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338.13 A46 1870 The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1870 AgLetter WAITE MEMORIAL BOOK COLLECTION DEPT. OF APPLIED ECONOMICS UNIVERSITY OF MINN 1994 BUFORD AVF -9. ST. PAUL MN 55108 U.S.A. month period ending in September. The increase in farmland values in Indiana stood in sharp contrast, with a yearover-year rise of 8 percent. The other three states fell somewhere in between, with reported twelve-month gains of either 3 or 4 percent. FARMLAND VALUES AND CREDIT CONDITIONS • November 1995 Our October 1 survey of agricultural bankers in the Seventh Federal Reserve District showed that farmland values edged upward during the third quarter, rising an average of 1 percent. Furthermore, farmland values were up 4 percent for the twelve-month period ending in September. The survey also showed that the demand for nonreal estate loans remained firm during the third quarter and that bank liquidity continued to tighten. But interest rates charged on new farm loans still managed a modest decline during the summer. The measure of available funds for agricultural lending indicated little change from a year ago, as did the gauge for loan repayment rates. A quarterly increase in farmland values was reported by the bankers in each District state except Michigan. Those in Illinois, Indiana, and Wisconsin reported average gains during the third quarter of 2 percent, while the Iowa bankers disclosed a more modest gain of 1 percent. In contrast, the Michigan respondents—on average—believed that farmland values were unchanged during the summer. In comparison to the quarterly changes, the year-over-year shift in farmland values was quite variable among the five District states. In line with the weakness of the past two quarters, Michigan farmland values were up only 1 percent during the twelve The bankers generally expect farmland values to be stable or rising in the near term. Approximately a third expect an increase during the fourth quarter while the remainder do not anticipate any change. These perceptions are fairly similar to the expectations the bankers have reported in surveys over the past two years, a time during which the gains in farmland values were fairly steady. Expectations for the individual District states generally fell in line with the overall picture. But the responses from Michigan suggest those bankers are somewhat less optimistic than those in the others District states. It appears the expectations of improving farmland values are underpinned by the perception that the demand to purchase farmland will be greater than a year ago, especially among non-farmer investors. Approximately one third of the bankers indicated that the demand among farmers to acquire farmland over the next three to six months will be up from a year earlier, with 16 percent Percent change in dollar value of "good" farmland July 1, 1995 to October 1, 1995 Top: Bottom: October 1, 1994 to October 1, 1995 • Illinois Indiana Iowa Michigan Wisconsin Seventh District July1, 1995 to October 1, 1995 October 1, 1994 to October 1, 1995 +2 +2 +1 0 +2 +1 +3 +8 +4 +1 +4 +4 +3 +3 +5 L. +5 III *Insufficient response. +4 suggesting there would be a decline (about half believed there would be no change). In comparison, nearly half the respondents indicated that the demand among non-farmer investors is expected to rise while 8 percent expect a decline. The situation in Wisconsin, however, differed from the other District states. The Wisconsin bankers expect a weakening in the demand among farmers but an especially sharp increase in the demand among non-farmer investors to acquire farmland. The bankers also reported that the demand for nonreal estate loans continued to grow at a moderate rate. As of October 1, the loan demand index stood at 123. This represents the 36 percent of the respondents who noted a year-over-year improvement in loan demand less the 13 percent that reported a decline. The remaining one-half of the respondents reported no change. The indicated gains in loan demand were more widespread in some District states than in others. The proportion of bankers noting a year-over-year rise in the demand for nonreal estate loans was relatively greater in Iowa than in the other District states, with over half the Iowa bankers noting an increase. Loan demand also appeared to be up in Illinois and Indiana, but about the same as a year earlier in Michigan and Wisconsin. In particular, well over two thirds of the respondents from Michigan thought that loan demand was unchanged from a year earlier. A small increase in the average loan-to-deposit ratio was reported for the third quarter, reflecting a further modest tightening in the liquidity of District agricultural banks. At 67.3 percent, the loan-to-deposit ratio reached its highest level since 1979 (see chart). The individual state averages stretched from a low of 61 percent in Illinois to a high of 76 percent in Wisconsin, with each of the five states logging an increase. But even though the loan-to-deposit ratio continued to climb, there was no clear trend in the availability of funds for agricultural lending during the third quarter. Overall, 19 percent of the respondents reported an increase in funding availability from a year ago while 15 percent thought a decline had taken place. The majority (nearly two-thirds) believed there had been no change from a year ago. Survey responses indicated that Illinois, Indiana, and Iowa followed the overall pattern. However, the availability of funds for agricultural lending appeared to be somewhat improved in Michigan when compared to a year earlier, while the responses from the Wisconsin bankers suggested a modest tightening. The bankers reported that interest rates on farm loans trended somewhat lower for the second consecutive quarter. But despite the general decline—which occurred in each District state—farm loan interest rates remain above the levels of a year earlier. As of October 1, the Average loan-to-deposit ratio at District agricultural banks percent 70 65 60 55 50 1111111 1977 '79 '81 '83 '85 '87 October 1 '89 '91 '93 '95 reported rate on new farm real estate loans averaged 9.27 percent, a decline of nearly 40 basis points from 3 months earlier. In comparison, the average operating loan rate edged down about 10 basis points from three months earlier to 10.16 percent. Among the individual states, the real estate loan rate ranged from a low of 9.11 percent in Illinois to a high of 9.73 percent in Michigan. The average operating loan rate ranged from a low of 9.88 in Illinois to a high of 10.69 in Michigan. The October 1 survey also asked the bankers to share their expectations of the net cash earnings of farmers for the next three to six months as compared to a year earlier. There was considerable variation among the responses, which probably reflects disparate trends in cattle and hog prices, uncertainty over grain prices and final yields, and different harvest conditions from one area to another. For example, the latest USDA report on crop production indicates the corn harvest in Michigan will drop 6 percent this year, while the other four District states are projected to register much greater declines. In comparison, soybean production is expected to drop in each District state except Michigan. But sharp gains in corn and soybean prices will offset the production shortfall for many farmers. So while 43 percent of the bankers thought that the earnings of crop farmers would be up from a year ago, a similar proportion-35 percent—believe that net earnings will decline. But thanks to the higher grain prices and more favorable crop conditions in Michigan, it is clear the bankers in that state expect the net earnings to crop farmers to improve from a year ago. The bankers' outlook for livestock and dairy farmers in the near term was relatively more pessimistic than that for crop farmers. Beef cattle prices have been below yearearlier levels throughout 1995. And while milk prices and hog prices are currently above a year ago, net earnings will Credit conditions at Seventh District agricultural banks Loan demand Fund availability Loan repayment rates (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 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 9.39 129 123 111 107 128 123 123 127 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 7.88 136 139 132 112 121 107 96 102 94 90 94 111 59.9 62.5 64.5 63.8 8.52 8.98 9.38 9.99 8.48 8.95 9.30 9.93 7.97 8.48 8.86 9.48 122 124 123 96 104 104 98 93 98 64.8 66.1 67.3 10.33 10.24 10.16 10.26 10.20 10.14 9.68 9.64 9.27 1991 Jan-Mar Apr-June July-Sept Oct-Dec 1992 Jan-Mar Apr-June July-Sept Oct-Dec 1993 Jan-Mar Apr-June July-Sept Oct-Dec 1994 Jan-Mar Apr-June July-Sept Oct-Dec 1995 • Jan-Mar Apr-June July-Sept. Interest rates on farm loans Real Feeder estate' cattle' Operating loans' Average loan-todeposit ratio' 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. be squeezed by higher feed costs. Consequently, about a third of the bankers believe that net cash earnings to cattle and hog farmers will register a year-over-year gain during the next three to six months, while 45 percent think a decline will occur. About a third of the bankers believe that net cash earnings to dairy farmers will decline, with the remainder expecting little change from a year ago. However, a much larger proportion of the bankers from Wisconsinwhere the dairy industry predominates-expect a decline. The pace of loan repayments during the third quarter appeared to be similar to that of the previous year. The most recent reading of the index came in at 98, representing 11 percent who noted an increase and 13 percent who indicated a decline had occurred from a year earlier. Moreover, there was no clear concensus among the bankers as to the direction repayments will take in the near term. This is not surprising considering the differing views held by the bankers on the near-term outlook for net cash income. Looking ahead, about half do not expect any change in loan repayments over the next three to six months when compared to a year ago, while the rest are evenly split between an increase and a decline. However, when looking at the responses from the individual District states, it appears that a modest improvement in loan repayments is expected in Indiana and Michigan when compared to a year ago, while a modest decline is anticipated in Wisconsin. The bankers also indicated that year-over-year growth in loan volume during the fourth quarter will be modest, at best. About a quarter of the respondents thought nonreal estate loan volume would be up, while about 15 percent thought there would be a decline. Most believe there will be no change from a year ago. Expectations were similar for real estate lending. Mike A. Singer AgLetter (ISSN 1080-8639) 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 Year Two years ago ago Latest period Value Prior period 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 (0 per doz.) October October October October October October October October October October October 105 114 2.95 83.00 6.17 4.71 92 47.30 61.90 13.20 66.5 1.0 0.9 9.7 3.4 3.0 4.2 -1.1 -3.7 -0.2 3.1 -0.2 11 15 43 -4 16 25 3 46 -6 2 15 4 11 29 -2 3 45 -7 0 -15 1 11 Consumer prices (index, 1982-84=100) Food October October 154 149 0.3 0.3 3 3 5 6 September 1 September 1 September 1 September September October 1,558 335 1,881 2.21 1.44 11.0 N.A. N.A. N.A. -4.2 -4.3 2.5 83 60 -9 4 -7 1 -26 15 -12 9 0 N.A July July July July 14,175 7,465 6,645 64 7.7 18.3 -0.6 -61.0 10 24 -1 -15 -2 20 -11 -92 Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) August August August August 4,385 210 47 127 10.6 9.3 13.2 35.9 25 85 15 16 49 112 90 24 Farm machinery sales (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines October October October October 6,136 3,721 2,415 987 33.6 14.5 79.8 13.1 9 8 11 -8 17 25 5 6 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.) .Receipts from farm marketings Crops** Livestock Government payments dol.) • • N.A. Not applicable *22 selected states. *"Includes net CCC loans. 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