Low farm prices reflected in second quarter Ag banker survey

"Low cattle, grain and milk prices are forcing area farmers out of farming. Current prices do not generate adequate income to repay debt and have a life." The North Dakota banker who made these comments is from an area particularly hard hit by bad weather and other adverse circumstances for farmers. But the general tenor of his comments is echoed by many of his colleagues from other parts of the Ninth District among the 93 bankers who responded to the Minneapolis Fed's second quarter survey of agricultural credit conditions.

Farm income and spending

Farm income continues to decline according to bankers, 71 percent of whom rated their customers' incomes as somewhat or substantially below average. Montana and North Dakota, the most wheat-dependent states, reported the worst conditions, while Minnesota and Wisconsin bankers were somewhat more positive in their estimates. Household spending is holding near normal levels in those two states and in South Dakota. In North Dakota a third of respondents say household spending is below normal and in Montana, two-thirds. Farmers cut investment in new machinery or facilities in most district states. The proportion rating this category below normal ranges from 38 percent in South Dakota to 94 percent in North Dakota. In Wisconsin 80 percent say farm capital investment is normal.

Farm loan volumes

Feeder livestock loan volumes, as in previous quarters, are below normal levels. But cheap corn is improving margins for fattening cattle and hogs, prompting increasing farmer demand for such loans in Minnesota, South Dakota and North Dakota. Other operating loan volumes are normal to high, particularly in North Dakota and Montana. The apparent explanation is not unusually high levels of input use, but rather that many farmers did not sell as much of their 1997 crop as usual and are financing 1998 expenses by borrowing rather than through grain sale revenues. Machinery loans are slow and markedly down from the first quarter in Minnesota, Montana and South Dakota, with the lowest ratings by North Dakota bankers. Real estate loan volume ratings increased in Montana and North Dakota, which may reflect lenders taking a security interest in land as collateral for other loans to their more highly leveraged borrowers rather than from booming land markets. Indeed, nearly 60 percent of Montana bankers report their collateral requirements as above normal, double the level in the first quarter.

Bank credit conditions and liquidity

As earlier in the year, 10 percent to 28 percent of respondents report loanable funds as above normal or high, and few as below. Where there were changes from the first quarter, as in Minnesota and Montana, they were in the direction of greater availability. Loan repayment rates are lower than in the prior quarter, except in North Dakota, where 65 percent of bankers describe repayments as below normal, somewhat better than the 73 percent in late February. Renewals and extensions are similarly high and up from the first quarter. Nearly a fifth of Montana bankers say this activity is significantly above usual levels; none chose that category only three months ago. Referrals to correspondent banks or other lenders show some increase, but overall are close to usual levels.

Interest rates and land prices

Interest rates on farm loans show little change, though fixed-rate loans of all maturities increased by an average of 10 basis points, and variable-rate loans by 40 points; however, all categories remained somewhat below levels one and two years ago. Land prices reportedly are up, with the smallest increases in North Dakota and Montana but surprisingly large increases in other areas. Bankers from South Dakota and Wisconsin report double-digit increases for cropland, although sources in these states indicate that land markets are thin, with few arm's-length sales.

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 May, 93 bankers responded regarding conditions during the second quarter.