AGRICULTURAL INCOME AND FINANCE--SUMMARY February 16, 1996 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. The complete text of AGRICULTURAL INCOME AND FINANCE is available 2-3 working days following release of this summary. ----------------------------------------------------------------------------- Lenders in Strong Financial Condition To Meet Farm Credit Demand Financial institutions serving agriculture continued to experience improved conditions in 1995, and further gains are expected in 1996. Total farm business debt at yearend 1995 is estimated at $151 billion, up more than 4.3 percent from a year earlier, but 22 percent below the 1984 peak. Commercial banks accounted for about 50 percent of the estimated $4.3-billion increase in farm lending in 1995. Total farm business debt is expected to grow 2-3 percent in 1996. Creditworthy farmers have adequate access to loans, mostly from commercial banks, the Farm Credit System (FCS), and trade credit (merchants and dealers). Agricultural lenders generally reported expanding demand for farm credit in 1995, especially for short- to intermediate-term loans (nonreal estate credit), which grew 4.2 percent. Real estate debt increased 1.8 percent. An exception was commercial banks where total loans outstanding increased 3.7 percent, or $2.1 billion, with real estate loans providing just over 60 percent of the increase. Total farm debt held by commercial banks grew about 10 percent between the end of 1993 and the end of 1995, with real estate loans gaining 14.4 percent. During the same period, FCS total lending only expanded 5.3 percent, but its nonreal estate loan portfolio grew 22.8 percent. Lending by individuals and others (merchants, dealers, and other seller financing) grew 10.4 percent during the same span, with nonreal estate debt expanding about 14 percent. Interest rates on new loans to farmers declined throughout 1995. On average, interest rates on nonreal estate farm loans declined about 50 basis points, while rates on real estate farm loans declined 50-60 basis points. Interest rates on farm loans are expected to gradually decline throughout 1996, following the decline in rates paid on government and nonfarm private sector securities. Agricultural banks had another good year in 1995. No agricultural bank failed for the second year in a row. The banks' annualized mid-1995 rate of return on assets of 1.2 percent matched their strong 1992-94 performance. At 11.7 percent, return on equity (ROE) was a bit below 1994's rate of 12.1 percent, but well above rates in the mid-1980s. The slight decline in ROE is not a concern because it reflects continued growth in bank capital rather than a drop in earnings. With nonperforming loans and loan loss provisions staying at 1.1 percent and 0.2 percent of total loans, respectively, agricultural banks show no signs of current or future problems. The Farm Credit System entered 1996 in strong financial condition. Loan quality continued to improve in 1995, and loan volume grew faster than inflation for the first time since the 1980s. Earnings recovered from the previous year's drop as operating efficiency improved. The system continues to build capital and reduce nonperforming assets. District level mergers continue. The Farm Credit Administration, the FCS regulator, has established regulatory reform as a major priority, with the goal of reducing the burden imposed by regulation whenever possible. Major regulatory initiatives in 1995 included reforming regulations concerning financially related services, capital adequacy, and eligibility and scope of financing. Farm Service Agency (FSA) guaranteed lending volume surpassed $1.9 billion in fiscal 1995, accounting for a record 77 percent of the agency's farm lending. Direct lending fell to a 30-year low during the year. Funding for fiscal 1996 is similar to last year and should be sufficient to meet demand in most programs. FSA continued to whittle down its backlog of delinquent loans in direct lending with delinquent volume dropping 10 percent from last year. Losses on direct loans remained above $1 billion during fiscal 1995, but losses on guaranteed loans fell. The overall quality of the $6 billion guaranteed loan portfolio remains good. Legislative proposals being debated for the farm bill, if enacted, would make significant changes to FSA credit programs, particularly to the direct lending programs. Legislation was passed in January 1996 to make Farmer Mac more competitive and stave off the possible failure of this government sponsored enterprise. The legislation modifies Farmer Mac's operating structure in an attempt to lower costs, and provides for regulatory relief from higher pending capital standards. The legislation also outlines steps for recapitalizing the corporation within 2 years and for an orderly liquidation if Farmer Mac fails to recapitalize. While the legislation should make Farmer Mac more competitive, the corporation still faces hurdles in becoming financially healthy over the next few years. Demand for fixed-rate loans--Farmer Mac'sprimary product--remains relatively weak and commercial banks--Farmer Mac's primary source of loans--continue to report ample lending capacity. Although there are signs these conditions are changing, Farmer Mac faces a competitive market for the limited number of potential borrowers that meet Farmer Mac's qualifications. As a result, Farmer Mac could have trouble attracting sufficient loan volume to demonstrate profitability within the 2-year period it has been granted. On the other hand, if Farmer Mac finds a way to rapidly expand, the legislation raises concerns about the corporation's safety and soundness because it dismantles safeguards originally put in place by Congress to keep Farmer Mac from becoming a liability to the U.S. Treasury. The annual lender issue of Agricultural Income and Finance Situation and Outlook Report features two special articles. Topics include the changing structure of nonreal estate credit markets and the impacts of interest rate derivatives on farm financial risk and credit. Printed copies of the Agricultural Income and Finance Situation and Outlook Report will be available in about 2 weeks. For more information, contact Jerome Stam (202) 219-0722. Full text of the report also will be available electronically. For details, call (202) 219-0515 or e-mail service@econ.ag.gov. END-END-END