An abstract for this article is not availableAgricultural credit

Sada L. Clarke

English

Research Papers in Economics

Focusing on .  .  . 
FARM  FINANCIAL  AND  CREDIT  CONDITIONS 
Sada  L.  Clarke 
Weather  and  the  cost-price  squeeze  competed  for 
top  billing  in  the  Fifth  District’s  story  of  farm  fi- 
nancial  and  credit  conditions  in  1976.  Both  played 
important  parts,  although  geography  determined 
which  factor  got  the  leading  role.  In  localities  where 
spring  freezes,  summer  drought,  or  too  much  rainfall 
at  harvesttime  cut  deeply  into  the  year’s  harvest, 
weather  took  the  spotlight;  where  weather  was 
normal,  the  cost-price  squeeze  was  the  prime  per- 
former. 
Weather’s  fickleness  caused  output  to  vary  .  .  . 
Where  weather  played  the  starring  role,  it  often 
“played  favorites”-  at  times  exerting  strongly  favor- 
able,  at  others,  unfavorable,  influences  on  local  farm 
production,  income,  and  credit  conditions. 
Weather’s  favorable  role  in  crop  output  in  1976 
was  accomplished  without  too  much  fanfare.  Ade- 
quate  rainfall  and  a  good  growing  season  in  many 
areas  aided  in  producing  better  yields  per  acre.  The 
improved  yields  plus  larger  acreages  combined  to 
produce  favorable  results  for  some  crops.  Cotton 
output  jumped  49  percent.  The  corn  crop  increased 
25  percent,  and  peanut  production  rose  12  percent. 
Tobacco  yields  averaged  slightly  higher,  but  drought 
conditions  in  some  areas  and  cuts  in  acreage  held 
total  poundage  down  some  6  percent  below  1975. 
But  weather’s  part  in  causing  sharp  declines  in 
production  was  of  unusual  scope  and  severity.  With 
the  hard  spring  freezes,  fruit  crops  suffered  severe 
frost-freeze  damage  in  large  areas  of  the  District. 
The  apple  crop,  a telling  case  in  point,  was  29  percent 
below  year-earlier  levels.  Soybeans  were  especially 
hard  hit,  both  by  extremely  dry  growing  conditions 
and  by  a  wet  harvesting  season,  and  yields  per  acre 
fell  sharply.  The  lower  yields  in  combination  with 
smaller  acreage  cut  soybean  production  28  percent. 
Hay  tonnage  dropped  18  percent.  And  because  of 
the  shortage  of  hay  and  poor  pasture  conditions, 
Note:  This  article  is  based  on  summary  reports  of  this  Bank’s 
QuarterI~  Survey  of  Agricultural  Credit  Conditions  in  19’76  and  on 
the  latest  statistical  information  from  the  U.  S.  Department  of 
Agriculture,  the  Farm  Credit  Administration.  and  the  Federal 
Reserve  Bank  of  Richmond. 
some  farmers  were  forced  to  sell  their  cattle  early  at 
low  prices. 
.  .  .  and  the  cost-price  squeeze  tightened. 
The  squeeze  between  costs  and  prices  continued  to 
be  a  major  factor  in  farmers’  financial  conditions  in 
1976.  But  the  intensity  of  the  squeeze  varied  with  the 
type  of  farming.  Costs  of  materials  used  in  farm  pro- 
duction,  interest,  taxes,  and  wage  rates  averaged 
around  7  percent  above  a  year  earlier.  Even  so,  the 
rise  in  farm  production  expenses  was  slower  than  in 
other  recent  years,  reflecting  lower  prices  for  ferti- 
lizer  and  seed  and  relatively  small  gains  for  feed  and 
chemicals. 
No  doubt  the  role  of  the  cost-price  squeeze  was 
not  readily  recognized  by  some  farmers.  For  those 
producing  tobacco,  cotton,  soybeans,  peanuts,  eggs, 
and  milk,  higher  prices  overshadowed  cost  pressures. 
But  the  lower  prices  for  cattle,  hogs,  poultry-especi- 
ally  turkeys-and  both  feed  and  food  grains  made 
the  pinch  of  the  cost-price  squeeze  not  only  apparent 
to,  but  painful  for,  their  producers. 
Costs  rose  faster  than  income. 
Whether  the  District’s  farmers  remember  1976  as 
a  poor  year  or  as  a  good  one  will  depend  on  what 
combination  of  crops  and/or  livestock  they  produced. 
Some  will  almost  surely  count  it  a  good  year.  Others 
will  not  be  so  fortunate.  But  when  the  cash  income 
from  all  crop  and  livestock  marketings  is  added  up, 
total  cash  receipts  may  run  slightly  higher  than  in 
1975.  Livesto&  production  has  provided  the  basis 
for  a  high  and  improved  level  of  income  from  live- 
stock  and  livestock  products.  But  crop  marketings 
may  not  be  large  enough  to  bring  crop  income  up  to 
the  1975  level.  Much  will  depend  on  the  volume  of 
crops  stored  for  sale  later  in  hopes  of  a  recovery  in 
prices. 
All  in  all,  the  situation  points  to  only  a  slight 
increase  in  gross  farm  income  in  1976.  And  with  the 
modest  gain  in  gross  income  likely  to  be  offset  by 
the  rise  in  production  expenses,  realized  net  farm 
income  seems  almost  certain  to  fall  short  of  the  1975 
figure. 
FEDERAL  RESERVE  BANK  OF  RICHMOND  13 Demand  for  farm  loans  was  strong  .  .  . 
Farmers’  demand  for  short-  and  intermediate-term 
loans  was  generally  strong  throughout  the  year,  both 
at  commercial  banks  and  at  production  credit  associ- 
ations.  This  general  increase  in  demand  for  loans 
stemmed  in  part  from  the  continued  rise  in  the  costs 
of  production  and  the  sharply  higher  prices  of  farm 
machinery  and  equipment.  Strength  in  loan  demand 
also  came  from  the  expansion  in  poultry  and  hog 
operations  and  from  new  and  expanding  dairy  oper- 
ations.  Moreover,  there  was  a  big  demand  for  loans 
to  build  on-farm  storage  facilities,  especially  in  the 
Carolinas. 
Weather-induced  problems  also  strengthened  the 
demand  for  loans.  After  experiencing  widespread 
dry  weather  conditions  in  the  early  fall,  some  live- 
stock  producers  borrowed  funds  to  buy  feed.  By 
late  fall,  however,  wet  weather  delayed  harvest  of 
some  fall  crops  and  increased  the  demand  for  loan 
renewals. 
Statistical  evidence  supports  these  findings.  Short- 
and  intermediate-term  farm  debt  held  by  member 
banks  at  midyear  was  14  percent  above  a year  earlier, 
while  the  loan  volume  held  by  PCAs  was  up  10 
percent.  But  farmers  stepped  up  their  borrowing 
from  PC4s  sharply  during  the  third  and  fourth 
quarters,  particularly  so  in  the  third.  As  a  result, 
the  volume  of  loans  made  by  PCAs  for  the  year  as  a 
whole  was  18  percent  larger  than  in  1975.  And 
the  year-to-year  gain  in  PCA  loans  outstanding 
amounted  to  14  percent. 
Unlike  non-real-estate  farm  loans,,  demand  for 
farm-mortgage  loans  in  1976  was  comparatively 
weak.  While  farm  real  estate  loans  held  by  member 
banks  in  mid-1976  were  down  fractionally  from  the 
year-earlier  level,  outstanding  loans  held  by  the 
Federal  land  banks  showed  a gain  of  12  percent.  But 
the  volume  of  new  money  loaned  by  the  Federal 
lancl  banks  during  the  entire  year  was  10  percent 
below  that  in  1975.  Most  of  the  decrease  came  in  the 
first  half  of  the  year  and  followed  on  the  heels  of  even 
larger  declines  during  the  second  half  of  1975.  By 
year-end  1976,  loans  outstanding  at  the  Federal  land 
banks  were  11  percent  above  the  level  a  year  earlier. 
Could  these  changes  represent  a  return  to  a  more 
normal  lending  pattern  when  annual  loan  increases 
were  not  so  high  as  they  have  been  in  recent  years? 
Reportedly,  farmers  were  less  optimistic  over  farm 
income  prospects  in  1976  and  hence  were  hesitant  to 
make  large  long-term  capital  investments.  Then,  too. 
other  lenders-especially  life  insurance  companies- 
increased  their  share  of  the  volume  of  credit-financed 
farmland  transfers  during  the  year. 
.  .  .  but  fund  availability  was  ample  .  .  . 
Bank  funds  available  for  making  short-  and  inter- 
mediate-term  loans  to  farmers  were  generally  ample 
throughout  the  year  even  though  farm  loan  demand 
was  strong.  (By  contrast,  fund  availability  for  long- 
term  real  estate  lending  was  reported  to  be  a  con- 
tinuing  problem  for  some  banks.)  While  loan  fund 
availability  varied  considerably  from  bank  to  bank 
and  state  to  state,  banks  with  the  greatest  availability 
of  funds  were  most  often  located  in  the  Carolinas. 
The  general  availability  of  loan  funds  at  commercial 
banks  has  stemmed  both  from  strong  inflows  of  time 
deposits  and  from  a  continued  weak,  but  improving, 
business  loan  demand. 
Rarely  did  one  of  the  surveyed  banks  report  that 
it  had  been  forced  to  refuse  or  reduce  a  farm  1oa.n 
because  of  a  shortage  of  funds-further  evidence  of 
the  availability  of ample  funds  for  lending  to  qualifie:d 
farm  borrowers.  Moreover,  bankers  reporting  that 
they  were  actively  seekin, (+ new  farm  loan  accounts 
usually  ranged  from  60  to  70  percent  of  all  respon- 
dents. 
Since  bank  loan  funds  were  ample,  loan  referral 
activity  remained  fairly  weak.  Generally,  the  number 
of  bankers  making  referrals  to  correspondent  banks 
was  small,  probably  because  many  of  the  sampled 
banks  are  either  large  branch  banks  or  bank  holding 
companies.  Nore  banks  as  a  rule  reported  referrals 
to  nonbank  credit  agencies,  but  the  volume  of  these 
referrals  was  not  unusual. 
Banker  respondents  in  this  five-state  area  do  not 
appear  to  be  too  enthusiastic  about  the  Farmers 
Home  Administration’s  guaranteed  loan  program  nor 
with  the  provisions  whereby  commercial  banks  and 
production  credit  associations  can  jointly  participate 
in  making  farm  loans.  Some  bankers  indicate  that 
too  much  red  tape  is  involved  : others  say  they  would 
much  prefer  to  have  the  opportunity  to  participate 
with  the  Federal  land  banks. 
Merchants  and  dealers,  especially  those  selling 
farm  machinery  and  equipment,  provided  a  higher 
volume  of  loan  funds  in  1976  by  strengthening  their 
lending  activity  over  that  in  other  recent  years. 
Increased  selling  competition  seems  to  have  provided 
the  impetus  for  this  change  in  lending  policy. 
,  .  .  and  interest  rates  showed  mixed  trends. 
On  the  average,  bank  interest  rates  on  farm  loans 
eased  slightly  during  the  first  three  quarters  of  1976. 
with  the  most  noticeable  lowering  of  rates  occurring 
in  the  third  quarter.  Rates  on  short-  and  inter- 
mediate-term  loans  softened  much  more  than  those 
14  ECONOMK  REVIEW,  MARCH/APRIL  1977 on  farm  real  estate  mortgages.  This  lowering  of 
bank  interest  rates  was  in  line  with  the  general 
movement  of  interest  rates  during  1976  at  PC4s 
and  other  major  institutional  farm  lenders  and  was  a 
boon  to  farm  financing. 
But  average  interest  rates  charged  by  banks  on 
short-term  farm  loans  edged  upward  again  during 
the  fourth  quarter  of  the  year.  Rates  charged  on 
both  feeder  cattle  and  other  farm  operating  loans 
averaged  8.89  percent,  about  the  same  as  a  year 
earlier.  Rates  reported  for  intermediate-term  loans 
averaged  9.29  percent,  down  from  the  9.48  percent 
charged  1’2 months  before,  while  the  average  charge 
of  9.28  percent  on  farm  real  estate  loans  was  up 
fractionally  from  the  average  reported  for  the  fourth 
quarter  of  1975.  Bank  interest  charges  on farm  loans 
in  1976  generally  varied  widely,  both  among  banks 
and  by  type  of  loan,  with  “typical”  rates  reported  by 
banks  ranging  from  a  low  of  7  percent  to  a  high  of 
12  percent. 
Farmers’  financial  conditions  vary. 
Despite  the  further  tightening  of  the  cost-price 
squeeze,  some  weather-induced  shortages  in  cash 
farm  income,  and  the  continued  upturn  in  farm  debt, 
a  majority  of  the  District’s  farmers  remain  in  gener- 
ally  good  financial  condition.  With  market  values  of 
farmland  continuing  to  advance  during  the  year, 
most  farm  owners  are  i~i an  improved  equity  position. 
But  the  cash  income  position  of  farmers  varies 
substantially.  Uetter  incomes  enabled  a  good  many 
farm  producers  to  meet  their  loan  obligations  on 
time.  On  the  other  hand,  where  cash  returns  were 
unfavorable,  delinquencies  were  high-especially  in 
certain  sections  of  Virginia,  Maryland,  and  South 
Carolina.  Ifany  of  these  farmers.  unable  to  make 
their  loan  repayments  as  scheduled,  found  it  neces- 
sary  to  renew  or  extend  their  loan  obligations.  Some 
no  doubt  began  1977  with  larger  debts  or  less  cash, 
or  both,  than  they  had  at  the  beginning  of  1976. 
Most  of  the  District’s  farm  lenders,  however,  will 
probably  remember  1976  as  a  comparatively  good 
year.  Demand  for  non-real-estate  farm  loans  was 
strong  throughout  the  year.  But  bank  funds  available 
for  making  short-  and  intermediate-term  loans  to 
farmers  were  generally  ample,  and  loan  referral  ac- 
tivity  remained  fairly  lveak.  Bank  interest  rates 
charged  on  farm  loans  showed  mixed  trends,  easing 
slightly  earlier  in  the  year  and  edging  upward  again 
in  the  fourth  quarter.  By  and  large,  most  bankers 
had  little  trouble  with  repayment  rates,  renewals,  and 
extensions  until  the  fourth  quarter  when  the  rate  of 
loan  repayments  slowed  noticeably  and  requests  for 
renewals  or  extensions  rose  significantly. 
THE  RELEVANCE  OF  ADAM  SMITH 
The  Federal  Reserve  Bank  of  Richmond  is  pleased  to  announce  the  publication  of 
The  Relevance  of  Adam  Smith,  a  reprint  of  the  1976  Annual  Report’s  feature  article. 
This  booklet  discusses  how  Smith’s  ideas,  as  revealed  in  The  Wealth  of  Nations,  appear 
in  contemporary  public  policy  debates  regarding,  e.g.,  monopoly  and  government  sub- 
sidies  and  centralized  economic  planning.  It  may  be  obtained  free  of  charge  by  writing 
to  Bank  and  Public  Relations,  Federal  Reserve  Bank  of  Richmond,  P.  0.  Box  27622, 
Richmond,  Virginia 23261. 
FEDERAL  RESERVE  BANK  OF  RICHMOND  15 

Focusing on...farm financial and credit conditions

http://www.richmondfed.org/publications/research/economic_review/1977/pdf/er630203.pdf

Focusing on...farm financial and credit conditions

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics