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FARM and RANCH BULLETIN Federal Reserve Bank of Dallas N ovem ber 1976 FARMLAND VALUES SHOW MODEST GAINS Rural land values in the Southwest continued rising at a slow rate in the year ended October 1, according to a survey of agribankers conducted by the Federal Reserve Bank of Dallas. Report ing on representative agricultural land with aver age productivity, the bankers indicated gains of 5 percent for dryland and irrigated cropland and 4 percent for ranchland. In Texas, values increased 5 percent for dryland cropland, 4 percent for irri gated cropland, and 3 percent for ranchland. On the whole, cropland values in the South west appreciated at a faster rate than ranchland values. The main reason is that crop production has a higher income-generating capability per acre than do most cow-calf operations. However, farm incomes in the southwestern states of Texas, Louisiana, Oklahoma, and New Mexico have been pressured by rising production costs, depressed cattle prices, and recent declines in grain prices. High natural gas prices, in particular, have slowed the advance in irrigated land values. And too, adverse weather has affected crop production this year in many areas in the four states. Changes in farmland and ranchland values have also been influenced by the general infla tionary trend in prices, land purchases for recre ational purposes, and speculative buying. For instance, rising rural land values in the East Texas timber region have reflected increased lignite mining activity and higher prices for the fuel. The consensus of agribankers across the South west was that farmland and ranchland values will likely be stable in the fourth quarter— 76 percent expected values to be unchanged. A fifth of the respondents expected values to rise, but only 3 percent expected them to decline. Land values in the northern High Plains, East Texas timber region, South Texas Plains, and northern Louisiana are expected to continue increasing. While banks normally do not extend a large volume of long-term credit for purchasing farm land and ranchland, respondents to the latest survey expected demand to increase somewhat during the last quarter of 1976. The proportion of southwestern agribankers indicating aboveaverage demand for farm real estate credit was 17 percent— up from the 11 percent indicated for the same period last year. Demand at commercial banks is expected to be particularly strong in the southern High Plains, the East Texas timber CHANGE IN AVERAGE PER-ACRE VALUES OF AGRICULTURAL LAND PERCENT CHANGES IN SURVEY FIGURES OCTOBER 1976 FROM OCTOBER 1975 region, and the Lower Rio Grande Valley. The upswing in farm mortgage loan demand at com mercial banks could, in part, be the result of a slowdown in the volume of credit extended by federal land banks in Oklahoma and Texas. Reported interest rates on long-term farm real estate loans averaged 9.35 percent in the South west— only 3 basis points higher than a year earlier but 1 basis point less than indicated in the July survey. The average interest rate in Texas was 9.30 percent. AGRICULTURAL CREDIT CONDITIONS REFLECT STRONG LOAN DEMAND Agricultural credit conditions across the South west have tightened somewhat in the past 12 months. Climbing costs, coupled with low prices for most agricultural products, have eroded the financial condition of most agricultural producers. And loanable funds at rural banks are being pressured by a strong demand for farm and ranch credit. Loan demand grows . . . ‘ Excludes d ra m a tic declines in isolated areas “ Not applicab le In a survey of approximately 200 agribankers in the Eleventh Federal Reserve District in early October, above-average demand for agricultural loans was reported by 47 percent of the respon dents— up substantially from 21 percent a year ago. Farm loan demand registered the biggest in creases in the intensive wheat, cotton, and grain sorghum producing areas of the High Plains and Rolling Plains of Texas. Demand was the lowest in the Central Blacklands and Coastal Prairies of Texas and in southeastern Oklahoma. The growing demand for farm and ranch credit stems from not only higher operating and ma chinery costs but also increased activity in most farming and ranching enterprises. And the pace of agricultural borrowings will likely continue, even though the volume of feeder cattle loans is expected to decline because feedlot placements are lower. Half the respondents indicated the volume of operating loans will be larger in the last quarter of 1976 than a year earlier. Demand for crop storage loans is apt to edge higher as farmers withhold wheat and perhaps other crops from market in anticipation of higher prices. Moreover, with machinery prices up significantly from a year earlier, more than a third of the re spondents indicated intermediate-term loans may increase. AGRICULTURAL CREDIT CONDITIONS AT SURVEY BANKS, OCTOBER 1, 1976 ELEVENTH FEDERAL RESERVE DISTRICT DEMAND FOR LOANS AVAILABILITY OF FUNDS . . . but funds available Although a large volume of loans has been ex tended by rural banks to cover the increasing demand for farm and ranch credit, the bankers generally reported that funds are available for creditworthy borrowers. As a result, 45 percent of the bankers are seeking new farm loan accounts. Average or above-average availability of funds was reported by 86 percent of the respondents, and only 14 percent reported less funds than usual. In the grain-producing and cattle feeding areas of West Texas, however, a few bankers in dicated that loanable funds were limited. Some of the survey banks are taking advantage of the seasonal borrowing privilege extended to members of the Federal Reserve System. Many banks that did not previously qualify can now borrow under the seasonal credit arrangement as the program has been liberalized. Also, the new guidelines increase the amount of funds available to many banks that previously qualified. M ost banks have been able to meet the grow ing demand for credit because they have had strong deposit growth. Data from a selected group of member banks in Texas heavily engaged in agricultural lending indicate that deposits at rural banks in September averaged 10 percent higher than a year earlier and total loans aver aged 20 percent higher. In fact, both deposits and loans have increased at a faster pace at rural banks than at banks in urban areas. Total loans averaged 60 percent of deposits at survey banks, compared with 55 percent in Oc tober 1975. Nevertheless, with higher production expenses squeezing profits for farmers and ranch ers, rural bankers are evaluating loans closely, RENEWALS OR EXTENSIONS AMOUNT OF COLLATERAL REQUIRED REFERRALS TO CORRESPONDENT BANKS T ~ ------------------ ABOUT USUAL LESS THAN USUAL GREATER THAN USUAL I— 0 T- - - 1— 20 T- - - - 1— 40 ' - - - - 1- - - - - T- - - T— 60 80 T- - - - 1 100 PERCENT OF RESPONDENTS and 32 percent of the respondents indicated col lateral requirements are greater than usual. A large number of loans are being renewed and extended, and the proportion of bankers report ing the rate of loan repayment as less than usual was 28 percent— up from 25 percent a year earlier. With low cattle prices and declining grain prices, repayments have been particularly slug gish in the Texas High Plains, South Texas, southern Biackland Prairies, and southern New Mexico. With increased credit demand, the proportion of bankers reporting greater than usual referrals to correspondent banks advanced from 12 per cent in October 1975 to 18 percent in the latest survey. But correspondent activity between rural and urban banks likely could have increased more. The proportion reporting greater than usual referrals to nonbank credit agencies drop ped from 20 percent in October 1975 to 9 percent a year later. Referrals to correspondent banks were highest in the northern High Plains and Coastal Prairies of Texas, while referrals to non bank credit agencies were highest in southeast ern Oklahoma and New Mexico. Generally, the agribankers indicated little ex perience in participation with production credit associations in jointly making farm loans. How ever, many were working with the Farmers Home Administration in making guaranteed loans. Interest rates on non-real-estate loans de clined slightly in the Southwest in the past 12 months, reflecting the steady supply of loanable funds. In the latest survey, interest rates aver aged 9.33 percent on feeder cattle loans, 9.31 percent on farm operating loans, and 9.41 per cent on intermediate-term loans. Rates in Louisi ana and Texas were slightly lower than in New Mexico and Oklahoma. Financial conditions deteriorate Compared with October 1975, the overall fi nancial condition of farmers and ranchers in the Southwest has weakened. While 41 percent of the bankers reported conditions of farmers had weakened, 57 percent indicated conditions were worse for ranchers. On the other hand, only 28 percent of the respondents indicated improved financial conditions for farmers, and only 16 per cent reported better conditions for ranchers. Regional differences are evident in the views reported by the agribankers responding to the latest survey, however. Bankers in northern Lou isiana and East Texas indicated that the financial conditions of farmers and ranchers have improved somewhat since a year ago. Elsewhere in the Southwest, the respondents generally reported that the cost-price squeeze had eroded financial conditions of ranchers. The deteriorated financial condition of farmers in the northern High Plains and New Mexico was attributed to a poor wheat crop and declining prices. And farmers in the Coastal Prairies region of Texas have been faced with sluggish rice markets and low prices. The bankers indicated that with the increas ing credit requirements and risks associated with agricultural production, lending arrangements with producers in the foreseeable future will necessitate more interbank and nonbank financ ing. Correspondent banking and participations with the guaranteed loan programs of the Small Business Administration and the Farmers Home Administration are expected to expand. And a larger proportion of machinery purchases will likely be financed by equipment companies. In addition, bankers will probably require more de tailed financial statements and planned market ing arrangements, such as forward contracting. Alan M. Young
@FedFRASER