
59
8.71
8.74
8.79
8.85
59.4
61.2
63.5
62.3
28
38
46
41
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
70
141
90
16.53
60.1
17
•
At end of period.
1
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
developments eroding actual and anticipated farm earnings, expenditures by farmers have been held in close
check, particularly capital expenditures.
The soft loan demand at banks also reflects the
comparatively high interest rates charged by banks on
farm loans. At the start of the first quarter, rates charged
by District agricultural banks on feeder cattle loans and
farm operating loans averaged more than 173/4 percent.
At the same time effective rates charged by production
credit associations averaged roughly 14 percent, while
the rates charged by FmHA and the CCC ranged from 11
to 13 percent. During the first quarter the gap narrowed
as rates on bank loans declined, while rates charged by
other farm lenders trended higher. Nevertheless, with
District bank rates averaging 161/2 percent by the end of
March, banks are still at a competitive disadvantage to
the other farm lenders whose interest rates for most
nonreal estate farm loans now range from 14 to 151/2
percent.
•
3
While interest rates on farm loans edged lower during the first quarter, rural banks were still faced with
upward pressures on costs of funds. The introduction of
•NOW accounts on January 1 resulted in some restructuring of deposits at rural banks. An overall estimate of the
impact of NOW accounts is not yet available. However, it
appears that "interest free" demand deposits (checking
accounts) at District agricultural banks declined more
than a fifth during the first quarter. Undoubtedly, most
if not all of these deposits were converted to NOW
accounts with an interest cost of 51/4 percent. In addition,
rollovers of the six-month money market certificates—
which account for nearly 30 percent of total deposits at
District agricultural banks—added additional pressure.
Any first-quarter rollovers would have come from MMCs
opened or renewed during the third quarter of 1980
when banks were permitted to pay ceiling rates averaging about 9.5 percent. In the first quarter of this year,
ceiling rates on six-month money market certificates
averaged nearly 14 percent, an increase of nearly 50
percent in the interest cost of such deposits for banks.
Following the recent upsurge in market rates of interest,
ceiling rates on six-month money market certificates
have soared to more than 153/4 percent, a high exceeded
only briefly in March 1980.
1980, new loans made by FLBs lagged year-earlier levels
by 4 percent.
New loans made by the Farmers Home Administration escalated rapidly during the early months of this
year. During the fourth quarter of 1980, loans extended
by the FmHA through the farm operating, farm ownership, emergency (disaster), and the economic emergency loan programs totaled less than $1 billion. During
the first four months of this year, however, loans
extended through these four programs soared to more
than $5 billion. The bulk of the extensions were through
the emergency (disaster) loan program in response to
the widespread drought losses of last year.
In contrast to other nonbank farm lenders, activity
at life insurance companies continued at a suppressed
level. Farm mortgages acquired by life insurance companies—which fell nearly 40 percent in 1980—were 27
percent below the year before in January and February.
Moreover, new farm mortgage commitments made by
life insurance companies in the first two months of this
year were more than a third below the year before and
70 percent less than in the same months two years ago.
The outlook for agricultural credit conditions is
Lending activity at most other farm lenders has been
on the upswing since the start of this year. During the
first quarter loans made by production credit associations—banks' chief competitor for nonreal estate farm
loans—were 10 percent above the year before. That
compares to the year-to-year gain of 5 percent recorded
during the latter half of 1980. Similarly, new loans made
by federal land banks—the leading institutional farm
mortgage lender—in the first quarter were nearly 5 percent above the year before. During the latter half of
Lending activity at PCAs and FLBs was
on the upswing in the first quarter
percent change from year earlier
50 —
.
I%
I
n
40
I
.
a
new loans made
by FLBs
30
20
•
•
10
•
loans
1
made
by PCAs
+0
10
II
1976
clouded by many uncertantities, including interest rate
trends, future commodity prices, and the income and
spending patterns of farmers. The latest spurt in market
rates of interest will add more pressure on the cost of
funds at agricultural banks. If the uptrend continues, or
if rates hold at current levels, the pressures will likely be
reflected in higher rates on bank loans to farmers. This
may well extend the competitive interest rate disadvantage facing banks with respect to the rates charged by
other farm lenders.
While commodity prices may remain quite volatile,
the forecasts of many analysts now reflect a degree of
pessimism that is more widespread than a couple of
months ago. Factors behind the pessimism include
recent rains that have diminished drought concerns,
prospects for a record winter wheat crop in the United
States, continued softness in livestock prices, and the
good condition of winter grains in most producing
countries in the Northern Hemisphere. With interest
rates high and farm income prospects diminished, capital spending—and hence borrowings—may remain soft
for the near term. However, borrowings to finance
operating capital will be seasonally high during the current quarter, reflecting expanded plantings, higherpriced inputs, and indications of a pickup in the movement of cattle into feedlots.
III 1111
1977
1978
1979
1980
Gary L. Benjamin
4
Selected agricultural economic developments
Percent change from
Subject
Index of prices received by farmers
Crops
Livestock
Index of prices paid by farmers
Production items
Producer price index* (finished goods)
Foods
Processed foods and feeds
Agricultural chemicals
Agricultural machinery and equipment
Consumer price index** (all items)
Food at home
Value
Prior period
Unit
Latest period
Year ago
1967=100
1967=100
1967=100
April
April
April
261
275
250
-
0.4
- 2.1
+ 1.6
+16
+26
+8
1967=100
1967=100
April
April
305
300
+ 1.0
+ 1.0
+11
+11
1967=100
1967=100
1967=100
1967=100
1967=100
April
April
April
April
April
268
252
247
277
281
+ 0.9
- 0.1
- 0.3
+ 0.9
+ 0.9
+11
+9
+ 8
+7
+11
1967=100
1967=100
March
March
265
269
+ 0.7
+ 0.5
+11
+10
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.
April
April
April
April
April
April
April
April
April
April
3.20
7.33
3.99
5.21
2.04
63.90
39.10
13.70
26.8
64.4
- 1.5
- 3.4
- 2.4
+ 0.8
- 1.9
+ 4.1
+ 0.8
- 0.7
- 9.8
+ 5.9
+36
+30
+11
+32
+48
0
bil. dol.
bil. dol.
bil. dol.
4th Quarter
4th Quarter
March
146
22
2,290
+ 2.0
+ 1.4
+ 0.8
+8
-26
+12
Cash prices received by farmers
Corn
Soybeans
Wheat
Sorghum
Oats
Steers and heifers
Hogs
Milk, all sold to plants
Broilers
Eggs
+40
+8
+19
+23
Income (seasonally adjusted annual rate)
Cash receipts from farm marketings
Net farm income
Nonagricultural personal income
*Formerly called wholesale price index.
**For all urban consumers.
AGRICULTURAL LETTER
FEDERAL RESERVE BANK
OF CHICAGO
Public Information Center
P.O. Box 834
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