Full text of Agricultural Highlights : November 1987
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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. > Q3 2. E g " 0) CD f i l l s i;?H § “ ^ 3 0 » » 2. o > W T3 l i f* tO !J » • O) VI Cl 01 (D - 3 TJ 01 J3 S ' ? 3. C | -n 2, ro “ ® ® 1 Q. ® — =3 ■< B — T » "< JJ ® ® CT 5 ssp* ® o <i> 5 ® c/) w 3 9L o C "D' 3 3 ? * 2 % o $ J J CD CD Q - T1 0) 3 § * £ ® J ® 3 t t l Oj TT Cfl <D 0 CD 2 , i 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