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FARM and RANCH BULLETIN Federal Reserve Bank of D allas September 1975 FA R M LO A N D E M A N D ST R O N G ; LOANABLE FUNDS ADEQUATE Overall demand for farm and ranch loans at commercial banks is strong, loan repayments are sluggish, and loan renewals and extensions are above average. But even with strong demand for loans, the supply of loanable funds is adequate. And bankers are being selective in their lending, with many reporting they have increased their collateral requirements. These are the major findings of a midyear survey of nearly 150 south western agribankers that was conducted by the Federal Reserve Bank of Dallas. The demand for non-real-estate loans— partic ularly loans for crop operations— has increased in the past year. About 80 percent of the bankers reported that loan demand is either above aver age or average, while only 20 percent said loan demand is weaker than usual. The strong demand for operating loans reflects the reduced incomes of many crop growers during 1974, the large acreages of crops planted this year, and high costs of supplies. Further, the sharply higher farm costs in the past year have coincided with lower prices for crops. However, demand for livestock loans has weakened, reflect ing sluggishness in the cattle feeding industry. The number of cattle on feed is considerably below a year earlier, and prices for feeder and stocker cattle remain depressed. The livestock industry has been depressed since last year, when— under the pressure of large supplies— cattle prices fell sharply as feed costs were mounting. Consequently, many loans that would otherwise have been repaid have been renewed. Crop growers in the Eleventh District also have had difficulty making repayments. Adverse weather reduced yields last year, and market prices— despite strengthening recently— have been generally weak since last fall. Over a third of the respondent bankers, therefore, reported r below-average rate of loan repayment. And only a few bankers indicated repayments are above average. Almost half the respondents said the rate of renewals and extensions is above average, reflecting the financial squeeze on both crop and livestock producers. Loanable funds to support agricultural credit are available to qualified borrowers, as nearly two-fifths of the bankers are actively seeking new farm loan accounts. And only 10 percent of FARM FINANCE DATA (Dollar amounts in millions) Item Latest 1975 period Agricultural banks in Texas’ Total d ep o s its.................................................................................. Total lo a n s ........................................................................................ Federal funds sold ......................................................................... Production credit associations Loans outstanding Eleventh District states .......................................................... . United States ............................................................................. Loans made Eleventh District s ta te s ............................................................ United States ............................................................................. Federal land banks Loans outstanding Eleventh District states ............................................................ United States ............................................................................. New money loaned Eleventh District states .......................................................... . United States ............................................................................. Interest rates2 Feeder cattle loans ..................................................................... . Other farm operating lo a n s ........................................................ Farm real estate loans ............................................................... Percent change from Valu Month earlier Year earlier $2,905 1,408 304 0.4% 1.6 .7 8 .0 % 4.2 24.2 1,213 10,786 1.2 2.3 8.7 18.5 156 1,216 3.2 -3 .7 5.7 27.0 1,956 15,437 1.5 1.7 21.4 24.5 38 321 20.9 - 2 .6 5.2 3.6 9.47% 9.39 9.26 n.a. n.a. n.a. n.a. n.a. n.a. 1. Selected member banks in Texas with 25 percent or more agricultural loans (seasonally adjusted data) 2. Averages of rates reported in District agricultural credit survey n.a. — Not available the bankers have been forced to turn down or reduce the size of farm loans this spring because of a shortage of funds. Total loans averaged 58 percent of deposits at banks participating in the survey, and more than half the bankers expressed satisfaction with their loan-deposit ratio. But a fifth of the respondents said the ratio is too high, while about a fourth said they would like to extend more loans. Although loanable funds are more readily avail able than they were last year, interest rates on agricultural loans have been at the highest level in many years. At respondent banks, interest rates on farm loans averaged more than 9 percent. Interest rates varied only slightly by type of loan. For all banks in the survey, interest rates on loans for feeder cattle averaged 9.47 percent, slightly higher than for other types of farm loans. Interest rates averaged 9.39 percent for farm operating loans, 9.36 percent for intermediateterm loans, and 9.26 percent for long-term farm real estate loans. Costs climb Agribankers in the D istrict are con cern ed about rapidly climbing operating costs and w eak ness in commodity prices— particularly prices for calves and cotton. And the index of prices re ceived by Texas farmers and ranchers and the index of prices paid by U.S. farmers reflect those developments. In the first half of 1975, the index of farm prices paid averaged 12 percent higher than in the same period last year. But compared with a year before, farm prices in Texas were down 47 percent for calves and 39 percent for upland cotton. Agricultural production prospects were good over most areas of the District early this summer. But because price prospects are extremely uncer tain, lending policies are being firmed. Almost 50 percent of the bankers indicated they are re quiring more collateral than in recent years, a NON-REAL-ESTATE FARM LENDING AT ELEVENTH DISTRICT BANKS, M ID-1975 llllllllllllllll ■ ■ ■ ■ lllllllll A V A I L A K J IL I 1 T Ur 1 U N L/v? reflection of reduced income in 1974 and cur rently high operating costs. And none reported any easing of collateral requirements. Referrals of non-real-estate loans to other lend ers appear to have changed little. Although the m ajority of bankers reported an average or slightly below-average number of referrals, 12 percent reported an above-average use of corre spondent banks and 21 percent indicated in creased referrals to nonbank credit agencies. Referrals to credit agencies other than com mercial banks have been most common in areas where cattle and cotton are the main agricultural enterprises. Since both industries have been de pressed in the past year, many of the referrals are being made to the emergency loan programs of the Farmers Home Administration. Other than the Farmers Home Administration, nonbank credit agencies include the Farm Credit Administration— federal land bank associations, production credit associations, and banks for co operatives— and insurance companies. For nonreal-estate loans, production credit associations and the Farmers Home Administration are the main nonbank institutional lenders. In addition, merchants, dealers, and individuals extend large amounts of farm credit. Outlook mixed lllllllllllllllllllllllllllll R A T F o f LOAN H L H A Y M h N 1 1■ llllllllllllllllllllll R EFERR ALS TO — BANKS ■ lllllllllllllll REFER R A LS TO — C R E D IT A G E N C IE S — — l l l l l l l l LESS THAN USUAL ■ ■ ABOUT USUAL ■ ■ GREATER THAN U S UA L “i 0 10 i 20 i— i— i— i— i— i— i— r 30 40 50 60 70 80 PERCENT OF SURVEY R E S P O N D E N TS 90 100 Nearly a third of the respondents expected the volume of non-real-estate loans this summer to be higher than a year before in their area. Conversely, a fourth expected loan demand to ease. Overall loan demand is expected to increase, reflecting the sharp advance in demand for oper ating loans. Demand for crop storage loans and farm machinery loans is also expected to remain strong— although several bankers noted that pur chases of farm machinery have fallen substan tially below levels a year earlier. Demand for feeder cattle loans is expected to remain weak— reflecting continued sluggishness in the cattle feeding industry. Current demand for loans relating to the cattle feeding industry is still weak despite a recent upturn in the num- ber of cattle on feed. Some investors that brought funds from sources outside agriculture are no longer interested in cattle feeding. And because of insufficient equity, some cattlemen with many years’ experience cannot qualify for credit. Dairy loans are also expected to remain weak as the cost-price squeeze continues to grip the dairy industry. Since nearly 90 percent of the respondents expected farmland values to remain stable in the third quarter, demand for farm real estate loans through September is expected to be either slightly lower or unchanged. Only bankers in the Valley area of Texas expected farmland values to increase. Bankers generally agreed that substantially higher costs of producing food and fiber have narrowed profit margins, making it difficult for farmers and ranchers with limited equity to meet credit requirements. And in appraising their po sition as lenders, they said that more expertise is needed to adequately evaluate credit arrange ments for farm and ranch loans. The trend toward larger farms and ranches will continue, the bankers said, necessitating even larger capital investments per farm and per farm worker. The upward trend in farm produc tion expenses is also expected to continue. So, although gross sales per farm probably will in crease, margins will likely remain narrow. The bankers believed that relatively more agricultural capital would be provided through credit and relatively less through equity, causing the debtfree portion of all farm assets to trend downward. F A R M E R S B U Y LAN D TO E X P A N D E X IS T IN G F A R M S Most transfers of farmland involve parts of farms, not complete farms. That is, the majority of transfers of farm tracts are designed to add to the acreage of existing units— not to establish complete farming operations. In the year ended in March, 59 percent of farmland transfers ex panded acreages already owned or leased. That represented a small increase over the years ended in March 1973 and March 1974 and indicated the trend to larger commercial farms is continuing. More than a third of the transferred tracts were, in fact, parts of other farm units being divided and consolidated into larger farms. Because most purchases of land added to exist ing farms, the purchasers in two-thirds of all land transactions were farmers. Most of these were owner-operators, but some were tenant farmers. Nonfarmers, including local and absen tee buyers, accounted for the remaining third. From the standpoint of farm acreage pu r chased in the year ended in March, owner-opera tors were the principal buyers, having purchased 61 percent of the acreage. The next largest group was absentee nonfarmers, who bought 20 percent of the acreage. The remaining acreage was di vided about equally between tenant farmers and local nonfarmers. On the seller’s side of the market, distribution of tracts transferred was basically unchanged from recent years. Active farmers sold 39 percent of all the tracts, retired farmers 16 percent, and administrators of estates 19 percent. Nonfarmers, meanwhile, sold about 26 percent of the tracts. Even with a dramatic 74-percent increase in average U.S. farmland prices since 1971, the m ar ket for farmland has changed little. The relative composition of the buyer’s market and the seller’s market has been essentially unchanged in the past four years. Prepared by Carl G. Anderson, Jr.
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