Results from the Richmond Fed's latest survey of Fifth District agricultural banks indicated that weakness in agricultural credit lending conditions eased during the first quarter of 2011. Bankers reported that farm loan demand contracted at a slower pace than in late 2010. However, contacts generally noted that requests for loan renewals or extensions increased at a slower pace than indicated in our last report, while requests for loan repayment rates declined further. Moreover, agricultural lenders reported that farm loans were generally less available and that collateral requirements tightened further. Reports indicated that interest rates increased for feeder cattle loans but eased for all other categories. Turning to farmland values, first-quarter land prices were above both the previous quarter and year-ago levels.
Lenders attributed the moderation of weakness in loan demand to higher cattle prices, farmland values and global food demand driving up commodity prices. However, significant increases in input costs raised concerns regarding profitability in 2011. Moreover, lenders continued to express concerns about escalated feed costs for poultry and livestock producers. Also, lenders indicated that the forestry industry continued to suffer due to weak economic conditions, although signs of improvement were noted in specialty markets. In addition, many of the nursery operators reported a positive first quarter.
Contacts in the Carolinas and West Virginia reported that cattle prices continued on an upward trend. They noted, however, that increased feed costs affected profits, but that operations had posted modest gains. A banker in North Carolina mentioned that global food demand is the driving factor in future commodity prices. He indicated that weather-related events will not only affect production, but also alter food demand around the world. Lenders in North Carolina and Virginia cited declines in demand for forestry products due to relatively low housing starts, but indicated that niche markets were managing to survive. Furthermore, a contact in North Carolina indicated that nursery operators had reported improvement in contracts for spring sales with existing homeowners improving "curb appeal."
Looking forward, lenders expect farm loan volumes generally to contract at a slower pace in the second quarter of 2011, led by less weakness in the demand for crop storage and farm machinery loans. The reading for crop storage loans moved up twenty-nine points to −27, and the expected demand for farm machinery loans rose sixteen points to −16. In other categories, the expected demand for feeder cattle loans lost sixteen points to −44, and the reading for dairy loans edged up three points to −38. In contrast, the reading for operating loans added twenty-six points to 31.
Interest rates for agricultural loans by category were mixed during the first quarter. Compared to fourth-quarter levels, rates for long-term real estate loans moved down 26 basis points and rates for intermediate-term loans declined 18 basis points. In other categories, interest rates for operating loans fell 11 basis points while rates for feeder cattle loans moved up 15 basis points.
In the first quarter, 77 percent of lenders reported that they had actively sought new farm loans — up from 63 percent in the previous quarter. Moreover, lenders reported that farm loans were generally less available — the funds availability index declined sixteen points to 16.
During the first quarter, the quality of agricultural credit demand was mixed. Loan repayment rates fell further, as the index moved down twelve points to −23 and the loan renewals index dropped fourteen points to 23. In addition, the index for collateral requirements picked up eleven points to end the first quarter at 69.
The market value of good farmland averaged $3,565 per acre in the first quarter, 9.3 percent above the fourth quarter reading and 2.9 percent higher than a year earlier. Looking ahead, however, bankers anticipate that farmland prices would grow at a slower pace during the second quarter of 2011; the index for expected land values lost three points to −8.
Senior Economic Analyst