An abstract for this article is not availableAgricultural credit

Sada L. Clarke

English

Research Papers in Economics

A  Replay  of  1977  .  .  . 
FARM  FINANCIAL  AND  CREDIT  CONDITIONS 
Sada  L.  Clarke 
Last  year  was  a  difficult  one  for  many  Fifth 
District  farmers  and  farm  lenders.  Drought  was  a 
leading  contributor  to  farmers’  woes  and,  in  combi- 
nation  with  low  prices-especially  for  cattle,  cotton, 
grain,  and  soybeans-and  high  costs,  created  financial 
problems  for  many  producers.  By  the  same  token, 
the  overall  quality  of farm  loan  portfolios  deteriorated 
at  a  number  of  banks.  Large  numbers  of  farm  oper- 
ators  are  reported  to  be  in  reasonably  good  shape, 
however,  and  all  Fifth  District  bankers  appear  to  be 
dealing  successfully  with  most  cases  of  problem  farm 
loans.  While  many  farm  borrowers  had  loan  repay- 
ment  difficulties  and  many  had  to  request  loan  re- 
newals  or  extensions,  no  Fifth  District  bank  expects 
to  have  to  absorb  any  losses  from  loans  to  farmers. 
Farmers’  demand  for  credit  from  traditional  lenders 
continued  fairly  strong  throughout  the  year,  but  bank 
supplies  of  loanable  funds  were  generally  ample. 
Financial  Conditions  Vary  Widely  Farmers’  fi- 
nancial  conditions  in  1977  varied,  to  a  large  degree, 
according  to  the  extent  and  the  severity  of  the 
drought  in  their  area.  Some  were  hit  hard.  Others 
will  almost  surely  count  it  a  fairly  good  year.  But 
when  cash  receipts  from  all  crop  and  livestock  mar- 
ketings  are  in,  it  is  expected  that  total  cash  farm 
income  in  1977  will  be  5  percent  or  more  below  the 
$5.5  billion  of  1976. 
Geographically,  farm  financial  conditions  varied 
not  only  from  state  to  state  but  also  from  area  to  area 
within  the  states.  Some  farmers  in  Virginia  and  the 
Carolinas,  for  example,  suffered  extensive  drought 
damage,  while  those  in  Maryland  and  West  Virginia 
appear  to  have  had  few  problems  with  the  dry 
weather.  Piedmont  farmers  felt  the  brunt  of  the 
drought  in  North  Carolina.  Virginia  producers  from 
Northern  and  Central  Virginia  and  the  Shenandoah 
Valley  were  seriously  affected.  But  drought  damage 
covered  most  areas  of  South  Carolina. 
Farm  financial  conditions  varied  almost  as  much 
by  type  of  farm  as  by  geographical  area.  With  last 
Note:  This  article  is  based  on  summary  reports  of  this 
Bank’s  Quarterly  Survey  of  Agricultural  Credit  Condi- 
tions  in  1977  and  on  the  latest  statistical  information 
from  the  U.  S.  Department  of  Agriculture,  the  Farm 
Credit  Administration,  and  the  Federal  Reserve  Bank  of 
Richmond. 
FEDERAL RESERVE 
summer’s  dry  weather  and  searing  heat,  yields  per 
acre  of  most  major  field  crops  were  below  those  of  a 
year  earlier.  Drought  hit  the  corn  crop  and  pasture- 
lands  hardest,  cutting  corn  output  40  percent  from 
1976  levels  and  searing  summer  pastures.  These 
conditions,  plus  sharply  lower  corn  and  cattle  prices, 
severely  reduced  the  income  of  cash-grain  producers 
and  beef  cattle  farmers,  many  of whom  were  forced  to 
sell  their  cattle  early  because  of  the  lack  of  forage. 
Cow-calf  operators  were  especially  hard  hit. 
Most  cotton  farmers  will  probably  remember  1977 
as  a  very  poor  year.  Hard  hit  by  drought  and  low 
yields  per  acre,  cotton  production  dropped  25 percent 
below  the  1976 level.  The  reduced  crop,  coupled  with 
prices  substantially  below  the  costs  of  production  per 
bale,  left  many  cotton  growers  in  serious  debt  situ- 
ations  that  required  renewals  or  estensions  of  loan 
repayment  dates. 
Producers  of  flue-cured  tobacco-the  chief  money 
crop-came  through  the  year  in  fairly  good  shape. 
Although  reduced  acreage  aud  lower  yields  per  acre 
combined  to  cut  production  17 percent,  the  season’s 
average’  prices  were  at  record  levels,  offsetting  much 
of  the  smaller  output.  Growers’  total  net  income  was 
down  sharply,  however,  because  of higher  production 
costs.  As  one  banker  describing  the  flue-cured  situ- 
ation  last  fall  said,  “Good  prices,  low  poundage,  but  a 
high  cost  crop  to  produce  . .  .  .  Some  farmers  may 
need  to  borrow  again  before  Christmas  because  they 
will  probably  have  little  left  after  paying  their  debts.” 
Peanut  farmers  appear  to  have  done  almost  as well 
as  in  1976.  By  and  large,  the  peanut  crop  escaped 
serious  drought  damage.  Both  yields  per  acre  and 
total  production  were  down  only  slightly,  while  prices 
held  near  the  support  level.  Moreover,  as  a  precau- 
tion  against  crop  losses,  most  peanut  farmers  now 
carry  crop  insurance. 
Soybean  producers  may  not  have  fared  as  well  as 
peanut  farmers.  Total  output  was  up  16 percent  over 
1976,  but  production  was  spotty.  Yields  averaged 
slightly  higher  but  were  so  low  on  some  farms  that 
the  soybeans  in  many  instances  were  cut  for  hay. 
More  importantly,  soybean  prices  were  down  sharply. 
Poultry  and  egg  producers,  on  the  other  hand,  had 
a  comparatively  good  year.  In  general,  the  second 
BANK  OF  RICHMOND  21 half  was  more  proiit:~l~Ie than  the  first.  The  year 
was  also  2 relatively  good  one  for  hog  farnlers.  \Yitll 
cheap  corn  ant1  fairly  goocl  prices,  they  fared  escep- 
tionnIIy  weI1 until  prices  l)egan  to  decline  in  the  fall. 
Dairymen  who  \\-ere  liot  adversel?  affected  1,) 
drought  had  a  rather  prosperous  Fear.  Eqxmdetl 
mill;  production  and  higher  suI)port  prices  ior  ~li;lnu- 
fxturing  milk  euhanced  dairy  income.  \Vith  declines 
in  feed  costs  more  than  offsetting  gains  in  cosrs  of 
other  production  inputs,  net  income  front  tlairying 
increased.  Financial  conditions  were,  of course,  much 
less  favorable  for  dairymen  whose  pastures,  hay,  ant! 
other  feed  crops  were  dntunged  by  drought. 
Farm  Loan  Demand  Strong  Farmers’  demand 
for  credit  from  traditional  farm  lenders  continued 
fairly  strong  throughout  the  year  even  though  nl:un~ 
were  able  to  qualify  for  Federal  drought  clisxster 
1OZlllS.  Bankers  surveyed  indicated  that  the  general 
increase  in  demand  for  loans  stemmed  in  part  from 
the  continued  tightening  of  the  cost-price  squeeze. 
On  top  of  the  rise  in  the  costs  of  regular  production 
inputs,  many  crop  farmers  were  also  faced  with 
unusual  insect  and  disease  outbreaks  that  required  the 
outlay  of  additional,  and  oftentimes  borrowed,  funds. 
Because  of  low  farm  prices,  there  was  a  big  demand 
for  loans  to  build  on-farm  storage  facilities  so  that 
farmers  could  hold  their  corn  and  soybeans  for  higher 
prices. 
The  weather-related  problems  mentioned  earlier 
also  strengthened  farmers  demand  for  loans.  Be- 
cause  of  last  summer’s  swere  and  widespread 
drought,  and  as insurance  against  recurring  droughts. 
many  farmers  sought  financing  for  heavy  imest- 
ments  in  mechanized  irrigation  equipment.  Drought 
also  forced  many  livestock  producers  \vho  normally 
grow  their  own  feed  to  borrow  funds  to  buy  hay  and 
other  feed.  Moreover,  the  drought-reduced  output 
and  low  prices  made  it  necessary  for  increased  num- 
bers  of  crop  farmers  to  refinance  short-  and  inter- 
mediate-term  loans  into  long-term  debt. 
These  observations  appear  to  be  supported  by 
available  statistical  evidence.  Outstanding  short-  and 
intermediate-term  loans  held  by  all comnercinl  hanks 
at  midyear  were  17  percent  above  a  year  earlier. 
Loan  volume  held  by  the  production  credit  associ- 
ations  on  the  same  date  .was  up  some  16  percent. 
Farmers  reduced  their  borrowing  from  PCAs  sharply 
in  the  second  half  of  the  year,  however,  mainly  be- 
cause  they  bought  less  machinery  and  equipment. 
As  a  result,  the  volume  of  loans  made  by  PCAs  for 
all of  1977 showed  only  a  12 percent  increase  over  the 
previous  year-well  below  the  18  percent  recorded 
in  1976.  PCA  loans  outstanding  for  1977 as a  whole 
registered  a gain  of  13 percent.  While  the  volume  of 
Ior&  iilnde  by  ~PCAs ;osc  at  a  slower  rate  than  :in 
1970.  loans  outstanding  increased  at  the  same  rate. 
loth  commercial  banks  and  the  Federal  land  banks 
recorded  year-to-yenr  increases  in  outstanding  farm 
real  estate  loans  by  mid-1977.  \VhiIe  the  volume  of 
outstanding  loans  held  by  banks  was  tip  13  percent 
over  nlidyear  1976,  the  xn~ount  held  by  the  FLI?s 
registered  an  11  percent  gain.  The  volume  of  new 
money  loaned  by  the  FL&  sho\ved  a  iiiuch  larger 
increase  over  3 year  earlier  in  the  second  half  of  the 
year  than  in the  first  and  for  the  entire  year  recorder! 
a  I6  percent  upturn.  The  1977  increase  in  the  vol- 
ume  of  lending  contrasts  sharply  with  the  10 perc’ent 
decline  iii  1976.  IVith  the  lower  cash  flows  of  many 
crolj  farnlers.  the  big  jump  in  Federal  land  bank 
lending,  especially  in  the  fourth  quarter,  suggests 
that  these  institutions  may  xell  have  increased  tlleir 
refinancing  of  short-term  loans  former!y  held  b> 
other  lenders.  Loans  outstanding  of  the  FLBs  at 
sear-end  1977  were  11  percent  al)ol-e  the  leyel.  of 
the  previous  year.  This  gain  was  the  same  as  %nt 
recorded  the  year  before. 
Loan  Fund  Supplies  Ample  \\%ile  the  demand 
ior  farm  loans  in  1977  ~33  fairly  strong,  bank  5Ulk 
plies  of  loatxkble  funds  ior  making  kori-  and  inter- 
mediate-term  loans  ro  farmers  were  generally  nde- 
cpte  to  meet  the  demand.  There  n-ere  indications. 
hoisex.er.  that  loan  fund  supplies  \vere  perhaps  not  ns 
abundxnt  as  i!l  1976.  E\-en  so,  bnnl;ers’  regular  farnl 
customers  aplxu-entlv  did  301  iinc!  it  difficult  to  get 
needecl  credit.  OnI;-  once  clxing  the  year  did  Oile 
of  the  surveyed  IxinI;s  report  that  it  had  hXi1  forced 
to  refuse  or  redrtce  n farm  lom  because  of  2 shortage 
of  funds.  XIoreo\.er,  bankers  indicating  that  the! 
were  actively  seeking  ue\r  farm  loan  2CCOtilltS  U:iW.i!>~ 
ranged  from  around  IO  to  SO percen:  0:’ those  re- 
portin, Q-up  significantly  from  a  year  earlier. 
li’itli  ban!;  loan  funds  genernliv  am:$e,  loan  re- 
ferral  activity  remained  weak  th&ighdl:t  the  year. 
Fen  hankers  as  A rule  made  referrals  to  corresponcl- 
ent  banks.  presunlabl>  because  rnr:n~~  of  the  sa~.npled 
banks  are  either  large  bmnc!l  banks  or  bank  holding 
companies.  IVhile  more  banks  nzlcle  reierr:.k  to 
nonbank  credit  agencies,  the  nur:ll)er  of  these  referrals 
was  not  unusual  until  the  fourth  quarter.  n-hen  ilearly 
three-tenths  of  the  bankers-highest  proportion  in 
the  past  two  yenrs-  reported  that  loan  referrals  to 
these  nonbnnk  credit  agencies  were  nbo\-e  average. 
Banks’  loan-to-deposit  ratios  are  importan.:  indi- 
cators  of  credit  a~!iInbility.  IYhen  they  are  high. 
banks  generally  have  less  money  to  lend.  In  general, 
the  reverse  is  true  when  they  are  low.  LOail-to- 
22  ECONOMIC  REVIEW,  MARCH/APRIL  1978 deposit  ratios  of  banks  reporting  during  the  year 
averaged  64.9  percent  versus  62.3  percent  in  1976, 
suggesting  as  pointed  out  earlier  that  District  banks 
in  1977  had  somewhat  smaller  supplies  of  loan  funds 
than  in  1976.  Each  quarter,  however,  while  a  good 
many  bankers  rated  their  current  ratios  above  de- 
sired  levels,  an  even  larger  proportion  considered 
their  ratios  to  be  too  low. 
The  SEA  or  FmHA  drought  disaster  loan  pro- 
grams  provided  additional  loan  fund  assistance 
during  the  year.  Bankers  in  general  encouragecl 
farmers  to  apply  for  these  low-interest  loans.  While 
the  many  who  qualified  waited  to  receive  loan  funds 
from  the  government  agencies,  hankers  made  addi- 
tional  loans  to  their  farm  customers  if  necessary  or 
estended  existing  ones.  Bankers  expected  that  the 
farmers  in return  would  use  these  disaster  loan  funds 
to  pay  off  their  1977  hank  loans.  In  this  way, 
bankers  said  they  would  be  able  to  finance  their 
regular  farm  customers  again  in  1978. 
Some  bankers  currently  report  that  while  they 
continue  to  receive  FmHA  disaster  futids  as  payment 
on  loans,  they  are  coming  in  slower  than  expected. 
Others  say  that  applications  to  obtain  drought 
disaster  loans  are  still  being  processed  in  their  areas. 
Interest  Rates  Mixed  By  and  large,  bank  interest 
rates  charged  on  farm  loans  in  1977  showed  mixed 
trends,  edging  upward  in the  second  and  fourth  quar- 
ters  and  easing  slightly  in  the  third.  Rates  on  inter- 
mediate-term  loans  proved  to  be  the  exception  hl 
continuing  to  rise  throughout  the  year. 
Interest  rates  banks  charged  on  all  types  of  farm 
loans  in  the  fourth  quarter  averaged  slightly  higher 
than  a  year  earlier,  with  rates  on  intermediate-term 
loans  showing  the  biggest  gain  and  those  on  feeder 
cattle  loans  the  smallest.  Rates  of  9 percent  and  over 
on  short-  and  intermediate-term  loans  were  charged 
by  a  much  greater  proportion  of  bankers  reporting 
than  was  the  case  a  year  earlier. 
Average  interest  rates  charged  by  banks  during 
1977’s  fourth  quarter  were  as  follows:  for  feeder 
cattIe  loans,  8.94  percent  ; other  farm  operating  loans, 
S.98  percent  ; intermediate-term  loans,  9.46  percent  ; 
and  long-term  farm  real  ‘estate  loans,  9.42  percent. 
As  is customary,  several  of  the  larger  banks  reported 
that  they  priced  their  loans  in  the  range  of  prime 
rate  +l  percent  and  prime  +2  percent  on  a  floating 
rate.* 
Repayment  Rates  Deteriorate,  Renewals  Rise 
Drought-reduced  crop  output  and  the  tightening 
cost-price  squeeze  combined  to  create  cash-flow 
problems  for  many  Fifth  District  farmers.  Reporting 
hankers,  as  a  result,  experienced  much  slower  loan 
repayment  rates  and  a  sharp  increase  in  requests  for 
renewals  or  extensions  of  existing  loans  as  the  year 
progressed.  By  the  fourth  quarter,  rates  of  loan 
repayments  m:ere the  slowest  and  the  number  of  re- 
newals  or  extensions  were  the  highest  since  this 
quarterly  farm  credit  survey  began  a  little  more  than 
two  years  ago. 
These  problems  were  confined  primarily  to  Vir- 
ginia  and  the  Carolinas-states  where  crop  output 
suffered  from  extensive  drought  damage  and  extreme 
heat  last  summer.  Maryland  bankers  in  recent 
months  also  pointed  out  the  likelihood  of  some  loan 
extensions  in  scattered  areas  of  the  Eastern  Shore, 
but  these  were  not  expected  to become  problem  loans. 
By  and  large,  .the  majority  of  bankers  required 
average  amounts  of  collateral  most  of  the  year. 
Roughly  one-fourth  of  the  respondents,  however, 
stepped  up  their  collateral  requirements  to  above- 
average  levels  during  the  fourth  quarter,  suggesting 
perhaps  that  the  risks  of  making  farm  loans  were 
rated  as  somewhat  higher. 
* The  rate  of  interest  is described  as “floating”  when  the 
rate  is  tied  to  some  other  rate  (such  as  the  prime  rate 
or  a  market  interest  rate)  and  neither  the  bank  nor  the 
borrower  knows  the  exact  rate  of  interest  to  be  charged 
over  the  life  of  the  loan. 
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FEDERAL RESERVE BANK  OF  RICHMOND  23 

A replay of 1977...farm financial and credit conditions

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A replay of 1977...farm financial and credit conditions

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