Full text of Agricultural Highlights : February 1986

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

DALLAS
Federal Reserve Bank of Dallas

February 1986

Financial Stress Begins to Idle Acres
In the past few years, increasing
numbers of farmers, caught in the
price-cost squeeze of lower commodity
prices and higher interest costs, have
been leaving farming. Before the
1980s, virtually all the acreage from
farmers leaving agriculture was ab­
sorbed by other farmers wishing to
expand.
Given the consensus outlook for
weak export markets and low com­
modity prices, together with near­
record agricultural debt, the ability of
efficient farmers to expand is limited.
Evidence of this can be seen in results
from a recent survey. Eleventh District
agricultural bankers estimate that 2.8
percent of farmland was left out of pro­
duction in 1985 because of farm finan­
cial stress. A statistical model shows
that the 1.3-percentage-point increase
in the number of District farmers leav­
ing agriculture in 1985 will likely be
associated with an increase in idled
acreage in 1986 ranging from 3.6 to 4.3
percent.
Efficient Farmers Expand Production

Agricultural crop production for the
past 45 years has been marked by a
more than doubling of productivity and
large reductions in the number of
farmers (Chart 1). Even with govern­
ment farm programs, farmers who did
not adopt new technology were gener­
ally unable to keep production costs
below market prices for their com­
modities. Consequently, the number of
farms has fallen from 6.1 million in
1940 to about 2.3 million today.
For most years, the acreage re­
leased by farmers leaving agriculture

was absorbed by efficient farmers will­
ing to make the investment necessary
for expansion. Nationally, average
farm size increased from 175 acres in
1940 to 437 acres in 1984. During that
period, technological advances, pre­
dictable government programs', in­
creasing domestic demand, and new
export markets provided efficient
farmers with the incentives for
investment.
Farm Investment Slows
Dramatically in the 1980s

In the 1980s, however, many of the
most efficient farmers are financially

stressed because of weak markets and
the tripling of farm debt in the 1970s.
The agricultural export boom of the
1970s has gone bust, driving real
(inflation-adjusted) commodity prices
below 1979 levels. The frantic rate of
debt accumulation slowed in the early
1980s, then declined in 1984. Much of
this slowdown in borrowing has come
at the expense of investment. Real
investment in farm machinery and
buildings has fallen more than 40 per­
cent since 1981.
A survey of agricultural bankers
showed that some efficient, low-debt
(Continued on back page)

Crop Price Supports Harm
Livestock and Poultry Producers
The Secretary of Agriculture recently
announced reductions in price sup­
ports for feed grains. They will help
livestock and poultry producers, as
price support programs can act to keep
feed grain prices higher than market
levels. Because feed grain costs are
a greater proportion of their costs,
poultry producers stand to gain rel­
atively more from lower feed prices.
Reducing the price supports should
also mean that consumers will even­
tually pay lower prices for red meat
and poultry products.
Effect of Agricultural Programs
on Feed Prices

The price of feed grains can be kept
above the market clearing price if com­
modity loans from the Commodity
Credit Corporation (CCC) function as

price floors. Eligible farmers can bor­
row money from the CCC by using their
crops as collateral for the loans. At the
farmer’s option, the debt can be
satisfied by surrendering the crops to
the CCC if the market price drops
below the floor price, known as the
loan rate. The crops are subsequently
put into stocks. During times of weak
markets and bountiful production, the
loan rate can serve as the effective
floor for prices in the United States.
Feeding costs have fallen during
1984 and 1985. The extent of the
decline, however, has been restrained
by the loan rates. The recently an­
nounced reductions in the loan rates
should lead to even lower feed prices.
Nevertheless, given current market
forecasts, the commodity loan pro(Continued on back page)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Chart 2
TOTAL FEEDING AND GRAIN COSTS
AS A PROPORTION OF TOTAL
PRODUCTION COSTS, 1983

Chart 1
U.S. FARM PRODUCTIVITY AND POPULATION

r— 80 PERCENT -------------------------TOTAL FEEDING COSTS

PORK
SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

BEEF

GRAIN COSTS

CHICKEN

TURKEY

SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

SELECTED INDICATORS OF THE TEXAS AGRICULTURAL ECONOMY
TEXAS FARM REAL ESTATE VALUES
-

850 DOLLARS PER A CRE---------------------------- ---(THREE-QUARTER CENTERED MOVING AVERAGE)

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

PRICES RECEIVED/PRICES PAID
r— 100 (1977 = 100)-------------------

NOTE: Index is constructed by dividing prices received by farmers in Texas 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
DEMAND FOR LOANS

NONPERFORMING LOANS
AT AGRICULTURAL BANKS

—

60 PERCENT OF BANKS REPORTING

r~

-

45

-

15

0

5 PERCENT OF TOTAL LOANS -

LESS

I

1983

I

1984

|

1985

I

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

1983

I

1984

I

INTEREST RATES ON TEXAS FARM LOANS

FARM DEBT OUTSTANDING IN TEXAS

r—

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

r- 4.5 BILLION DOLLARS--------------------

-

15

- 3.5

"

- 2.5

-----"

13

-

11

BANKS

FIXED

BANKS
-

1985

SOURCES: Board of Governors, Federal Reserve System.
Federal Reserve Bank of Dallas.

PCAs

V ARIABLE..."...

1.5

FLB

FLB
FmHA
PCAs

I

1983

I

1984

|

1985

NOTE: Starting with the first quarter of 1985, bank rate is decomposed into fixed
and variable rates for agricultural loans.
RCA rate is for farm operating loans at production credit associations.
FLB rate is for farm real estate loans at the Federal Land Bank.
SOURCES: Farm Credit Banks of Texas.
Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

I

I
1984
I
1985
SOURCES: Farm Credit Banks of Texas.
Farmers Home Administration (FmHA).
Federal Reserve Bank of Dallas.

1986

AGRICULTURAL BRIEFS
New farm bill enacted; land values stabilize; cotton export forecasts and some interest rates fall.
In December 1985, President Reagan signed in­
to law the new farm bill, the Food Security Act
of 1985. One of the more notable features of the
new law is the discretionary powers given to
the Secretary of Agriculture to cut loan rates.
The loan rate determines the loan —per bushel,
per bale, or per hundredweight—that the
government is willing to make to eligible
farmers on their crops. Under current market
conditions, the loan rates are functioning as
price floors, keeping U.S. prices above world
levels. The Secretary has already reduced loan
rates on corn and wheat by 20 percent to make
these crops more competitive in world markets.
Preliminary estimates show that the rate of
decline in average dry cropland and ranchland
values in the District slowed during the fourth
quarter while irrigated land values continued to
fall. Dry cropland fell 1 percent to $706 per acre,
ranchland fell 1 percent to $568 per acre, and ir­
rigated land fell 4 percent to $914 per acre. For
all of 1985, both dryland and ranchland values
decreased 7 percent, while irrigated land values
decreased 11 percent. The trend of the data

suggests that dry cropland and ranchland
values may be close to the bottom.
Estimates of 1985-86 cotton exports continue
in a virtual free-fall. The United States normally
exports 5 million to 7 million bales of cotton per
year. In May 1985 the U.S. Department of Agri­
culture forecast that exports of cotton would
be around 5 million bales. By August the figure
had dropped to 4.0 million bales; by December,
to 3.1 million bales. In January 1986 it reached
2.8 million bales. Because of domestic support
prices, U.S. cotton is not competitive in world
markets.
Average interest rates on short-term fixed-rate
loans at Eleventh District agricultural banks
declined during the fourth quarter of 1985,
following national credit market trends. These
fixed-rate operating loans dropped to 12.9 per­
cent from 13.2 percent. Short-term variable-rate
loans remained unchanged at 12.3 percent.
Average fixed-rate farm real estate loans re­
mained steady at 13.1 percent, but those with
variable rates fell to 12.2 percent from 12.5
percent.

TEXAS COMMODITY MARKET PRICES
UPLAND COTTON

ALL WHEAT

r—

80 C EN TS PER POUND-

■
—

40
J ' F M ' A ' M ' J '

j

GRAIN SORGHUM
r— 6.0 DO LLARS PER H UN D RED W EIG H T--

'

a

'

s

'o '

n

'

d

3.0

'

SLAUGHTER STEERS
—

SOURCE: U.S. Department of Agriculture.

FEEDER STEERS

75 DO LLARS PER H UND REDW EIG HT —

CORN

80 D O LLARS PER H U N D RED W EIG H T--

—

1984

3.9 DO LLARS PER B U SH EL

— 3.6

—

1984 /

\

55
'

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

i , i i . i i i . i . i r n — i— i— i
J F M A M J J A S O N D

SOURCE: U.S. Department of Agriculture.

j

'

f

'

m

'

a

V

j

'

j

'

a

'

s

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

'

o

'

n

'

d

'
SOURCE: U.S. Department of Agriculture.

Idle Acres (cent.)

Price Supports (cont.)

farmers whose capital stock is likely
oversized for their existing operations
have expanded operations. But these
operators have been able to employ
only a portion of the acres released by
financially stressed farmers. The in­
vestment necessary for total absorp­
tion is hindered by high debt loads and
market uncertainty.
In the Eleventh District, 5.4 percent
of farmers at survey banks left agricul­
ture in 1985, compared with 4.1 percent
in 1984. Because of financial stress,
2.8 percent of normally cultivated
acres were out of production in 1985. A
statistical model using the increase in
financial stress among farmers in 1985
predicts that the acreage removed
from production will amount to 3.6
to 4.3 percent in 1986. Until the
agricultural outlook improves and debt
levels become more manageable, acre­
age left idle will continue to increase.
— Hilary H. Smith and Eric J. Weigel

gram may still keep prices higher than
market levels, which would burden the
livestock and poultry industries.
Impact on Meat Producers

While all livestock and poultry pro­
ducers are affected by higher feeding
costs, poultry producers are affected
relatively more by price supports. The
proportion of total costs accounted for
by feeding costs is fairly similar among
livestock and poultry producers (Chart
2). A differential effect exists, however,
because grains and other pricesupported feeds form a larger share of
production costs for poultry than for
red meats. Because of this larger share
for poultry, the drop in the loan rates
will probably reduce the costs of pro­
ducing poultry relative to red meat. As
the relative price of poultry falls, con­
sumers will tend to eat more poultry
than they did at the original higher
price level. The lower feeding costs will

I

also lead to lower prices for beef and
other red meats, which is likely to
boost consumption, but the gains in
consumption will probably be smaller
than for poultry.
This has important implications for
beef producers, who are losing market
share to lower-priced poultry. Per
capita beef consumption fell from its
peak of 96 pounds in 1976 to 79 pounds
in 1983. During the same period, per
capita poultry consumption increased
from 53 pounds to 66 pounds. Re­
search has shown that the decline in
beef consumption stems from rela­
tively lower poultry prices rather than
the more commonly cited reason of a
change in consumers’ tastes. The im­
plication for beef and other red meat
producers is that they must find addi­
tional ways to cut production costs to
be able to compete with lower-priced
poultry.
—
Roger H. Dunstan

The view s expressed are those o f the authors and do not necessarily reflect the positions o f the
_________________ Federal Reserve Bank of D allas or the Federal Reserve System .________________

f3 lE

-n >
CD (Q
Q. 3
CD o

I 83

E

2§=
£u
O 3
> Q-

O—.
^ (/) G
cd c (U CQ
O"

CZ) CZ)
CD
o

"O
E c
a;
3 CD*
CZ) CZ)
o'
=r
CD
>
Q . Q_
CD Q .
.Q
c
D O CD
3
CD CD
CD
CD
O '<
CD
< "0
CT
cd
CD* *<
CD CZ)
C7
Z7
CD
CD

3

3

o
o