Beige Book Report: Minneapolis
August 10, 1977
Nonagricultural developments in the Ninth District are still favorable. Concerns remain about the farm sector, however. Consumer spending is quite good in urban areas but off in farming communities. Businesses, except farm implement dealers, are satisfied with current inventories. They are taking care to avoid unwanted accumulation. Homebuilding is strong. Although many district farmers are looking for a good harvest, they expect low prices to depress farm income. Finally, farm income declines have slowed both deposit inflows and loan repayments at rural banks. But most rural bankers are still able to meet customers' credit demands.
Consumer spending continues to be quite good in the district's urban areas. But weak farm income has caused it to drop off in rural areas. Around 45 percent of the bankers' respondents to our July Agricultural Credit Conditions Survey report farm spending down from a year ago. They look for lower farm spending over the coming months too. Respondents say that most farmers are still spending only the bare minimum. In many cases, they are purchasing used equipment where replacement is necessary. Also, the current strike by iron ore workers could lower consumer spending in northeastern Minnesota and the Upper Peninsula of Michigan if it's prolonged.
District businesses appear to be pretty well satisfied with their inventories, while cautiously avoiding unwanted accumulations. Retailers expect sales to remain quite good in the Minneapolis-St. Paul area. But they are looking for some slowing in sales growth and are keeping a close eye on inventories. Outside of the Twin Cities area, retail sales have not been as strong. But inventory buildup is not a problem. One exception: several of this Bank's directors report a buildup in farm implement inventories.
Homebuilding remains strong throughout the district. One director, whose firm sells temperature controls for residential housing, illustrates this strength by stating that new single-family home costs in the district are rising very fast. New home price increases have been much more rapid in this region than in the southeast and eastern parts of the United States. But new home prices here have risen only about half as fast as on the West Coast. Home prices are not expected to increase as rapidly in the coming year, as the above mentioned firm's outlook is for some slowing in housing demand for the balance of 1977 and for a further easing in 1978. Shortages of labor and materials are not expected to be a factor in any slowing. Further, mortgage funds are thought to be ample to support a high level of residential building.
Even though district crop prospects are quite good, concern over low prices continues to dampen the agricultural situation. Sixty-seven percent of recent ag credit survey respondents report farm earning in their areas to be lower than last year. Fifty-four percent look for farm income to remain below last year's level during the next three months. The situation is particularly acute in North Dakota with its relatively greater dependence on wheat. Ninety-six percent of that state's respondents report lower earnings in July than last year.
Poor farm income has slowed deposit inflows and has adversely affected farmers' ability to repay debt. Fifty-five percent of the bankers responding to the July survey observe unusually high demand for refinancing. Sixty-two percent of them characterize the current rate of farm debt repayment as "slow." And 60 percent expect an adverse change in area farmers' ability to repay debt. Finally, 55 percent of the bankers report a greater than usual number of farmers at their debt limits.
These developments are reducing liquidity at agricultural banks. Loan to deposit ratios have been rising more than the seasonal amount. And 29 percent of our ag credit survey respondents feel their bank's ratio is too high. Further, 12 percent of respondents report reducing or refusing ag loans because of fund shortages. The situation is more severe in North Dakota, where twenty-three percent of the responding bankers report reducing or refusing ag loans. To help ease the situation, rural banks are taking the following steps. Some are encouraging farmers holding two or three years of inventories to sell crops. Others are either increasing the amount of loan participations with large correspondent banks or selling Small Business Administration guaranteed loans to other financial institutions. Finally, some banks are urging farmers to refinance their real estate to pay for operating expenses.
Despite these problems, most ag bankers appear to be able to meet agricultural credit demands. Fifty-eight percent of the respondents are still actively seeking new farm loan accounts and only 7 percent expect problems in meeting loan demand in the coming months. This Bank's directors feel the situation is serious, but manageable. The important question at this point is whether fall farm receipts will be substantial enough to reverse the order of growth between loans and deposits at ag banks, thus improving bank liquidity.