Year end upbeat for agricultural industry, but pockets of weakness persist

"Farmers in the area had excellent yields with an ideal fall. We look for above average pay downs on loans," reports a southern Minnesota banker in the recent Minneapolis Fed agricultural credit survey. A counterpart in a ranching area of Montana says, "Cattle income up 25-30 cents over last year had a positive effect on our portfolio."

But such optimism is not universal: "$3 wheat has taken a toll on our customers and this bank—almost back to the mid-1980s!" is the comment by a banker in a wheat area of Montana. And views across North Dakota are uniformly pessimistic. "Many farmers and ranchers are leaving the area due to the net effect of poor prices and weather conditions," is a typical remark.

These mixed reports from the 91 bankers who responded to the Ninth District Fed's fourth quarter survey reveal an agricultural sector that is generally strong, but with severe weaknesses in certain geographic areas and for producers of specific products.

Producers of corn, soybeans, hogs and cattle reportedly are in generally good financial condition and are optimistic about prospects for 1998. Dairy farmers, wheat producers and farmers in areas of North Dakota plagued by successive years of adverse weather and plant disease problems are in much poorer financial shape. On balance, the number of farmers and banks reportedly in good condition well outnumber those who are struggling.

Farm income and spending

Estimates of farm income and spending rose sharply over the prior quarter for Montana and South Dakota. Already high Minnesota estimates rose slightly higher, while in Wisconsin low estimates remained essentially unchanged. In North Dakota, where conditions were already bleak in the third quarter, farm income estimates rose marginally, but those of household and particularly of capital spending nosedived.

Farm loan volumes

Estimates of most categories of loans were stable to slightly lower. Operating loan volumes dropped most sharply; comments from Minnesota and South Dakota indicate that this was largely due to improved farm cash revenues. Still, despite this drop, operating loans are the one category still rated as above usual levels by the preponderance of bankers. Feeder livestock loans declined somewhat and are rated the lowest of any of the five categories of loans surveyed. Reasons are unclear, but a few bankers noted that expected feeding margins were tightening from fall into winter.

Bank credit conditions and liquidity

Banker estimates of available funds increased sharply from the third quarter and on balance are rated as above usual levels. Loan repayment rates also improved somewhat. The proportion of borrowers against their debt limits dropped slightly in Minnesota and sharply in Montana and South Dakota. At 37 percent, Montana is still the highest in the district, but has declined about in half from levels reached in late 1996. There was a slight increase in this variable for North Dakota and Wisconsin. The proportion of banks having refused loans due to shortage of funds rose in Montana and North Dakota and dropped sharply in South Dakota and Montana. In Minnesota, no bank answered yes to this query.

Interest rates and land prices

Lending rates showed slight upticks from the third quarter, but are about where they were a year ago. Cropland prices show strong gains in Minnesota, South Dakota and Wisconsin, but bankers in the last state describe such increases as motivated by sales for nonagricultural uses. Montana cropland prices are nearly flat, reflecting poor wheat prices. North Dakota land prices are up moderately, mirroring a thin market and expansion buyers, according to one source.