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A mild spring, high livestock prices and government payments have contributed to a continuing upswing in financial conditions for district agricultural producers, according to the Minneapolis Fed's second quarter survey of agricultural lenders. The results of this quarter's survey are very similar to last quarter's survey, but a marked improvement from the second quarter 1999 survey when the outlook for the agricultural economy was dismal.
Farm income, household spending and capital spending have improved significantly from a year ago. Also, agriculture producers are making more loan repayments and fewer are extending loans. The percentage of farm borrowers at their loan limit has decreased 6 percentage points from last spring. In addition, land prices have risen from last year's planting season; however, interest rates have also increased. [See the outlook for Ninth District agriculture in the District Economic Review.]
Farm income and spending
"Increased government payments kept income levels high," says a North Dakota farm lender. Farm income and spending improved from the previous planting and calving season. Over half the lenders responding to the survey report average or above-average farm income in the second quarter of 2000, compared with under one-fifth of lenders in the second quarter 1999 survey. Farmers' income in South Dakota improved the most, primarily due to higher cattle prices. Over three-fourths of South Dakota lenders indicate average or above-average farm income, a 57 percentage point increase from last spring's survey.
Capital spending continued to increase but is still below normal. A third of lenders report normal or above-normal capital spending over the last three months, compared with only 14 percent in the second quarter 1999 survey. Farm household spending also increased: 68 percent of the lenders noted average or above-average levels in the second quarter, compared with 46 percent in the year-ago survey.
Farm loan volumes
Farm loan volumes increased slightly from the second quarter 1999 survey. Operating loan volume, except for feeder loans, increased as 94 percent of lenders report normal or above normal demand, compared with 88 percent in last year's second quarter survey. In addition, the higher livestock prices caused demand for feeder livestock loans to rise, with 18 percent of lenders indicating above-normal levels in the second quarter in relation to only 7 percent in the second quarter of 1999.
Machinery loans have started to rise from the doldrums; over half the bankers report normal or above-normal loan volumes in the second quarter, an improvement of 11 percentage points from the year-ago survey. Real estate loan volume decreased slightly, as 57 percent of surveyed bankers note average or above-average levels in the second quarter of this year compared with 62 percent of last year's respondents.
Credit conditions, liquidity
Increased cattle prices have reduced ranchers' debt and improved the local economy, says a South Dakota lender. The stronger financial health means farmers can repay loans and reduce their use of loan extensions. Above-normal levels of loan repayments are reported by 14 percent of lenders, a 9 percentage point increase over second quarter 1999 results. Renewals and extensions returned to normal as two-thirds of respondents indicate average levels, a 24 percentage point increase over second quarter 1999 survey. Moreover, the number of farmers at their debt limit continued to decrease from 31 percent in the second quarter 1999 survey, to 25 percent in the second quarter 2000. Meanwhile, availability of funds is not a problem, as only 5 percent of banks report not lending due to shortage of funds.
Land values, collateral and interest rates
"Land values are skyrocketing for marginal wooded land that is in high demand from urban areas," reports a western Wisconsin lender. Cropland prices increased from an average of 5 percent in North Dakota to 9 percent in Wisconsin over last spring's prices. In addition, pasture land price increases ranged from an average of 3 percent in North Dakota to 10 percent in Wisconsin over those of a year ago.
The solid land prices have helped farmers' financial position as collateral requirements have returned to normal levels. Over two-thirds of respondents require normal levels of collateral, up 9 percentage points from a year ago. Meanwhile, interest rates for farm loans have increased about 75 basis points from the second quarter of 1999.
| Fixed Interest Rates * | ||||
|---|---|---|---|---|
| Feeder Livestock | Operating | Machinery | Real Estate | |
| 1st Q '99 | 9.4 |
9.5 |
9.3 |
8.6 |
| 2nd Q '99 | 9.4 |
9.4 |
9.3 |
8.7 |
| 3rd Q '99 | 9.4 |
9.5 |
9.3 |
8.7 |
| 4th Q '99 | 9.6 |
9.7 |
9.5 |
9.0 |
| 1st Q '00 | 9.8 |
9.9 |
9.8 |
9.0 |
| 2nd Q '00 | 10.1 |
10.1 |
10.0 |
9.4 |
| * Average of reported rates in mid-May 2000. | ||||
Facts about the survey
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, 111 bankers responded regarding conditions during the second quarter.
