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"In this area the weather has caused planting problems. The prices for crops are not at a profitable level and future prices do not look like things will improve. Rents are stable with land values increasing ... the equity level of farmers continues to fall," said a Minnesota agricultural lender responding to the Minneapolis Fed's second quarter (May 2001) agricultural credit conditions survey. This comment reflects the view of many farm lenders, as survey results indicate a pessimistic outlook for farmers' financial statements.
The outlook may be grim, but it is not dissimilar to the financial performance reported in the first quarter 2001 and second quarter 2000 surveys. Overall farm income and household and capital spending are little changed from last quarter and a year ago. Agricultural producers are repaying loans and extending loans at about the same pace as in second quarter 2000. However, the proportion of farm customers at their debt limit increased slightly in the second quarter, up from both the first quarter 2001 survey and last year's second quarter survey. Meanwhile, interest rates are down from a year ago, while land prices continue to increase.
Farm income and spending
Overall farm income is mixed. "Severe winter drastically reduced feed supplies and cost of hay skyrocketed," said a South Dakota agricultural lender. Farm income in South Dakota decreased as 40 percent of lenders noted below-average farm income in second quarter 2001, compared with 23 percent during the same period last year. About 67 percent of Minnesota lenders indicated below-average farm income in the current period, more than the 53 percent in second quarter last year. In Montana, a third of lenders reported below-average farm income compared with half the lenders a year ago. Meanwhile, in western Wisconsin farm income improved somewhat: Half of lenders reported below-average income in the second quarter compared with nearly all lenders in the past quarter and a year ago.
Overall farm household spending is similar to the previous survey, with 29 percent reporting below-average household spending in the current period vs. 31 percent last quarter. Capital spending remains depressed at nearly the same level as last quarter as 56 percent of respondents indicated below-average capital spending this quarter compared with 58 percent last quarter. The biggest drop in capital spending is in North Dakota, where 73 percent of respondents noted below-average levels compared with half the lenders last quarter.
Farm loan volumes
Demand for loans remains at normal levels. Livestock and other operating loan volumes were about average over the last three months, as 66 percent and 64 percent of lenders, respectively, reported normal loan demand. Machinery loan and other intermediate-term loan activity was reported to be about average by 56 percent and 66 percent of lenders, respectively. In addition, 49 percent of lenders indicated normal real estate loan volumes.
| Agricultural Loan Volumes | ||||
|---|---|---|---|---|
| Feeder Livestock | Operating | Machinery | Real Estate | |
| Significantly higher than normal | 0% |
1% |
0% |
1% |
| Somewhat higher than normal | 10% |
28% |
5% |
10% |
| Normal | 67% |
64% |
55% |
49% |
| Significantly lower than normal | 15% |
7% |
33% |
32% |
| Somewhat lower than normal | 8% |
0% |
7% |
8% |
| Percent of respondents, second quarter 2001. | ||||
Bank credit conditions and liquidity
Bank credit conditions and liquidity are little changed from a year ago. Normal levels of loan repayments, renewals and extensions, and the percentage of farmers at their debt limit were reported by lenders to be about the same as in second quarter 2000. Availability of funds does not seem to be a problem: Only 2 percent of lenders reported refusing to make a loan due to shortage of funds.
| Bank Credit Conditions | ||
|---|---|---|
| Available Funds | Loan Repayment | |
| Significantly higher than normal | 10% |
1% |
| Somewhat higher than normal | 14% |
9% |
| Normal | 64% |
68% |
| Significantly lower than normal | 11% |
22% |
| Somewhat lower than normal | 1% |
0% |
| Percent of respondents, second quarter 2001. | ||
Land values, collateral and interest rates
Cropland prices increased over last winter's prices from an average of 5 percent in North Dakota to 22 percent in South Dakota. In addition, pasture land price increases range from an average of 5 percent in Minnesota to 18 percent in South Dakota over those of a year ago. Average levels of required collateral were noted by 80 percent of lenders. Meanwhile, interest rates for farm loans have decreased about 80 basis points from a year ago.
Outlook
"A major concern for much of Montana remains our serious drought condition. Many cow-calf operations in south-central Montana are facing the issue of reducing cow numbers due to lack of grazing and hay," said a Montana banker. Other district states face the opposite problem of too much moisture, which delayed planting. The adverse growing conditions, higher input costs and low commodity prices have agricultural lenders worried about the future. Below-normal income levels are expected in the next three months by 61 percent of lenders, while only 8 percent predict above-normal income. The outlook for capital spending is nearly the same: 60 percent of lenders anticipate below-normal capital spending over the next three months.
| Fixed Interest Rates * | ||||
|---|---|---|---|---|
| Feeder Livestock | Operating | Machinery | Real Estate | |
| 1st Q '00 | 9.8 |
9.9 |
9.8 |
9.2 |
| 2nd Q '00 | 10.1 |
10.1 |
10.0 |
9.4 |
| 3rd Q '00 | 10.4 |
10.5 |
10.3 |
9.7 |
| 4th Q '00 | 10.3 |
10.4 |
10.3 |
9.6 |
| 1st Q '01 | 9.8 |
9.8 |
9.7 |
9.1 |
| 2nd Q '01 | 9.2 |
9.3 |
9.2 |
8.6 |
| * Average of reported rates in mid-May 2001. | ||||
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 mid-May, 87 bankers responded regarding conditions during the second quarter 2001.
