Full text of Agricultural Highlights : November 1985

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DALLAS
Federal Reserve Bank of Dallas

November 1985

Lower Interest Rates Not Likely to Save
Financially Troubled Texas Farmers
The agricultural financial crisis is
thought to be rooted in high interest
rates, high debt levels, declining asset
values, and low commodity prices.
Analysis of farm financial data shows
that even substantial declines in in
terest rates or increases in farm in
come probably will not save most
financially troubled farms.
Who Is Hurting?

Most farmers with debt-asset ratios
greater than 70 percent currently have
problems both with servicing their
debts and with declining net worth. Of
the approximately 250,000 farms in
Texas and Oklahoma, 11,000 to 14,000
have debt-asset ratios greater than 70
percent.
Texas and Oklahoma farms are
divided into four categories by the
amount of annual sales: small (less
than $40,000 annual sales), medium
($40,000 to $100,000), large ($100,000 to
$250,000), and very large (over
$250,000). As the sales class gets
larger (see table), the percentage of
Financially troubled farms,
________ Texas and Oklahoma________
Size of
sales
class

Percent of
class

Percent of
overall cash
receipts

Number in
class

S m a ll............
M edium ........

3.9
4.4

0.5
0.5

8,500
1,000

Large............
Very l a r g e . . .

16.4
19.2

2.8
10.9

2,100
1,200

Source of Primary Data: U.S. Department of Agriculture.

farms that are financially troubled in
creases, the percentage of total cash
receipts produced by troubled farms in
creases, but the number of financially
troubled farms decreases.
Lower Interest Rates, Higher Incomes
Not Enough

Only in the very large sales class
would the average financially troubled
farm stand much chance of returning
to profitability. A rough estimate is
that the average financially troubled

very large farm would need about a
four-percentage-point reduction in in
terest rates in order to have positive
cash flow. Alternatively, if prices for
farm products increased only 5 percent
(holding farm input costs constant),
then the average very large farm would
have positive cash flow.
The average financially troubled
farms in the other sales classes would
not have positive cash flows even if in
terest rates fell to zero. Alternatively,
(Continued on back page)

Cotton Price Supports Sandbag
U.S. Cotton Exports
World production of cotton has in
creased dramatically, but U.S. cotton
exports have plummeted. Price sup
ports have kept U.S. cotton prices from
falling enough to be competitive on
world markets. Though price supports
make cotton farmers better off now,
government stockpiling of cotton can
not substitute for export markets.
U.S. Cotton Policy Can Affect
Texas Farm Income

U.S. cotton agricultural policy sup
port prices can have a large role in
determining the level of U.S. cotton ex
ports. When worldwide cotton supplies
match anticipated use, U.S. cotton
support prices have little effect. When
cotton supplies exceed normal use,

however, prices fall and support prices
can come into play. Economic theory
and common sense both predict that
when price supports keep domestic
cotton prices from falling to world
market levels, competing foreign ex
porters will take over U.S. export
markets, and domestic surpluses will
build up.
Normally, 50 to 70 percent of Texas
cotton is exported. Any substantial
falloff in cotton exports, if not fully off
set by government programs or an in
crease in domestic mill use, would
seriously reduce farm income in Texas.
With a $1 billion to $1.5 billion in cash
receipts per year, cotton ranks second
in the state behind cattle and calves.
(Continued on back page)

PRIME INDICATORS OF THE TEXAS AGRICULTURAL ECONOMY
INTEREST RATES ON TEXAS FARM LOANS'

INDEX OF PRICES RECEIVED: TEXAS

!—

17 PERCENT---------------------------------------------------------------—

1983

1984

1985

1. RCA: Production Credit Associations.
FLBA: Federal Land Bank Associations (Real Estate Rate).
2. Starting first 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.

PRICES RECEIVED/PRICES PAID'
i— 100 (1977 = 100)-----------------------------------------------------------------------------

TEXAS FARM REAL ESTATE VALUES'
I— 850 DOLLARS PER ACRE----------------------------------

800
DRYLAND

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.

1. 3 quarter centered moving average.
SOURCE: Quarterly Survey of Agricultural Credit Conditions,
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.
DEMAND FOR LO ANS*

AVAILABILITY OF FUNDS*

I—

60 PERCENT OF BANKS REPORTING

-i5

60 PERCENT OF BANKS REPORTING

1983

1984

0 I

1985

.LESS
1983

1984

COLLATERAL REQUIRED*

RENEWALS OR EXTENSIONS*

60 PERCENT OF BANKS REPORTING-

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

—

1985

LESS

LESS
0

1983

”

1984

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

1985

L-

1983

1984

1985

AGRICULTURAL BRIEFS
Farmer financial stress increases; land values, interest rates, and exports decline.
Eleventh District agricultural bankers, in a re
cent Federal Reserve survey, now estimate that
3.7 to 5.5 percent of their agricultural borrowers
will leave farming in 1985 because of financial
stress. In April, their estimate was 3.5 to 4.8 per
cent. Surveyed bankers anticipate that they will
not provide operating credit in 1986 to an
average of 8.3 percent of their current farmer
borrowers. These loans represent an average of
11 percent of the banks’ present farm loans.
Since summer 1984, average District land
values have declined steadily until the second
quarter of 1985 when they stabilized for a
quarter. In the third quarter, however, pre
liminary survey estimates show ranchland
dropped 1 percent to $572 per acre, dry
cropland dropped 3 percent to $708 per acre,
while irrigated cropland dropped almost 5 per
cent to $944 per acre. The contributing factors
were the outlook for continued low commodity
prices and less generous agricultural pro
grams. Average land values would have fallen
still more but for nonagricultural demand for
land, principally in Central Texas.

Average interest rates at Eleventh District
agricultural banks declined during the third
quarter, completing adjustment to secondquarter interest-rate declines in national credit
markets. Short-term fixed-rate operating loans
dropped to 13.2 percent from 13.4 percent.
Those with variable-rate provisions dropped to
12.3 percent from 12.5 percent. Fixed-rate farm
real estate loans dropped to 13.0 percent from
13.4 percent, but those with variable rates re
mained steady at 12.5 percent.
During 1985-86, the high price support levels of
U.S. agricultural policy seem to have priced
U.S. agricultural exports out of the world
market. The index of agricultural tradeweighted exchange rates shows the value of
the dollar little changed from its level of a year
ago. Although total world trade in some com
modities is less this year than last, forecasts of
U.S. exports have fallen more: 26 percent less
wheat, 11 percent less coarse grains (corn,
sorghum, and the like), and 44 percent less cot
ton. Of the major export crops, only soybean ex
ports increased (13 percent).

TEXAS COMMODITY MARKET PRICES
UPLAND COTTON
I—

ALL WHEAT

GRAIN SORGHUM

80 CENTS PER POUND

i— 6.0 DOLLARS PER HUNDREDWEIGHT—

L - 3.0

I ,I I I I I

I , I— 1—1—I— I— I

J F M A M J J A S O N D

SOURCE: U.S. Department of Agriculture.

SLAUGHTER STEERS

FEEDER STEERS

i—

L-

|—

3.9 DOLLARS PER BUSHEL

1 l 1 it1 m 1 « 1 n . 1 , 1 ■ * . I c I ' s J . , 1 _ I

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

CORN

80 DOLLARS PER HUNDREDWEIGHT----

75 DOLLARS PER HUNDREDWEIGHT —

SOURCE: U.S. Department of Agriculture.

F M A M J J

A S O N D

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

SOURCE: U.S. Department of Agriculture.

Interest Rates (cent.)

Cotton Price (cont.)

gross farm income would, have to in
crease 27 to 128 percent, depending on
sales class, for these farms to have
positive cash flows.

Price Supports Bind, Exports Drop

Conclusion

Thousands of farms in Texas and
Oklahoma are in precarious financial
condition. However, the financially
sound farms represent a significant
part of the agriculture sector, ranging
from 60 percent of farms in the largest
sales class to almost 90 percent in the
smallest sales category. Further, many
farms with debt-asset ratios greater
than 70 percent still have positive cash
flow. But average financially troubled
farms, except those in the highest
sales class, would need dramatic and
unlikely movements in either interest
rates or gross farm income, or both, to
restore financial health.
—Hilary Smith

From 1965 through 1984, U.S. cotton
support prices were generally below
world price levels, and cotton exports
were competitive in world markets.
U.S. exports steadily increased. In the
1980s, however, government agricul
tural policies moved away from tying
cotton support prices to world prices.
Despite that, the cotton support price
did not really become binding until this
year.
Last year, favorable weather condi
tions, attractive world prices, and
changes in Chinese agricultural prior
ities have led to record world cotton
production. World cotton prices fell;
but largely because of support levels,
U.S. cotton prices on the European
market are averaging 15 percent above
foreign-produced cotton. Consequent
ly, expected 1985-86 U.S. cotton ex
ports will fall to 3.50 million bales, a

decline of 44 percent from last year.
U.S. cotton surpluses are expected to
double to 8.57 million bales, less than
a million bales shy of this year’s com
bined domestic use and exports.
Conclusion

If U.S. support prices stay above
world levels, there are short-run
benefits and long-run dangers. In the
short run, U.S. cotton farmers’ incomes
are protected from the full decline in
market prices. But in the long run, it is
unlikely that government-held stocks
will replace exports as an outlet for
cotton. Thus, the adjustment to lower
prices necessary among cotton pro
ducers will only be delayed by high
support prices, and may be magnified
because of the difficulty in recapturing
lost export markets.
—Hilary Smith
and 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 : November 1985

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