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338.13 A46 1858 FRB CHICAGO WAITE MEMORIAL BOOK COLLECTIO ONOM DEPT. OF AG. AND APP 1994 BUFORD Po UNIVERSITY t ; ST pAuu-pAN AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Number 1858 November, 1994 Farmland values and credit conditions gains of 6 percent. The bankers in Michigan reported a more modest gain of 4 percent. Our October 1 survey of over 450 agricultural bankers in the Seventh Federal Reserve District indicated that the uptrend in farmland values continued during the summer months. On average, farmland values edged 1 percent higher during the summer quarter and were up 7 percent for the 12-month period ending with September. Moreover, the 12-month gain was the largest in five years. The bankers also reported that farm loan demand continued strong during the summer. However, the availability of funds for agricultural lending tightened and the interest rates charged on new farm loans moved higher. In addition, the survey found that loan repayment rates were generally sluggish during the summer when compared to a year earlier. • Both farmers and nonfarm investors are expected to contribute to a modest strengthening in the farmland markets over the near term. In particular, nearly half the respondents foresee a greater interest in purchasing farmland by nonfarm investors when compared to a year earlier. This view held in each District state. The demand to acquire farmland among farmers is also expected to rise, though to a somewhat lesser degree. Over a third of the survey respondents believe farmer demand for farmland will increase compared to a year ago while about 16 percent anticipate a decline. But while farmer interest is on the upswing in Illinois, Indiana, and Iowa, the survey results indicate it will be stable to declining in Wisconsin and Michigan. In line with the growth in demand, the bankers also predict the number of transactions involving farmland will increase from a year ago. Farmland values rose in four of the five District states during the summer quarter. The exception was Wisconsin, where values were unchanged. The bankers in Illinois noted—on average—an increase of 2 percent from three months earlier while a 1-percent rise was registered in the other three states. Furthermore, all five District states recorded year-over-year gains. The Illinois bankers reported the largest increase at 9 percent. Farmland values in Indiana were up 7 percent from a year earlier while Iowa and Wisconsin each posted Consequently, the bankers believe that further gains in farmland values are likely during the fall quarter. Approximately 37 percent—a fairly high proportion relative to recent years—foresee rising values compared to a year earlier. In comparison, nearly 60 percent expect little change while only a few anticipate a decline. Percent change in dollar value of "good" farmland XII Top: July 1, 1994 to October 1, 1994 VI * Bottom: October 1, 1993 to October 1, 1994 VII +3 L XIV IV +2 +6 +1 +4 Illinois Indiana C July 1, 1994 October 1, 1993 to to October 1, 1994 October 1, 1994 +2 +9 +1 +7 Wisconsin Seventh District +9 III —2 +6 r +1 +5 +1 +4 0 +6 +1 +7 viii IX J XI +3 +12 +6 Iowa Michigan +3 12( XVI +1 +9 X V II *Insufficient response +1 +5 XV The expectations of rising values appeared to be strongest in Illinois, where half the bankers predicted gains. The bankers reported that the demand for nonreal estate farm loans held above year-earlier levels during the summer quarter. Approximately 45 percent of the surveyed bankers stated that loan demand was up compared to a year ago while only 13 percent believed a decline had occurred. The remainder indicated there had been no change. Loan demand appeared to be stronger in Iowa relative to the other District states, continuing a trend that has held over the past year. Specifically, nearly two thirds of the Iowa bankers reported an increase from last year. Furthermore, the responses from the bankers in Illinois, Indiana, and Wisconsin also indicated the demand for nonreal estate loans strengthened. In contrast, loan demand appeared to have softened in Michigan when compared to a year earlier. Agriculture's access to loanable funds from commercial banks came under pressure during the summer months, according to the survey. The measure of fund availability fell to 96, the first time it has dipped below 100 since 1980. This gauge of the inclination of District banks to lend to agriculture represents a composite of the 18 percent of the bankers that reported an increase in the availability of funds for agricultural loans—compared to a year earlier—and the 23 percent who reported a decline. The remainder did not discern any shift from a year ago. However, the change was not uniform across the individual District states. The availability of funds for agricultural lending tightened in Iowa and Wisconsin compared to a year earlier, held steady in Indiana, and rose slightly in Illinois and Michigan. Furthermore, the loan-to-deposit ratios of District banks rose—on average—during the summer. The mean ratio came in at 64.5 percent as of October 1, up from 62.5 percent three months ago and the highest level recorded since 1980. However, considerable disparity exists across District states. The Wisconsin average was the highest at 73 percent while the low of 57 percent was reported by the bankers in Illinois. In addition, the actual loan-to-deposit ratios have been drawing closer to the desired ratios reported by the bankers in recent surveys, which implies that future gains in loan volume could moderate unless banks acquire deposits at a faster pace. The interest rates charged on new farm loans edged higher for the second successive quarter. While the firm agricultural loan demand contributed to the increase in rates on new loans, higher market rates boosted returns on alternative investments for banks and also put upward pressure on funding costs. The interest rate charged on new farm real estate loans as of October 1 averaged 8.86 percent while the average farm operating loan rate came in at 9.38 percent. Both loan rates were up 40 basis points from three months earlier. On an annual basis, the farm real estate loan rate was up 90 basis points while the operating rate gained a more modest 75 basis points. The agricultural bankers again noted that—on average—farm loan repayments continue to be sluggish. A fifth stated that repayments were coming in more slowly than the pace of a year ago while 14 percent said there had been an improvement. The majority thought that the timeliness of repayments was about the same as a year ago. Loan paybacks improved in Indiana but tended to lag in the other District states, particularly Iowa. The slow loan repayment situation in Iowa dates back to last year's flood and is mirrored by the relatively large number of Iowa bankers—some 40 percent—who noted an increase in the number of loan extension or renewals granted. The outlook of the bankers for the near term corresponds to the recent trends in livestock prices as well as the differences in crop production between District states. While both cattle and hog prices have been running well below year-earlier levels for several months, hog prices have been under particularly severe pressure since September. As a result, the mood of the bankers regarding the prospective net cash earnings of livestock producers was quite uniform across District states as 90 percent believe that earnings will be down during the fall and winter when compared to a year earlier. In comparison, the expectations held by the bankers for the earnings of crop producers is somewhat mixed. As yields recover from last year's flood, a large majority of the bankers in Illinois and Iowa anticipate a rise in net cash earnings while about half the respondents from Wisconsin expect an improvement. In contrast, a majority of the bankers from Indiana and Michigan—the two District states which not only escaped last year's flood but also benefited from the resulting increase in grain prices—expect a reduction in the earnings of crop farmers when compared to a year earlier. The bankers also indicated an improvement in loan repayments is on the horizon, ostensibly due to the banner harvest. Though grain prices have fallen, the impact on cash flow is lessened by deficiency payments to farmers and the availability of commodity loan programs. Overall, one third of the bankers stated they expect repayments to show year-over-year improvement during the next three to six months while a fifth believe there will be a decline. The rest anticipate little change from the previous year. Among the individual District states, improvement is anticipated in both Iowa and Illinois. However, hog prices have weakened further since October 1 and many bankers Credit conditions at Seventh District agricultural banks Interest rates on farm Loan demand Fund availability Loan repayment rates Average loan-to-deposit ratio' Operating loans' Feeder cattle' Real estate' (index? (index? (index? (percent) (percent) (percent) (percent) 1991 Jan-Mar Apr-June July-Sept Oct-Dec 128 130 113 109 127 122 122 132 98 74 81 69 56.5 58.1 58.5 57.4 11.40 11.19 10.88 10.06 11.37 11.17 10.89 10.08 10.57 10.43 10.15 9.39 1992 Jan-Mar Apr-June July-Sept Oct-Dec 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 7.88 136 139 132 121 107 96 94 90 94 59.9 62.5 64.5 8.52 8.98 9.38 8.48 8.95 9.30 7.97 8.48 8.86 1993 Jan-Mar Apr-June July-Sept Oct-Dec 1994 Jan-Mar Apr-June July-Sept 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. may have revised their expectations downward since then. In contrast, the tone of the responses from Indiana and Wisconsin suggest loan repayments will exhibit little year-over-year change during the next three to six months while the Michigan respondents anticipate a decline. The bankers' near-term outlook also indicates that expectations for further gains in operating loans during the fall quarter are mixed while modest increases are in store for farm machinery lending. In particular, it appears the recent growth in operating loan volume may be slowing. While the proportion of those expecting an increase in operating loans still outweighs the proportion anticipating a decline, the gap between the two has narrowed. Among the individual District states, the likelihood of a year-over-year increase in operating loans appears to be strongest in Illinois and Iowa while little change is indicated for Indiana. In contrast, a decline appears likely in Michigan and Wisconsin. Furthermore, expectations favor a somewhat greater interest in borrowing for farm machinery purchases during the fall quarter. While about half of the bankers foresee little change from last year, the remainder predict an increase in farm machinery loans by a margin of two to one. However, the decline in hog prices and low grain prices may encourage many farmers who were considering machinery purchases to postpone their plans. On the other hand, the projected trend in farm real estate lending appears to be flat. Two thirds of the surveyed bankers expressed the belief that volume will be unchanged from a year ago during the winter quarter. The remainder were nearly evenly split between an increase and a decline. The expectations of the bankers for adding farm real estate loans appear somewhat modest relative to their beliefs concerning future activity in farmland markets. This disparity, however, could stem from the availability of competing sources of funds to those purchasing farmland. Mike A. Singer AGRICULTURAL LETTER (ISSN 0002-1512) 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 Selected agricultural economic indicators Percent change from Latest period Value Prior period Year ago Prices received by farmers (index, 1977=100) Crops (index, 1977=100) Corn ($ per bu.) Hay ($ per ton) Soybeans ($ per bu.) Wheat ($ per bu.) October October October October October October 132 120 1.96 86.80 5.15 3.85 -1.5 -1.6 -10.5 5.3 -5.9 7.8 -9 -8 -14 5 -14 18 -4 3 -4 23 -2 20 Livestock and products (index, 1977=100) Barrows and gilts ($ per cwt.) Steers and heifers ($ per cwt.) Milk ($ per cwt.) Eggs (0 per doz.) October October October October October 142 33.50 64.50 13.10 57.6 -2.1 -6.7 -2.4 2.3 -4.8 -11 -29 -11 0 -4 -10 -21 -16 -2 1 October October 150 145 0.1 0.0 3 2 5 5 850 209 2,053 2.14 1.54 10.7 N.A. N.A. N.A. -3.6 3.1 1.7 -60 -28 -3 5 7 3 -23 -25 -3 7 2 1 12,914 6,025 6,814 74 3.8 11.5 0.2 -70.2 -11 -3 -8 -91 -5 -5 -5 -10 Consumer prices (index, 1982-84=100) Food 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.) September 1 September 1 September 1 September September October Receipts from farm marketings (mil. dol.) Crops** Livestock Government payments July July July July Two years ago Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) August August August August 3,514 114 41 110 11.6 22.0 138.3 49.6 19 15 65 7 14 -16 4 6 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines October October October October 5,636 3,464 2,172 1,076 11.4 11.8 10.9 39.6 7 17 -5 15 0 -2 3 -18 N.A. Not applicable *21 selected states. **Includes net CCC loans. 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