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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1918 November 2002 AgLetter FARMLAND VALUES AND CREDIT CONDITIONS the previous year in all District states, reinforcing growing concern about financial stress in the agricultural economy. Interest rates on agricultural loans dropped across the District again, the ninth quarterly drop in a row. Loan-to-deposit ratios climbed to the highest average in two years, still about 3 percent below the average the bankers reported as their desired ratio. Hence, there are a few positive signs mixed with the signs of deterioration in agricultural credit conditions. Summary Demand to purchase farmland grew last quarter, especially among nonfarm investors, contributing to the increase in the value of “good” agricultural land for the Seventh Federal Reserve District. Based on a survey of more than 360 agricultural bankers as of October 1, 2002, the quarterly increase in farmland values rose to 2 percent, on average, for the District as a whole. For the twelve months ending September 30 the increase was 7 percent. The year-over-year increase exceeded that of last year. Looking ahead, more bankers expected farmland values to go up and fewer expected farmland values to decline in the next three months. Farmland values Overall, the value of “good” agricultural land continued to rise in the third quarter of 2002, but the survey provided evidence of differences among District states (see map and chart below). From July 1 to October 1, the rate of change in Michigan’s farmland values moved ahead of the other states with a 4 percent increase (quarter-to-quarter), whereas Illinois, with no change, trailed the rest. Wisconsin experienced reduced upward pressure on farmland values in the past year, as dairy prices recover very slowly from lows not seen since the 1970s. Farmland value gains in Indiana, where crop yields were poor, have also slowed, with a 1 percent increase, on average, in the third quarter. Iowa exhibited steady growth of 2 percent for the quarter, as crop yields were even stronger than expected. There has been some deterioration in agricultural credit conditions from a year ago according to District bankers. In the third quarter, although the availability of funds was greater than last quarter but down slightly from a year ago, demand for loans was unchanged. However, a larger proportion of banks required increased collateral, which may have constrained demand. More renewals and extensions of loans were generated in the third quarter than a year earlier, according to the respondents. Even with an improvement from last quarter, the rate of loan repayment declined from Percent change in dollar value of “good” farmland XII VI Top: July 1, 2002 to October 1, 2002 Bottom: October 1, 2001 to October 1, 2002 July 1, 2002 to October 1, 2002 Illinois Indiana Iowa Michigan Wisconsin Seventh District 0 +1 +2 +4 +1 +2 October 1, 2001 to October 1, 2002 +4 +5 +7 +10 +7 +7 –2 +6 II I 0 +5 +2 +6 +6 +8 V III *Insufficient response. VII XIV +3 +8 IV +1 +5 VIII 0 +10 –1 +9 * * +1 +7 XV IX +2 +3 +2 +8 X XI 0 +3 XVI 0 +4 The average year-over-year increase in District farmland values was 7 percent. Michigan, at one end of the range, recorded a 10 percent gain, while Illinois at the other end reported a 4 percent gain. These gains were supported by demand from nonfarm investors, which seems to have increased as other investments have tumbled and as cities continue to expand. Fueled by demand from the nonfarm sector, 27 percent of Seventh District bankers anticipated farmland values to rise, with only 6 percent seeing a fall. Only in Wisconsin was there a higher proportion of respondents that expect farmland values to fall than rise during the next three months. At the other end of the spectrum, 44 percent of the Iowa bankers that responded predicted a rise in farmland values, reflecting the outstanding yields in much of the state. Credit conditions In the third quarter of 2002, agricultural banks had more funds available to lend, but there was flat demand for agricultural loans. Over 30 percent of the bankers reported they had more funds available during July, August and September than they had a year earlier. All District states reported improved funds availability, but a larger proportion of bankers in Illinois, Michigan, and Wisconsin noted increased funds availability. The index of fund availability was 124, highest of the year (see table on page 3). At the same time, 24 percent of the bankers reported higher demand for non-real estate loans, while 25 percent reported a decline. Thus, the index of loan demand dropped to 99, the lowest since an index of 91 last year at this time. There was very little increased demand for non-real estate loans in Michigan reported for last quarter, though the proportion of banks reporting decreases was also the lowest in the District. Despite the continued pressures on farm incomes in most of the District, the respondents indicated that non-real estate farm loan repayment rates had improved from last quarter, but had fallen since last year. About 30 percent of the bankers reported lower rates of loan repayment, while only 6 percent reported higher rates. These numbers increased the index of loan repayment rates to 76. Moreover, there were more renewals and extensions, with 30 percent, on average, of the bankers noting an increase, and only 7 percent noting a decrease. Lenders in Michigan and Wisconsin reported the lowest levels of loan repayments, as well as the highest levels of renewals and extensions. With signs of increased problems in agricultural loans, banks tightened collateral requirements, with 21 percent requiring a higher level of collateral in the past three months. Very few banks reported lower amounts of collateral required for non-real estate loans. Offsetting the impact of tighter collateral requirements to some extent, banks reported once again that farm loan interest rates had declined. As of October 1, the District average for interest rates on new operating loans had fallen to 7.17 percent, more than 325 basis points lower than the cyclical peak of two years ago. And, at an average of 6.83 percent, interest rates for farm mortgages were down over 235 basis points from the last peak. The spread widened a bit, another indication of heightened uncertainty in the agricultural sector. Looking forward Comparing the fourth quarter of 2002 with the fourth quarter a year ago, 23 percent of the bankers reported that they expect higher non-real estate loan volume, while 23 percent expect lower volume. Respondents look for increases primarily in operating loans (35 percent) and Farm Service Agency (FSA) guaranteed loans (27 percent). Only a fifth foresee higher real estate loan volume. A majority of the respondents indicated that they expected loan volumes would remain the same in the fourth quarter of this year compared with a year ago. However, in Wisconsin over 40 percent anticipate lower volumes for both real estate and non-real estate loans, with a similar percentage anticipating a rise in operating loans. Based on record yields and higher corn and soybean prices than last year, 29 percent of Iowa respondents expect higher farm machinery loan volume, the only state with a sizeable increase. The increasing reliance on loan guarantees seems to have slowed. Bankers were asked to indicate if they expect to rely more heavily on the USDA’s FSA farm loan guarantees during October through December than they did during the same period a year ago.1 Although 27 percent of the respondents indicated that more loans would have FSA guarantees, 13 percent indicated a reduction in their utilization of the guarantees. Together these numbers represent a slowing in the increased use of FSA guaranteed loans. The most notable characteristic of the farm real estate market was the 65 percent of bankers that expect higher Quarterly District farm loan interest rates percent 13 11 Farm operating 9 Farm real estate 7 1990 ’92 ’94 ’96 ’98 ’00 ’02 Credit conditions at Seventh District agricultural banks Interest rates on farm loans Loan demand Fund availability Loan repayment rates Average loan-todeposit ratio1 Operating loans1 Feeder cattle1 Real estate1 (index)2 (index)2 (index)2 (percent) (percent) (percent) (percent) 1998 Jan-Mar Apr-June July-Sept Oct-Dec 134 127 117 113 113 102 104 121 84 74 60 57 68.9 72.7 72.0 70.3 9.52 9.54 9.43 9.09 9.51 9.55 9.41 9.07 8.50 8.52 8.33 8.06 1999 Jan-Mar Apr-June July-Sept Oct-Dec 120 115 109 107 119 107 94 104 40 50 63 72 69.9 71.7 72.7 72.7 9.03 9.11 9.32 9.44 9.01 9.08 9.28 9.41 8.06 8.18 8.42 8.59 2000 Jan-Mar Apr-June July-Sept Oct-Dec. 121 109 106 105 95 76 82 92 77 72 77 81 72.9 75.5 76.9 74.9 9.78 10.43 10.17 9.92 9.72 10.14 10.14 9.90 8.89 9.21 9.18 8.90 2001 Jan-Mar Apr-June July-Sept Oct-Dec 118 106 91 101 101 109 127 129 67 73 86 75 75.0 75.1 74.9 72.8 9.16 8.60 8.01 7.41 9.17 8.58 8.07 7.51 8.23 7.91 7.47 7.21 2002 Jan-Mar Apr-June July-Sept 108 105 99 118 120 124 66 71 76 72.7 75.1 75.8 7.33 7.28 7.17 7.48 7.35 7.23 7.22 7.08 6.83 1 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. 2 demand from nonfarm investors for the purchase of agricultural land in their areas over the next six months compared to a year ago. Some bankers speculated that investors pulled out of the stock market to invest in farmland. Respondents see the volume of farmland transfers increasing as well. Only in Iowa and Illinois (to a lesser extent) did bankers anticipate greater interest by farmers in the purchase of agricultural land. A majority of Wisconsin bankers foresee a retreat in interest in land by farmers, especially as they expect an increase in forced sales or liquidation of farm assets among financially stressed farmers. In fact, across the District bankers foresee some increase in forced sales and liquidations over the next six months compared with last year. Financially stressed operations not only face low prices for many agricultural products, but also must deal with disruptions due to the implementation of the Farm Security and Rural Investment Act of 2002 and uncertainty concerning the passage of emergency federal farm aid. Even though farmland values continued to rise this quarter, and most likely for the near future, there seems to be a spreading unease about the future of agriculture in much of the District. David B. Oppedahl, Associate economist 1 FSA guarantees apply to ownership and operating loans to farmers who do not meet the standards of conventional lenders. Guarantees may apply up to 90 percent of the loan principal, and lenders may resell the guaranteed portion in a secondary market. AgLetter (ISSN 1080-8639) is published quarterly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Jack L. Hervey, senior 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 AgLetter is also available on the World Wide Web at http://www.chicagofed.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) Barrow and gilts ($ per cwt.) Steers and heifers ($ per cwt.) Milk ($ per cwt.) Eggs (¢ per doz.) October October October October October October October October October October October 95 101 2.36 94.50 5.16 4.41 87 32.60 67.80 11.9 54.0 –4.0 –8.2 –4.5 –0.1 –4.3 4.8 1.2 19.9 –0.3 2.6 –6.7 1 15 28 –4 26 54 –16 –20 –3 –24 –10 2 11 36 11 16 56 –10 –22 –4 –5 –19 Consumer prices (index, 1982-84=100) Food October October 181 177 0.2 0.1 2 1 4 4 September 1 September 1 September 1 September September October 1,599 208 1,740 2.20 1.64 12.0 N.A. N.A. N.A. –10.9 0.1 3.1 –16 –16 –19 4 8 2 –7 –28 –26 –3 5 2 July July July July 16,269 7,862 8,407 N.A. 19.5 22.0 17.2 N.A. –4 7 –12 N.A. 1 13 –8 N.A. September August September August 3,946 159 31 94 –4.2 –4.8 –17.0 17.0 1 –30 –2 2 –3 –15 –40 –13 October October October October 7,562 5,157 2,405 779 59.6 33.2 177.4 25.0 1 5 –7 –5 0 –1 4 –7 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 (mil. dol.) Crops** Livestock Government payments Agricultural exports (mil. dol.) Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) Farm machinery (units) Tractors, over 40 HP 40 to 100 HP 100 HP or more Combines N.A. Not applicable *20 selected states. **Includes net CCC loans.