Results from the Richmond Fed's latest survey of Fifth District agricultural banks continued to indicate a stable lending environment in the third quarter of 2011. Despite Hurricane Irene's negative impact on yields in some areas of the region, bankers generally reported that farm loan demand held steady. In addition, lenders noted that loan repayment rates were on par with the second quarter and that requests for loan renewals or extensions increased notably from our last report. Moreover, agricultural lenders reported that availability of farm loans was in line with second quarter levels and that collateral requirements inched higher. Reports indicated that interest rates for agricultural loans moved lower across the board. Turning to farmland values, third-quarter land prices were slightly below the previous quarter and year-ago levels.
Lenders attributed the stablization in loan demand to solid cattle prices, combined with continued worldwide demand driving commodity prices higher. However, Hurricane Irene's impact on crop yields was a primary factor of concern in some areas of the District, while lenders remained apprehensive about the continued volitaility in feed ingredients for poultry and livestock producers. Also, lenders noted that the forestry industry remained weak and nursery products had slowed down.
Contacts in North Carolina and West Virginia reported that cattle prices were solid and are expected to remain so into 2012. A banker in North Carolina cited high winds from Hurricane Irene as the primary reason for reduced crop yields — particularly for corn and tobacco — and noted that cotton planted in the coastal plain areas was seriously batterered. In contrast, a banker in Virginia reported above-average yields for the 2011 corn crop, despite areas of noticeable, but minor damage due to Hurricane Irene. A contact in North Carolina indicated that unstable feed costs continued to impact profitability of integrators and had slowed expansion plans in parts of North Carolina and southern Virginia. Furthermore, a banker in North Carolina indicated that problems in the housing industry continued to depress lumber demand and that demand for nursery products had stalled, with sales expected to be low until next spring.
Looking forward, lenders' expectations for farm loan volumes in the fourth quarter of 2011 were mixed. The reading for farm machinery loans moved up thirty-seven points to 17, and the expected demand for operating loans rose nine points to 16. In other categories, however, the expected demand for dairy loans fell further, losing thirteen points to −30, while the reading for crop storage loans added six points to −27.
Interest rates for agricultural loans by category declined across the board during the third quarter. Compared to second quarter levels, rates for feeder cattle loans moved down 54 basis points and rates for intermediate-term real estate loans fell 37 points. In other categories, interest rates for long-term real estate loans fell 27 basis points, while rates for operating loans dropped 17 basis points.
In the third quarter, 75 percent of lenders reported that they actively sought new farm loans — up from 60 percent in the previous quarter. Moreover, lenders reported that farm loans were virtually unchanged — the funds availability index fell thirteen points to 0.
During the third quarter, the quality of agricultural credit demand was mixed. Loan repayment rates changed little, as the index eased down one point to −8, while the loan renewals index moved up twenty-seven points to 34. In addition, the index for collateral requirements gained five points to end the third quarter at 58.
The market value of good farmland averaged $3,263 per acre in the third quarter — 1.5 percent below the second quarter reading and 4.5 percent lower than a year earlier. Looking ahead, bankers anticipate that farmland prices would slow somewhat during the fourth quarter of 2011; the index for expected land values lost seventeen points to -17.
Senior Economic Analyst