Full text of Agricultural Highlights : November 1986

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DALLAS
Federal Reserve Bank of Dallas

November 1986

Government Programs Buoy Eleventh District Agriculture
The Federal Government’s spend­
ing on agricultural programs has in­
creased dramatically as a result of
farm legislation passed in 1985 and
falling commodity prices. The growth
in outlays comes at a time when
greater attention is being focused on
the federal budget deficit. Plans to
reduce federal spending invariably
focus attention on agricultural pro­
grams. Farmers in the Eleventh
District, especially in Texas, receive a
large share of government payments
and are likely to suffer dispropor­
tionately if funding for agricultural pro­
grams is reduced.
Government Programs Raise
Agricultural Incomes

Agricultural programs of the Federal
Government increase farm incomes
through direct payments and com­
modity loans. Direct payments are
made to farmers either to protect their
income or as an inducement to adopt
certain practices, such as reducing
production. The major commodities in
these programs are dairy products,
wheat, feed grains, rice, and cotton.
Commodity loans are made by the
Commodity Credit Corporation (CCC).
Participating farmers pledge their
crops as collateral for the loan. The
value of the crop is determined by the
loan rate—a value per unit that the
CCC places on crops offered as col­
lateral. If the market price falls below
the loan rate, the farmer can satisfy the
debt by surrendering the crops to the
CCC. During times of weak markets
and bountiful production, the loan rate
can serve as the effective floor for
prices in the United States, allowing

farmers to earn more than if crops
were sold at the world market price.
Program Costs Increase

In 1985, world agricultural commod­
ity prices slipped well below domestic
levels, slashing U.S. exports and in­
creasing U.S. surpluses. To regain
foreign markets, Congress enacted the
Food Security Act last December,
which cut the loan rate for com­
modities. At the same time, additional
income protection was provided to
farmers. Generous payments were in­
cluded for rice and cotton, crops for
which the Eleventh District states, par­
ticularly Texas, are major producers.

As a consequence, the cost of the
programs during fiscal year 1986 could
be as high as $28 billion, up from ap­
proximately $18 billion in 1985. The
size of the agricultural support pro­
grams makes them an attractive target
for budget cutters.
Budget cuts in agricultural programs
are likely to have an adverse effect on
farming in the Eleventh District states,
especially Texas. Farmers in Texas
receive a large share of government
payments in comparison with farmers
in other major agricultural states
(Chart 1). Because of recent changes in
the rice and cotton support programs,
(Continued on back page)

Agricultural Land Values:
How Low Will They Go?
Farmland values have declined in
major agricultural areas in the nation
since 1981. Movements in land values
respond to agricultural supply and de­
mand forces, local economic condi­
tions, and national and international
macroeconomic forces. Although the
bottom of the land market cannot be
predicted with certainty, models of
land valuation show that farmland
values may have completed much of
the eventual decline.
Expectations Determine Land Values

The value of land comes from the
returns it offers as a productive asset
in agriculture, mineral extraction, rec­
reation, and real estate. A mathemati­
cal model can be used to get an
estimate of the land’s value, based on
the future stream of net income from

these activities. The model assumes
that the future is known with certainty;
thus, it yields theoretical indicators of
value.
In the 1970s, U.S. farmland values
rose rapidly. Despite short-run gyra­
tions in income, long-term growth in
future returns may have seemed
assured because of assumed future
growth in agricultural exports. Exports
grew steadily during the 1970s, rein­
forcing the expectation that growth
was an enduring phenomenon.
Farmland Values Peaked in 1981

The agricultural boom of the 1970s
drove farmland values to their peak in
1981. After 1981, new expectations
about agricultural income had to be
formed in an environment of greatly in(Continued on back page)

Chart 1
GOVERNMENT PAYMENTS TO AGRICULTURE
IN RELATION TO CASH RECEIPTS
i—

Table 1
INDICATORS OF AGRICULTURAL LAND VALUES

16 PER C EN T O F 1981-84 R E C E IP T S -------------------

Annual percent
change in returns
initial
Trend

___________Number of years of initial change_________
_ 2 ____________4____________6____________8___________ A0_
Land values, as percent of peak,
resulting from periods of initial
change in returns followed by trend

6.2 a
2.0
-2.0
-6.0
-2.0
-6.0
-6.0
-10.0

100
62
50
47
44
42
38
35

6.2a
2.0

0.0
0.0
-2.0
-2.0
-4.0
-4.0

100
62
49
43
44
40
37
33

100
62
48
41
44
38
36
31

100
62
47
39
44
37
36
30

100
62
46
38
44
36
35
30

a. Historical 1950-79 value; includes government payments.
NOTE: The capitalization formula used is
=

R

+ R(1 + g) + fill +

1 +/
SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

(1 +0'

g f

+ ... +

(1 +O’

R(1 + 8)n ~ 1

(1 +o"

where V is the value of an acre of land, R is the per-acre returns to land,
g is the growth rate in returns, / is the discount rate and can be thought of
as the mortgage interest rate, and n is 50 years.

SELECTED INDICATORS OF THE TEXAS AGRICULTURAL ECONOMY
PRICES RECEIVED/PRICES PAID

TEXAS FARM REAL ESTATE VALUES

|— 100 (1977 = 100)----------------------

95

-

90

-

85

-

80
75 I

1984

I

1985

I

19816

TEXAS CASH RECEIPTS
FROM LIVESTOCK AND CROPS

FARM DEBT OUTSTANDING AT TEXAS BANKS

1— 1,000 M ILLION D O LLARS

r-

4.0 BILLIO N D O L L A R S --------------------------- ——

-

3.9

-

3.8

-

3.7

-

3.6

3-5 I

1984

I

1985

I

1986

I

1986

SOURCE: Board of Governors, Federal Reserve System.

INTEREST RATES ON TEXAS FARM LOANS

NONPERFORMING LOANS
AT AGRICULTURAL BANKS

I—

r—

17 P E R C E N T -------------------------------------

9 I

1984

I

1985

I

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.

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

I

1986

NOTE: Starting with the first quarter of 1985, bank rate is decomposed into fixed
and variable rates for agricultural loans.
PCA 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.

6 PE R C E N T O F TOTAL LOANS

I

1984

I

1985

NOTE: Because of data limitations, renegotiated troubled debt is not included
in nonperforming loans.
SOURCES: Board of Governors, Federal Reserve System.
Federal Reserve Bank of Dallas.

AGRICULTURAL BRIEFS
• The rate of decline in District agricultural land
values slowed during the third quarter,
although the 3.6-percent reduction was the
third largest quarterly decline in the 1980s. Dur­
ing the first two quarters of 1986, however, dry
cropland values were practically in a free-fall,
dropping a total of 10.3 percent. Agricultural
bankers attributed much of this drop to the cut
in the value of mineral rights. Lower energy
prices are likely to cause only a one-time drop
in land values this year, since they should be
fully incorporated into expectations of future
returns to land.
• Agricultural bankers continue to pare marginal
credits. A recent survey showed that, on
average, District bankers are planning to
discontinue credit lines in 1987 to 8.0 percent of
their current farm borrowers, who account for
6.6 percent of the banks’ agricultural loans.
These figures are close to those for 1986 and
larger than 1985 percentages, meaning that

about one farm borrower in five has been re­
fused further financing for the years 1985-87.
• With U.S. stocks of grains exceeding a whole
year’s production, the U.S. Department of
Agriculture has announced a paid diversion
program for feed grains. Under this plan,
farmers will be offered the option of retiring 15
percent of their feed grain acreage program
base in return for up to $2 a bushel of produc­
tion forgone. This would come on top of the
20-percent nonpaid reduction in acreage re­
quired as a condition of program participation.
• District cattle producers have benefited from
lower feeding costs. Ranges have received ample
rainfall, and feedlots’ grain costs are lower this
year than last. Given expected supplies of com­
peting meats and the number of cattle currently
in pasture and on feed, cattle prices may slide
this coming winter. The price decline is expected
to be modest, however, compared with the sharp
price retreats of the previous two winters.

TEXAS COMMODITY MARKET PRICES
UPLAND COTTON

ALL WHEAT

GRAIN SORGHUM

SOURCE: U.S. Department of Agriculture.

SOURCE: U.S. Department of Agriculture.

80 C EN TS P E R POUND-

48
I—

40

1986 _ — --- ,
1985

r Ji „F i Mi A. iM"iJ , i J iA iS Oi Ni Di i

SOURCE: U.S. Department of Agriculture.

SLAUGHTER STEERS

FEEDER STEERS

CORN

r-

r-

i—

75 D O LLA RS P E R H UN D RED W EIG HT —

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

80 DO LLARS PER H UN D R ED W EIG H T —

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

4.0 D O LLA RS P E R B U SH E L

SOURCE: U.S. Department of Agriculture.

Programs (cont.)

Land Values (cont.)

the Texas proportion will probably be
even greater than shown in the chart.
Compared with Texas, the share of
government payments is lower for
Louisiana and New Mexico—7.4 per­
cent and 5.6 percent, respectively—but
both are still larger than the national
average of only 2.2 percent.
The majority of program benefits
are paid to crop producers. If pay­
ments were to be reduced, important
crop-producing regions, such as
the Southern High Plains, would be
hard hit. The already-high levels of
financial stress among farmers in that
region would be exacerbated. On the
other hand, the dominant form of
agriculture in the Eleventh District is
cattle and livestock production. These
ranchers generally are not recipients of
government support; hence, their
revenues will be largely unaffected by
reductions in federal spending.
—Roger H. Dunstan

creased uncertainty. With government
payments excluded, growth in nominal
net agricultural asset income fell from
the 1950-79 average of 6.4 percent to
none for the 1981-85 period. Exports
plummeted. While current government
income support has reached record
highs, clearly the program direction
is toward significant reductions in
payments. Fresh bad news has piled
on year after year, and farmland values
have fallen steadily.
Finding the Bottom of the Land Market

Table 1 uses a 50-year model to
estimate the theoretical bottom for
land values (in terms of percentage of
peak value) for different sets of expec­
tations. The first row of figures puts
land values at 100, which is where they
would be if the 1950-79 rate of growth
in returns (including government
payments) had continued unabated. If
a below-trend 2-percent growth in net

i
income were now expected, farmland
values would stabilize at 62 percent of
peak. Alternatively, if expectations are
that agriculture is in the midst of a pro­
longed decline, then land values could
shrink to 30 percent of peak. Choosing
an alternative between the extremes
suggests that land values would bot­
tom out in the 40-50 percent range.
In West Texas, some cropland
values are now 60 percent of their peak
value. For midwestern states, farmland
values average around 55 percent of
their peak. Given the differences in
crop mix, farm size, and dependence
on government income support, there
is little reason to expect land values in
different regions of the country to bot­
tom out at the same percentage of
peak value. Still, it would appear that
for all but the grimmest assessments
of agriculture’s future, most of the
decline in values has already occurred.
—Hilary H. Smith

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

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