Reduced income plagues farmers

First Quarter 1999 Agricultural Credit Conditions Survey

Toby Madden | Regional Economist

Published April 1, 1999  | April 1999 issue

Many farmers are deciding to rent their cropland and find a job off the farm because of the poor outlook for agriculture, commented a Minnesota banker in the Minneapolis Fed's first quarter (February 1999) survey of agricultural credit conditions. This comment tells the plight of many farmers over most of the Ninth District.

Reduced farm income has forced farmers to lower spending and increase borrowing. Loan renewals and extensions have increased and loan repayments have slowed. This has not yet strained bank liquidity, but lenders are requiring additional collateral and referrals to other lenders has increased. The outlook for farm income is grim unless commodity prices increase.

Farm income and spending

"Low crop and hog prices continue to have a serious negative impact on the farm sector," stated a South Dakota lender. Farm income has deteriorated, with 78 percent of bankers reporting below normal levels, a 6 point increase over fourth quarter survey results. Capital spending is drastically reduced, and farm household spending remains depressed, with about 50 percent of lenders noting below normal levels in both the first and fourth quarter surveys. Montana and North Dakota farmers are having the toughest time; 82 percent and 65 percent of lenders, respectively, report below normal farm household spending.

Farm loan volumes

As farm income decreases, demand for operating loans increases. Operating loan volume, except for feeder loans, increased substantially as 31 percent of bankers report loans as above usual levels in the first quarter, an 8 percentage point increase from the fourth quarter. Decreases in feed prices and other factors have increased the demand for feeder loans; only 33 percent of respondents rate loan volumes in this category as below usual levels, a 9 percentage point drop from the fourth quarter.

Bank credit conditions and liquidity

Not only are farmers taking on new loans to finance operations, they are having a tough time repaying existing loans. Loan repayment rates dropped 11 percentage points from the fourth quarter. Renewals and extensions are up 11 percentage points from the fourth quarter. Moreover, the districtwide average of farmers at their debt limit is 30 percent; Montana is still substantially higher at 49 percent and Wisconsin much lower at 16 percent.

Higher than normal levels of collateral required for loans is reported by 35 percent of respondents, an 8 percentage point increase from the fourth quarter. Bankers are more frequently referring their farm customers to other lenders, with 27 percent of survey respondents indicating above normal levels of referrals, a 16 point increase over the fourth quarter.

Interest rates and land prices

The battered farmers have a little bit of good news: across the board declines in interest rates, about 10 basis points from the fourth quarter. While such declines do little to offset low prices, rates are near their lowest level in more than four years.

Montana and North Dakota lenders report land prices down from a year ago on average from 1 percent to 5 percent. Minnesota lenders responded with generally higher land values for grazing land and lower land values for cropland. Wisconsin and South Dakota lenders, however, report land prices up on average from 4 percent to 8 percent.


"The agriculture sector is seeing some tough times and will continue to struggle unless we see an increase in crop prices," says a South Dakota lender. The expectation for net income for the next three months is dismal: 85 percent of lenders expect farmers to have below average net income. In addition, 83 percent of lenders expect below-normal capital spending levels in the next three months, and 63 percent of lenders predict that the rate of loan repayments will be below normal in the next three months.

Fixed Interest Rates*
  Feeder Livestock Operating Machinery Real Estate
1st Q '98
2nd Q '98
3rd Q '98
4th Q '98
1st Q '99
* Average of reported rates in mid-Feb. 1999

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 February, 98 bankers responded regarding conditions during the first quarter.

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