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Agriculture AN EIGHTH DISTRICT PERSPECTIVE SPRING 1987 Rural and Agricultural Banks: A Performance Update The episode termed as the farm sector recession is now in its sixth year. Sharp declines in real farm income have dragged down the values of farm assets pledged as collateral for farm loans. Normally, collateral serves as a cushion for the lender should a borrower default on a loan. The declines in farm asset values have been so severe in many parts of the country, however, that the process of foreclosure and sale of acquired property still has produced losses for farm lenders. In this issue, we update the condition of rural and agricultural banks in the Eighth Federal Reserve District relative to their counterparts nationally. Some analysts claim that rural banks, regardless of their direct lending to farmers, have been affected adversely by the general recession in rural areas. The argument is that, as farm incomes fell, farmers bought fewer goods and services in their local communities, which caused subsequent declines in the incomes of rural merchants and less spending on their part. Agricultural banks, of course, are said to be experiencing higher loan losses and lower earnings as a direct result of the deteriorating quality of farm loans. Table 1 (on page 2), which shows data for the most recent three years, indicates contrasts across years and type of institution. Nationally, the number of problem banks is up 4.5 percent over 1985 and 32.8 percent over 1984, while the percentage of the total represented by rural banks is down slightly, from 58 percent in 1984 to 50 percent as of December 31, 1986. At the District level, however, conditions have improved. The number of problem banks is 21, down from 42 in 1984 and the lowest figure since 1982. The share represented by rural banks remains near 90 percent, however, as it has historically. Not only have the District numbers shown improvement in recent years, problem banks in the Eighth District still represent only 1.6 percent of all District banks, whereas 6.1 percent of all banks nationally are problem banks. Agricultural Banks Examining the problem banks in table 1 in terms of their exposure to agricultural loans produces more diversity between national and Eighth District performance. If an agricultural bank is defined as one which has 25 percent or more of its total loans as loans to farmers, the lower Problem Banks portion of table 1 indicates that absolute numbers of problem A primary criterion by which to analyze bank performance farm banks nationally and their share of all problem banks is the likelihood of survival. With this in mind, problem (26 percent) are down somewhat from the 1985 values. While banks can be defined as those for which the value of pastthe number of problem farm banks in the Eighth District due and nonperforming loans exceeds the sum of total bank also fell, from 15 to eight, their share of the total changed capital and loan loss reserves. The latter two items represent little. the resources of a bank to absorb loan losses. Using this Changing the definition of an agricultural bank to one that comparison, if all loans currently delinquent were written has 17 percent or more of its loans in farm loans does not change the percentage shares of the table in off, loan losses would exceed bank equity and an appreciable manner. The implication of the banking firm would be insolvent. This the table is that the number of problem banks definition of “problem banks” should not be is increasing nationally but that agricultural confused with the technically more complex THE banks reflect a smaller share of that general ratings used by the three bank regulators. FEDERAL RISERM. trend. In the District, however, it appears as Moreover, it should be noted that this is a RAN K of if conditions at both agricultural and very severe criterion since it assumes the ST m i IS nonagricultural banks have improved bank would recover nothing from a somewhat. foreclosure action and sale of acquired assets. SPRING 1987 FEDERAL RESERVE BANK OF ST. LOUIS Table 1 Problem Banks: The United States vs. Eighth District December 31, 1986 Number Percent December 31 , 1984 December 31, 1985 Number Percent Number Percent R U R A L VS. U R B A N BANKS U .S. P roblem Banks R u ra l1 U rban TOTAL D istrict Problem Banks R u ra l1 U rban TOTAL 425 429 50% 50 465 352 57% 43 376 267 58% 42 854 100 817 100 643 100 19 2 90 10 31 6 84 16 37 5 88 12 21 100 37 100 42 100 224 630 26 74 268 549 33 67 205 438 32 68 854 100 817 100 643 100 8 13 38 62 15 22 41 59 11 31 26 74 21 100 37 100 42 100 A G R IC U L T U R A L VS. N O N A G R IC U L T U R A L BANKS U .S. Problem Banks (A gricultural L oan Ratio) G reater T han 25% Less Than 25% TOTAL D istrict Problem Banks (A gricultural Loan Ratio) G reater T han 25% Less T han 25% TOTAL 'Rural banks are defined as all banks not in a Metropolitan Statistical Area. Urban banks are defined as those in an MSA. Bank Earnings Another item that indicates bank performance is earnings, which typically is measured as the return on equity (ROE) or return on assets (ROA). Data for small banks (less than $50 million in assets), presented in table 2, tend to reaffirm what has been shown above. Small Eighth District banks appear to be in better financial condition than small banks generally and have shown less variation in earnings in recent years. Especially notable is the steady downward trend in earnings nationally, both at agricultural and nonagricultural banks. In contrast, earnings at comparable District banks have been nearly constant, with the exception of a dip at nonagricultural banks in 1986. —Michael T. Belongia and Kenneth C. Carraro Table 2 Returns on Equity and Assets at Small Banks (less than $50 million in assets) 1986 U N IT E D STA T E S N onagricultural B anks1 ROE ROA A gricultural Banks ROE RO A E IG H T H D IST R IC T N onagricultural B an k s1 ROE RO A A gricultural Banks ROE RO A 1985 1984 1.3% 0.1 4.1% 0.4 5.8% 0.5 5. 1 0 .4 5 .7 0 .5 8 .0 0 .7 5 .5 0 .5 8 .0 0 .6 8 .6 0 .7 8 .4 0 .7 8 .9 0 .8 8 .9 0 .8 'Nonagricultural banks have less than 5 percent of total loans as agricultural loans. All figures are based on end-of-year data. Agriculture—An Eighth District Perspective is a quarterly summary of agricultural conditions in the area served by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official positions of the Federal Reserve System. 2 FRASER Digitized for FEDERAL RESERVE BANK OF ST. LOUIS SPRING 1987 EIGHTH DISTRICT AGRICULTURAL DATA Percent Change Dec. 1986 Prices and Costs1 C O N S U M E R P R IC E IN D E X N o nfood Food Jan. 1987 Feb. 1987 Average for 1986 Year-To-Date 19872 Same Month Year Ago 0 .9 % 2.1 1 .6 % 5.0 (% chan g e ) P R O D U C T IO N C O S T S FO R F A R M E R S (% cha n g e ) A g ric u ltu ra l m a c h in e ry and e q u ip m e n t M ixe d F e rtilize rs O th e r A g ric u ltu ra l c h e m ic a ls G a so lin e 0 .1 % 0.1 0 .5 % 1.6 0 .4 % 0.4 0 .0 % 0.3 0.4 -1 .0 -0 .8 9.9 0.1 3.5 -1 .5 6.2 0.1 -0 .3 0.5 -4 .3 0.5 2.4 -2 .3 16.6 -2 .4 0.0 0.0 -2 .8 -3 .9 0.7 0.0 1.4 -2 .0 -0 .5 0.3 -1 .4 2.1 -2 .0 -0 .8 8.3 -1 1 .8 FE E D E R C A T T L E W h o le sa le p rice - K an sa s C ity ($/cw t.) $65.00 $69.00 $71.38 $ 6 2 .3 4 9.8 14.4 F E E D E R PIG S W h o le s a le p ric e - So. M isso u ri ($/head) $47.69 $47.00 $53.96 $45.61 13.2 4 4 .8 1.7 P R IC E S R E C E IV E D BY F A R M E R S (% ch a n g e ) A ll p ro d u c ts L ive sto ck C ro p s -0 .1 0.0 0.2 1.5 0.0 0.9 -1 .0 0.0 -2 2 .0 B R O IL E R S W h o le s a le p rice - 12-city ($/lb.) 49.95$ 51.77$ 49.80$ 56.90$ -0 .3 TURKEYS W h o le sa le p rice - N ew Y o rk, 8-16 lb. yo u n g hens ($/lb.) 68.24$ 53.58$ N.A. 71.92$ -2 1 .5 -1 1 .1 CORN W h o le s a le p rice - No. 2, y e llo w - St. Louis ($/bu.) $ 1.69 $ 1.61 $ 1.57 $ 2.08 -7 .1 -3 7 .2 SOYBEANS W holesale price - No. 1, yellow - Central Illinois ($/bu.) $ 4.96 $ 4.98 $ 4.89 $ 5.23 -1 .4 -9 .1 W HEAT W h o le s a le p rice - No. 1, hard w in te r K ansas C ity ($/bu.) $ 2.68 $ 2.70 $ 2.80 $ 2.93 4.5 -1 5 .2 $11.88 $11.88 $11.88 $ 1 3 .7 8 0.0 - 3 1 .1 -1 4 .4 -1 7 .8 LO N G -G R A IN R IC E W h o le s a le p ric e - A rka n sa s ($ /cw t.) CO TTO N A v e ra g e price re ce ive d by U.S. F a rm e rs ($/lb.) 54.70$ 51.00$ 46.80$ 5 4.72$ Percent Change U.S. Exports C o rn (m il. bu.) S o yb e a n s (m il. bu.) W h e a t (m il. bu.) R ice (rough e q u iva le n t, m il. cw t.) C o tto n (thou, bales) Dec. 1986 Jan. 1987 Feb. 1987 Average for 1986 111.0 88.2 104.0 71.3 76.7 N.A. 612.5 N.A. N.A. N.A. N.A. N.A. 89 .8 6 5 .3 82.1 5.9 2 5 2 .4 58.1 4.6 543.7 Year-To-Date 19872 - 6 .3 % -1 9 .2 3 2 .0 N .A. 12.7 Same Period Year Ago -3 7 .4 % -1 5 .8 2.3 N.A. 229.3 3 Non-Real-Estate Farm Debt Outstanding Banks Outstanding ($ millions) u.s. E ig h th D is tric t1 4 3 2 A rka n sa s K e n tu c k y M isso u ri T e n n e sse e $ 3 1 ,2 7 8 2 ,312 401 562 1,066 281 PCAs3 Percent Change 12/84 - 12/86 12/85 - 12/86 -1 1 .9 % -6 .8 -1 .1 -4 .1 - 1 3 .1 -1 3 .2 -2 1 .0 % -1 8 .3 -1 6 .5 -4 .8 -2 7 .2 -2 3 .4 Outstanding ($ millions) Percent Change 12/84 - 12/86 12/85 - 12/86 -2 1 .4 % NA -2 4 .5 -2 5 .8 -3 0 .2 -1 8 .4 $11 ,1 8 4 NA 185 200 188 211 -3 7 .6 % NA -4 8 .8 -5 4 .7 -5 2 .3 -4 6 .6 A gricultural B ank Loan P e rfo rm a n c e 5 Percent of Total Loans Written Off at Agricultural Banks Percent of Farm Loans Overdue at Agricultural Banks U .S. E ig h th D is tric t4 A rk a n s a s K e n tu c k y M isso u ri Tennessee 12/86 12/85 3 .4 % 4.5 1.7 4.0 4.5 2.8 5.5 5.3 4.7 6.7 6.0 12/84 4 .2 % 3 .7 % 4.9 3.4 3.7 5.4 7.1 12/86 12/85 12/84 2 .5 0 % 1.80 1.33 1.34 2.39 1.73 2 .4 7 % 1.97 1.28 .96 3.01 1.65 1 .3 9 % 1.19 .93 .91 1.67 1.80 Agricultural Production Loan Interest Rate6 PCAs Banks E ig h th D is tric t A v e ra g e 2/87 2/86 1 0 .0 % 1 1 .8 % 3/87 3/86 1 1 .0 % 1 2 .0 % 1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted. 2 Percent change from December of previous year, based on the most recent month available. 3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration. 4 Includes all of AR and parts of IL, IN, KY, MO, MS and TN. 5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans. 6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements. Source: Farm Credit Banks of St. Louis.