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The Agricultural Newsletter from the Federal Reserve Bank of Chicago Number 1930 AgLetter November 2005 basis points lower than the most recent cyclical peak in 2000. The average loan-to-deposit ratio inched up, equaling the high set in 2000, but was 3.3 percent below the ratio desired by respondents. FARMLAND VALUES AND CREDIT CONDITIONS Summary Despite continued increases in the value of “good” agricultural land for the Seventh Federal Reserve District, agricultural bankers painted a gloomier picture of credit conditions. The survey results for 262 agricultural bankers as of October 1, 2005, showed a quarterly gain in farmland values of 3 percent for the District. The 11 percent rise in farmland values for the twelve months ending September 30 remained close to the highest of the last 25 years. A third of the responding bankers expected land values to increase in the fourth quarter of 2005. Farmland values The value of “good” agricultural land in the District continued to climb in the third quarter of 2005, rising 3 percent for the quarter. The quarterly results for District states (see map and table below) varied from no gain in Indiana to 4 percent gains in Iowa and Wisconsin. Bankers continued to comment on the key role tax deferred exchanges play in boosting farmland values. The year-over-year increase in District farmland values averaged 11 percent. Wisconsin had the largest gains in land values, closely followed by Illinois, Indiana, and Iowa. Michigan farmland values increased the least, reflecting greater economic distress relative to other District states. Consequently, Michigan’s slower growth in farmland values was due in part to less pressure from development. Agricultural credit conditions in the third quarter of 2005 deteriorated from a year ago according to District bankers. Loan repayment rates in the District fell below the levels of a year ago, the first decline in two years. Renewals and extensions of loans increased in the third quarter relative to a year earlier. The proportion of banks requiring more collateral was larger than in recent quarters, with 86 percent of respondents keeping collateral requirements unchanged. Moreover, the availability of funds was less than the previous year for the first time since 2000, though loan demand rose compared to a year ago. Average interest rates on agricultural loans increased again, still more than 200 The proportion of respondents expecting farmland values to go up in the next three months declined to a third. Only in Wisconsin did more than a third (45 percent) expect farmland values to rise during the fourth quarter of 2005. Overall, almost two-thirds anticipated that farmland values will be stable from October to December. Percent change in dollar value of “good” farmland Top: July 1, 2005 to October 1, 2005 Bottom: October 1, 2004 to October 1, 2005 Illinois Indiana Iowa Michigan Wisconsin Seventh District July 1, 2005 to October 1, 2005 +3 0 +4 +3 +4 +3 October 1, 2004 to October 1, 2005 +12 +11 +11 +4 +14 +11 VI +5 +11 II I +4 +9 +3 +13 +3 +10 V +5 III +14 * VII +4 +18 IV XIV * X +6 +11 VIII +2 +12 *Insufficient response. XII * IX –1 +11 XV XI +2 +12 XVI +3 +10 –1 +12 respondents said that the state faces the bleakest net cash income forecast with over 80 percent seeing declines from crops, without much prospect of livestock increases. Government payments helped compensate for the loss of market income, increasing by $13.3 billion from disbursements in 2004. The stream of government payments has also contributed to the increases of farmland values. 1. Real net farm income billion 2004 $ 90 government payments 75 60 45 30 15 0 1980 ’85 ’90 ’95 2000 ’05* *Projected. Source: Data from USDA. Strong demand for farmland among nonfarm investors remained the dominant factor producing these expected increases, even as demand among farmers cooled. More respondents thought interest by nonfarm investors to acquire farmland will rise rather than fall (57 percent versus 9 percent) over the next three to six months. However, 5 percent more bankers expected demand among farmers to go down than up, with about half seeing farmer demand unchanged. This perception was strongest in Illinois, possibly because of lower corn and soybean yields due to drought. In contrast, Indiana and Wisconsin respondents had expectations for higher demand by farmers. Half of the responding bankers anticipated the volume of farmland transfers to remain unchanged during the fall and winter, while almost 40 percent expected higher volumes of transfers (especially in Illinois). One explanation for the lower interest among farmers to acquire farmland this fall and winter relates to the drop in net farm income from the record set in 2004 (see chart 1). The U.S. Department of Agriculture (USDA) estimated that net farm income this year will be $71.5 billion, down $11 billion from last year. The decrease is primarily due to lower crop production, combined with some lower crop prices. For District states the corn harvest was forecast to be 5.48 billion bushels this year, 7 percent below 2004's record. District production of soybeans was estimated at 1.37 billion bushels, a 3 percent decline from last year’s record harvest. Survey results for the District echoed the USDA forecasts, as over 60 percent of the respondents expected decreased net cash farm earnings over the next three to six months compared with a year earlier for crop farmers. About 10 percent more respondents expected higher rather than lower net cash farm earnings for cattle and hog producers, while the split was essentially even for dairy farmers. Illinois Credit conditions Most measures of credit conditions worsened in the third quarter of 2005. A primary factor in this reversal from a year ago is the predicted decline in net farm income. Yet, even when adjusted for inflation, net farm income in 2005 will be higher than almost all years prior to 2004. Still, bankers indicated that non-real-estate farm loan repayment rates fell from last year, ending a string of improvements fueled by higher agricultural prices and output. With 6 percent of the respondents reporting higher rates of loan repayment and 18 percent reporting lower rates, the index of loan repayment rates was 87, the first dip below 100 in two years (see table on the next page). Furthermore, loan renewals and extensions were up from a year ago, with 22 percent of the bankers indicating an increase and 5 percent indicating a decrease. Only Wisconsin had higher levels of loan repayments and lower levels of renewals and extensions. Wisconsin may have bucked the trend toward worsening credit conditions due to increases of over 20 percent in corn and soybean production compared with 2004, as well as a more diversified agricultural sector. Collateral requirements at District banks tightened more than in recent quarters, with 13 percent requiring a higher level of collateral in the past three months. Moreover, fund availability was down from a year ago, for the first time in over four years. With 15 percent of the bankers reporting they had more funds available during July, August, and September than they had a year earlier and 18 percent reporting they had less, the index of fund availability was 97. 2. Quarterly District farm loan interest rates percent 13 11 Farm operating 9 Farm real estate 7 5 1990 ’92 ’94 ’96 ’98 ’00 ’02 ’04 ’06 Credit conditions at Seventh District agricultural banks Interest rates on farm loans Loan Fund Loan Average loan-to- Operating Feeder Real demand availability repayment rates deposit ratio loans1 cattle1 estate1 (index) 2 (index) 2 (index) 2 (percent) (percent) (percent) 2003 Jan–Mar 109 130 79 72.4 6.61 6.75 Apr–June 99 138 84 72.7 6.43 6.52 July–Sept 95 129 86 72.9 6.41 6.47 Oct–Dec 97 127 104 71.8 6.26 6.35 (percent) 6.36 6.04 6.12 6.05 2004 Jan–Mar Apr–June July–Sept Oct–Dec 116 101 109 109 131 117 111 121 128 118 112 127 73.2 73.7 74.5 74.1 6.22 6.39 6.57 6.81 6.28 6.46 6.61 6.80 5.87 6.23 6.28 6.39 2005 Jan–Mar Apr–June July–Sept 117 119 115 112 101 97 116 103 87 74.4 76.3 76.9 7.07 7.33 7.68 7.08 7.30 7.65 6.63 6.74 7.02 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. 1 2 Non-real-estate loan demand rose again for the seventh quarter in a row. More respondents (30 percent) reported higher demand for non-real-estate loans from a year earlier than reported a decline in demand (15 percent). This set the index of loan demand at 115, down a bit from last quarter. Iowa, followed by Illinois and Indiana, experienced the strongest demand for non-real-estate loans. Farm loan interest rates increased again (see chart 2 and table above). As of October 1, the District average for interest rates on new operating loans rose to 7.68 percent, the highest level in four years. Interest rates on operating loans ranged from 7.36 percent in Illinois to 7.86 percent in Iowa. At 7.02 percent, interest rates for farm mortgages were at the highest level in over three years. For farm real estate loans, Illinois again had the lowest rate, 6.89 percent, and Wisconsin had the highest rate, 7.29 percent. The District loan-to-deposit ratio was 76.9 percent, matching the highest ever reading in 2000. Illinois (68.1 percent) pulled down the District average, as the other states were near 80 percent or above. The percentage of banks that reported being above their desired loan-todeposit ratio was 18 percent versus 47 percent below. Looking forward Responding bankers do not foresee improvement in credit conditions over the fall and winter. In contrast with last year at this time, more bankers (21 percent) expected an increase in forced sales or liquidation of farm assets among financially stressed farmers than expected a decrease (9 percent). These concerns were voiced by 35 percent more Illinois bankers, with almost 60 anticipating no change. In addition, respondents in all states expected the volume of farm loan repayments to decrease over the fall and winter, particularly in Illinois. For the period covering October, November, and December of 2005 compared with the same period last year, 33 percent of the respondents expected higher nonreal-estate loan volume. Only 10 percent expected lower volume for the District. Bankers anticipated increases in operating loans (49 percent), grain storage construction loans (23 percent), and Farm Service Agency (FSA) guaranteed loans (26 percent). Given recent increases in input costs and the piles of grain stored outdoors, these results are not surprising. Only in Indiana did more bankers foresee higher rather than lower real estate loan volume in the fourth quarter of 2005. David B. Oppedahl, Business economist AgLetter (ISSN 1080-8639) is published quarterly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by David B. Oppedahl, business economist, and members of the Bank’s Research Department. 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. © 2005 Federal Reserve Bank of Chicago AgLetter articles may be reproduced in whole or in part, provided the articles are not reproduced or distributed for commercial gain and provided the source is appropriately credited. Prior written permission must be obtained for any other reproduction, distribution, republication, or creation of derivative works of AgLetter articles. To request permission, please contact Helen Koshy, senior editor, at 312-322-5830 or email Helen.Koshy@chi.frb.org. AgLetter and other Bank publications are available on the Bank’s website at 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 110 101 1.74 97.70 5.44 3.54 122 49.10 96.0 15.4 53.4 –6.0 –9.8 –8.4 –1.3 –5.7 5.7 0.0 –1.6 4.0 0.7 –21.9 –4 –9 –19 5 –2 3 3 –7 5 –1 11 –3 –9 –18 17 –18 3 5 33 –2 3 –36 Consumer prices (index, 1982–84=100) Food October October 199 192 0.2 0.4 4 2 8 6 September 1 September 1 September 1 September September October 2,112 256 1,919 2.16 1.74 13.4 N.A. N.A. N.A. –6.9 –0.5 2.7 120 129 –1 3 –2 4 94 44 –6 –7 4 –4 June June June 17,101 7,370 9,731 –2.9 7.3 –9.4 –9 –1 –14 10 –4 24 September August August August 4,581 146 30 85 –5.5 1.2 51.5 –7.1 0 –5 181 –18 4 14 –12 –29 October October October October 9,760 6,901 2,859 549 26.4 10.2 96.6 –55.5 –4 2 –16 –50 15 18 8 1 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 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 *23 selected states. **Includes net CCC loans. Source: Data from USDA, U.S. Bureau of Labor Statistics, and the Association of Equipment Manufacturers.