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___________ Agriculture AN EIGHTH DISTRICT PERSPECTIVE FA LL 1984 Eighth District Agricultural Banks Weather the Financial Storm Agricultural banks in the Eighth District, according to many observers, are under the same financial stress as agricultural lenders across the nation. Evidence o f this financial stress is usually founded on surveys, which show that farm loans are being repaid slowly and that asset values supporting these loans are declining. Under expectations that collateral values could decline further while real returns to farming remain stable or fall, prospects for many agricultural banks, say these observers, look bleak. Agricultural banks in the Eighth District, however, have earned higher average returns on assets and equity than rural and city banks not engaged in agricultural lending. Banks with more than 30 percent o f their loan portfolio allocated to agricultural loans have earned returns consistently higher than banks that are o f similar size but hold less than 5 per cent o f total loans in the form o f agricultural loans. Table 1 shows that, in the 11 years spanning 1973-83, agricultural banks earned average returns o f 1.1 percent on assets and 13.4 percent on equity. These returns compare with rates o f 1.0 and 11.9 percent for rural nonagricultural banks. Nonagricultural banks in metropolitan areas earned average returns o f 0.9 percent on assets and 10.5 percent on equity. Even in 1983, when many economists started to report signs o f financial stress in agriculture, agricultural banks posted returns on assets equal or superior to the other two classifica tions. Agricultural banks’ return on equity, however, was lower than that o f rural nonagricultural banks but equal to that o f city banks. The prospects for agricultural loan losses increasing in the Eighth District can be examined in table 2, which presents the proportion o f agricultural loans considered more than 30 days past due. Loans reported as “ past due” have some likelihood o f later turning up as loan losses and, therefore, provide a rough indicator o f anticipated volumes o f future loan losses. For the seven District states, banks in five states have seen declines in the percentage o f farm production loans past due since the end o f 1982. Increases in the shares o f delinquent loans for banks in Indiana and Tennessee have been slight. Although these data do not rule out the existence o f financial stress in particular areas affected by production problems, the trends do not indicate significant increases in problem loans for Eighth District agricultural banks as a whole. 1985 Farm Programs Announced Producers o f wheat, feedgrains, cotton and rice can sign up for the 1985 acreage programs from October 15 until March 1. The programs’ payment levels and qualification criteria are presented in table 3. Upon sign-up, producers can request 50 percent o f both projected 1985 deficiency and land diversion payments. Offsetting and cross compliance requirements have been waived, which allows a farmer to participate in the program for one crop while not participating in another. The benefits accruing to an individual farmer from pro gram participation are difficult to assess in advance because Table 1 also shows that while agricultural banks in the little is known about the size o f next year’ s crops and the District have experienced higher loan loss rates since the demand for those commodities. In general, drought year o f 1980, the losses are likely however, it is important to compare prices due to factors other than nonperforming expected to exist at the time o f 1985’ s fall agricultural loans. This is indicated by an harvest with a program’ s loan rate (the sup TH E average loss rate for agricultural banks on port level) and its target price (the basis for FEDERAL a par with that o f rural banks that hold few RESER\E deficiency payments). On the basis o f this HANK of agricultural loans. The loss rates o f city comparison, a producer can evaluate the ST. IX H I S banks, however, have not risen over the benefits o f protection against market prices same time period. declining below support levels relative to the possiblity o f foregone earnings if prices should rise above target levels, but production has been reduced as required by the commodity programs. For example, 1985 futures prices for corn and wheat dated for delivery near the time o f their respective harvests currently are near $2.80 and $3.40 per bushel, only slightly above the price floors established by loan rates. Even with loan rates and target prices little changed from 1984 program levels, these expected prices and anticipated increases in production costs suggest that the price insurance afforded to program participants may be valuable during the 1985 crop year. —Michael T. Belongia and Kenneth C. Carraro Table 1 Return on Assets and Equity and Net Loan Loss Percentage (Eighth District banks with less than $100 million in total assets) 1977 1973 1974 1.1 0 .9 0 .9 1.1 1 .0 1.1 1 .0 0 .8 0 .9 0 .7 1 .0 0 .8 1 3 .3 11.1 8 .7 1 3 .4 1 3 .6 1 1 .8 9 .0 1 2 .6 9 .8 1975 1976 1978 1979 1980 1981 1.1 1.1 1.1 0 .9 1 .3 1.1 0 .9 1 .2 1 .0 0 .8 1 .0 1 .0 1 2 .9 1 4 .5 1 3 .5 12.1 1 2 .4 1 2 .8 1 1 .4 1 3 .3 1 1 .7 1 2 .3 1 1 .6 1 0 .8 1 1 .4 0 .6 0 .4 Average 1982 1983 1.1 1.1 1 .0 1.1 0 .9 0 .9 0 .8 1 .0 0 .9 1.0 0.9 9 .9 1 0 .6 1 1 .3 1 2 .0 1 1 .3 11.9 10.5 0 .7 0 .9 0.4 0 .6 0 .4 0 .9 0 .4 0.4 RETURN ON ASSETS Rural A gricultural Banks Rural N onagricultural Banks City Nonagricultural Banks 0 .8 RETURN ON EQUITY Rural Agricultural Banks Rural N onagricultural Banks City Nonagricultural Banks 1 4 .9 1 4 .8 1 1 .8 1 0 .8 1 2 .7 9 .4 0 .2 0 .2 0 .2 0 .2 0 .2 0 .2 0 .2 0 .2 0 .4 0 .2 0 .2 0 .2 0 .3 0 .3 0 .4 0 .4 0 .2 0 .2 0 .4 0 .4 0 .4 0 .4 13.4 LOAN LOSS PERCENTAGE Rural A gricultural Banks Rural N onagricultural Banks City Nonagricultural Banks 0 .3 0 .3 0 .3 Table 2 Farm Production Loans Past Due 30 Days or More as a Percentage of Total Farm Production Loans 1 Date State A rkansas Illinois Indiana Kentucky Mississippi Missouri Tennessee 12/31/82 5 .0 % 2.1 2 .7 3.1 5 .2 3 .3 4 .8 12/31/83 4 .2 % 1.9 3.1 2 .9 3 .8 3 .2 5.1 1 1nsured commercial banks at which farm production loans exceed 1 percent of total loans Table 3 1985 Farm Program Provisions Crop Corn Sorghum W heat U p lan d Cotton Rice Maximum allowable planting (percent of base) 90% 90 70 70 65 Loan rate1 $2.55 2.42 3.30 0.57 8.00 Target1 price $ 3.03 2.88 4.38 0.81 11.90 Diversion2 payment n.a. n.a. $2.70 0.30 3.50 1 Values for corn, sorghum and wheat are dollars per bushel. Cotton is cents per pound. Payments for rice are dollars per hundredweight. 2 Required paid acreage division for wheat and upland is 10 percent of base; for rice, 15 percent. 2 FRASER Digitized for 0.3 FEDERAL RESERVE BANK OF ST. LOUIS FALL 1984 EIGHTH DISTRICT AGRICULTURAL DATA Percent Change Prices and Costs1 CONSUM ER PRICE INDEX (% change) Nonfood Food June 1984 0.2% 0.1 July 1984 0.3% 0.2 Aug. 1984 0.4% 0.8 Average Year-To-Date 19842 for 1983 0.3% 0.2 2.8% 3.2 Same Period Year Ago 4.2% 4.2 PRODUCTION COSTS FOR FARMERS (% change) All inputs Fertilizer A gricultural chem icals Fuels and energy 0.0 0.0 0.0 -0 .2 -0 .3 0.0 0.0 -1 .0 -0 .3 0.0 0.0 -1 .0 0.8 -0 .2 0.3 -0 .3 -4 .0 8.1 2.5 -0 .7 2.5 6.4 2.0 -4 .7 PRICES RECEIVED BY FARMERS (% change) All products Livestock Crops -0 .4 -1 .2 1.1 0.0 1.2 -2 .2 -0 .4 -2 .0 2.2 0.8 0.3 1.6 2.7 -0 .4 6.1 3.1 2.5 4.5 FEEDER CATTLE W holesale price - Kansas City ($/cwt.) $63.16 $63.80 $64.05 $63.71 0.6 9.3 FEEDER PIGS W holesale price - So. Missouri ($/head) $39.58 $34.27 $34.30 $33.96 24.1 42.9 BROILERS • W holesale price - 12-city ($/lb.) 55.53$ 57.30$ 51.47$ 50.39$ -9 .9 -5 .1 TURKEYS W holesale price - New York, 8-16 lb. young hens ($/lb.) 67.00$ 68.57$ 72.40$ 60.48$ -3 .7 25.7 CORN W holesale price - St. Louis ($/bu.) $ 3.57 $ 3.43 $ 3.33 $ 3.27 -3 .5 -9 .5 SOYBEANS W holesale price - N.C. Illinois ($/bu.) $ 8.13 $ 6.96 $ 6.53 $ 6.86 - 1 7 .7 - 1 5 .2 W HEAT W holesale price - No. 1, hard w inter Kansas City ($/bu.) $ 3.80 $ 3.67 $ 3.80 $ 3.95 -1 .3 -2 .1 LONG-GRAIN RICE W holesale price - Arkansas ($/cwt.) $18.62 $18.62 $18.41 $18.40 - 3 .1 -0 .5 COTTON W holesale price - all markets ($/lb.) 69.50$ 68.20$ 68.10$ 62.30$ 1.2 1.6 Percent Change U.S. Exports Corn (mil. bu.) Soybeans (mil. bu.) W heat (mil. bu.) Rice (rough equivalent, mil. cwt.) Cotton (thou, bales) Apr. 1984 May 1984 June 1984 175.3 68.6 104.8 6.3 850.0 164.4 56.8 121.5 6.2 593.3 112.0 41.1 113.0 4.7 448.8 157.6 69.5 125.7 5.9 459.7 - 3 6 .4 - 4 4 .8 - 14.1 -6 .3 - 3 2 .3 - 2 6 .2 - 3 9 .3 -8 .7 - 3 7 .9 -2 .0 $4,944 913 $6,120 1,241 $5,079 943 $5,779 1,234 -3 .9 -8 .9 -1 0 .7 - 2 6 .0 5,621 878 6,423 1,002 5,839 937 5,763 930 -2 .2 -4 .3 -0 .3 4.5 Average Year-To-Date for 1983 19842 Same Period Year Ago Receipts3 CROPS (m illions of dollars) United States D istrict (seven-state total) LIVESTOCK (m illions of dollars) U nited States D istrict (seven-state total) 3 EIGHTH DISTRICT AGRICULTURAL DATA Marketing Year Crop Production4 1981/82 1982/83 1983/84 CORN (O ctober 1 - S eptem ber 30) Acres planted (mil. acres) Production (mil. bu.) Yield (bu. per acre) Ending stocks (mil. bu.) 84.1 8,118.7 108.9 3,880.1 81.9 8,235.1 113.2 4,923.9 60.2 4,166.1 81.0 2,137.1 SOYBEANS (Septem ber 1 - August 31) Acres planted (mil. acres) Production (mil. bu.) Yield (bu. per acre) Ending stocks (mil bu.) 67.5 2,000.2 30.2 646.4 70.9 2,229.5 32.1 790.6 63.1 1,566.0 25.3 456.5 W HEAT (June 1 - May 31) Acres planted (mil. acres) P roduction (mil. bu.) Yield (bu. per acre) Ending stocks (mil. bu.) 88.3 2,785.4 34.5 1,159.4 86.2 2,765.0 35.5 1,515.1 76.4 2,419.8 39.4 1,394.0 RICE (August 1 - July 31) Acres planted (mil. acres) Production (mil. cwt.) Yield (cwt. per acre) Ending stocks (mil. cwt.) 3.8 182.7 48.2 49.0 3.3 153.6 47.1 71.5 2.2 99.7 46.0 46.9 14.3 15.6 1.1 6.6 11.3 12.0 1.2 7.9 7.9 7.8 1.1 2.8 COTTON (August 1 - Ju ly 31) Acres planted (mil. acres) Production (mil. bales) Yield (net bales per acre) Ending stocks (mil. bales) 1 The consumer price index and its components are seasonally adjusted. All other data are not seasonally adjusted. 2 Percent change from December 1983, based on the most recent month available. 3 Data for receipts are seasonally adjusted. 4 Annual data for crops are based on each crop’s marketing year. SOURCE: Crop Production, Statistical Reporting Service, Crop Reporting Board, USDA.
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