Low commodity prices taking toll across the Ninth District.

"The current pricing and near-term prices for crops and livestock are extremely serious. If our agricultural borrowers are not able to get better prices, they will not be able to survive their debt or make purchases to stimulate the economy." These comments by a South Dakota banker, included in the Minneapolis Fed's third quarter survey of agricultural credit conditions, are echoed by colleagues in nearly all parts of the Ninth District. The 107 bankers who responded to the survey revealed the most pessimistic outlook seen this decade.

Farm income and spending

Nearly 82 percent of bankers describe farm incomes as below normal levels. The proportion rating such income in the lowest category offered-"substantially below"-doubled from 20 percent to 41 percent. Only two of the 107 respondents thought their customers' income was above normal.

Capital spending has also gone south, with 68 percent of bankers viewing it as below usual levels. For North Dakota and Montana the percentages are 96 percent and 89 percent, respectively. Only in Wisconsin, favored by relatively strong milk prices and declining feed costs, do a majority of bankers see spending on facilities and equipment as normal.

Household spending has also apparently declined, with 45 percent of bankers placing it below usual levels. As with income estimates, this represents a marked deterioration from the second quarter survey, with those choosing the lowest possible category tripling in number. Furthermore, responses to questions about income and spending show that bankers expect the situation to get worse in 1998's closing quarter.

Farm loan volumes

While feeder loan volumes were already low, they dropped further in the third quarter. Over 60 percent of bankers rate them as below normal; no one sees above-normal volumes. Other operating loans, already above usual levels, crept higher, with 37 percent of bankers rating this category above normal. The proportions are highest in North Dakota and South Dakota, where many farmers have unsold grain from 1997 as well as 1998. Only in Wisconsin, where farmers face favorable feed to milk price ratios, are general operating loans at usual levels.

Machinery loans are down and below usual levels everywhere but Wisconsin. The pattern is similar for other intermediate-term loans, though not as pronounced as that for machinery loans. Real estate loan demand also apparently slackened, with 38 percent rating it below normal.

Bank credit conditions and liquidity

Most banks still have normal or above normal levels of loanable funds, but the proportion of below-normal responses increased from 15 percent in the prior quarter to 27 percent in the third quarter. Repayment rates slipped further, with 56 percent of respondents describing them as below normal. Renewals and extensions are up as farmers hold grain off the market in hopes of higher prices.

The estimated proportion of borrowers at their debt limits increased from 27 percent to 41 percent of all Ninth District respondents. Montana and South Dakota, at 63 percent and 45 percent respectively, are the most extreme. Wisconsin, where the proportion dropped to 20 percent, is the only state to show improvement.

Interest rates and land prices

Interest rates on farm loans were unchanged or down slightly in all categories. Estimated price increases over year-earlier levels were down for both crop and grazing land in most states. For North Dakota and Montana, average estimated cropland price increases are about 1 percent, with many bankers reporting no increase and a few North Dakota respondents reporting declines. These are the first land price declines reported in the 1990s.

Each quarter, the Federal Reserve Bank of Minneapolis surveys agricultural bankers in the Ninth Federal Reserve District, which includes Montana, North Dakota, South Dakota, Minnesota, northwestern Wisconsin and the Upper Peninsula of Michigan. In August, 107 bankers responded regarding conditions during the second quarter.