AGRICULTURAL INCOME AND FINANCE--SUMMARY February 21, 1997 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 (AIS-64) will be available 2-3 working days following release of this summary. ----------------------------------------------------------------------------- Demand for Farm Credit Increases, But Supply Remains Adequate Financial institutions serving agriculture continued to experience improved conditions in 1996, and further gains are expected in 1997. Total farm business debt at yearend 1996 is estimated at $155.5 billion, up 3.1 percent from a year earlier. The Farm Credit System (FCS) accounted for about 54 percent of the estimated $4.7-billion increase in farm lending in 1996, compared with 39 percent in 1995. Farm business debt is expected to grow about 3 percent again in 1997. Commercial bank loans are projected to increase less than 2 percent, compared with an anticipated 5-percent rise in FCS debt. Creditworthy farmers should have adequate access to loans, mostly from commercial banks and the FCS, the largest suppliers. Agricultural lenders reported generally expanding demand for farm credit in 1996. Both the short- to intermediate-term loans (nonreal estate credit) and real estate debt components increased just over 3 percent. In recent years farm real estate lending had lagged behind. Despite a 2-percent increase in bank loans in 1996, banks' share of the farm debt market declined for the first time in 15 years. Contributing to this decline were a 6.8-percent rise in debt held by the FCS and bank customers' use of favorable incomes to reduce loan balances. Additional debt is not expected to unduly burden farm operators in 1997. Reduced income levels and higher farm business indebtedness suggest that farm operators will have less income available to meet higher principal and interest payments on their loans. But the outcomes will vary considerably by region and commodity. Weather-related problems will affect operators and lenders in some regions. Net cash income in 1997 will decline on most types of commercial farms specializing in crops and increase on those specializing in livestock. Interest rates on new loans to farmers declined from 1995 to 1996. Annual interest rates on new nonreal estate farm loans declined about 100 basis points, while rates on real estate farm loans declined about 50 basis points for bank and FCS lenders. Interest rates on new farm loans in 1997 are expected to remain relatively stable. While their performance indicators were a bit mixed, agricultural banks had another solid year in 1996. Their annualized mid-1996 rate of return on assets (ROA) grew to 1.3 percent, exceeding the strong performance of recent years. Though return on equity (ROE) also increased, at 12.3 percent it remained below the average ROE of nonagricultural small banks. However, this is not a concern because it reflects high capital levels for agricultural banks. Nonperforming loans and loan loss provisions increased a little to 1.3 percent and 0.3 percent of total loans, respectively, perhaps reflecting problems in the livestock industry. But loan loss provisions were only 0.3 percent of total loans, and agricultural banks showed no general signs of current or future problems. Their strong capital positions provide a cushion against unexpected problems. Only two agricultural banks failed in 1996 and only five failed during 1993-96. The FCS entered 1997 in strong financial condition. Loan quality continues to improve, and loan volume grew faster than inflation for the second consecutive year. Earnings remain strong as net interest income and operating efficiency improve. Net income before extraordinary items increased for the first 9 months of 1996 despite a $61-million increase in provisions for loan losses. The increased reserves reflect additional risks of loans to: cooperatives because of potential losses associated with certain hedging contracts; livestock producers confronting higher feed costs and lower livestock prices; food processing cooperatives affected by higher grain costs; and borrowers who experienced drought or other adverse weather conditions in 1996. Funding for Farm Service Agency (FSA) credit programs in fiscal 1997 is similar to last year. The exception is the direct farm ownership program, which saw its funding cut to less than half the 1996 level. FSA continues to pare down its backlog of delinquent loans in direct lending, with outstanding delinquent volume at the end of fiscal 1996 dropping 24 percent from a year earlier. Losses on direct loans remained above $1 billion, while losses on guaranteed loans remained low. The overall quality of the $6.4-billion guaranteed loan portfolio remains good. Extensive changes to FSA's credit programs were made in the 1996 farm legislation. To encourage graduation from FSA's credit programs, stricter time limits were imposed on farmers' eligibility to borrow through the programs and a 95-percent loan guarantee was made available to help direct loan borrowers move to commercial credit sources. Beginning farmers were aided by a 95-percent guarantee on certain loans, targeting of annual loan funds to these applicants, and a new farmland purchase program offering rates at 4 percent. Debt restructuring and loan servicing eligibility were tightened to increase the likelihood that such actions will help farmers stay in business and reduce the government's costs. Rules governing the sale and management of real inventory property were streamlined to expedite disposal and reduce program costs. Farmer Mac sold stock in 1996 to recapitalize after many years of sustained losses had depleted its capital. Two stock issues during the year netted $37 million in fresh capital to the government-sponsored enterprise. During the year, the Western Farm Credit Bank terminated its loan pooling operation and Farmer Mac began directly purchasing loans from lenders under authority granted by the FCS Reform Act of 1996. In the first 6 months of operation, Farmer Mac issued just $46 million in mortgage backed securities (MBS) from loans purchased from lenders. Loan volume in the MBS pools was concentrated in the Western States. The annual lender issue of Agricultural Income and Finance Situation and Outlook Report features two special articles. Topics include the agricultural lending of the Small Business Administration and the FSA's limited resource interest rate program in the 1990s. 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. END_OF_FILE