Results from the Richmond Fed's latest survey of Fifth District agricultural banks indicated that credit lending conditions deteriorated during the third quarter of 2008. Bankers reported that demand for farm loans dropped sharply due to generally higher input costs and lower commodity prices. In addition, contacts noted that loan repayment rates retreated further into negative territory in the third quarter, while requests for loan renewals or extensions moved into positive territory. Moreover, agricultural lenders reported that farm loan availability turned negative, and collateral requirements tightened further from second quarter levels. Reports also indicated that interest rates for agricultural loans moved lower across all categories. Turning to farmland values, third quarter land prices were below both the previous quarter and year-ago levels.
Lenders attributed the latest reduction in loan demand to the combination of generally higher input prices and lower commodity prices, which raised concerns regarding 2009 profitability levels. Furthermore, lenders indicated that farmers continued to worry about below normal precipitation in much of the District, which resulted in substantial variation in crop yields.
A contact, reporting for both Maryland and Virginia, said that increasing input costs coupled with falling commodity prices had depressed net margins. Similarly, a North Carolina banker told us that recent declines in commodity prices had caused farmers to focus their planting intentions for 2009 on crops with significantly lower input costs. He also noted that while fuel had decreased considerably, other input costs had remained high. Additionally, contacts throughout the region reported spotty rainfall had caused inconsistency in crop conditions and yields. Analysts in South Carolina and West Virginia indicated that area farmers continued to worry about the low water table and lack of moisture in the soil.
Reflecting the dimmer outlook, respondents expected farm loan volumes to contract at a slightly quicker pace in the fourth quarter of 2008, led by further weakness in the demand for farm machinery and dairy loans. The index for farm machinery loans moved down thirty-four points to −47 and expected demand for dairy loans declined thirty-two points to −46. In addition, the reading for feeder cattle loans fell twenty-three points to end at −36, while the reading for operating loans lost twenty-seven points to −27. Moreover, the index of anticipated demand for crop storage loans turned negative, losing twenty-eight points to −22.
Interest rates for agricultural loans moved lower across all categories during the third quarter. Compared to second quarter levels, rates for operating loans decreased 40 basis points and rates for intermediate-term loans moved down 33 basis points. In other categories, interest rates for feeder cattle loans fell 32 basis points, and interest rates for long-term real estate loans dropped 16 basis points.
In the third quarter, 73 percent of lenders reported that they had actively sought new farm loans, up a bit from last quarter's reading of 71 percent. On the other hand, the funds availability index declined twelve points to −6.
During the third quarter, the quality of agricultural credit weakened further. The index for loan repayment rates contracted at a quicker pace, losing nine points to −21, while the reading for loan renewals turned positive, gaining thirteen points to end at 7. Likewise, the index of collateral requirements increased six points to finish at 47.
The market value of good farmland averaged $3,303 per acre in the third quarter, 5.7 percent lower than the second quarter reading, and 0.1 percent below the mark from a year earlier. Looking forward, bankers anticipated slower growth in farmland prices during the fourth quarter of 2008; the index of expected land values fell twenty points to −20. An analyst in South Carolina told us, "Farmland values have been declining due to the bad economic conditions and nobody is buying right now."
Senior Economic Analyst