------------------- ais-56s.asc follows -------------------- HDR1011800200200215951500 SUMMARY AGRICULTURAL INCOME & FINANCE SITUATION & OUTLOOK February 15, 1995 Economic Research Service U.S. Department of Agriculture Washington, D.C. 20005-4788 Demand for Farm Credit Increases, But Supply Remains Adequate Financial institutions serving agriculture continued to experience improved conditions in 1994, and further modest gains are expected in 1995. Total farm business debt at yearend 1994 is estimated at $148.1 billion, up more than 4 percent from a year earlier, but nearly 24 percent below the 1984 peak. Commercial banks accounted for about 77 percent of the estimated $6.2-billion increase in farm lending in 1994. Total farm business debt is expected to grow 3 percent in 1995. Creditworthy farmers should have adequate access to loans, mostly from commercial banks and the Farm Credit System (FCS), the largest suppliers. Agricultural lenders generally found the demand for farm credit was stronger in 1994, especially for short- to intermediate-term loans (nonreal estate credit). Much of the increased demand is related to financial restructuring following the flood- and drought-ravaged crops of 1993. Total bank loans outstanding increased nearly 9 percent, or $4.8 billion, in 1994, with around 69 percent of the dollar volume coming in the nonreal estate portfolio. Total farm debt held by commercial banks grew about 15 percent during the 2 years 1993-94. FCS total lending only expanded 2 percent during 1992-94, but its nonreal estate loan portfolio grew 13 percent. Interest rates on new farm loans made by farm lenders increased throughout 1994, reversing a downward trend that began in the early 1980's. The differential in the cost of borrowed funds between farm and nonfarm business customers narrowed in 1994, reflecting greater competition in agricultural lending and a strong farm economy that reduced the risk of extending credit to farm borrowers relative to nonfarm businesses. Agricultural interest rates are expected to rise throughout 1995, although to a lesser extent than rates anticipated for the general economy. Agricultural banks had another good year in 1994. Their annualized mid-1994 rate of return on assets (ROA) of 1.2 percent matched their solid 1993 performance. At 12.4 percent, return on equity capital (ROE) was a bit below 1993's 12.8 percent but well above levels seen a few years earlier. With nonperforming loans and loan loss provisions down to 1.1 percent and 0.2 percent of total loans, respectively, agricultural banks' loan portfolios remain strong. Average loan-to-deposit ratios grew to 64 percent for agricultural banks on September 30, 1994, up from 60 percent a year earlier and 58 percent 2 years earlier. The loan-to-deposit ratio has increased from a low of around 53 percent in 1987, but the current ratio remains below the high of just over 68 percent recorded in September 1968. The FCS entered 1995 in strong financial condition. While loan volume remains sluggish, loan quality continues to improve. Earnings have fallen but remain strong, and the system continues to build capital and reduce nonperforming assets. FCS capital has now returned to levels not seen since the early 1980's due to loan loss recoveries, conversions of protected borrower stock to at-risk stock, and high net interest margins experienced since 1991. During 1994, the FCA and FCS institutions took steps to enhance efficiency, reduce per unit costs, and increase loan volume. Efforts that are at least partly motivated by the desire to improve FCS efficiency include FCA's campaign to identify and reduce regulatory burden, joint ventures among FCS entities to provide data processing or other support services, and several proposals to increase the range of services provided. With the signing of the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 (P.L. 103-354) on October 13, 1994, the Farmers Home Administration's (FmHA's) farm credit programs were transferred to the new Consolidated Farm Service Agency (CFSA). Created in the aftermath of the Great Depression, FmHA was nearly 50 years old when it ceased operation. It once administered a broad range of grant and loan programs for agriculture and for rural businesses, communities, and housing. Farm credit programs were little affected by the transfer of authority. Outstanding principal on CFSA direct farm loans fell $1.1 billion to $12.6 billion at the end of fiscal 1994. The decline occurred despite a $200-million boost in obligations, which reversed a decade of declines in direct farm lending. Guaranteed obligations surged $400 million during the year to a record $1.8 billion. Funding for most direct and guaranteed programs will be tighter in fiscal 1995 as total lending authorities were cut by about 10 percent. Applicants to the direct programs are more likely to experience funding shortages, which could occur in some regions by spring. Some applicants not served by direct programs likely will obtain credit through guaranteed programs. A backlog of unobligated applications left over from 1994 has raised demand for the smaller 1995 lending allocations. Facing falling capital and revenues, Farmer Mac undertook several initiatives in 1994 to rekindle its secondary market for agricultural and rural housing mortgages. Farmer Mac has only guaranteed a small $38-million pool since October 1992. To spur its nine poolers to securitize loans, Farmer Mac announced plans to decertify poolers if they fail to securitize at least $50 million per year. Farmer Mac also announced it will enter into strategic business alliances with poolers. The Western Farm Credit Bank was the first to enter into an alliance that will provide for the first securitization of FCS farm mortgages. If securitization remains weak in 1995, Farmer Mac might ask for a legislative fix. Farmer Mac II, the secondary market for USDA-guaranteed loans, continued to grow in 1994, with sales reaching nearly $50 million. The annual lender issue of Agricultural Income and Finance Situation and Outlook Report features two special articles. Topics include the role of mortgage credit in influencing land values and the financial structure and credit sources of young farmers. Printed copies of the Agricultural Income and Finance Situation and Outlook Report will be available in about 2 weeks. For information, contact Jerome Stam (202) 219-0722. Full text of the report also will be available electronically. For details, call (202) 210-9045.