Farmers are still hurting

Farm sales, liquidations and bankruptcies are on the increase, commented a South Dakota banker in the Minneapolis Fed's second quarter (May 1999) survey of agricultural credit conditions. This comment reflects the plight of many farmers over most of the Ninth District.

The results from the second quarter survey reveal slightly poorer financial health of farmers as compared to the first quarter. Loan renewals and extensions have increased and loan repayments have remained low, while bank liquidity remains stable. In addition, farmers are facing higher collateral requirements and are looking to other lenders for financing. The expectation for farm income is bleak unless farmers produce high yields this summer and commodity prices increase.

Farm income and spending

Farmers are looking for ways to trim expenses, stated a North Dakota lender. Farm income has deteriorated, with 82 percent of bankers reporting below normal levels, a 4 percentage point increase over first quarter survey results. Capital spending is drastically reduced, with 86 percent of bankers reporting below normal levels, a 7 percentage point increase over first quarter survey results. Farm household spending remains depressed, with 54 percent of lenders noting below normal levels in the second quarter, a 2 point increase over the first quarter survey. Montana and North Dakota farmers are having the toughest time; 100 percent and 86 percent of lenders, respectively, report below normal farm income.

Farm loan volumes

As farm income decreases, demand for operating loans increases. Operating loan volume, except for feeder loans, increased as 33 percent of bankers report loans at above usual levels in the second quarter, a 2 point increase from the first quarter. In addition, real estate loans increased, as 20 percent of bankers reported higher than normal levels of real estate loans in the second quarter, a 7 point increase from the first quarter.

In contrast, machinery loans continue to slide, with 59 percent of bankers reporting below normal loan volumes in the second quarter, a 3 point increase from the first quarter.

Bank credit conditions and liquidity

Not only are farmers taking on new loans to finance operations, they are having a tough time repaying existing loans. Below normal levels of loan repayments are reported by 57 percent of lenders in the second quarter, a 5 point decrease from the first quarter, while above normal renewals and extensions are reported by 51 percent of respondents, a 2 point increase from the first quarter. Moreover, the districtwide average of farmers at their debt limit is about 30 percent for both the second and first quarters; Montana is still substantially higher at 43 percent in the second quarter, a 5 point decrease from the first quarter. Higher than normal levels of collateral required for loans are reported by 37 percent of respondents, a 3 point increase from the first quarter. Availability of funds does not seem to be an issue as nearly all banks report normal or above normal levels of loanable funds.

Land prices and interest rates

A bright spot in this quarter's report is land prices, with Minnesota, Wisconsin, Montana and South Dakota lenders reporting land prices up, on average, from 1 percent to 14 percent. The only state reporting land prices down from a year ago is North Dakota, where land prices fell, on average, from 1 percent to 2 percent.

Farmers are facing about the same level of interest rates as last quarter, which are near their lowest level in more than four years.

Outlook

"If our area does not have an average to good crop and prices do not increase, there will be problems and some farmers will be forced out of business," says a Minnesota lender. The outlook for net income for the next three months is gloomy: 84 percent of lenders expect farmers to have below average net income. In addition, 88 percent of lenders expect below-normal capital spending levels in the next three months, and 55 percent of lenders predict that the rate of loan repayments will be below normal in the next three months.

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, 100 bankers responded regarding conditions during the second quarter.