Results from the Richmond Fed's latest survey of Fifth District agricultural banks indicate that credit lending conditions deteriorated during the third quarter of 2009. Bankers reported that farm loan demand weakened and noted that the rate of loan repayments continued to decrease, although at a slightly slower pace than reported in our last survey. In contrast, lenders reported that requests for loan renewals or extensions increased at a somewhat quicker rate. Moreover, agricultural lenders reported that farm loan availability steadied, and collateral requirements tightened from second-quarter levels. Reports also indicated that interest rates declined for feeder cattle and operating loans, but increased for intermediate-term and long-term real estate loans since the second quarter of 2009. Turning to farmland values, third-quarter land prices were below the level recorded in the previous quarter but above year-ago levels.
The demand for farm loans weakened further in the third quarter. Lenders attributed the softness in loan demand to substantially lower commodity prices coupled with higher input costs, which they believed would dramatically reduce net farm income in 2009. Moreover, lenders continued to express concern about depressed product demand. In addition, bankers noted that cattle and dairy farms continued to struggle.
A contact in North Carolina told us that considerably lower commodity prices combined with higher input costs would negatively impact net farm income in 2009. Similarly, a South Carolina banker told us that lower cotton prices had reduced the number of acres of cotton planted. Additionally, a contact in North Carolina reported that the continued reduction in meat demand caused swine producers to restructure debt in an effort to endure the financial pressure of the recession. Moreover, analysts in Virginia and West Virginia indicated that cattle and dairy farms remained under a great deal of stress. Although they noted that culling herds could steer prices in the right direction, the benefits from liquidation might be too late for some farmers.
Looking forward, respondents expected farm loan volumes overall to contract at a slower pace in the fourth quarter of 2009. Contacts indicated diminished weakness in the demand for farm machinery loans. The reading for farm machinery loans moved up 24 points to −37. In addition, the expected demand for operating loans picked up 27 points to −6. In other categories, the expected demand for dairy loans advanced 11 points to −36, and the reading for crop storage loans increased 10 points to end at −19. In contrast, the expectations for feeder cattle loans edged down three points to −50.
Interest rates for agricultural loans were mixed during the third quarter. Compared to second quarter levels, rates for long-term real estate loans moved up 22 basis points and rates for intermediate-term loans moved up 11 basis points. In other categories, interest rates for feeder cattle loans dropped 19 basis points and operating loans decreased 13 basis points.
In the third quarter, 75 percent of lenders reported that they had actively sought new farm loans, which was virtually unchanged from last quarter's reading of 76 percent. Moreover, the funds availability index stabilized at 0.
During the third quarter, the quality of agricultural credit was mixed. The index for loan repayment rates contracted at a slower pace, gaining 10 points to −12, while loan renewals retreated three points to end at 31. In addition, the index of collateral requirements tightened 21 points to finish at 56.
The market value of good farmland averaged $3,341 per acre in the third quarter, 5.8 percent below the second quarter reading but 1.1 percent above the mark from a year earlier. Looking forward, however, bankers anticipated that farmland prices would decline at a slower pace during the fourth quarter of 2009; the index of expected land values moved up eight points to -25.
Senior Economic Analyst