The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
t
LIBRARY
DEC
Z 1986
FEDERAL RESERVE
{lANK OF CHICAGO
I
I
FKB CHICAGO
I
AGRICULTURAL LETTER
FEDERAL RESERVE BANK OF CHICAGO
November 7, 1986
Credit trends at District agricultural banks
Credit conditions continue to exhibit trends established in the last several quarters according to a recent
survey of 530 agricultural bankers. Fund availability
at the banks continued ample in the third quarter
while loan demand among farmers remained weak.
Interest rates charged by banks on farm loans continued to drop, registering the eighth consecutive quarterly decline. Farm loan repayment rates at banks
remained weak, but showed some signs of stability.
However, the bankers' responses suggest that the difficulties of many financially-strapped farmers will require further restructuring of their balance sheets and
maintain pressure on repayment rates in the months
ahead.
The measure of nonreal estate farm loan demand,
which has been below 100 for the last several surveys,
continues to denote weak demand for loans by farmers at District agricultural banks. At 68, the third
quarter measure of farm loan demand is up negligibly
from the previous quarter but well below a year ago.
The measure represents a composite of the 14 percent
of the respondents noting a pickup in loan demand at
their institutions, less the 46 percent noting a drop
from the same period last year. The remainder of the
reporting bankers, about 59 percent, indicate that
nonreal estate farm loan demand at their banks was
unchanged from a year earlier.
The measure of farm loan demand showed a rather
clear division between the District states. Responses
from Michigan and Wisconsin bankers indicated a
somewhat smaller dropoff than the other states, with
measures of farm loan demand of 80 and 91. Bankers
in the other District states, with measures ranging
from 61 to 63, indicated a more pronounced drop in
demand.
The weak loan demand evident in the bankers' responses reflects the general contraction of debt that
has occurred in the farm sector over the last several
years. Nonreal estate debt owed by farmers to institutional lenders dropped 1.5 percent in 1985 and
about 1 percent during the first half of 1986. However,
when price support loans from the Commodity Credit
Corporation (CCC) are excluded from the total, the
decline in nonreal estate debt owed by farmers is significantly greater, registering year-to-year declines of
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Number 1694
10 percent in 1985 and 13 percent during the first six
months of 1986. Because of the high level of participation in government programs CCC support loans
are widely available and have likely substituted for
commercial credit in many instances. In addition,
large government payments to farmers this year have
also lowered farm loan demand.
A number of other factors have also contributed to a
drop in farm lending. Lower production costs and reduced acreage for program crops along with reduced
dairy and hog output have limited demand. Continuing efforts by producers to rein-in costs and operate
more efficiently, which in many cases has meant reducing the size of operations or foregoing additional
capital expenditures, has also curtailed farmer borrowing. In addition, the willingness of some lenders to
extend credit to farmers has likely been tempered by
the erosion of farm sector equity and cash flow difficulties of some farmer borrowers during recent years.
Despite the reduction in farm loans, fund availability
has not been a constraining factor. As has been the
case throughout the 1980s, District agricultural banks
had an adequate supply of funds for lending to farmers. The third quarter measure of fund availability remained at a high level, with very few bankers, less than
5 percent, reporting a decline. Half of the survey respondents indicated that funds available for lending to
farmers during the third quarter were higher than a
year earlier, while 45 percent reported no change from
the third quarter of 1985. The measure of fund availability was high across all District states, ranging from
158 in Iowa to 120 in Michigan.
The weakness in farm loan demand and the ample
supply of funds for lending are reflected in the relatively low loan-to-deposit ratios of District agricultural
banks. At 51.4 percent, the average of the responding
banks' loan-to-deposit ratios was about the same as
three months earlier, but well below the 55.5 percent
level of a year earlier. Moreover, lending at agricultural
banks as a proportion of total deposits remains well
below the high levels of the late 1970s and early 1980s,
when loan-to-deposit ratios at District agricultural
banks averaged nearly 70 percent. Among the five
District states, Illinois and Iowa banks had average ratios of about 47 percent, while agricultural banks in
the remaining states had average ratios that ranged
from 56 to 61 percent.
Selected measures of credit conditions
at Seventh District agricultural banks
Average
loan -to - deposit
rat io 1
(percent)
(percent)
Banks w ith
loan-to - deposit
ratio above
des ired level 1
Loan
demand
Fund
ava ilab ility
( index}2
(index) 2
( index) 2
152
148
158
135
79
73
64
62
64
81
84
93
8.90
9.12
9.40
10.14
63.7
64.5
65.8
65.4
44
46
52
50
156
147
141
111
51
62
61
67
85
91
89
79
10.46
10.82
11 .67
13.52
67 .3
67.1
67 .6
66.3
58
55
52
48
85
65
73
50
49
108
131
143
51
68
94
114
17.12
13.98
14.26
17.34
66.4
65.0
62.5
60.6
51
31
21
17
70
85
66
66
141
121
123
135
90
70
54
49
16.53
17.74
18.56
16.94
60.1
60.9
60.9
58.1
17
20
21
17
76
85
87
74
134
136
136
151
36
41
36
47
17.30
17.19
15.56
14.34
57 .8
57 .3
57 .8
55.1
18
14
15
11
69
85
81
101
158
157
156
153
66
78
78
78
13.66
13.49
13.70
13.65
53 .3
54.0
54.8
53 .6
6
6
8
8
131
138
120
103
135
128
122
124
62
64
59
49
13.82
14.32
14.41
13.61
54 .4
55 .7
57 .2
55 .9
12
14
17
19
107
105
90
68
120
133
127
144
47
56
59
97
13.48
12.93
12.79
12.70
56 .1
55.1
55.5
52 .7
17
14
14
10
74
65
68
149
152
146
80
86
87
12.34
11 .81
11.31
50.9
51 .1
51 .4
8
6
6
1978
Jan - Mar
Apr-June
July- Sept
Oct - Dec
Average rate
on feeder
cattle loans 1
Loan
repayment
rates
(percent
of banks)
1979
Jan - Mar
Apr -June
Ju ly - Sept
Oct- Dec
1980
Jan - Mar
Apr - June
Ju ly - Sept
Oct -Dec
1981
Jan - Mar
Apr-June
Ju ly - Sept
Oct- Dec
1982
Jan - Mar
Apr -June
July- Sept
Oct- Dec
1983
Jan - Mar
Apr -June
July-Sept
Oct - Dec
)i
1984
Jan - Mar
Apr -June
July- Sept
Oct - Dec
1985
Jan - Mar
Apr -June
July- Sept
Oct-Dec
1986
Jan - Mar
Apr -June
July-Sept
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.
Most of the bankers indicated that their current loanto-deposit ratio was below the desired level. The average of the desired ratios for the District as a whole,
at about 60.5 percent, was about 9 percentage points
higher than the average of the actual ratios at the end
of the third quarter. Almost 74 percent of the respondents reported that their actual ratio was below
the desired level, while about 21 percent indicated
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
that their current loan-to-deposit ratio was satisfactory. The remainder of the survey respondents, less
than 6 percent, desired a lower ratio.
Interest rates on farm loans at District agricultural
banks fell again during the third quarter, extending the
decline that began in the final months of 1984. Average rates on feeder cattle and farm operating loans
~
stood at 11.3 percent at the end of the third quarter,
down about 50 basis points from three months earlier
and 150 points lower than a year earlier. Interest rates
on farm real estate loans have also dropped sharply.
At the end of September, surveyed banks reported an
average rate on farm real estate loans of 10.75 percent,
about 50 basis points lower than three months earlier
and 175 points below last year.
Although rates on farm real estate loans are fairly
consistent across the District states, banks in Iowa and
Wisconsin continue to report somewhat higher rates
on feeder cattle and operating loans. Rates on short
term loans at Iowa and Wisconsin banks averaged
about 11.8 and 11.4 percent, respectively, while the
other District states averaged about 11 percent at the
end of the third quarter.
Despite the recent drops in rates charged on nonreal
estate loans to farmers, the decline has been significantly .smaller than the drop in the prime rate, a
benchmark from which many banks price their commercial and industrial loans. Since the most recent
peak in the third quarter of 1984, the average rate
charged by District agricultural banks on farm operating loans has dropped about 3 percentage points while
the prime rate has fallen about 5 percentage points
over the same two year period. However, most of the
difference in the rate reductions is accounted for in
the first year of the period, when agricultural banks
were first coming to grips with mounting arrears and
loan losses and adjusting for the increased risks of agricultural lending. During the last four quarters, on the
other hand, the 1.5 percentage point drop in average
operating loan rates at District agricultural banks has
come closer to the 2 percentage point drop in the
prime.
Bankers' responses continued to indicate some weakness in loan repayment among farmer borrowers. The
third quarter measure of loan repayment rates, at 87,
represents a composite of the 13 percent of bankers
noting an improvement in farm loan repayment rates
from a year earlier less the 26 percent noting further
declines. However, for the second consecutive quarter a majority of the respondents-more than 60
percent-indicated that repayment rates were unchanged from a year ago, suggesting some stabilization of repayments at District agricultural banks.
Repayment rates were reported unchanged by a majority of the respondents in each of the District states,
although responses from Michigan bankers indicated
a somewhat weaker position than bankers in the other
states, likely reflecting the recent flood damage in that
area. On the other hand, Iowa bankers reported the
strongest repayment situation, with a slightly larger
proportion noting an improvement than noting a decline.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The more stable repayment situation in Iowa and
other District states is attributable to a number of factors. Returns to livestock producers improved sharply
this summer and have continued strong through the
fall months, boosting the cash flow of many financially
stressed farm borrowers. The whole-herd Dairy
Buyout Program and the Conservation Acreage Reserve Program have provided relief for participants
suffering a cash squeeze. In addition, the accelerated
schedule for cash and in-kind deficiency payments to
the large number of farmers enrolled in crop support
programs has injected a huge amount of liquidity into
the farm sector.
Despite the large level of government payments,
about three-fourths of the surveyed bankers expect
that the net cash earnings of crop farmers will drop
below a year ago during the fall and winter months.
However, a similarly large majority expect that the net
earnings of cattle and hog producers will register
year-to-year gains over the next several months. The
banker's expectations regarding dairy farmers'
earnings are more mixed, with the proportion expecting a decline outweighing the proportion expecting an
increase. However, the majority of the survey respondents expect dairy farmers' incomes to be unchanged from last fall and winter.
Based on these income trends, agricultural· bankers in
the District expect the financial pressure on many
highly leveraged farmer borrowers to continue. About
a fifth of the respondents anticipate an increase in the
volume of farm loan repayments during the fall and
winter months, but about a third expect a drop from
the year-ago level during the period. In addition, more
than half of the respondents foresee an increase in
forced sales or liquidation of farm capital assets among
financially-stressed farmers compared to the fall and
winter months of a year ago, suggesting that the
process of adjustment in the farm sector that has been
underway for some time has not run its course.
Peter
J. Heffernan
AGRICULTURAL LETTER (ISSN 0002-1512) is published bi-weekly by the
Research Department of the Federal Reserve Bank of Chicago. It is
prepared by Gary L. Benjamin, economic adviser and vice-president,
Peter J. Heffernan, 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
publi cation 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
Tel.no. (312) 322-5111
Selected Agricultural Economic Indicators
Percent change from
Latest
period
Value
Prior
period
Year
ago
Two years
ago
October
October
October
October
October
October
121
96
1.31
1.04
4 .50
2.33
-0.8
-1 .0
-9 .0
5.1
-7 .4
2.2
-2
-14
-38
-4
-7
-25
-12
-30
-51
-38
-26
-32
Livestock and products (1977= 100)
Barrows and gilts ($per cwt.)
Steers and heifers ($per cwt.)
Milk ($per cwt.)
Eggs (¢per doz.)
October
October
October
October
October
145
53.80
59.00
13.00
58.1
-0.7
-8 .5
0.7
2.4
-7.5
8
23
4
3
-9
5
21
0
-7
4
Prices paid by farmers (1977= 100)
Production items
Feed
Feeder Iivestock
Fuels and energy
October
October
October
October
October
160
143
98
160
154
t
-0.6t
-1 .4t
-8.4t
3.9t
-0.6
-1
-3
-9
8
-24
-2
-6
-22
7
-23
Producer Prices (1967=100)
Agricultural machinery and equipment
Fertilizer materials
Agricultural chemicals
October
October
October
October
291
340
198
477
1.0
-0.1
-2 .8
-0.3
-1
1
-13
4
0
1
-16
4
Consumer prices (1967=100)
Food
September
September
330
323
0.5
0.2
2
4
5
6
Production or stocks
Corn stocks ( mil. bu.)
Soybean stocks (mil. bu.)
Beef production (bi/. lbs.)
Pork production (bi/. lbs.)
Milk production (bi/. lbs.)tt
September 1
September 1
September
September
September
4,038
536
2.05
1.14
9.77
N.A.
N.A.
-1 .3
9.6
-4.6
145
70
3
-5
-3
301
205
8
0
7
Prices received by farmers (1977=100)
Crops (1977=100)
Corn ($per bu.)
Oats ($per bu.)
Soybeans ($per bu.)
Wheat ($per bu.)
~.A. Not applicable
tt'.rior period is three months earlier.
21 selected states.
~11111
)
AGRICULTURAL LETTER
FEDERAL RESERVE BANK OF CHICAGO
Public Information Center
P.O . Box 834
Chicago, Illinois 60690
(312) 322-5112
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
)