Fifth District Survey of Agricultural Credit Conditions



January 25, 2009

4th Quarter 2008 - Farm loan demand remains weak; farmland prices change little



Results from the Richmond Fed's latest survey of Fifth District agricultural banks indicated that credit lending conditions remained weak during the fourth quarter of 2008. Bankers reported that the demand for farm loans was little changed from its sharp drop off in the third quarter, which they attributed to variations in commodity prices and production costs. In addition, contacts generally noted that loan repayment rates continued to decline more slowly than indicated in our last report, while requests for loan renewals or extensions increased at a quicker pace. Moreover, agricultural lenders reported that farm loan availability turned positive, and collateral requirements eased slightly from third quarter levels. Reports also indicated that interest rates for agricultural loans moved lower across all categories. Turning to farmland values, fourth quarter land prices were slightly below the previous quarter and considerably lower than year-ago levels.

Demand for Farm Loans

Lenders attributed the lingering weakness in loan demand to the volatility of commodity prices and input costs, which raised concerns regarding profitability in 2009. Furthermore, lenders continued to express concern about escalated feed costs which had reduced profits for livestock production.

Contacts in Maryland, and Virginia told us that a decline in commodity prices without a corresponding decline in production costs will significantly decrease profitability prospects in 2009. Similarly, a South Carolina banker told us that unstable forecasts of next year's commodity prices will likely reduce agricultural loans substantially. Additionally, a contact in North Carolina reported that soaring feed costs in 2008 had negatively impacted profits for animal production. On a brighter note, analysts in Virginia and West Virginia indicated that their general farm land areas had been replenished with rain — filling up ponds and greatly improving soil moisture.

Looking forward, respondents expected farm loan volumes in the first quarter of 2009 to continue its downward trend led by further weakness in the demand for dairy and feeder cattle loans. The reading for dairy loans moved down four points to -50 and the expected demand for feeder cattle loans declined seven points to
−43. In other categories, the reading for operating loans fell ten points to end at −37, while the reading for crop storage loans edged down one point to −22. In contrast, the index of anticipated demand for farm machinery loans remained in negative territory but picked up 10 points to −37.

Loan Demand

Interest Rates

Interest rates for agricultural loans moved lower across all categories during the fourth quarter. Compared to third quarter levels, rates for intermediate-term loans decreased 34 basis points and rates for operating loans moved down 28 basis points. In other categories, interest rates for long-term real estate loans fell 19 basis points, and interest rates for feeder cattle loans dropped 10 basis points.

Availability of Credit

In the fourth quarter, 75 percent of lenders reported that they had actively sought new farm loans, up a tad from last quarter's reading of 73 percent. Moreover, the funds availability index increased fourteen points to 7.

Credit Quality

During the fourth quarter, the quality of agricultural credit was mixed. The index for loan repayment rates contracted but at a slower pace, picking up fourteen points to −7, and loan renewals advanced five points to end at 12. In contrast, the index of collateral requirements eased three points to finish at 44.

Farmland Values

The market value of good farmland averaged $3,284 per acre in the fourth quarter, 0.6 percent lower than the third quarter reading, and 8.4 percent below the mark from a year earlier. Looking ahead, bankers anticipated that slower growth in farmland prices would persist during the first quarter of 2009; the index of expected land values edged up one point to −19. An analyst in North Carolina told us, "Potential declines in farm income, coupled with the depressed overall economy (and discouraging job market) may influence farmland value trends in the near future."

Average Farmland Value
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Aileen Watson
Senior Economic Analyst
(804) 697-7995