February 20, 1998 AGRICULTURAL INCOME AND FINANCE -- SUMMARY February 1998, ERS-AIS-68 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete text of the report will be available 1-2 weeks following this summary release. ----------------------------------------------------------------------------- Demand for Farm Credit Increases, But Supply Remains Adequate Financial institutions serving agriculture continued to experience improved conditions in 1997, and further gains are expected in 1998. Total farm business debt at yearend 1997 is estimated at $162.2 billion, up 3.6 percent from a year earlier, but 16.3 percent below the 1984 peak. Farm loan volume held by both commercial banks and the Farm Credit System (FCS) expanded approximately 4 percent. Commercial banks and the FCS accounted for 45 and 27.5 percent, respectively, of the estimated $5.7-billion increase in farm lending in 1997. Commercial banks have gained farm debt market share for 12 of the past 13 years and now hold 39.7 percent of the market. FCS market share dropped for 12 straight years before increasing during 1995-97 to 25.5 percent at yearend 1997. Total farm business debt is expected to rise about 3.4 percent in 1998 with nonreal and real estate loans increasing about 3 percent and 4 percent, respectively, about the same as in 1997. Commercial bank loans are projected to increase about 4 percent, compared with an anticipated 3-percent rise in FCS debt. Creditworthy farmers should have adequate access to loans, mostly from the largest suppliers--commercial banks, the FCS, and trade credit (merchants and dealers). Interest rates on new nonreal estate farm loans increased slightly from the first through the fourth quarters of 1997. Over the same period, interest rates on new farm real estate loans decreased slightly. Interest rates on farm loans made in 1998 are expected to maintain their current levels with little volatility throughout the year. Agricultural banks had another solid year in 1997. Their annualized mid-1997 rate of return on assets was 1.3 percent, in line with their strong performance in recent years. At 12.4 percent, return on equity remained below 1992's rate of 13.1 percent, but this is not a concern because it reflects high capital levels. Nonperforming loans declined a little to 1.2 percent of total loans. Loan loss provisions are only 0.3 percent of total loans, and agricultural banks in general show no signs of current or future problems. Their strong capital positions will provide a cushion if unexpected problems develop. Only one agricultural bank failed in 1997 and only six failed in the past 5 years. Average loan-to-deposit ratios for agricultural banks grew to 70.3 percent on September 30, 1997, up from 67.4 percent a year earlier and 59.7 percent 4 years earlier. The loan-to-deposit ratio has increased from a low of 53.5 percent in June 1987 and the previous high of 68.2 percent recorded in September 1968. In the current financial environment, commercial banks can easily access nondeposit sources of funds, and profitable, well-managed banks often have very high loan-to-deposit ratios. The FCS entered 1998 in strong financial condition. Loan quality and earnings remain strong, and loan volume continues to grow faster than inflation. Volume growth in 1997 was dominated by growth in short-and intermediate term loans, traditionally dominated by commercial banks. Net income fell slightly for the first 9 months of 1997 reflecting increased operating expenses and income taxes. In December 1997, the FCS inaugurated AgSmart, its first nationwide credit product. AgSmart is a point-of-sale trade credit program designed to overcome inconsistent lending products and terms across areas served by different FCS institutions. The volume of Farm Service Agency ( FSA) direct and guaranteed loan program obligations fell nearly 14 percent in fiscal 1997 from a year earlier. Reduced applications for emergency loans, a profitable farm economy, and new lender rules implemented in fiscal 1997 explain much of the decline. Obligations to beginning farmers were up strongly during the year. Fiscal 1998 program funding has been trimmed somewhat from the previous year, but should be sufficient to meet demand in most program areas. FSA continues to pare back its backlog of delinquent loans. Outstanding delinquent payments declined 16 percent from a year earlier in fiscal 1997, although delinquent payments in the direct loan program still totaled over $2 billion at yearend. Delinquent payments in the guaranteed program inched up again in 1997, but account for less than 2 percent of total outstanding guaranteed loan volume. Outstanding volume in the direct lending program continued to shrink, falling below $10 billion. The year-over-year increase in outstanding guaranteed loan volume was the smallest in 9 years. Farmer Mac's net profit rose $3.8 million in 1997 to $4.6 million. The increase in net income was largely due to a $4.5-million rise in net interest income rather than from activity in its core business of securitizing farm mortgages. A $700-million increase in its outstanding nonprogram investment portfolio and a shift in the composition of this portfolio to longer-term investments with greater spreads contributed substantially to the higher profits. Farmer Mac posted modest volume gains in its core business of securitizing farm mortgages, purchasing $231 million in loans and securitizing another $198 million. To boost volume, Farmer Mac launched new loan products and expanded the number of qualified Farmer Mac sellers. Late in the year, Farmer Mac raised $23 million in fresh capital through another public sale of common stock. Due to the ongoing financial crises in Southeast and East Asia, farm and rural lenders can expect a lower cost of funds, but also a weaker farm sector outlook and slower employment growth in rural areas. USDA's export credits are helping to mitigate the effects on U.S. agricultural exports. The Asia situation is expected to be a short- to medium-term event, with the outlook substantially brightening after 3 - 4 years. So, production credit decisions need to be scrutinized more carefully, but the long-term outlook for farm real estate remains good. The annual lender issue of Agricultural Income and Finance Situation and Outlook Report features one special article addressing recent trends in farm taxation. 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) 694-5365. Full text of the report also will be available electronically. For details, call (202) 694-5050. END_OF_FILE