Ag bankers optimistic overall, but problems may lurk in some areas

"Strong sale prices of grains and livestock are being put toward debt repayment and/or capital purchases," reports one southern Minnesota banker who is optimistic about farmers' finances in his region. "Overall attitude and optimism much improved from last year" is the word from a counterpart in central Montana. But while this bright outlook is echoed by many of the 101 bankers who answered the quarterly survey of agricultural credit conditions conducted by the Minneapolis Fed in mid-August, there are some who are not so sanguine.

"We look for repayment to be very tight for our ag producers," says a South Dakota banker from an area where beef producers suffered high death losses from adverse weather in winter and early spring. Similar financial constrictions are also noted in eastern North Dakota where wheat scab and other plant disease problems have combined with low small grain prices to pinch farmers' incomes.

Farm income and spending

Montana up, North Dakota down is the income and spending news in a nutshell. Higher cattle prices and good grain yields have finally pulled Montana farmers and ranchers out of the cellar. Montana farm incomes are rated as above usual levels for the first time in nearly three years. But low wheat prices and widespread plant disease problems hit North Dakotans hard. Milk prices some 25 percent below year-earlier levels gave a similar blow to Wisconsin dairy farmers. Minnesota continues to fare the best, with generally favorable weather and prices for corn and soybeans that are relatively stronger than wheat and other small grains. Except in Minnesota, capital spending is sluggish.

Farm loan volumes

Feeder livestock and machinery loan volumes are essentially unchanged from the prior quarter. The rating of machinery lending as somewhat below normal is puzzling since machinery manufacturers and dealers report generally strong sales. Continued increases in manufacturer financing may be one explanation. Nonmachinery intermediate-term and real estate loan volumes dropped slightly. Business in general operating loans increased and is reportedly well above usual levels. This is reflected in high loan-to-deposit ratios, which are most extreme in Montana where they average nearly 84 percent.

Bank credit conditions and liquidity

Funds availability again tightened marginally from the preceding quarter, and a few more bankers reported having refused loans due to shortages of funds, particularly in the western reaches of the district. Loan payments improved, while renewals dropped substantially and referrals to other lenders are down slightly. Once again, the number of bankers reporting loan repayment as either below normal or significantly below normal shrank.

Interest rates and land prices

After a year of essentially stable interest rates, district banks apparently are cutting rates on most categories of farm loans. Rates dropped 20 to 90 basis points for most categories. Only one, variable-rate machinery loans, showed an uptick, and given the very small number of banks offering such loans, this increase is probably a statistical quirk.

Land price changes reportedly were largely in the 3 percent to 6 percent range, with the exception of North Dakota, where cropland prices increased only 1 percent and grazing land dropped slightly. The drop in grazing land prices is the first drop of any kind seen in this decade. One banker commented that the sharp cattle losses in last winter's severe storms had soured ranchers on any expansion.