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Federal Reserve Bank of Dallas FARM and RANCH BULLETIN February 1972 CHANGING AGRICULTURE MEANS CHANGING CREDIT NEEDS Dramatic changes in agriculture have afforded significant increases in production and efficiency. Larger production units, more sophisticated man agement, substitution of capital for both land and labor, and increased specialization are among the changes that have brought about more efficient pro duction in agriculture, the nation’s largest business. These same changes have also modified the credit needs of farmers. Total agricultural debt in the United States on January 1, 1960, was $23.6 billion. By January 1, 1971, it was estimated at $59.4 billion, an increase of over 150 percent. Due to greatly expanded de mands and periodic high interest rates, credit cost was the most rapidly expanding cost item in agri culture during this period. The increased demand for credit has resulted from the changes noted above and consequent cost shifts. Increasingly, farm inputs are of off-farm origin and fall in the broad category of capital (fertilizer, pesticides, machinery, etc.). Farming is becoming increasingly land and capital intensive. On January 1, 1971, for the first time, more of the agri cultural debt was non-real-estate ($29.8 billion) than real estate ($29.6 billion) debt. Two other important trends are the increasing size of loans and the declining equity ratio of farms. Because of the expanding size of farm operations and more expensive capital inputs, loans are be coming larger. The average real estate loan more than doubled between 1965 and 1971, and similar trends have been noted for non-real-estate loans. Farmers’ equity has declined from 88 percent in 1960 to an estimated 81 percent in 1971, although it is still very high on the average. This increased demand—especially in size of loans—and declining equity place increased pres sure on all lenders to service agriculture. This pres sure is especially noticeable among lenders of pro duction credit as the production credit needs of the larger and more sophisticated operations expand. Nationally, the leading institutional source of this type of credit is the commercial bank. In the South west, commercial banks provide about 68 percent of the production credit extended by institutional lenders. Role of commercial banks At the start of 1971, commercial banks had $15.5 billion in agricultural loans. Non-real-estate loans accounted for $11.1 billion, or 71 percent, of this total. About 88 percent of all insured commercial banks were participating in agricultural lending, and over 20 percent had at least half of their loan portfolio in agriculture. Commercial banks in the United States have ex perienced a 133-percent increase in agricultural lending over the past ten years. However, this growth has not kept up with the total expansion in agricultural lending. Several reasons have been projected for this difference in growth: (1) legal lending limitations, (2) the static deposit situation of rural banks, (3) credit demand from nonagricultural sectors, and (4) competition for agricultural loans among institutional lenders. The American Bankers Association reports that the proportion of banks with legal loan limits under $50,000 declined from 31 percent in 1965 to 12 per cent in 1970. However, 55 percent of all agricultural banks still had legal loan limits under $150,000 and only 10 percent had limits of $1 million or over. There was a slight decline during 1970 in the num ber of excess loan applications that were otherwise acceptable. While this was due in some degree to improving legal limits, much of it was the result of increased competition from other lenders. Deposits at rural banks have not been expanding as rapidly as deposits at urban banks. Because of this, rural banks, which are the front line in agricul tural lending, have not experienced increases in their legal loan limits sufficient to service the increasing size of loans demanded. Most of the com petition for funds has come from other banks, sav ings and loan associations, and Government bonds. The high demand for funds that resulted in the slow growth of rural bank deposits was coupled with high credit demands for nonagricultural business expansion and consumer credit. These demands are in competition with agricultural demands. Because these nonagricultural loans often have higher inter est rates, farmers are at a competitive disadvantage, especially during periods of tight money, such as the late 1960’s. In addition, competition is increasing among agricultural lenders. Production credit associations had a 258-percent increase in non-real-estate loans between 1961 and 1971, while merchants and deal ers showed a 152-percent increase. Federal land banks showed a 181-percent increase for real estate loans during the same period. Banking’s reaction Initially, commercial banks were slow in respond ing to the needs of a changing agriculture and the rising competition of other lenders. However, it is clear that commercial banking is now beginning to meet the challenge of these changing conditions. An ABA study in 1950 found that only about 1,000 banks had agricultural specialists on their staffs. In 1970, nearly 3,500 banks employed agri- FARM LOANS HELD BY VARIOUS U.S. LENDERS, JANUARY 1 Type and lender NON-REAL-ESTATE Banks ..................................................................................... Production credit associations........................................... Federal Intermediate Credit banks..................................... Farmers Home Administration........................................... Merchants, dealers, finance companies, and others . . . Total .............................................................................. REAL ESTATE Banks ..................................................................................... Life insurance companies................................................... Federal land banks................................................................ Farmers Home Administration1........................................... Individuals and others........................................................... Total .............................................................................. 1971 Volume outstanding (Million dollars) 1970 1961 Percent change 1971 from 1961 1970 $11,102 5,295 220 795 12,340p 29,752p $10,330 4,533 224 785 11,230 27,102 $4,991 1,480 88 420 4,900 11,879 7% 17 2 1 10 10 122% 258 150 89 152 152 4,445 5,626 7,145 347 12,024p $29,588p 4,113 5,746 6,714 455 11,441 $28,469 1,691 2,975 2,539 484 5,131 $12,820 8 -2 6 -24 5 4% 163 89 181 -28 135 131% p— Preliminary 1. Direct loans only SOURCE: American Bankers Association (compiled from data furnished by Economic Research Service, U.S. Department of Agriculture) cultural specialists and about half of these were full-time agricultural representatives. This indicates banking’s awareness of the need for specialized per sonnel to evaluate and service the increasingly com plex credit needs of agriculture. Many urban banks have also employed agricultural personnel because of the increased demand from large agricultural pro duction units and agribusiness. These banks also find agricultural specialists invaluable in servicing the needs of their correspondent country banks. Over 80 percent of the bankers in the ABA study who faced excess loan demand in 1970 attempted to obtain funds—generally by selling participations to correspondent banks. Some borrowed from the Federal Reserve System, and a few placed loans with the Federal Intermediate Credit banks. A few banks have created credit corporations or similar organizations internally. An increasing number of banks are offering farm accounting services and management services. There are also some banks that offer farm equipment leasing services. The future Many commercial banks seem aware of the changing situation in agricultural lending, but the response has not been universal. A recent study by the Federal Reserve Bank of Dallas of the financing of cattle feeding noted extreme variation in reaction to agricultural loans among bankers and regions. Noticeable differences exist between banks in their aggressiveness in obtaining agricultural loans and the competitiveness of interest rates and services offered by various banks. It is also apparent that many of the more innova tive services are found primarily in larger banks. But, frequently, rural areas are not served by these large banks nor by an interested big-city correspon dent bank. As agriculture becomes more and more sophisti cated, it requires more credit, better credit, and more knowledgeable lenders. It is estimated that by 1980, the agricultural debt will be between $90 billion and $137 billion. Satisfying this need is not the exclusive right of any single institution but should be the complementary effort of all lenders. Commercial banks are responding. But to meet the challenge adequately, there must be more aware ness and adaptation at all levels—and particularly among the country banks that serve the majority of the agricultural areas of the United States. FARM AND RANCH CREDIT SCHOOL TO MEET AT TEXAS A&M The 20th Annual Farm and Ranch Credit School will convene February 14 on the Texas A&M cam pus to discuss the problems of financing Texas’ changing agriculture. The three-day conference is conducted by the department of agricultural eco nomics and rural sociology of Texas A&M Univer sity in cooperation with the Texas Bankers Asso ciation. Registration is from 1 p.m. to 7 p.m. Mon day, February 14, in the Memorial Student Center. The first event of the conference will be a smor gasbord supper Monday evening, featuring presen tation of awards by the Texas Bankers Association and an address by TBA President Oscar Lindemann of Dallas. On Tuesday morning, Dr. John Hopkin, Stiles Professor of Agricultural Finance at Texas A&M, and Dr. Edward Uvacek, Texas A&M extension livestock marketing economist, will cover the gen eral financial and economic outlook. Both are noted authorities in their respective fields. “Sources of Funds” will be the general topic for a Tuesday afternoon session. Otto Moser, chair man of the board of the State Bank of DeKalb, will chair the session and discuss “How I Can Handle My Customers’ Business.” Other topics and speak ers include: “Correspondent Bankers,” Tommie E. Stuart, vice presi dent, First National Bank, Fort Worth “What I Expect of the Correspondent Banker,” Edward Leatherwood, vice president, First State Bank, Gustine “Common Trusts,” Henry Searcy, trust officer, Citizens National Bank, Waco “Insurance Companies,” S. R. Greenwood, president, Temple National Bank, Temple “Agricultural Credit Corporations,” Rex Reeves, president, Farmers and Stockmens Bank, Clayton, New Mexico A special feature of this session will be an address by Leon W. Cowan, vice president in charge of bank relations and services for the Federal Reserve Bank of Dallas. His topic is “The Federal Reserve Bank and Agriculture.” The theme for the Wednesday morning session will be “Make Yourself a Better Banker for Your Customers,” with a focus on the mechanics of handling loans. Walter C. Richburg, vice president of First Victoria National Bank, Victoria, and Pat Malone, executive vice president, First National Bank, Hereford, will examine the aspects of cowcalf loans and feedlot lending. Other topics and speakers are: “Cattle Financing,” Arthur B. Adams, president, Lawrence Systems, Inc. “Mechanics of Row-Crop Loans,” Joe Montgomery, execu tive vice president, Security State Bank, Littlefield “Federal Crop Insurance,” Richard H. Aslakson, manager, Federal Crop Insurance Corporation, U.S. Department of Agriculture “Bankers Are Important,” Dr. T. R. Timm, head of the department of agricultural economics and rural soci ology, Texas A&M University A registration form is included in this issue of the Farm and Ranch Bulletin. It may be mailed to James I. Mallett, Economist-Management, Texas Agricultural Extension Service, Texas A&M Uni versity, College Station, Texas 77843. Prepared by Dale L. Stansbury REGISTRATION AND ROOM RESERVATION FORM, FARM AND RANCH CREDIT SCHOOL Name____________ _____ ______________________ ______ Position_______________________ __ _______ Bank __ Address____________ __ _________________ Please complete this section for room reservations. 1. Give the number of each type accommodation desired: (a) Single room_____ (b) Double for two_____ (c) Twin for two____ (d) Three or more______ 2. Motel preference.___ ____________________ ____ ____ 3. Give names of others included in this reservation, indicating by brackets those sharing room: Name__ _ Name Bank____ BankAddress__ Address_____ Departure 4. Day of arrival. INFORMATION Rooms will be reserved in the Memorial Student Center in the order that requests are received to the extent of facilities. Thereafter, reservations will be made in nearby modern motels or according to your preference listed above. You will receive notice as to where your reservation has been made. Please do not send money in advance for your reser vation or registration.
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