View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Speech by Carry! R. Francis, President
Federal Reserve Bank of St. Louis
At the Agricultural Nitrogen Institute Convention
Kansas City, Missouri
November 18, 1968
At the outset, I might say that outside credit has played a
relatively minor role in financing our agricultural plant. Most farms
have largely been financed internally. Much of the physical capital
such as land clearing, drainage, fencing, and building was produced
on the farm by the farm family. Only in the past few decades has a
large portion of farm capital been acquired through off-farm purchases,
and many of such costs were covered by savings of the farm family.
Since 1948 credit used by farmers has not exceeded 1 per
cent of total-farm assets, and in the 6 years prior to 1954 the volume
of farm credit outstanding was less than 1 per cent of total farm assets.
In comparison, credit used by manufacturing establishments has
accounted for a much greater portion of total assets. During the period
1948 to 1967, inclusive, total liabilities of all manufacturing corporations, excluding newspapers, on the basis of book value never fell
below 28 per cent of total assets. Furthermore, in 1967 manufacturing
debt exceeded 40 per cent of the value of assets.
Although still relatively low, farm debt as a per cent of
assets has increased sharply in recent years. From 7.3 per cent of
asset value in 1948, farm debt rose to 1 per cent of asset value in

-21967. The importance of internal farm financing has declined sharply
in recent years, and credit has played an increasing role in total farm
capital. The financial structures of agriculture and manufacturing
are thus becoming increasingly similar.
With the rising credit volume, farm credit sources have also
changed. The change, however, has been gradual rather than
revolutionary. It is when we view changes, over the past half century
that major contrasts appear. Significant changes have occurred in
both the number of competitor groups in the business and ihe relative
portion of credit supplied by each.
Trends in FarmMortgageCredit
Prior to the 1900's most farm mortgage credit was supplied
by individuals and other noninstitutional sources. Soon after the turn
of the century, commercial banks and life insurance companies began
to play an increasing role in the farm mortgage business. In 1916
the Federal Land Banks entered the farm mortgage business, and in
the 1930's the Farmers Home Administration was created to finance
high-risk farm mortgages with government assistance.
By early 1967 individuals and other non institutional lenders
held only 40 per cent of ihe farm mortgage debt, in contrast, the
holdings of major institutional lenders (commercial banks, life

-3insurance companies, FLB's and the FHA) had increased from an
insignificant amount at the turn of the century to 69 per cent of the
total in 1967.
Non-Real Estate Farm Credit
Non-real estate farm credit supply groups have also increased
since the early 1900's. Even to a greater extent than mortgage lenders,
this group was dominated by local suppliers well into this century.
Local banks, dealers, merchants, and other local sources were almost
the only suppliers of such credit prior to the beginning of credit extension
by the Federal Intermediate Credit Banks (FICB's) and the emergency
crop and feed loans in the mid-1920's. In the mid-1930's the Production
Credit Associations (PCA's) entered the short-term farm credit market
and have since become a major source of such loans. Like the land
bank system, the PCA's are tied to the nation's financial markets.
It is generally believed that merchants, dealers, and other
noninstitutional lenders held at least 50 per cent of all non-real estate
farm credit prior to the 1940's. Since early 1940, however, the position
of this group has declined, and by early 1967 it accounted for only 41
per cent.
This relative decline in merchant and dealer credit occurred
despite their greater access to financial markets. Merchants and
dealers who extend credit to farmers must, in turn, be financed. Prior

-4 to the development of large agribusiness industries, most of this
financing was probably done at local banks. In recent years, however,
manufacturers who sell machinery, fertilizer, and other products to
farmers through merchants and dealers have provided a sizable portion
of this financing. These manufacturers in turn obtain funds through
retained earnings, by selling debt and equity instruments to the public
and by borrowing directly from large city banks.
Summary of Farm Credit Trends
From these trends in the farm credit supply I believe that
the following conclusions are plausible:
1. With the entry of more financial institutions into the farm
credit business and the relative decline of nonfinancial institution
lending, farm credit suppliers have become less personal. This tends
toward greater efficiency in the industry. Credit and credit-purchased
resources tend to flow to the more efficient users as determined by the
impersonal officials of the financial agencies. Those users, in turn
provide the greatest returns-to capital and can more readily repay debts.
2. The closer ties of farm credit to financial markets, as
represented by life insurance companies, the Farm Credit Administration, large agribusiness corporations supplying credit through dealers,
and to a lesser extent commercial banks, through the correspondent
banking system, assure a more reliable supply of farm credit. With

-5such ties, credit at some price will probably be available to any
farmer in the absence of legal restrictions, provided he meets the
lender's usual credit requirements.
The same sources of funds, however, reflect relatively wide
interest rate fluctuations, and credit agencies which rely on them
must ultimately reflect such rate changes in loans to farmers. In the
financial markets, interest rates are determined by the demand for
and supply of loanable funds nationally. The rate is thus determined
by the productivity of funds to all potential users. Therefore, to gain
control of funds in this market the farmer must pay the wholesale
rate plus the cost of retailing.
3. The impact of changes in the market structure of farm
credit agencies on credit costs is difficult to measure. Also, the
question of whether farmers obtain credit on a parity with the nonfarm
economy remains unanswered. Direct measures of interest rates are
not conclusive because of wide variations in risks and of lending and
collection costs. Nevertheless, actual rate comparisons are not
unfavorable to farmers. Farm credit outstanding at banks in mid1956 was at lower average rates than 1966 yields on all bank loans.
Also, Federal Land Sank rates on farm mortgages were below most
nonfarm rates.

-64. The large increase in farm credit and the relatively small
advance in interest rates charged point to rising efficiency in gathering
and channeling funds into agriculture.
Nonfinancial Agencies Remain Major Credit Suppliers
If credit is efficiently flowing into agriculture through the
financial agencies, the question emerges: Why do merchants, dealers,
manufacturers and other nonfinancial groups continue to be a major
factor in supplying farm credit? Furthermore, can these groups
supply credit as efficiently as the financial agencies?
A partial answer to the question of why merchants and dealers
continue to be an important factor in the farm credit business may be
the wide variations in the performance of the commercial banking system.
Commercial banks continue as the largest suppliers of non-real estate
farm credit. In the Midwest, banking is structured primarily on the
unit basis. Where branching is permitted, it is usually limited to
relatively small geographic areas. Any movement of funds between
banking offices, therefore, must usually be between banks, not between
offices of the same bank.
Since customer relationships are involved, funds move more
freely between offices of the same bank than between banks. This
appeared to be confirmed by recent unpublished studies undertaken in
connection with the reappraisal of the Federal Reserve discount mechanism.

-7These studies appeared also to confirm the view that the total flows of
funds between banks in different communities in unit banking areas was
very small relative to total flows in areas served by state-wide branch
Since some rural banks are short of funds during the heavy
lending season, credit supplies from the commercial banking system
may tend to dry up. There remain the PCA's which, if aggressive,
can make up for the banking shortage. However, variations may exist
in the aggressiveness of the PCA's. In such limited cases where the
PCA's are not willing to take up the excess of credit demand, merchants
and dealers are provided with an opportunity of supplying farm credit
on a profitable basis.
1 suspect that the real reason for the large volume of merchant
and dealer credit, however, is not based on the relatively few areas
in which farm credit may be somewhat stringent. The reason probably
lies in the close association of selling and credit demand. The illusion
that sales can be greatly increased if only credit is available in adequate
quantity has been expressed so often by those not qualified in credit
analysis that many firms have been converted to the credit shortage
thesis. Once oriented in this direction, subsidized credit has probably
been used as a selling tool. To put the case more succinctly, credit
by merchants and dealers has probably been used to reduce the selling

-8price of products without theretaliatoryresults which often occur from
a reduction in price quotations. Farmers quickly recognize the value
of free or subsidized credit when not offset by higher price tags. As
long as such practices continue, I would predict that merchants and
dealers will find great demand for their credit and that an illusion of
credit stringency by the financial agencies will prevail. On the other
hand, if total credit costs are included in the credit bill rather than
having a portion of them in the price tag, credit supplied by the
financial agencies may appear quite adequate in most communities.
My final point is directed at the question: Who should supply
farm credit? The answer will probably be determined on the basis
of efficiency. If merchant and dealer credit is based on interest
subsidies, which actually mean a markup in prices beyond the
competitive price level, the volume of such credit is likely to decline
over the longer run. ! believe that such prices which include part of
credit cost ultimately will be adjusted downward through the competitive
process. When this adjustment occurs, interest charged will reflect
actual credit costs. If such costs greatly exceed rates at which banks
and PCA's can supply farm credit, the volume of credit supplied by
merchants and dealers will continue its long-run downtrend. On the
other hand, if such costs are competitive, there is no reason why

-9merchants and dealers should not remain a major source of farm
credit. If they can obtain funds from the national financial markets
and loan them to farmers at competitive rates, excluding all interest
subsidies, they merit the business and should get it.