Full text of Agricultural Highlights : August 1985

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PALLAS
Federal Reserve Bank of Dallas

August 1985

Increased Agricultural Imports Lead
For Domestic Producers
President Reagan’s recently an
nounced proposal to increase tariffs
on a variety of agricultural products
has drawn attention to growing levels
of agricultural imports. The action was
prompted by complaints that foreign
producers were receiving unfair sub
sidies, and that foreign governments
have put restrictions on imports of U.S.
agricultural products.
Initially, tariffs or quotas raise prices
by reducing competition. This may pro
tect domestic producers in the short
run, but the higher price encourages
the use of substitutes. This substitu
tion further reduces the quantity
demanded which, in time, will at least
partially reverse the benefits of the im
port tariff for producers.

are countries that are relatively close
to the United States, such as Brazil,
Mexico and Canada.
Effects of Import Restrictions

Import restrictions lead to an in
crease in the domestic price of an
agricultural commodity, either by
reducing competition or by allowing
higher-cost producers to stay in
business. This initially may help
agricultural producers but can lead to
problems. These restrictions en
courage importation of processed
goods. This circumvents the import
restriction on the bulk commodity by
taking advantage of the cheaper costs
of transporting manufactured prod
ucts. As a consequence, however,

food processing moves overseas,
reducing both U.S. employment and
the demand for domestic raw agricul
tural products. In general, the
categories of imports with the fastest
growth have been processed goods
rather than raw agricultural com
modities. The most dramatic example
of this has occurred in response to the
quotas on sugar. Because of sugar
quotas, imports of prepared products,
such as cookies, skyrocketed. Recent
ly, quotas on prepared products were
imposed in an attempt to maintain
high domestic sugar prices. A similar
example has occurred with pasta and
noodles. The U.S. price for wheat is
above the world price. The higher
(Continued on back page)

Growth of Imports

The value of agricultural com
modities imported into the United
States in 1984 was a record 19 billion
dollars, which should be exceeded in
1985. The value of U.S. agricultural ex
ports is still greater than that of im
ports but the gap is narrowing.
Despite the growth, agricultural im
ports have not risen as much as other
merchandise imports. There are two
important reasons for this. First, there
are protective barriers against some
products. The most striking example is
sugar, whose domestic price is cur
rently about six times the world price.
Second, the high transportation costs
for bulk commodities retards the
growth in imports. Not surprisingly, the
major exporters of agricultural goods

Agricultural Bankers Suffer From Farmers’ Woes
Agricultural banks’ rural location
and small size make their financial per
formance very sensitive to changes in
farm income conditions. During the
1970s, agricultural banks benefited
from the general prosperity of the farm
sector and achieved high rates of prof
itability. During the 1980s, however,
low commodity prices and high real in
terest rates have severely diminished
the debt servicing capacity of many
farmers. The result has been an in
crease in problem loans at agricultural
banks. In addition, financial deregula
tion has resulted in higher costs of
funds to rural banks. Both factors have
adversely affected the profitability of
Texas agricultural banks.

Agricultural banks feel pinch

In recent years, the deteriorating
financial condition of U.S. farmers has
had a strong impact on the perfor
mance of agricultural banks, here
defined as banks with 25 percent or
more of their loans out to farmers. For
example, in 1984, when farm banks
made up 29 percent of all U.S. banks,
41 percent of all bank failures were
agricultural banks.
Agricultural banks in Texas have
been suffering from steady declines in
profitability since 1981. Several factors
have contributed to this development.
First, many farmers and ranchers
are in precarious financial condition.
(Continued on back page)

PRIME INDICATORS OF THE TEXAS AGRICULTURAL ECONOMY
IN D EX O F PRICES RECEIVED: TEXAS

IN TER EST RATES ON TEXAS FARM LO A N S1
r—

17 PERCENT-------------------- -----------------------------------------------

FLBA

1983

1984

1985

1. RCA: Production Credit Associations.
FLBA: Federal Land Bank Associations (Real Estate Rate).
2. Starting firs t quarter 1985 bank rate is decomposed into fixed and variable rates.
SOURCES: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.
Federal Credit System.

TEXAS FARM REAL ESTATE VA LU ES1

PRICES RECEIVED/PRICES PAID1

850 DOLLARS PER A CRE-----------------------------------

i—

800

—

100 (1977 = 100)---------------------------------------95

1984 x ^

DRYLAND

1. 3 quarter centered moving average.
SOURCE: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

1. Prices received by farmers in Texas divided by prices paid by farmers
nationwide (No separate series exists for prices paid in Texas).
SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

ELEVENTH DISTRICT AGRICULTURAL LOANS

Bankers report whether the variable is “ greater,” “ the same,” or “ less” than a year ago.
Percent reporting “ greater” or “ less” are depicted below.
D EM AN D FOR LO A N S *
i—

AVAILABILITY OF FU N D S *

60 PERCENT OF BANKS REPORTING

1983

1984

1985

80 PERCENT OF BANKS REPORTING------------------------------------------

60 PERCENT OF BANKS REPORTING

COLLATERAL R EQ U IR ED *
i—

_L_E_SS

1983

1984

1985

RENEW ALS OR E X TE N S IO N S *
-

60 PERCENT OF BANKS REPORTING

LESS
°

1983

1984

* SOURCE: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

1985

1983

1984

AGRICULTURAL BRIEFS
Following trends in the national credit markets,
average interest rates on agricultural loans by
Eleventh District banks declined in the second
quarter of 1985. Short-term fixed-rate operating
loans dropped by 0.42 percent to 13.41 percent;
those with variable-rate provisions fell 0.69 per
cent to 12.45 percent. Longer-term loan rates
also declined. Fixed-rate farm real estate loans
moved down 0.22 percent to 13.41 percent and
variable-rate farm real estate loans dropped
0.63 percent to 12.55 percent.
Preliminary estimates show that average
agricultural land values in the District stayed
fairly constant during the second quarter of
1985 compared with the large declines in value
during the previous quarter. Ranchland did
drop 2.1 percent to $586 per acre, but dry crop
land held steady at $745 per acre, while irri
gated cropland inched up a few dollars to
$1,004 per acre. Lower agricultural land values
for the second quarter were reported by eight
out of 13 District regions. Nonagricultural de
mand for land is holding up average land values.
Cash receipts for Texas beef cattle are likely to
be much lower in 1985 than last year’s level.
Because of increased production nationally,
1985 beef-cattle prices to date are far below

1984 levels. Texas commercial cattle slaughter
in 1985 is running slightly below the pace of
last year. Total revenues have declined sharply,
although partially offset by lower feed and in
terest costs. The forecast for the rest of the
year calls for smaller-than-seasonal increases
in beef-cattle supplies in Texas, while national
ly the prospect is for larger-than-seasonal
marketings. The resulting lower prices suggest
that 1985 Texas cattle producers’ revenue will
not reach 1984 levels.
Texas’ total planted acreage in crops increased
522,000 acres during 1985, despite greater par
ticipation in government acreage reduction pro
grams and sharply reduced major crop prices.
This conundrum can be explained by examining
individual crop statistics. Acres planted to the
major Texas income-producing crops, except
winter wheat, did fall: cotton, sorghum, and
corn all down 6-11 percent. Offsetting that has
been an increase in winter wheat planted acre
age of 9.4 percent (because the wheat program
attracted acres out of other crops) and a boom
in the minor crops. Sunflower planted acreage
increased by 80,000 acres. Plantings of crops
such as hay, barley, and rye for animal fodder
and forage have also increased significantly.

TEXAS COMMODITY MARKET PRICES
UPLAND CO TTO N
72 CENTS PER P O U N D -

u
I—

, - / \ z
64

/1 9 8 4

_
1 9 8 3/

|—

6.5 DOLLARS PER HUNDREDW EIGHT —

—

3.6

5.7

4.9

4.1

3.3

1 9 8 3 _ ,'- > x
x " ._ ./' \

—

3.4

—

3.2

x 'l 9 8 4

— X

40
'

'm '

'a '

'o '

—

3.0

2.8

1 J1 1 F
c: 1M
l>. 1A» 1
1 D1 r. 1
M» J1 , 1 J, 1A. XS X
O N

SOURCE: U.S. Department of Agriculture.

SLAUG HTER STEERS

SOURCE U.S. Department of Agriculture.

___________

1 . 1 ,-1 , „l . 1„„l .1 . 1 . 1 - 1r. 1 1„ 1
J F M A M J J A S O N D

SOURCE: U.S. Department of Agriculture.

FEEDER STEERS

75 DOLLARS PER HUNDREDW EIGHT —

1983
1984 __ _____________________ _

-7 ^ ^ 1 9 8 5
198£hx

r—

G RAIN SO RG HUM

3.8 DOLLARS PER B U S H E L ---------------------

ALL W HEAT
—

CORN

80 DOLLARS PER HUNDREDW EIGHT —
-

1985x

X \
A
" \\ \
i
\ \\
\ V >A - A - v ' /
X '
1984v^ /
1983" '
—

55
'

SOURCES: Texas Department of Agriculture.
Federal Reserve Bank of Dallas.

'm '

'a '

SOURCES: Texas Department of Agriculture.
Federal Reserve Bank of Dallas.

'
SOURCE: U.S. Department of Agriculture.

Imports (cont.)

Farmers’ Woes (cont.)

wheat price is one factor that has en
couraged imports of pasta and noodle
products.
The higher price induced by import
restrictions also promotes the use of
substitutes. Again, the effects that
have occurred from the quotas on
sugar provide an example. Highfructose corn sweetener and artifical
sweeteners have taken the place of
sugar in many products.
Import restrictions do not address
the major reason for the increase in im
ports—the appreciation of the dollar
relative to other currencies. This ap
preciation makes goods denominated
in foreign currencies cheaper in the
United States. Obviously, this affects
virtually all imports and exports, not
just a few agricultural commodities. As
the recent declines of the dollar have
shown, currency values tend to be
volatile while tariffs or quotas gener
ally last longer.
—Roger Dunstan

According to the U.S. Department of
Agriculture, nearly 16 percent of the
region’s farm operators may be ex
periencing some financial stress.
Many farmers thus have been unable
to service their debts. This translates
into a growing percentage of p&st-due
loans and a greater volume of loan
charge-offs. In the last two years,
nonperforming loans and charge-offs
as a proportion of total loans out
standing at agricultural banks have in
creased 31 and 55 percent, respectively.
A second factor affecting the prof
itability of agricultural banks is the
closer integration of local farm credit
conditions with national financial
markets. Before the advent of financial
deregulation, agricultural banks’ rural
location insulated them from major
competition and allowed them access
to low-cost demand deposits. The
gradual phaseout of interest ceilings
on deposits, however, has prompted

many rural residents to transfer their
funds into higher yielding instruments.
The net result has been an increase in
the cost of funds to agricultural banks
and, in many cases, smaller profits
margins.
Outlook for Agricultural Banks

In the near future, agricultural banks
in Texas are unlikely to experience the
high rates of profitability obtained dur
ing the 1970s. Financial deregulation
has resulted in a more competitive en
vironment and many agricultural banks
have been forced to accept lower profit
margins. In addition, agricultural
banks will suffer from falling levels of
farm income. Current net farm income
forecasts for both the United States
and Texas are below 1984 levels, and
an increasing number of farm
operators are expected to experience
financial distress in 1985.
—Eric Weigel

The views expressed are those of the authors and do not necessarily reflect the positions of the
_______________Federal Reserve Bank of Dallas or the Federal Reserve System._____________

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Full text of Agricultural Highlights : August 1985

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