November 10, 1976
Information this month about district economic conditions is not particularly encouraging. The agricultural situation remains bleak. District cash farm receipts have been restricted by low wheat, corn, and livestock prices, and will be further affected by drought-induced reductions in output. As a result, farm debt is being extended while farm spending is curtailed. The outlook for nonagricultural jobs isn't very promising either. And expected wage increases will likely add to inflationary pressures.
Respondents to our October survey of Ninth District agricultural bankers gave two principal reasons for the reported drop in farm earnings throughout the district. First, depressed prices for agricultural products—notably, cattle, hogs, corn, and wheat—have restricted income gains. Second, drought conditions in most of Minnesota and a large part of South Dakota have drastically cut agricultural production. Furthermore, little improvement in district farm income was foreseen by those ag bankers, and concern was expressed that soil moisture next spring would not be sufficient for successful planting of the 1977 crops. Their responses join with evidence gathered from this Bank's directors.
Reductions in farm income are already having an impact on farm spending. Fifty-one percent of our survey's respondents reported lower spending in October of this year as compared to a year ago, and sixty-three percent expect spending to be lower in the next three months than the previous twelve months. Some of the responding bankers commented that farmers appeared to have eliminated expenditures for most items except irrigation equipment.
Despite spending cuts, lower earnings appeared to be forcing farmers into a financial squeeze. Forty-seven percent of the bankers responding had experienced greater demands than usual for farm debt refinancing, and 71 percent expected greater demand in the coming quarter. In addition, 60 percent of the bankers characterized the current rate of debt repayment as "slow," 42 percent reported a greater proportion of farmers now are at their debt limit than at this time last year, and 70 percent expected adverse changes in the ability of farmers to repay debt.
However, most bankers felt they would be able to meet current credit needs of farmers. Of those reporting, 55 percent were still actively seeking new farm loan accounts and only 10 percent had reduced or refused a loan as a result of funds shortages. The average loan-to-deposit ratio was reported as 65 percent, and only 26 percent of the respondents regarded their current ratios as being too high. These figures were identical to those reported three months earlier. While some increase occurred in the percentage of bankers who expect problems in meeting loan requests in the next three months, it is not a cause for alarm. The percentage rose from 9 percent to 12 percent between the July and October surveys. Also, several directors of this Reserve Bank reported that rural banks do not foresee any significant loan losses.
Our directors' information doesn't provide a good outlook for unemployed workers in the Ninth District. One director, from a major Twin Cities area employer, said employment at his firm has been flat, and he expects no significant growth. An economist from a large Twin Cities commercial bank said that major local companies are not currently expanding operations here which points towards poor employment growth. Manufacturing jobs in the central Minnesota area were reported to be down about 14 percent from a year ago, with no immediate increases foreseen. A Montana director indicated that the employment outlook was not particularly encouraging there, and a director from the Upper Peninsula of Michigan termed job prospects in his area "nil." The farm income situation was expected to hold down job growth in many rural areas. Some job gains were expected, though, in central Minnesota's trade and service sectors. And a southern Minnesota director said that the demand for unskilled labor in his area was quite strong.
Several of our Bank's directors expected wage increases to boost nonfarm prices in coming months. One of them heads a large manufacturing firm which will be raising prices to meet higher payroll costs in 1976 and 1977. An economist for a large Twin Cities commercial bank foresees wage settlement increases as a problem in attempts to ease inflation. A Montana director said labor negotiations in the farm machinery industry could significantly boost farm machinery prices. And a Minnesota director indicated that wage increases would raise service prices in his area about 10 percent next year. A few directors from rural areas, however, felt wage increases would not be a serious inflationary factor in those areas.