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Federal Reserve Bank of Dallas FARM and RANCH BULLETIN February 1973 NEW STRENGTH IN AGRICULTURE CHALLENGES FARM LENDERS Agricultural credit increased sharply last year, following a general surge of strength in agricul ture and improvements in financial conditions. The increase in agricultural lending results mainly from the growth and increasing mechanization of farming and ranching operations, rising costs, and higher prices for land and other production items. In addition, the development of large, spe cialized agricultural industries—such as com mercial cattle feeding—requires vast amounts of capital and credit. Although agricultural credit is already a big market, it is expected to get bigger. By 1972, the nation’s farm debt had risen to $67 billion from about $25 billion in 1960—a gain of more than 165 percent. The debt is expected to reach about $110 billion by 1980. come per farm has climbed substantially. As farms and ranches expand, so do the use of credit and the need for still more credit. Loans held by major lenders in the Eleventh District states (Arizona, Louisiana, New Mexico, Oklahoma, and Texas) have increased rapidly A V E R A G E D I S T R I B U T I O N OF A S S E T S H E L D B Y U.S. F A R M E R S A N D R A N C H E R S BILLION DOLLARS 350 -------------------------------------------------------------------EZI OTHER ASSETS Growing credit needs As the need for capital continues to exceed the amount farmers can supply from their normal cash flow, the proportion of this need met by bor rowing will continue to grow. The trend in the debt-asset ratio shows this trend. Where the ratio was only 12 percent in 1960, it had in creased to almost 20 percent by 1972. The increased use of resources is reflected in the uptrend in average size of commercial farm operations. The gain in size has come about mainly through the consolidation of smaller units. Changes in gross income, production costs, and net returns also point out the increasing need for large amounts of capital and credit. For example, where realized gross farm income in Texas has risen 58 percent since 1960, realized net income has risen only 21 percent. But production ex penses have increased 78 percent. Because there are fewer farm units, however, realized net in 1971 f i g u r e s pre lim in a ry SOURCE: U . S . D e p a r t m e n t of A g r ic u ltu re FARM R E A L ESTATE L O A N S HELD BY P R INCIP AL LENDER S, J AN U A RY 1, 1972 Area and lender Amount held (Thousand dollars) ARIZO NA Banks .................. $5,380 37,346 FLB’s .................. Life insurance 106,755 companies . . 2,342 FHA .................... Individuals and others . . . 126,587e 278,410 Total ............... LOUISIANA 83,396 Banks .................. 172,487 FLB’s .................. . Life insurance 133,389 companies . . . 3,376 F H A ...................... Individuals 198,071 e and others . . 590,719 Total ............... NEW MEXICO 12,266 Banks ................. 66,068 FLB’s ............... Life insurance companies . 80,445 1,356 FHA .................... Individuals 141,414e and others . . 301,549 Total ............. OKLAHOMA 102,377 Banks ............... 157,528 FLB’s ............... Life insurance 163,592 companies . . . 5,526 FHA ................. Individuals 290,372e and others . . 719,395 Total ............. TEXAS 207,817 Banks ............... 577,371 FLB’s ............... Life insurance 571,645 companies . . 13,022 FHA .................. Individuals 768,084e and others . . Total ............. . . 2,137,939 1. Less than one-half of 1 percent e— Estimated SOURCE: Am erican Bankers Association Percent of area total 2% 13 Percent change from January 1 , 1970 -3 9 % 3 38 1 1 81 46 100 6 2 14 29 18 25 23 1 -4 -2 6 33 100 18 13 4 22 42 13 27 (1) -4 -1 47 100 11 8 14 22 8 25 23 1 -7 -9 40 100 27 14 9 27 6 15 27 1 -7 1 36 100 10 6 NO N-REAL-ESTATE FARM LO A N S HELD BY P R IN CIP AL LENDERS, JANUARY 1, 1972 Area and lender Amount held (Thousand dollars) ARIZO NA Banks ................ . . $223,977 21,137 PCA’s ............... FHA .................. 4,522 Total ............. 249,636 LOUISIANA Banks ............... 84,005 PCA’s ............... 71,616 FHA .................. 15,627 Total ............. 171,248 NEW MEXICO 108,514 Banks ................ PCA’s ................ 59,450 FHA .................. 6,443 Total ............. 174,407 OKLAHOM A Banks ............... . 424,693 PCA’s ................ 168,305 FHA .................. 29,848 Total ............. 622,846 TEXAS Banks ............... . 999,148 PCA’s ............... 409,943 FHA .................. 69,174 Total ............. . . 1,478,265 Percent of area total Percent change from January 1 , 1970 90% 8 2 100 -1 % 34 27 2 49 42 9 100 12 13 -8 10 62 34 4 100 34 10 -1 8 22 68 27 5 100 35 26 43 33 67 28 5 100 24 36 -1 2 25 SOURCE: Am erican Bankers Association over the past ten years. Total farm loans out standing (real estate and non-real-estate) in creased from about $2.6 billion on January 1, 1962, to about $6.7 billion at the start of 1972— a gain of 158 percent. In the five southwestern states, all institutional lenders except the Farmers Home Administration have reported growth in the amount of farm loans held since 1962. Loans held by production credit associations posted the largest gain, but those held by commercial banks, federal land banks, and individuals and other noninstitutional lenders also registered sizable gains in the 1962-72 period. Consequently, the shares of out standing credit held by these four lender groups expanded while the shares held by life insurance companies and the Farmers Home Administra tion declined. Continuing growth Agriculture’s need for capital will, no doubt, continue to grow, increasing the demand for credit. This seemingly irreversible trend places a premium on financial management ability. As a result, progressive agricultural lenders and bor rowers alike have turned to the tools of financial management, such as cash flow statements, bal ance sheets, capital budgeting, and more detailed records. As the characteristics of modern farming have changed, so has today’s farmer. The progressive farm operator is probably in the business largely by choice and has the resources and management capacity to succeed. Generally, he is well in formed and has the ability and knowledge to make decisions about complex farm production IN S T I T U T I O N A L L E N D E R S ’ S H A R E S O F F A R M C R E D I T M A R K E T FIVE SOUTHWESTERN STATES NON-REAL ESTATE JANUARY 1, 1962 JANUARY 1, 1972 BANKS F L B ’S ] LIFE INSURANCE COMPANIES 3--------- INDIVIDUALS & OTHERS T 10 20 T~ ~ r 30 40 50 PERCENT SOURCE: A m e ric a n B a n k e r s A s s o c i a t i o n 60 70 80 90 100 and marketing problems. Of course, this farm op erator keeps records that indicate comparative earnings of different enterprises, as well as the usual business records. Today, in order to meet the growing credit needs of his farm, the operator often seeks a credit package of short-term, inter mediate-term, and long-term loans tailored to the cash flow plans of his business. ANNUAL CLINIC TO FOCUS ON CHANGES IN AGRICULTURAL FINANCE “New Dimensions in Agricultural Finance” is the theme of the 21st Annual Texas Farm and Ranch Credit School for Commercial Bankers set for February 12-14 at Texas A&M University. The school is cosponsored by the Texas Bankers Association (TBA) and the host university. Registration will begin at 10 a.m. Monday, February 12, at A&M’s Memorial Student Center. Presentation of TBA-sponsored awards and an address by TBA President Leon Stone of Austin will highlight Monday evening’s smorgasbord. Tuesday’s schedule includes a presentation by John Hopkin, nationally known authority on agricultural finance, on “Projecting Capital and Credit Needs for Texas Agriculture.” New dimen sions of the Farm Credit Administration program will be discussed by E. A. Jaenke, governor of the administration. He will comment on the Farm Credit Act of 1971, which opened new avenues for an adequate and flexible flow of money into rural areas to meet current and future rural credit needs. The final Tuesday morning session will feature Lynn Futch of the Farmers Home Administration, speaking about the relationship between bankers and the FHA and focusing spe cial attention on the changes in FHA lending services brought about by recent legislation. Financial management New dimensions in financial management will receive attention in Tuesday’s early afternoon sessions. Economist J. Michael Sprott will speak on “Budgets for Texas Crops and Livestock,” the topic of a new publication of the Texas Agricul tural Extension Service. “Purchase, Lease, or Hire Equipment” will be discussed by Peter Barry of the Texas A&M Department of Agricul tural Economics. He will compare the economics of alternative methods available for obtaining farm machinery. Also on Tuesday afternoon, Don Workman, senior vice president of the First National Bank of Lubbock, will speak on “Mechanics of Live stock Loans—Cow-Calf, Stocker, Feeder.” Bill Jones, vice president of First National Bank, Levelland, will discuss “Mechanics of Crop Loans.” Marcus H. Dougharty, senior vice pres ident of First Security National Bank of Beau mont, will conclude the afternoon program speak ing on “Financial Statements and Analysis.” The Honorable W. R. Poage of Texas, chair man of the Committee on Agriculture of the U.S. House of Representatives, will speak at Tuesday evening’s banquet. Outlook for agriculture Credit files and loan documentation will be discussed on Wednesday morning by Bill Nesbitt, assistant vice president of Citizens National Bank of Waco. Other sessions on Wednesday will examine the agricultural and economic outlook— topics of special interest in view of the upsurge in livestock prices over the past year and new developments in the economy in general. Edward Uvacek, of Texas A&M, will speak on “Livestock Prices and Future Outlook.” The general eco nomic outlook will be discussed by William H. Kelly, director of research at the Federal Reserve Bank of Dallas. A wrap-up session, presided over by Tom Prater, Texas A&M extension economist, will conclude the program for adjournment at noon Wednesday. Registration may be made by writing James I. Mallett, Texas Agricultural Extension Service, Texas A&M University, College Station, Texas 77843, or by calling (713) 845-3271. Prepared by Carl G. Anderson, Jr.