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FEDERAL RESERVE BANK OF CHICAGO .0. ISSN 0002 - 1512 AD ft. Of NOG. t\ a September 30, 1983 4\1 ha t414°V61S1. THE BALANCE SHEET OF THE FARM SECTOR is expected to show some improvement this year, according to a recent analysis by the U.S. Department of Agriculture. For the first time since 1980, the value of farm sector assets is expected to rise. Moreover, for the first time since 1945, outstanding farm debt at the end of the year may be unchanged to slightly lower than the ending 1982 level. These projections, if correct, suggest that proprietor's equity in the assets employed in the farm sector will recoup a portion of the losses of the previous two years. Despite the rise, the inflation-adjusted value of proprietor's equity will still be 20 to 25 percent below the peak in real equity in 1980. • Farm balance sheet (January 1) 1980 Physical assets Real estate Nonreal estate Machinery Livestock and poultry Stored crops Household equipment Total Financial assets Total assets 1981 1982 1983 (billion dollars) 1984* 756 828 819 773 810 96 61 34 17 208 103 61 36 19 219 109 54 36 21 220 111 53 42 23 229 114 53 42 24 233 41 43 46 47 49 85 80 166 96 86 182 106 96 202 110 106 216 113 102 215 Equity 840 908 882 833 880 .165 .167 .186 .206 .200 *Figures shown represent the mid-points of ranges projected by the USDA. As such, components may not add to the totals shown. di Number 1613 lin* It in the first half of this year, particularly in the Midwest. And higher crop prices and farm sector earnings, along with lower than year-ago interest rates are expected to extend the trend. However, there is some concern that areas hit hardest by the summer drought may not share proportionately in the uptrend in the second half of the year. Real estate accounts for nearly three-fourths of the value of all farm assets, a share that is down only slightly from a couple of years ago but still up considerably from the range of 58 to 68 percent that prevailed in the 1950s and the 1960s. The remaining assets are livestock and poultry, stored crops, machinery and equipment, household furnishings of farm operators, and a partial accounting of the financial assets of farm operator families. The combined value of these nonreal estate assets at the beginning of this year was estimated at $276 billion, up nearly 4 percent from the year before and a new high. By the end of this year, the USDA analysis foreshadows a modest increase of about 2 percent. Although the quantity of crops in inventory will be lower—because of the drought and acreage cuts this year—higher crop prices will be about offsetting, holding crop values unchanged. The value of livestock and poultry at the end of this year is also expected to be roughly comparable to the yearearlier level. 1,005 1,090 1,083 1,049 1,090 Liabilities Real estate debt Nonreal estate debt Total Debt-to-asset ratio - 1ED E- The value of farm real estate assets is expected to rise about 5 percent this year. The increase would recoup at least a portion of the 7 percent decline in the value of real estate assets of the previous two years. A number of reports have noted an upturn in land values Farm debt, which grew at the extraordinary compound annual rate of 15 percent in the last half of the 1970s, has slowed noticeably in recent years. With high interest rates and low earnings discouraging capital expenditures and debt financing, the rise in outstanding farm debt slowed to 7.3 percent last year, the smallest annual rise since 1970. By the end of this year, the USDA believes that farm debt may be unchanged or perhaps even down somewhat from the $216 billion level that prevailed at the beginning of the year. If outstanding farm debt does decline, it would mark the first annual decline since 1945. The prospective decline in farm debt assumes a major reduction in outstanding nonreal estate farm 2 loans held by the Commodity Credit Corporation dur- While second-half trends are uncertain, it is clear ing the second half of this year. With the large move- that the year-to-year decline in farm loan portfolios held ment of grains under loan and into the reserve program by the Cooperative Farm Credit System continued to following record crop harvests in 1981 and 1982, outstanding CCC loans to farmers jumped from $5 billion at widen through August. However, with the cutback in debt held by the CCC, farm loan demand will increas- the end of 1980, to over $15 billion at the end of last year, ingly be shifting to other lenders. Moreover, FmHA and to roughly $16 billion by mid-1983. However, high lending may register a sudden spurt this fall as it cranks crop prices—which have triggered the release of feed up its Disaster Loan Program following the summer grains from the grain reserve program and discouraged drought. Farmers located in counties designated as agri- the movement of 1983 crops under CCC loan—and the cultural disaster areas who suffer a 30 percent decline in transfer of PIK grain entitlements to farmers will result in production will be eligible for the disaster loans. The a sharp decline in CCC loans during the second half. By loans will be available in amounts up to 80 percent of the year-end, the USDA believes outstanding CCC loans borrower's production loss, to a maximum of $500,000. For borrowers unable to get credit elsewhere, the in- may fall to around $10 billion. Although trends among lending institutions have varied widely, growth in farm debt held by all reporting terest rates on the disaster loans will be 5 percent on the first $100,000 and 8 percent on amounts above that cutoff. lenders other than the CCC has slowed appreciably so far this year. Preliminary estimates show that outstanding farm debt held by banks, the Farmers Home Administration, life insurance companies, and the lending arms of the Cooperative Farm Credit System (primarily FLBs and PCAs) was up less than 2 percent from a year earlier The debt-to-asset ratio for the farm sector would decline slightly if the USDA's projection of asset growth and stable or declining debt levels materialize. However, the ratio will likely remain at a level unprecedented since the early 1940s. While the ratio for individ- as of the end of June. Among these lenders, the growth ual farm operators varies widely, the high overall sector at banks, at 7 percent, contrasted sharply with the 1 percent rise at FmHA and the slight declines recorded by average is indicative of the continuing financial stress that still exists in the farm sector. both the Cooperative Farm Credit System and life insurance companies. Gary L. Benjamin HOG PRODUCTION continued to expand this summer, a trend that will continue this fall. However, tight operating margins are encouraging producers to scale back earlier expansion plans, foreshadowing a likely downturn in production this winter. These developments suggest that pork supplies will remain above year-earlier levels through mid-1984 before turning downward. In the meantime, low hog prices and high feed costs will be curtailing the earnings of hog farmers. The USDA's latest Hogs and Pigs report shows that the June-August pig crop in the ten major producing states, at 17.7 million head, was 9 percent larger than last summer's crop. The 2.4 million sows that farrowed during the June-August period coincided closely with producers' intentions as stated in the USDA's June report and was near the level of two years ago. The average litter size for the period was down slightly from the previous two years at 7.36 pigs per litter. The USDA report suggests that farrowings will continue to increase through November but at a slower rate than had been reported earlier. Producer intentions for the September-November period indicate a 4 percent increase in farrowings over the same period last year and 2 percent more than in 1981. The increases however, are considerably smaller than has been indicated by producers' farrowing intentions in June. Moreover, their farrowing intentions for the December-February quarter point to a 1 percent decline from the level of a year ago. And many analysts believe that the DecemberFebruary farrowings will be down even more because of the high feed costs and lower hog prices expected this fall. Hog inventories remain well above year-ago levels. As of September 1, the inventory of hogs and pigs in the 10 major hog producing states stood at 45.9 million head, up 10 percent from a year earlier. Most of the rise was accounted for by an 11 percent increase in market hogs. The increase was distributed across all weight groups and brought market hog inventories quite close to 1981 levels. Breeding hog inventories registered less than a 5 percent increase from the previous year's level, which was the lowest September 1 breeding stock since 1975, and continued well below September 1981 levels. • 3 slaughter was up more than 3 percent over last year and Hog inventories up in major producing states • preliminary indications suggest an increase of nearly 12 million head 0 percent for the third quarter. A high level of sow slaughter contributed to the large rise this summer. Sow total inventory slaughter thus far through the third quarter is up 42 50 percent from a year ago and equivalent to more than 7 percent of all federally inspected hog slaughter. 40 The size of the current hog and pig inventory and the likelihood of further liquidation of the breeding herd suggests that the year-to-year gains in hog slaughter will extend well into next year. The current inventory 30 of market hogs over 60 pounds is up 12 percent from last year and comparable to the high levels of two years ago. 20 This implies that a substantial year-to-year increase in hog slaughter will be experienced this fall. Further, the 10 large summer pig crop and producers' intended increase in farrowings this fall foreshadow an increase in hog slaughter during the first half of 1984. 1973 '75 '77 '79 '81 '83 September 1 When taken together, hog production in the three Hog prices rose slightly in late summer but have since returned to the mid-$40 per hundredweight, down from $63 a year ago. Many analysts believe that the large District states covered in the USDA's quarterly report inventory of market hogs and the prospects for addi- reveals trends quite similar to the ten-state group. However, in some cases figures for the individual District tional liquidation of breeding stock will result in further states depart from the ten-state norm. The June-August pig crops in Indiana and Iowa were up 13 and 12 percent, respectively, substantially exceeding the rise for all ten states. In contrast, the June-August pig crop in Illinois was up only 2 percent. Similarly, inventory increases of breeding stock in Indiana and Iowa were nearly double the rate for the ten states combined. Market hog inventory on September 1 was more than 13 percent above last year's level in Indiana but in Iowa it was up only half that amount. In Illinois the number of breeding animals declined 4 percent from a year earlier but the number of market hogs climbed 9 percent to place total inventories 7 percent above the September 1982 level. Further indication of a decline in hog production in Illinois is evident in producer intentions. Farrowing intentions for the third quarter indicate no change from a year ago, while intentions for the December-February period suggest a 4 percent decline in farrowings from the same period last year. Hog producers in Indiana and Iowa, on the other hand, intend to increase sow farrowings this fall by 10 and 6 percent, respectively, while winter quarter intentions suggest little or no curtailment in farrowings from a •year ago. price declines this fall. Supplies of other meats will continue to pressure hog prices for the next few months. Poultry production has lagged year-earlier levels in recent weeks and may remain marginally below year-ago levels for the next few months. However, cattle slaughter continues above year-earlier levels. Federally inspected cattle slaughter exceeded last year's level by more than 3 percent in the third quarter. Moreover, cattle on feed in the seven largest producing states remained near 1982 levels through September which, coupled with the likelihood of more cattle moving directly from parched pastures to slaughter, will hold beef production above year-earlier levels through winter. While increased livestock production and slaughter have contributed to low producer prices, the same factors have provided consumers with lower retail meat prices. Although the Consumer Price Index for all food items was up nearly 2 percent in August, prices of red meats were down more than 4 percent. Pork prices, down 6.9 percent from a year ago, posted the largest decline. Beef and veal prices fell 3.5 percent year to year. Poultry prices, on the other hand, were up 2.2 percent over last year. Hog slaughter, after lagging year-ago levels during the first quarter, has been-rising steadily. Second quarter Peter J. Heffernan 4 Selected agricultural economic developments Percent change from Subject Unit Latest period Index of prices received by farmers Crops Livestock 1977=100 1977=100 1977=100 September September September 137 137 137 1.4 1.4 1.4 + 1 +10 7 Index of prices paid by farmers Production items 1977=100 1977=100 September September 161 154 + 0.6 + 0.7 + 3 + 3 Producer price index* (finished goods) Foods Processed foods and feeds Agricultural chemicals Agricultural machinery and equipment 1967=100 1967=100 1967=100 1967=100 1967=100 August August August August August 286 261 256 278 327 0.2 0.1 0.5 0.4 0.3 Consumer price index** (all items) Food at home 1967=100 1967=100 August August 300 283 + 0.3 - 0.1 Cash prices received by farmers Corn Soybeans Wheat Sorghum Oats Steers and heifers Hogs Milk, all sold to plants Broilers Eggs Income (seasonally adjusted annual rate) Cash receipts from farm marketings Net farm income Nonagricultural personal income dol. per bu. dol. per bu. dol. per bu. dol. per cwt. dol. per bu. dol. per cwt. dol. per cwt. dol. per cwt. cents per lb. cents per doz. bil. dol. bil. dol. bil. dol. Value PM Prior period Year ago • + 3 + 1 ■ Septembr 3:3/ +'0.6 Septembkr 17 , . 8.46 / +11.8 Sept)e , mbet;,, 3.60/ - 0.3 September ‘,.i '") '• -5:46 z 0'34 September 1.59 September 56.00 k W+ .6 September 44.40 <C September 13.50 September 33.8 September 65.4 +57 +62 19.9 2nd Quarter 2nd Quarter August 141 26 2,711 + 6.5 + 0.3 +26 +15 • 0 +55 + 7 *Formerly called wholesale price index. **For all urban consumers. AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Public Information Center P.O. Box 834 Chicago, Illinois 60690 I IRST-CLASS MAIL U.S. POSTAGE PAID Chicago. II. P•rmut No. 1942 FEDERAL RESERVE BANK Of ( HI( AGO Tel no. (312) 322-5111 Ali FiGO]l aa D2P7.0.,1 7 A CI t , C" .:. a 'INSTITUTE DF Fif,3RICULTURE - LikUT 1 E 1.Y OF MI 14 ENt ESCTR S f , 11 L 4 fq 11 .1r 1n 1.1