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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1900 May 1998 AgLetter FARMLAND VALUES AND CREDIT CONDITIONS The strength in farmland values seems unusual in light of the recent weakness in commodity prices and the outlook for farm income. Net cash income to the farm sector is expected to drop this year due to a decline in receipts from both crops and livestock. In particular, hog prices are down sharply from last year in response to extensive production gains. Furthermore, prices for corn and soybeans—two other predominantly midwestern agricultural enterprises—have shown little strength this year. The widely reported economic problems in Southeast Asia also contributed to lower exports of farm commodities in recent months. However, several factors that support farmland values are also in play. Milk prices have been quite strong this year. Government payments are fixed for the next few years, reducing uncertainty and allowing farmers greater freedom in responding to market signals when making their planting decisions. Lower costs for some inputs—especially feeds, feeder livestock, seed, and fuel—are expected to keep a lid on total cash expenses. And despite the recent downturn in farm exports, the General Agreement on Tariffs and Trade (GATT) has provided a framework to actively address trade barriers and make it more difficult for other nations to arbitrarily set up roadblocks to foreign sales of U.S. farm Our latest survey of agricultural banks in the Seventh Federal Reserve District found that farmland values continued to rise during the winter. The bankers reported that farmland values rose 2 percent during the first three months of 1998, while the year-over-year gain, as of April 1, averaged about one-tenth. The demand for new farm loans remained firm and the survey respondents reported a modest increase in available funding for farm loans. But loan repayments at agricultural banks deteriorated— compared with a year earlier—due to lower prices for most farm commodities. The trend in farmland values showed considerable variation among the five District states. Illinois and Iowa registered little change during the first quarter of 1998. Indiana and Wisconsin both showed a 3 percent rise, while the bankers in Michigan reported an increase of nearly 5 percent. The year-over-year change followed a similar pattern, with Illinois and Iowa showing the smallest increase and Michigan the largest. For the 12 month period ending in March, Illinois and Iowa registered gains of 7 percent and 9 percent, respectively. An increase of 12 percent was reported for both Indiana and Wisconsin, while Michigan registered a 15 percent rise. Percent change in dollar value of “good” farmland XII Top: January 1, 1998 to April 1, 1998 Bottom: April 1, 1997 to April 1, 1998 January 1, 1998 to April 1, 1998 Illinois Indiana Iowa Michigan Wisconsin Seventh District 0 +3 0 +5 +3 +2 VI +4 +10 April 1, 1997 to April 1, 1998 +7 +12 +9 +15 +12 +10 II I 0 +9 +1 +9 +1 +9 V III +1 +7 * VII XIV +1 +15 IV * X +3 +10 VIII * 0 +9 0 +5 XI 0 +7 XVI XVII *Insufficient response. +2 +12 XV IX +4 +11 * Quarterly District farm loan rates percent 13 11 Farm operating 9 Farm real estate 7 1988 ’90 ’92 ’94 ’96 ’98 products. Finally, anecdotal reports suggest that some investors have moved funds out of financial assets and into real assets such as farmland. Reflecting these developments, the survey results indicate that gains in the demand to purchase farmland simply outstripped the corresponding increase in the number of farms on the market. Over 55 percent of the responding bankers indicated there had been a year-overyear increase in the demand for farmland, while only 4 percent noted a decline. Demand was up in all District states, but especially in Indiana and Wisconsin. Nearly two-thirds of the bankers in these two states believed there had been an increase. On the supply side of the market, only 38 percent reported an increase in the number of farms for sale, while 16 percent observed a decline. The number of bankers reporting an increase in the amount of farmland for sale was highest in Illinois (50 percent) and lowest in Iowa (25 percent). Furthermore, the bankers indicated that nonfarm investors played a larger role— relative to farmers—in farmland purchases during the fall and winter. This was especially true in Indiana, Michigan, and Wisconsin. The near-term outlook for farmland values is fairly optimistic. About one-third of the bankers expect farmland values to rise in the second quarter, while nearly all the rest anticipate a sideways trend. But the pattern of responses varied considerably across District states and was similar to that regarding the first-quarter change in farmland values. The bankers in Michigan and Wisconsin showed the most optimism, with about 60 percent in each state expecting an increase in the second quarter. Nearly 40 percent of the Indiana respondents expect an increase. A much smaller share of the Illinois and Iowa bankers—15 percent and 28 percent, respectively—anticipate further gains during the second quarter. The bankers reported that cash rental agreements remain the preferred method of leasing farmland throughout the District, accounting for two-thirds of all rented ground. Thirty percent is rented on a crop-share basis. However, there is some variation among states. Cash rental arrangements account for 85 percent of the rented ground in Wisconsin, 75 percent in Michigan, and two-thirds in Indiana and Iowa. In Illinois, the proportion of land leased under cash rent agreements was only slightly larger than that leased under crop-share agreements (50 percent versus 45 percent). Like farmland values, cash rents were up from a year earlier, though not to the same extent. The reported increase averaged 5 percent for the District, ranging from 4 percent in Illinois and Michigan to 9 percent in Wisconsin. Turning to credit conditions in the Seventh District, the survey responses showed that the demand for new farm loans was up throughout the District, with the loan demand index rising to 134 (see table). This measure is a composite of the 42 percent of the respondents that indicated loan demand was up from a year ago and the 8 percent that noted a decline. About half thought that loan demand was unchanged from a year earlier. The increase is likely due to a couple of factors. First, the year-over-year declines in livestock and grain prices that have persisted since last fall prevented some farmers from repaying loans as originally agreed, resulting in higher renewal balances. Moreover, some operators have been forced to place a greater reliance on borrowed funds to purchase new crop inputs. Second, a recent report from the U.S. Department of Agriculture indicated a substantial increase in the number of hogs on farms in Illinois, Indiana, and Iowa (and to a lesser extent, Michigan), which would increase producers’ needs for working capital. As with the previous survey, the gains in loan demand appeared to be concentrated in Illinois and Iowa. The bankers’ ability to fund agricultural loan requests showed lackluster improvement during the first quarter. One-fourth of the respondents stated that fund availability had improved, while a tenth thought there had been a decline. A sizeable group believed there was little change from a year earlier. Furthermore, the funding situation appeared to be somewhat tighter in Michigan than in the other District states. Bank liquidity, on average, was little changed from three months earlier. The average loan-to-deposit ratio at District agricultural banks on April 1 was reported at 70.6 percent. Moreover, 45 percent of the bankers indicated they are still below the desired ratio. Among the individual District states, the average loan-to-deposit ratio ranged from a low of 66.1 percent in Illinois to 77.2 percent in Michigan. Continued upward pressure on the loan-todeposit ratio in the second quarter is likely due to seasonal increases in farm lending and the year-over-year gain reported in farm loan demand. Credit conditions at Seventh District agricultural banks Interest rates on farm loans 1995 Jan-Mar Apr-June July-Sept Oct-Dec 1996 Jan-Mar Apr-June July-Sept Oct-Dec 1997 Jan-Mar Apr-June July-Sept Oct-Dec 1998 Jan-Mar Loan demand Fund availability Loan repayment rates Average loan-todeposit ratio1 Operating loans1 Feeder cattle 1 Real estate1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 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 8.73 134 134 131 120 110 97 97 109 105 94 93 95 67.6 69.7 70.2 70.7 9.71 9.72 9.71 9.65 9.65 9.68 9.69 9.63 8.77 8.83 8.76 8.69 134 113 84 70.6 9.52 9.51 8.50 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. Another factor contributing to an increase in loan-todeposit ratios was the deterioration in farm loan repayments. The measure of loan repayments came in at 84 during the first quarter, down from the 95 recorded three months earlier. One tenth of the respondents reported that farm loan repayments were up relative to a year ago, while 26 percent reported a decline. The decline in repayments was relatively greater in Illinois and Iowa. Furthermore, the bankers reported an increase in the number of loan extensions and renewals requested. In general, the poor repayment performance reflects lower prices for farm commodities. In particular, market hog prices averaged a year-over-year decline of about one-third during the first four months of this year. The interest rate charged on new farm loans by District agricultural banks dropped slightly in the first quarter. The average rate charged on farm real estate loans as of April 1 was 8.50 percent, about 20 basis points below the previous quarter’s level. The average operating loan rate declined about 13 basis points from three months earlier to 9.52 percent. Among the individual District states, the farm real estate loan rate ranged from a low of 8.34 percent in Illinois and Iowa to a high of 9.05 percent in Michigan. Illinois registered the lowest operating loan rate at 9.19 percent, while Michigan recorded the highest at 10.06 percent. Looking ahead, the surveyed bankers expect farm lending to register a year-over-year gain during the spring. Nearly 40 percent anticipate an increase in the volume of nonreal estate loans, while 10 percent expect a decline. The other half do not foresee any change from a year ago. Most of the gains in nonreal estate lending will be spurred by a rise in the volume of operating loans. The proportion of bankers expecting an increase in operating loan volume was especially high in Illinois and Iowa (60 percent), relative to the other three District states (about 30 percent). In comparison, one-fourth of the surveyed bankers expect farm machinery and real estate loans to register gains from last year. Mike A. Singer Notice to Subscribers Future issues of the AgLetter will be published quarterly and will focus on the farmland values and credit conditions survey. The next issue will be published in late August, 1998. AgLetter (ISSN 1080-8639) is published monthly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by 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.) April April April April April April April April April April April 105 116 2.36 101 6.22 3.23 95 35.50 66.40 14.10 63.5 2.9 4.5 –7.1 3.6 –2.8 –2.7 0.0 0.9 3.3 –2.1 –9.2 –1 0.0 –16 –10 –24 –21 –4 –35 –2 7 –4 –3 –9 –39 14 –16 –39 2 –30 14 1 –16 Consumer prices (index, 1982–84=100) Food April April 162.5 159.8 0.2 0.1 1 2 4 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.) March 1 March 1 March 1 March March April 4,937 1,203 1,166 2.08 1.60 11.56 N.A. N.A. N.A. 5.3 9.5 –1.3 10 14 42 6 12 1 30 1 42 2 12 3 Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments January January January January 20,378 10,412 8,137 1,829 3.2 –5.9 2.3 N.A. –3 –7 3 N.A. 11 –4 10 N.A. Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) January January January January 4,809 141 120 84 –8.3 17.0 –21.0 3.5 –4 –25 –1 58 –13 –24 34 –18 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines April April April April 9,628 5,443 4,185 836 20.3 16.0 26.4 48.8 13 21 3 37 20 26 12 25 N.A. Not applicable *20 selected states. **Includes net CCC loans. AgLetter is printed on recycled paper 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 AgLetter PRESORTED FIRST-CLASS MAIL ZIP + 4 BARCODED U.S. POSTAGE PAID CHICAGO, ILLINOIS PERMIT NO. 1942
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