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Outlook for F r Credit in Arkansas
Speech by Darryl R. Francis, President,
Federal Reserve Bank of St. Louis,
Before the Arkansas Agricultural Credit Conference
November 29, 1967
It is good to have this opportunity to discuss some current
farm credit problems with you who represent the major source of
farm credit in this great agricultural state. The fact that we meet
for this discussion indicates our interest in the agricultural sector
of the Arkansas economy.
In terms of employment, the farm sector of the state's
economy is declining. In 1966 farm employment in Arkansas totaled
127 thousand workers, only about one-third the number employed in
1950. Furthermore, farm income has declined relative to total
personal income from 14.8 per cent in 1960 to 12.6 per cent in 1956.
However, most agribusiness groups such as those represented at
this conferencehave increased, rather than following the decline in
number cf farmers. The farm credit industry is typical in this
respect t o other agribusiness industries.
Both the farm supply and the processing and marketing
sectors of agribusiness have trended constantly upward. Agribusiness
output in the nation in 1965 totaled about $130 billion. Such products
accounted for 30 per cent o the nation's economic activity. Based
on Arkansas share of the nation's farm production, agribusiness

-2output in the state will total about $3.5 billion, or substantially more
than the 30 per cent national average of total activity. The agr ibusiness group of industries grows about 4.0 per cent per year in
dollar volume, despite the decline in workers at the farm sector.
From a welfare viewpoint, we are indeed fortunate to live
in a nation and an age when the production of food and fiber requires
such a small portion of the nation's labor. Only 5 per cent of our
labor force in the United States was employed on farms in 1966, and
the per cent employed in this sector has declined almost every year
during the past three decades. In Arkansas employment on farms
accounted for 8 per cent of the total. However, the rate of decline
here has been much greater than for the nation as a whole. Indicative
of the gains in farm technology, one worker in the United States in
\%t produced sufficient food and fiber for himself and 39 other people.
This was almost six times the number of people sustained by one farm
worker at the turn of the century.
Of the 1 major industrial nations of the world, the United '
States in recent years has had the lowest per cent of workers employed
directly in agriculture. Employment on farms in the early 1960s ranged
from 6 per cent of the labor force in the United States to 49 per cent
in Greece. In Western Europe, one of the most highly-developed areas
of the world outside the United States, about 20 per cent of the labor

-3force was engaged in agriculture and still failed to produce sufficient
food and fiber for the population.
In nonindustrial nations such as the African states, India,
and Latin America, which contain about three-fourths of the world's
population, more than half of the workforce is usually engaged in
producing food. In other words, while we are living in a land of
abundance, most of the world is subjected to the harsh laws of
scarcity. The level of population in most countries is probably
determined by the food supply. Thus, starvation is the norm rather
than the exception.
How have we in the United States achieved this efficiency in
production of farm products? I might begin by commenting that we
have made wise use of our productive resources (labor, land and
capital). Our laborhas generally been well trained and our other
resources have been efficiently allocated, not dictatorially nor by
committee, but by the desire of each person to achieve greater profits
via increased sales and/or reduced costs. This incentive to maximize
has provided a market for productive farm resources. The more
efficient operators have found it profitable to expand by purchasing
resources from others. Individual farm expansion has taken several
forms, including more acres per farm and an increase in both fixed
a d operating capital. The less efficient operators and many of the

-4farm youth not already established in farming have moved to other
occupations where labor returns art greater. Indicative of the
rapid gains in farm production efficiency in Arkansas is the fact
that farm income per farm worker in 1966 was 2.5 times that of I960.
Net income per Arkansas farm now exceeds the average net income
per farm in the nation. Furthermore, assets, liabilities, equities and
cash receipts per farm in the state only slightly trail the average for
all farms in the nation. Attesting to the high rate of growth in farming
efficiency in Arkansas during the past decade, net income per farm
rose at the annual rate of 7.1 per cent compared with an average gain
of 6.2 per cent for the nation.
Efficiency of farm production has been greatly enhanced by
technologies developments. Science has attacked farm production
problems on a wide front and with amazing success. Mechanization
technology has made possible our large multi-row cultivating and
harvesting equipment, as well as numerous other labor-saving machines.
Plant and animal breeding have changed the characteristics of plants
and livestock. Chemicals, including insecticides, fungicides, weed
control agents, and fertilizers, have been developed which enable
producers to greatly increase output per acre and lower direct labor
requirements per unit of output.

-5In this development lost government programs, especially
those concerned with education and research, have aided the market
to achieve maximum efficiency. Agriculturally-trained specialists
encouraged farmers to adopt new devices and use new products.
Credit markets for farmers were improved through the organization
of the Farm Credit Banks and more realistic commercial bank farm
credit practices. Research supported by government has made major
contributions to new farm production and marketing techniques.
Government price stabilization programs have tended to reduce risk
and possibly increase marginal innovations. On the other hand, price
supports have tended to reduce the rate of adjustment in the farm
labor force and farm organization for maximum efficiency. The
Acreage Control Programs, a compilerto price stabilization, may
also have contributed to inefficiency in farm organization and output,
but possibly hastened the exit of labor from agriculture. Despite the
inefficiencies inherent in price and acreage controls, most other
government programs have, on balance, tended to aid the market
forces in moving toward greater efficiency in agriculture.
Most moves toward greater farming efficiency have involved
larger quantities of credit for longer terms. High returns to scale
have hastened farm enlargement and greatly enhanced demand for
farm real estate credit. T h eaveragesize of farms in Arkansas has

-6more than doubled since 1950, increasing from 102 to 218 acres.
Farm real estate credit in the state rose at an annual rate of II per
cent during the past decade and at an annual rate of 7 per cent in the
prior ten years. Demand for credit per farm, i.e., size of loan,
rose at a faster rate than total credit demand. Total credit per farm
rose at an annual rate of 1 per cent during the decade ending in 1966,
with real estate credit increasing at the rate of 1 per cent and non6
rea! estate credit at the rate of 1 per cent.
Each increase in purchased inputs from farm supply industries
has resulted in a corresponding increase in credit demand. Costs of
many farm supply items such as machinery, breeding livestock, and
specialized buildings can only be recovered after many years of use.
Demand for longer-term credit for non-real estate purposes thus
Despite government price stabilization programs, farm credit
risks have probably increased during recent decades. Major fluctuations rn farm income could formerly be absorbed by the farm family,
since family labor and other nonpurchased materials constituted the
major portion of farm production expense. Now, however, purchased
inputs such as chemical fertilizer, machinery and equipment, seed,
feed, and other supplies total more than four-fifths the value of all farm

-7innuts and three-fourths the value of all farm product sales. The
farmer has thus moved into the category of a businessman. His
margin from operations has declined. This narrower margin makes
necessary a large volume of output. His capital and credit demands
are high in relation to net returns. He can now go bankrupt.
With this brief background of developments in the farming
industry, it seems appropriate to ask ourselves the questions.- How
well have farm credit demands been met? How well has the commercial banking system performed its job of supplying farm credit, and
what are the prospects for bank credit to agriculture during the next
few decades?
We have several yardsticks for measuring the efficiency of
credit flows into agriculture. First, we have a general measure which
is over -all productive efficiency of the industry. If agriculture is
credit starved, it would necessarily be inefficient. This is not, however, true compared to agriculture in other nations. Compared with
the rest of the world we are quite efficient. We have a very small
per cent of our labor force in agriculture. Yet it is able to produce
an excess of farm commodities for domestic use at current prices.
Net income per Arkansas farm now exceeds the average for the nation.
Thus, on the basis of over-all efficiency of farm production in both
the state and the nation, it appears that farm credit demands have been
adequately met.

-8Another measure of the farm credit market is the rate of
return on f r
am productive assets. If agriculture is starved for
credit or capital, one would expect the returns to capital to be
relatively high. In other words, if farm credit is scarce, farm
assets are likely to be moderately priced. The rate of return on
such assets would be high. Returns on assets in agriculture, however,
are actually relatively low. Since 1959 the rate of return on farm
productive assets in the nation has averaged only about 5 per cent.
This is less than the average rate of return on book value in any of
the 61 major industries listed in Standard and Poor's Industry Surveys.
Despite the differences in measuring the value of farm and nonfarm
assets, these data indicate that credit to farmers has been sufficientto bid up farm assets to relatively high levels.
A third measure of farm credit availability is the interest
rates paid by farmers on borrowed funds. Rates charged farmers
are generally higher than rates on other business loans. It is
difficult, however, to compare interest rates in absolute terms,
since size of loan and risk involved greatly influence the rate charged.
During the past twenty years the rates paid by farmers have increased
less than rates paid by almost any other group. Average rates nationally on commercial bank non-real estate loans to farmers rose from
6.3 to 7.1 per cent. This was an increase of only 1 percent or less

-9than one percentage point, in the rate paid, whereas the prime
commercial loan rate more than tripled and the average rate on all
short-term business loans doubled. Agriculture would thus appear
to be in a more favorable position on the basis of interest rates paid
than it was twenty years ago.
These data on the farm credit situation are evidence that
agriculture is being adequately financed and that farmers are able
to borrow money at competitive rates.
If agriculture is bei ng financed at reasonable rates, apparently
we do not have a farm credit problem. It is rather a commercial
bank problem of financing agriculture. The data suggest this conclusion.
The volume of non-real estate farm credit by commercial banks has
already declined to a secondaryposition in some states. In Arkansas,
banks supply only about 50 per cent of non-real estate farm credit.
In contrast, prior to the Great Depression of the 1930's, banks were
the only institutional lenders of importance in this field. In the late
1930's the Production Credit Associations and the Farmers' Home
Administration (Farm Security Administration) began to supply substantial quantities of short-term credit to farmers. The commercial
banks' share of all short-term farm credit by institutional lenders in
the nation had declined to 57 per cent of the total in 1939. The remaining 4 3 percent included holdings of 30 per cent by the PCA's and13per

-10cent ty the Farmers' Home Administration. Following WorldWar II
commercial banks were in a highly liquid condition and eager to
acquire additional loans. As a result of this liquid condition, plus
a rapid increase in farm credit demand, their holdings of short-term
farm loans rose rapidly. By 1952 the banks1 share had increased to
76.8 per cent of the $4.1 billion outstanding to reporting lenders.
The share of short-term farm loans held by banks turned
down, however, in 1952 and the relative decline continued through
1967. Nationally the banks' share of thetotal declined from 76.8
per. cent in 1952 to 69 per cent in early 1967. In Arkansas the share
held by banks declined from 60 to 51 per cent during this 15-year
period. The PCA proportion increased nationally from 1 to 24 per
cent and in Arkansas from 1 to 42 per cent during the period. Little
change occurred in the shares held by Federal Intermediate Credit
Banks, while the share held by the Farmers' Home Administration
declined in both the U.S. and Arkansas.
By early 1967 banks had been replaced as the leading
institutional lender of short-term farm credit in seven states, and
as indicated above, were only slightly ahead of the PCA's in Arkansas.
In contrast, banks were the leading institutional suppliers of such
credit in all states only ten years earlier.

-11 Looking at rates of growth during the past ten years, tanks
more than doubled their short-term farm credit outstanding in the
U.S. and such credit held by the PCA's more than tripled. In
A rkansas, bank holdings of such credit tripled while PCA holdings
increased more than nine-fold. In dollar amount, holdings of shortterm farm credit by banks in the nation continued to increase somewhat faster than holdings by PCA's rising $4.4 billion compared with
again of $1.9 billion for PCA's. In Arkansas, however, PCA holdings
rose $87 million, compared with the commercial bank gain of $76
million. These data all point to the fact that PCA's have already
become a major competitor to banks in supplying non-real estate
credit to farmers.
Commercial banks have historically held only a small portion
of the farm real estate debt. At the beginning of 1967 all operating
banks in the nation held only 1 per cent of all farm mortgage credit,
a slightly smaller per cent than ten years. earlier. In Arkansas, banks
held 8 per cent of all farm mortgage credit in 1967, compared with
1 per cent 19 years earlier. Thus, banks in this state can look back
on some relative gain in holdings of farm real estate credit and a
major relative decline in holdings of non-real estate farm credit, and
some decline in relative holdings of total farm credit.

-12The facts with reference to farm credit thus indicate that
farmers are not only being supplied with credit at reasonable rates,
but that the competition for farm credit is so great that banks are
losing in the struggle to maintain their relative position of recent
I do not believe that the relative decline of commercial bank
credit to farmers can be traced to a shortage of funds in the banking
system as a whole. For example, a large portion of farm credit
supplied by the PCA's and the Federal Land Banks has come from the
commercial banks. At the close of last year, banks in the nation held about
$6.5 billion of non-insured government agency issues, a large part
of which were FICB debenture and FLB bonds. This is not a complaint
against cooperative farm credit. On the contrary, I would suggest
that the evidence points to the possibility that these cooperative agencies
have done a more efficient lending job by purchasing funds from banks
at wholesale rates and retailing them to farmers than has the banking
system through direct loans and correspondent bank relationships.
In looking at commercial banks to determine why they are
not gaining farm credit relative to other agencies, three problem
areas are apparent. I would classify them as follows: (I) problems
arising at the individual bank level, (2) bank structural problems, and
(3) legal restrictions.

First let's take a look at some individual bank problems.
It is quite obvious from the data that a number of banks are about
"loaned up," given the set of conditions under which they are currently operating. A Federal Reserve System survey of bank credit
to agriculture in mid-1966 indicated that 30 per cent of all farm banks
in the nation had loan-to-deposit ratios exceeding 70 per cent. These
ratios are about the same for Arkansas as in the nation. Given the
legal requirements for guaranteeing certain public accounts and the
need for day-to-day liquidity, it is apparent that a substantial number
of farm banks, especially those with 70 per cent loan-to-deposit
ratios, are short of liquid assets.
Further confirming the "loaned up" thesis is the fact that
one-sixth of all farm banks in the nation reported difficulty in meeting
farm financing requests from their own resources. About one-eighth
of all banks in the Eighth Federal Reserve District, which includes
Arkansas, similarly reported difficulty in meeting farm credit
Frior to rushing out with major programs for the solution
of this problem, however, we should take another look at the
situation. Surely one important factor in meeting credit requests
is the price charged on farm loans — interest rates. If the rates
charged on farm loans are bo

the going rate for other loans of


risks and size, one would expect an excess of requests and

obviously all farm loan requests could not be handled, i.e., rationing becomes necessary.
Also, if the price paid by banks for loanable funds such as
time and savings deposits is below the going market rate, it is
reasonable to expect a shortage of incoming money. One way of
looking at the supply side of the credit market is to imagine yourseif
a wholesale merchant. If his offering price for apples is below the
going rate but his asking price is the current market price, he will
find his opportunities for selling to be about normal, but his warehouses will soon be empty because his purchases will decline.
The data indicate that many commercial banks are trying
to.operate in a manner similar to that of the wholesale apple merchant.
Of the 1/5 banks in the Eighth Federal Reserve District which reportea
difficulty in meeting farm credit requests, 119, or two-thirds of the
total, were paying well below the. nation's maximum permissible rates
on savings in mid-1966. It seems apparent that funds will be lost to
other agencies and other geographic areas if the local offering price
is not at generally competitive rates. I might mention that the PCA's,
the banks' leading competitor in supplying short-term farm credit,
were paying well about 5 per cent for their funds last year. These
funds are always obtained at the market rate through salses of debentures.

-15Part of the bank problem in the farm credit field is
probably associated with individual bank motivation and quality
of personnel. When I observe bank statements which show low
loan-to-deposit ratios in periods of high loan demand and note
the high rate of growth of non-bank loans to farmers in their communities, I can only assume that the banker doesn't care for the
additional business. Perhaps more competition among financial
agencies is desirable in such communities. In other instances,
the quality of personnel in the competing agencies appears to be
the deciding factor. Most of the credit agencies
are staffed by well-trained farm credit specialists. Banks in rural
communities may also find it advantageous to obtain specialists in
farm credit, just as banks in non-farm areas have credit specialists.
I note that many Arkansas banks have already added such men to
their staffs. This is a major step in equalizing bank opportunities
in the farm credit field.
Second to individual bank problems in meeting farm credit
competition I would place bank structural problems. Some banks
grow at rapid rates while others grow at slower rates. The capitalization and credit needs of Arkansas farms are increasing at a
very high rate. As a result, many farms are becoming increasingly

-16difficult for the local banks to finance because of size alone. Some
banks are located in low savings and high credit demand areas.
Since loanable funds of banks are generally obtained locally, these
banks may not be able to obtain sufficient funds at competitive rates
to meet all their farm credit requests. A banking system which
moved funds freely throughout the state from high savings to high
credit demand areas would apparently be more efficient in meeting
all credit demands.
In the absence of statewide or nationwide banking, however,
we attempt to take care of these local fund shortage and over line
problems through correspondent banking arrangements. Individual
over line requests have probably been handled through correspondent
banking arrangements with areater efficiency than local credit demands
which have resulted from over-all iiquidity shortages. In the Eighth
Federal Reserve District.about one bank in six reported having received
overline requests during the 1 months ending in June '966. Of the
smaller banks (those with capital and surplus of less than $300,090),
about a fifth received overline requests during the year.
I believe that most large correspondent banks are eager to
participate with their customers in handling overline demands of
farmers. On the other hand, I know of instances where smaller
banks preferred not to be bothered with such credit, and the loans were

-17eventually made by non-bank agencies. How much of the farm
credit business banks have lost because of problems of this type
I do not know. If we were farmers, I wonder how long we would
give the banker to reply to credit requests when we knew that someone else who had the means to meet all our credit demands was
ready to give us a favorable hearing. With farms increasing in
size and capitalization at a fast rate, it is inevitable that participation
requests will rise. I believe that Arkansas banks will rise to the
occasion and meet a considerable portion of such requests. On the
other hand, unless many banks make preparations to avoid unnecessary
delays in meeting overl ine requests, the banking system will probably
continue to lose many overl ine customers.
The other part of the bank structural problem, namely,
areas which are short on loanable funds at going rates, may require
solutions outside the commercial banking system in some instances,
loanable funds and debt instruments do not move through the banking
system as freely as we would like. Federal funds, certif icates of
deposit, and other instruments move quite freely among the larger
banks and provide a convenient means for liquidity adjustments.
Federal funds also move quite readily from the smaller to the larger
banks. However, it is the smaller banks jn the areas which are
chronically short on credit than m y have difficulty in financing farm

-18credit demands. Also, certificates of deposit ot smaller banks are
not so marketable as those of larger banks. Unfortunately, the
correspondent banking system does not work as well as we would
like in.these situations. Different credit standards among banks
prevent the free movement of customers' notes from bank to bank.
We do not have insurance policies available for most types of farm
loans in care of default. Since aggressive banks in credit-deficit
farm areas are likely to be loaned up, they have few asset instruments
other than notes for exchanging, and the market for customers' notes
has been less than satisfactory in providing a uniform farm credit
market. Nevertheless, 1 believe that more cooperation within the
banking system toward the solution of this problem would be profitable.
It has been suggested that a system of farm credit discount
banks be organized for discounting the paper of commercial banks.
These discount banks would apparently obtain funds by selling debt
instruments in the money market similar to Federal Intermediate
Credit Bank operations.
I am not sure, however, that we have exhausted the facilities
that are in existence for distributing funds to rural areas. The
Federal Intermediate Credit Banks were originally designed for this
purpose. Most bankers have looked upon the FICS's as the exclusive
discount agency for the PCA's. The officials at the St. Louis Federal

-19Intermediate Credit Bank, however,

informed me that they are

discounting farm notes for commercial banks. i believe that they
are willing to expand such discounting. They report that the terms
are generally the same for commercial banks as for the Production
Credit Associations. If the facilities of the Intermediate Banks are
capable and willing to do the job, and I believe they are, then I think
that these discounting facilities should be used by commercial banks.
Only if we try the FICB's and find them unable to do the
job do I suggest new agencies for channeling funds from money
markets to rural banks. Ultimately, all loanable funds must come
from savings and the small increments created through the banking
system by monetary operations. Thus, an agency already in
existence for channeling such savings would appear to be stronger
and more efficient than a new agency, if its policies are sufficiently
The third category of bank problems in meeting farm credit
demands involves legal restrictions. In some respects legal restrictions
are similar to bank structural problems, since both retard flows or
loanable funds through the money market.
The type of restrictions to which I refer are those which limit
the rates that banks may pay and charge for funds. When market rates
are below the legal limits, the legal restrictions are not effective. On
the other hand, when market rates rise above the legal limits, legal

-20 n
restrictions can be damaging, both to the banks involved a d to
borrowing sectors of the economy.
When commercial banks are unable to pay rates comparable
with other financial intermediaries on time and savings deposits,
banks tend to lose deposits to these institutions. As a result,
potential borrowers from banks are the ultimate losers. When
effective limits are placed on rates paid by all financial agencies,
savings tend to move directly from savers to users, or to other
types of investments, thus bypassing our efficient lending agencies
and thereby creating major inefficiencies in the financial markets.
Furthermore, instead of providing funds at lower rates to
the borrowing public, effective restrictions on rates paid by banks
andother financial agencies are likely to cause higher rates to
borrowers. As indicated earlier, the restrictions will tend to reduce
the funds flowing into our efficient financial agencies including commercial banks. They will in turn have less funds to lend. With
reduced supplies and an unchanged demand for funds, rates are likely
to be higher.
Maximum limits on loans create problems similar to the
limits on savings. For example, there is a legal limit of 6 per
cent on single payment loans in one state of the Eighth Federal
Reserve District and a limit of 7 per cent in another state

-21market rates, as determine hv supply and demand conditions ''for
loanable funds, exceed these legal limits, either credit rationing or
a tendency to bypass the regulations occurs. Banks may purchase
loans made in other areas which yield higher returns, or they may
divert money from single payment farm loans to installment loans
at higher rates of return.
If credit rationing occurs, the banks will be likely to supply
funds to the very low-risk applicants until all loanable funds are
depleted. Higher-risk borrowers will thus be unable to obtain credit.
In either the case of credit rationing or of by-passing the restrictions,
the poorer and higher-risk farmers who the restrictions were designed
to protect are damaged most, for credit is unavailable to them.
So long as the basic supply and demand situation with respect
to loan and investment funds produces high general interest rates, it
is necessary for the commercial banks to go along with these trends.
Banks must both pay high rates and charge.high rates if they are to
perform their function in the economy. In many ways the high and
increasing general level of interest rates is disruptive and undesirable.
But If the general level of rates needs to be kept down, total demand
for loanable funds must be reduced. Public policy can accomplish
this only by influencing the supply and demand situation with respect
to the total product of the economy.Theonly way we know to accomplish

-22this is by a more restrictive restrictivebudgetand a somewhat less
rapid monetary expansion.
In conclusion, we have a very efficient agricultural industry
in the United States. Arkansas has moved forward even faster than
the nation, both in size of farm and net income per farm. Apparently,
most farmers, both locally and nationally, are receiving credit at
competitive rates. Commercial banks, however, have declined somewhat from their earlier position as the predominant supplier of farm
credit. Several factors may have restrained the rate of bank credit
growth to farmers. Such factors include lack of proper personnel
and bank structural problems. Legal restrictions on banks relative
to rates paid and rates received have probably been harmful. In some
areas, a basic shortage of bank credit at market rates prevails. I
believe, however, that we should fully utilize existing institutions and
attempt to remove some legal restrictions both on rates charged and
rates paidbeforeproposing additional agencies. I don't believe that
we have exhausted these opportunities at the present time.

Per Cent of Population Employed in
Agriculture in Selected Nations

Per Cent
Japan (1966)


Norway (1966)


Switzerland (I960)


Iceland (1964)


United States (1965)


Italy (1966)


Portugal (I960)


Denmark (I960)


Canada (Oct. \%Z)


Ireland (Apr. 1965)


Greece (1961)


Germany (1965)


Source: Economic Surveys, Organization for Economic Coooeration
and Development, Paris, 1967.

Interest Rates on Selected Loans and Securites




Farm loans
Nonreal estate
Commercial banks
Real Estate - Federal Land Banks



Other loans
Bank business loans
Prime commercial
All short-term
FHA new home mortgages






3-month Treasury bills
3-to 5-year U.S. Government bonds 1.18
Corporate Aaa bonds
High-grade municipal bonds
Federal Land Bank bonds
Intermediate Credit 8ankdebenturesC88



1/ 1946.
Sources.- Rates on farm credit from USDA; FHA new home mortgage yields
from 1964 Supplement to Economic Indicators and Federal Reserve
Bulletin; all other data from Economic Report of the President,
January 1966.