4GRICIILTIJRAL LETTER FEDERAL RESERVE BANK OF CHICAGO

August 23, 1991 Number 1819

338.13 A46 1819

• FRB CHICAGO

WAITE MEMORIAL BOOK COLLECTION DEPT. OF AG. AND APPLIED ECONOMICS

1994 BUFORD AVE. - 232 COB UNIVERSITY OF MINNESOTA ST. PAUL. MN 55108 U.S.A.

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Credit conditions at District agricultural banks

Our latest survey of District agricultural bankers indicated that credit conditions were little changed during the sec-ond quarter. The consensus view of the more than 400 responding banks was that farm loan demand continued to strengthen. Loan-to-deposit ratios among the surveyed banks rose seasonally and reached the highest level in a decade. But with ample funds for lending and the gener-ally easing conditions in credit markets, interest rates charged by banks on farm loans continued to drift lower. Although farm loan repayment rates slowed during the spring quarter, the bankers regard the quality of their farm loan portfolios to be comparable with last year.

The latest evidence of a firming in farm loan demand ex-tends a trend that began in 1988. The overall measure of farm loan demand in the most recent survey edged up to 130 (see table on page 2). That number represents a com-posite tabulation of the 43 percent of the bankers who indicated loan demand in the second quarter was up from the year before, less the 13 percent that noted a weaker loan demand. The remaining 45 percent of the bankers reported that farm loan demand during the spring quarter was unchanged from a year ago. The continued firming in farm loan demand was noted by banks from each of the five states of the Seventh Federal Reserve District.. But the responses of Iowa bankers again translated into a particu-larly high measure of farm loan demand (150). In the other District states, the second-quarter measure of farm loan demand ranged from 115 among banks in Indiana to 126 among banks in Illinois.

A number of developments that impinge on the cash flows of farmers likely contributed to the sustained strengthening in farm loan demand this spring. Sharply lower milk prices and weaker corn and soybean prices reduced the earnings of many District farmers during the first half of this year. Lower government payments also contributed to lower earnings for crop farmers. Government payments to feed grain program participants nationwide during the first six months of this year were down 11 percent from last year's pace. With lower earnings, many farmers had to rely more on borrowings to cover their cash outlays for operating and capital expenditures. In addition, operating expenses were up somewhat again this year. A 3.5 per-cent rise in the combined corn and soybean acreage planted in District states this year translated into larger

purchases of seed, fertilizer, chemicals, and fuel. More-over, prices paid by farmers for fertilizer, chemicals, and fuel this spring were up 5 percent or more from year-earlier levels. In addition, increased hog and cattle inven-tories added to the operating expenses of many livestock farmers. Recent USDA tabulations show that hogs on farms in District states numbered 5 percent more than a year ago. Reports for Illinois and Iowa show roughly comparably gains in the number of cattle in feedlots.

In addition to the continued firming in loan demand, the latest survey found more widespread evidence of a slower repayment rate on existing farm loans. Some 29 percent of the bankers indicated that the second-quarter rate of farm loan repayments was down from a year ago, substan-tially exceeding the 3 percent of the bankers that noted an increase in repayments. The overall measure of farm loan repayments thus declined to 74, the lowest reading for any quarter since the mid 1980s. The slower repayments were noted by bankers throughout the District, especially those from the hard-hit dairy state of Wisconsin. The second quarter measure of farm loan repayments dropped to 50 in Wisconsin. For the other District states the sec-ond-quarter measure of loan repayments ranged from 71 in Iowa to 87 in Indiana.

While the latest reading on farm loan repayments is com-paratively low, the implications for agricultural banks are cushioned considerably by the short duration of the slow-ing and by the strong performance in loan repayments experienced from mid 1989 through late 1990. As such, the slowing in loan repayments is probably more indica-tive of "normal" year-to-year fluctuations in farm earnings than a signal of pending quality problems in the portfolio of farm loans held by banks. This was implied in the bankers' latest evaluations of their farm loan portfolios. On average, the bankers felt that 85 percent of their farm loans were free of repayment problems. Another 10 per-cent of the loans were judged to have only minor repay-ment problems that could be easily remedied. Less than 3.5 percent of the farm loan portfolios, on average, were characterized as having major repayment problems re-quiring more collateral and/or longer term workouts. The remaining 1.5 percent of the portfolios were considered to have severe repayment problems which might result in forced sales of borrower assets and/or some losses to the bank. Despite the recent slowing in repayments, the latest distribution of farm loan portfolios by degree of repayment

Credit conditions at Seventh District agricultural banks

1981

Loan demand

Fund availability

Loan repayment

rates

Interest rate on farm

operating loans'

Average loan-to-deposit

ratio'

Banks with loan-to-deposit

ratio above desired level'

(index)2 (index) 2 (index) 2 (percent) (percent) (percent of banks)

Jan-Mar 70 141 90 16.55 60.1 17 Apr-June 85 121 70 17.78 60.9 20 July-Sept 66 123 54 18.57 60.9 21 Oct-Dec 66 135 49 16.98 58.1 17

1982 Jan-Mar 76 134 36 17.34 57.8 18 Apr-June 85 136 41 17.24 57.3 14 July-Sept 87 136 36 15.61 57.8 15 Oct-Dec 74 151 47 14.36 55.1 11

1983 Jan-Mar 69 158 66 13.67 53.3 6 Apr-June 85 157 78 13.50 54.0 6 July-Sept 81 156 78 13.73 54.8 8 Oct-Dec 101 153 78 13.65 53.6 8

1984 Jan-Mar 131 135 62 13.83 54.4 12 Apr-June 138 128 64 14.34 55.7 14 July-Sept 120 122 59 14.45 57.2 17 Oct-Dec 103 124 49 13.63 55.9 19

1985 Jan-Mar 107 120 47 13.47 56.1 17 Apr-June 105 133 56 12.93 55.1 14 July-Sept 90 127 59 12.81 55.5 14 Oct-Dec 68 144 97 12.70 52.7 10

1986 Jan-Mar 74 149 80 12.32 50.9 8 Apr-June 65 152 86 11.82 51.1 6 July-Sept 68 146 87 11.34 51.4 6 Oct-Dec 61 153 107 11.11 49.4 3

1987 Jan-Mar 71 149 118 10.89 48.8 5 Apr-June 75 140 118 11.02 50.5 6 July-Sept 75 136 134 11.29 51.5 7 Oct-Dec 78 142 145 11.30 50.3 5

1988 Jan-Mar 102 137 143 11.06 50.2 4 Apr-June 113 127 114 11.24 52.1 6 July-Sept 120 115 88 11.67 54.3 8 Oct-Dec 127 123 87 11.98 53.3 8

1989 Jan-Mar 138 115 84 12.54 53.8 11 Apr-June 138 107 92 12.42 55.9 12 July-Sept 124 109 106 12.19 57.1 10 Oct-Dec 119 124 123 12.05 55.8 9

1990 Jan-Mar 125 124 122 11.93 55.2 7 Apr-June 118 125 119 11.95 56.5 7 July-Sept 117 122 115 11.94 57.0 8 Oct-Dec 116 123 100 11.82 56.9 9

1991 Jan-Mar 128 127 98 11.40 56.5 7 Apr-June 130 122 74 11.19 58.1 7

At end of period. 2Bankers responded to each item by indicating whether conditions during the current quarter were higher, lower, or the same as in the year-earlier period. The index numbers are computed by subtracting the percent of bankers that responded "lower" from the percent that responded "higher" and adding 100.

problem is unchanged from the average distribution re-ported a year ago and substantially better than the distribu-tions reported in the mid-1980s.

Loan-to-deposit ratios registered a fairly normal seasonal upturn at the surveyed banks during the second quarter. The average of the ratios reported as of the end of June (in percentage terms) rose to 58.1, up 1.6 percentage points from both the previous quarter and a year ago. The aver-age of the mid-year ratios ranged from 51.9 among banks in Illinois to 69.6 among the responding banks in Michi-gan. The biggest gains relative to the ratios reported a year ago were evident among banks from Iowa and Wisconsin. Districtwide, the second-quarter increase pushed the aver-age loan-to-deposit ratio to the highest level in nearly a decade.

Despite higher loan-to-deposit ratios, it would appear that agricultural banks have ample funds for lending to farmers and that most would desire to have a higher ratio. Nearly 30 percent of the respondents in the most recent survey indicated that the availability of funds for lending to farm-ers this spring exceeded the year-earlier level. Only 8 percent reported a decline in fund availability while the remaining bankers felt that fund availability was un-changed from the year before. Bankers from all five Dis-trict states noted the increase in fund availability, espe-cially those in Illinois and Indiana.

The evidence of ample funds for lending to farmers is also reinforced by the desires of the surveyed banks to have still higher loan-to-deposit ratios. Overall, only 7 percent of the respondents noted that their actual loan-to-deposit ratio exceeded their desired ratios. The average of the desired ratios reported in the latest survey (in percentage terms) rose to 63.8, nearly 6 percentage points above the average of the actual ratios reported. The margin between desired and actual loan-to-deposit ratios was highest among banks in Iowa (7.3 percentage points) and the lowest among banks in Michigan (2.1 percentage points).

Interest rates on farm loans continued to drift lower this spring, reflecting both the ample funds for lending and the prevailing downtrend in overall market rates of interest. The typical rates charged by the responding bankers on feeder cattle and farm operating loans as of the end of June averaged 11.2 percent. Rates charged on farm real

Notice to Subscribers Future issues of Agricultural Letter will be published

monthly. The next issue will be published in late September.

estate mortgages averaged 10.4 percent. In general, the mid-year rates were down 15 to 20 basis points from three months earlier and 70 to 75 basis points below the average rates reported a year ago. From a longer term perspective, the current rates on farm loans are among the lowest re-ported since 1979.

The latest survey findings suggest that farm loans at banks rose further this spring. In contrast to the normal seasonal decline, the portfolio of farm loans at banks held remark-ably stable during the fall and winter months. As a result, the year-over-year gains have widened considerably. Re-ports filed as of the end of March show that farm loans held by banks nationwide totaled $49.5 billion, up 7.3 percent from the year before. The total for banks in District states approached $12.0 billion, up 9.3 percent. The year-over-year rise for individual District states ranged from a nominal 0.4 among banks in Michigan to over 13 percent among banks in Iowa. In most instances, the growth in nonreal estate farm loans exceeded the growth in loans secured by farm real estate by a sizable margin. Nonreal estate farm loans at banks nationwide rose 9.0 percent during the year ending March 31. The rise in nonreal estate loans at banks in District states was 11.5 percent.

Gary L. Benjamin

AGRICULTURAL LETTER (ISSN 0002-1512) is published monthly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Gary L. Benjamin, economic adviser and vice-president, and members of the Bank's Research Department, and is distributed free of charge by the Bank's Public Information Center. The information used in the preparation of this publication is obtained from sources considered reliable, but its use does not constitute an endorsement of its accuracy or intent by the Federal Reserve Bank of Chicago.

To subscribe, please write or telephone:

Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690 Tel. no. (312) 322-5111

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Selected agricultural economic indicators

Latest period Value

Percent change from

Prior Year

period ago Two years

ago

Prices received by farmers (1977=100) July 151 -2.6 0 2 Crops (1977=100) July 137 -6.2 6 0

Corn ($ per bu.) July 2.23 -3.5 -15 -10 Oats ($ per bu.) July 1.11 2.8 -3 -27 Soybeans ($ per bu.) July 5.20 -6.3 -13 -24 Wheat ($ per bu.) July 2.47 -3.1 -11 -35

Livestock and products (1977=100) July 163 0.0 -5 4 Barrows and gilts ($ per cwt.) July 55.10 -0.9 -11 16 Steers and heifers ($ per cwt.) July 76.40 -0.5 0 7 Milk ($ per cwt.) July 11.60 1.8 -17 -8 Eggs (0 per doz.) July 65.0 9.6 13 0

Prices paid by farmers (1977=100) July 189 -0.5* 3 6 Production items July 173 -1.1* 2 4

Feed July 119 -4.8* -8 -11 Feeder livestock July 214 -4.0* 0 11 Fuels and energy July 196 -1.0* 5 5

Producer prices (1982=100) July 122 ?4, Agricultural machinery and equipment July U4 ci' Fertilizer materials Agricultural chemicals

July July

99 .1.26

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1.1 ''.' 2

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\ OD i : Consumer prices (1982-84=100)

Food July July

186 137

,1 z 0 1/ Pk" ME P.,

....A

•••• .

_1:9 ****---_0:5 7 94 9 0 9

Production or stocks Corn stocks (mil. bu.) June 1 2,992 N.A. 5 -12 Soybeans stocks (mil. bu.) June 1 724 N.A. 21 56 Beef production (bil. lbs.) June 1.87 -3.8 -5 -7 Pork production (bil. lbs.) Milk production (bil. lbs.)**

June July

1.14 10.5

-11.7 0

-0.6 -2 -10

3

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• N.A. Not applicable. *Prior period is three months earlier. **21 selected states.

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