Results from the Richmond Fed's latest survey of Fifth District agricultural banks indicate that weakness in credit lending conditions tapered off during the first quarter of 2009. Bankers reported that farm loan demand contracted, but at a slower pace than in late 2008. However, contacts noted that loan repayments deteriorated, while requests for loan renewals or extensions increased at a quicker pace. Moreover, agricultural lenders reported that farm loan availability edged lower, and collateral requirements eased slightly from fourth quarter levels. Reports also indicated that interest rates for agricultural loans moved higher across all categories since the last quarter of 2008. Turning to farmland values, first quarter land prices were slightly below the previous quarter and considerably lower than year-ago levels.
The demand for farm loans remained weak in the first quarter, though the pullback in demand was less pronounced than in the fourth quarter of 2008. Lenders attributed the softness in loan demand to generally lower commodity prices and higher input costs, which raised concerns regarding profitability in 2009. Furthermore, lenders continued to express concern about escalated feed costs along with lower product demand. In addition, bankers noted that the decline in home building and the paper industry had significantly reduced timber prices.
Contacts in Maryland and Virginia told us that although fuel and fertilizer prices have fallen, lower commodity prices will lower profits in 2009. Similarly, a South Carolina banker told us that commodity prices were very weak and profitability prospects are bleak. Additionally, a contact in North Carolina reported that swine and poultry integrators have trimmed production by reducing the number of animals placed per year and/or severing contracts with weaker producers due to higher feed costs and lower product demand. Moreover, an analyst in North Carolina indicated that both loggers and sawmills were experiencing serious cash flow problems due to the decline in home building and the paper industry.
Looking ahead, respondents expected farm loan volumes overall to contract at a slower pace in the second quarter of 2009 with particularly diminished weakness in the demand for feeder cattle and operating loans. The reading for feeder cattle loans moved up 10 points to −33 and the expected demand for operating loans advanced 13 points to −25. In other categories, the reading for dairy loans edged up three points to end at −47. In contrast, the expectations for indexes for crop storage and farm machinery loans fell further into negative territory, losing eight and nine points, to finish at −29 and −47, respectively.
Interest rates for agricultural loans moved higher across all categories during the first quarter. Rates for intermediate-term loans increased 28 basis points and rates for long-term real estate loans moved up 23 basis points. In addition, interest rates for operating loans gained 22 basis points, and interest rates for feeder cattle loans rose 8 basis points.
In the first quarter, 67 percent of lenders reported that they had actively sought new farm loans, down a bit from last quarter's reading of 75 percent. Moreover, the funds availability index eased two points to 4.
During the first quarter, the quality of agricultural credit was mixed. The index for loan repayment rates contracted further, losing 32 points to −38, while loan renewals advanced 25 points to end at 38. In contrast, the index of collateral requirements retreated six points to finish at 38.
The market value of good farmland averaged $3,260 per acre in the first quarter, 0.7 percent lower than the fourth quarter reading and 8.6 percent below the mark from a year earlier. Looking forward, bankers anticipated that declines in farmland prices would persist during the second quarter of 2009; the index of expected land values edged down one point to −20. A lender in South Carolina told us, "Farmland is not selling due to the economy," and noted that values have dropped.
Senior Economic Analyst