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DALLAS
Federal Reserve Bank of Dallas

November 1987

Localized Problems Pull Down Loan Quality
at District Agricultural Banks
Although nonperforming loans as a
percentage of all loans at agricultural
banks in the Eleventh Federal Reserve
District continue to increase, the prob­
lems are largely confined to areas of
West Texas.' The nonperformance rate
is actually going down at District
agricultural banks outside those areas,
which matches the experience of agri­
cultural banks outside the District.
Within the banking system, the con­
centration of local economic distur­
bances is one problem that could be
avoided with statewide branching.
Nonperformance Rate Down
Outside District

At agricultural banks outside the
Eleventh District, the proportion of all
loans that are nonperforming declined
to 4.13 percent during the second
quarter of 1987, compared with 5.27
percent in the second quarter of 1986
(Chart 1). At the same time, the non­
performance rate on just farm loans at
these banks fell to 5.68 percent, com­
pared with 7.85 percent a year earlier.
(The nonperformance rate of nonfarm
loans also fell.) These improvements in
loan quality reflect not only increased
government farm payments and in­
creased livestock profit margins but
also the renewed health of the local
economies.
District Nonperformance Rate Rises

In contrast to the improved loan
quality at the agricultural banks out­
side the District, average loan quality
at agricultural banks in the District has
deteriorated. The nonperformance rate

at these banks was 4.23 percent in the
second quarter of 1987, up from 3.99
percent in the second quarter of 1986.
As of mid-1987, the nonperformance
rate at District agricultural banks ex­
ceeded that for agricultural banks in
the rest of the nation. The increase in
the District nonperformance rate, how­
ever, does not reflect general agri­
cultural conditions in the District.
The rise in the District nonperfor­
mance rate resulted from a sharp dete­
rioration in loan quality at agricultural
banks in the Texas Southern Plains
(roughly the area around Lubbock
and eastward toward Abilene). Many
farmers there became financially
stressed when poorly timed rains, low
temperatures, and hail reduced the

area’s cotton production 46 percent
from 1985 to 1986. As a consequence,
the nonperformance rate for Southern
Plains agricultural banks rose to 6.04
percent in the second quarter of this
year, up from 4.61 percent in the sec­
ond quarter of 1986. In stark contrast,
the nonperformance rate at Dis­
trict agricultural banks outside the
Southern Plains fell to 3.55 percent,
down from 3.78 percent a year earlier.
In fact, these banks had a lower non­
performance rate than did agricultural
banks outside the District.
Geographical Concentration Harmful

The recent experience of the
Southern Plains agricultural banks II(Continued on back page)

Agriculture Can No Longer Bail Out
the Merchandise Trade Account
During some years in the 1970s,
agricultural trade surpluses more than
offset nonagricultural merchandise
trade deficits. Even as late as the early
1980s, agricultural trade surpluses had
the effect of reducing total merchan­
dise trade deficits by almost half. In
the current marketing year, however,
shrunken agricultural trade surpluses
will count for little compared with the
swollen nonagricultural trade deficits.
Agriculture’s Importance
to Total U.S. Trade Declining

Agriculture’s share of U.S. trade has
been declining for most of this century
(Chart 2). In 1930, agricultural products

constituted almost half of U.S. mer­
chandise imports and nearly a third of
U.S. merchandise exports. Yet by the
mid-1980s, agricultural exports made
up only 15 percent of merchandise ex­
ports, while agricultural imports were
less than 6 percent of merchandise im­
ports. This outcome can be explained
by the large growth of world and U.S.
income since 1930 and the fact that the
demand for agricultural products in­
creases only modestly when income
rises.
Since the Civil War, the United
States generally has been a net ex­
porter of agricultural products. Simi(Continued on back page)

Chart 1
NONPERFORMANCE RATE OF LOANS
AT AGRICULTURAL BANKS

Chart 2
AGRICULTURE’S SHARE OF U.S.
MERCHANDISE EXPORTS AND IMPORTS

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

Federal Reserve Bank of Dallas.

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

PRICES RECEIVED/PRICES PAID

I-

825 DOLLARS PER A C R E--------------------------------(THREE-QUARTER CENTERED MOVING AVERAGE)

-

750

90 (1977 = 100)---------------------------------------

675
600
525 i

1985

I

1986

I

1987

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

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.

TEXAS CASH RECEIPTS
FROM LIVESTOCK AND CROPS
i—

FARM DEBT OUTSTANDING AT TEXAS BANKS

5.7 BILLION DOLLARS -

1981

1982

1983

1984

1985

1986

1987

SOURCE: U.S. Department of Agriculture.

INTEREST RATES ON TEXAS FARM LOANS

NONPERFORMING LOANS
AT AGRICULTURAL BANKS

I— 15.0 PERCENT-----------------------------------------------------------------

-

6.00 PERCENT OF TOTAL LOANS -

-

5.25

-

4.50

BANKS:
— 13.5

—

12.0

-

10.5

3.75
3.00
—

9.0 ,

1985

I

1986

I

1987

NOTE: 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.

•— 2.25

1985

I

1986

I

1987

NOTE: Nonperforming loans consist of loans past due 90 days or more and
still accruing plus nonaccrual loans.
SOURCES: Board ol Governors, Federal Reserve System.
Federal Reserve Bank of Dallas.

AGRICULTURAL BRIEFS
• Although agricultural land values in the
Midwest and some sections of West Texas are
rising, average District farm and ranch land
values are falling. Land values in midwestern
states rose about 3 percent in the third quarter,
as profitable livestock operations and govern­
ment programs to retire land made land pur­
chases more feasible. The generous govern­
ment cotton program and a strong demand for
cotton have reversed the land market in West
Texas around Lubbock. Land values there also
rose about 3 percent in the third quarter, the
second rise in land values following 11 quarters
of decline. By depressing nonagricultural de­
mand for land and by restricting off-farm
sources of income for farmers and ranchers,
the anemic general economy of the Eleventh
District probably has prevented average land
values from bottoming out.
• The quality of farm loans in District bank
portfolios is improving. Agricultural bankers
reported that as of October 1, 68.2 percent of

their farm loans had no significant repayment
problems, compared with 63.7 percent a year
earlier. Further, the proportion of farm loans
that have severe repayment problems dropped
to 4.1 percent on October 1, 1987, compared
with 5.3 percent on October 1, 1986. Higher
prices for livestock and cotton, plus continued
heavy government support for many crop
farmers, have made the difference.
• Government programs are critical to the
economic well-being of most farmers, accord­
ing to a survey of agricultural bankers. These
bankers estimated that at current commodity
and input prices, only 32 percent of their com­
mercial farmer customers (those with at least
$40,000 in gross sales per year) could survive
without government farm payments of any kind.
The implication is that the subsidies provided
by current agricultural policy keep significantly
more resources tied up in the agricultural sec­
tor than would be the case if a free-markets
policy were adopted.

TEXAS COMMODITY MARKET PRICES
UPLAND COTTON

ALL WHEAT

i—

65 CENTS PER PO UND--------------

—

60

GRAIN SORGHUM
i— 5.4 DOLLARS PER HUNDREDWEIGHT-----

1987 /

r i 1 r ’1

J

SOURCE: U.S. Department of Agriculture.

SOURCE: U.S. Department of Agriculture.

A I , , l ,1 , I . r o"l „ I .TTTT1

F M A M J

J A S O N D

SOURCE: U.S. Department of Agriculture.

SLAUGHTER STEERS

FEEDER STEERS

CORN

r-

|—

96 DOLLARS PER HUNDREDWEIGHT-----

i— 4.0 DOLLARS PER BUSHEL

-

88

-

75 DOLLARS PER HUNDREDWEIGHT—

3.5

1987/
-

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

80

z-- ------ —

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

SOURCE: U.S. Department of Agriculture.

Loan Quality (cont.)

Bail Out (cont.)

lustrates one of the drawbacks of geo­
graphical concentration in bank lend­
ing. If their loan portfolios had been
geographically diversified across the
District, the nonperformance rate at
these banks would not have risen so
dramatically. The improvement in
agricultural credit conditions in other
areas of the District would have offset
the deterioration in credit conditions in
the Southern Plains. A liberalization of
branch-banking restrictions in Texas to
allow statewide branching would in­
crease the ability of banks to diversify
their loan portfolios geographically,
thereby lessening the stress on the
banking system associated with
localized economic shocks.
—Jeffery W. Gunther

larly, U.S. nonagricultural trade was in
surplus for much of this century, but in
1971 it turned negative and has stayed
so since then. During the 1970s, there
was an agricultural export boom,
powered by the low exchange rate
value of the U.S. dollar, world income
growth, and massive expansion of ex­
ternal debt by developing countries.
The rapid increases in U.S. agricultural
trade surpluses were large enough to
offset the nonagricultural merchandise
trade deficit completely in the years
1974-76. Even in the early 1980s, U.S.
agricultural trade surpluses offset
almost half the nonagricultural mer­
chandise trade deficit. The U.S. agri­
cultural export boom ended in the
1980s as the dollar rose in foreign ex­
change markets, the world slipped into
recession, and the less developed
countries struggled with a debt crisis.
At the same time, U.S. agricultural im­
ports rose steadily as foreign agri­

1. Nonperforming loans consist of loans past due
90 days or more and still accruing plus nonac­
crual loans. Agricultural banks are defined here
as insured U.S. commercial banks at which
farm loans account for at least 25 percent of
total loans.

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cultural products became cheaper in
dollar terms.
Agriculture Now a Minor
Player in U.S. Trade

Today, the surplus of agricultural ex­
ports over agricultural imports is onethird to one-fourth the size it was in the
early 1980s, while nonagricultural mer­
chandise trade deficits are two to three
times larger than those registered six
and seven years ago. The projected
agricultural surpluses of $5 billion to
$10 billion for the 1987-88 marketing
year will be swamped by likely nonagri­
cultural merchandise trade deficits of
more than $140 billion during the same
period. The secular trend of agricul­
tural shares of merchandise exports
and imports indicates that U.S. agricul­
ture is unlikely ever again to play a
major role in determining the size of
trade deficits or surpluses.
—Hilary H. Smith