AGRICULTURAL INCOME AND FINANCE -- SUMMARY February 28, 2000 February 2000, ERS-AIS-74 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 electronically about 1 week following this summary release. ------------------------------------------------------------------------------ Demand for Farm Credit Declines, Farm Lenders Continue To Show Caution Uncertainty over how long low commodity prices will persist is depressing demand for farm credit, but widespread negative effects on farm loan portfolios have yet to materialize. Financial institutions serving agriculture continued to experience improved conditions in 1999 and some additional gains are possible in 2000. The sound position of agricultural lenders reflects the generally healthy state of farmers' finances in the mid-1990s, a strong nonfarm economy, and high levels of government farm assistance in 1998 and 1999. But continued low prices for key agricultural commodities, regional weather and disease problems, and uncertainty over future Federal support continue to raise concerns among lenders about the ability of some farmers to repay new or existing loans. About 14 percent of all farm businesses are forecast to have debt repayment problems in 2000. Farmers' use of net repayment capacity is forecast to rise to 66 percent in 2000, up from 56 percent in 1999. In 2000, lenders will be dealing with a farm sector whose net cash income is forecast to decline roughly 16 percent to $49.7 billion, substantially below the 1990-98 average of $55.1 billion. The impacts of this decline will not be evenly distributed across all U.S. farm operations. Producers specializing in food grains, feed grains, cotton, oil crops, tobacco, and dairy are more likely to experience financial stress in 2000, while beef, poultry, vegetable, fruit, nursery, and greenhouse operations are less likely to experience financial difficulties. Interest rates on farm loans "bottomed out" by the first quarter of 1999, then rose throughout the year. The increases were due mainly to four 25-basis-point increases in the Federal funds target rate instituted by the Federal Reserve. Further increases in the Federal funds rate are likely in 2000. Hence, interest rates on new farm loans are expected to continue rising, putting additional financial burden on highly leveraged farms and putting downward pressure on farm asset values. Government assistance has been important in stabilizing farm income, particularly for grain, soybean, and cotton farms. Direct government payments to farmers totaled $12.2 billion in 1998, $22.7 billion in 1999, and are projected at $17.2 billion for 2000, barring additional emergency assistance. By providing liquidity to farmers, high levels of direct government payments are reducing demand for credit and bolstering farm creditworthiness. Farm business debt is expected to decline slightly in 2000, the second consecutive decrease following 6 years of expansion. Total farm business debt at yearend 1999 is estimated at $172.8 billion. Nonreal estate loans are forecast to decrease about 1 percent in 2000, while real estate loans increase by less than 1 percent. Agricultural banks remained very profitable through the middle of 1999. Their annualized mid-1999 rate of return on assets was 1.2 percent, in line with their strong performance in recent years. Nonperforming loans increased to 1.2 percent of total loans, but loan loss provisions were only 0.3 percent of total loans. Only one agricultural bank failed in 1999. These results indicate that problems in the farm sector have not seriously affected farm bank loan portfolios. The average loan-to-deposit ratio for agricultural banks was nearly 72 percent on June 30, 1999, about the same as a year earlier and up from 57 percent at the end of 1992. In the current financial environment, commercial banks can easily access nondeposit sources of funds. The Gramm-Leach- Bliley Act of 1999 provides farm banks access to a stable source of long-term funds from the Federal Home Loan Bank System to supplement other sources of loanable funds. The Farm Credit System's financial condition remains solid as it enters 2000. Loan volume and at-risk capital continue to grow while income for the first 9 months of 1999 remained solid but below a year earlier. Loan portfolio quality is strong and has improved since December 1998. In the last 2 years, higher provisions for loan losses, many in conjunction with problem loans originated by one bank, have reduced reported income. Volume growth has supported the System's earnings, while net interest margins have declined. Retained earnings for the first 9 months of 1999 remained sufficient to raise the ratio of at- risk capital to assets. Congress has authorized more than $4.0 billion in Farm Service Agency (FSA) guaranteed loan program lending and $1.7 billion in FSA direct loan program lending for fiscal 2000. If all authorized funds were obligated in fiscal 2000, it would be the most FSA lending since the farm financial stress of the mid-1980s. FSA's direct loan program delinquency rate showed little evidence of growing debt repayment problems at the end of fiscal 1999. Delinquent loan payments in the direct loan portfolio fell for the 11th consecutive year. However, delinquent guaranteed loan program volume rose slightly to 2.4 percent. This is the highest delinquency rate since fiscal 1985, when the guarantee programs were first emphasized. Life insurance companies historically have provided mortgage credit to the farm sector. Among life insurance companies, total farm lending activity was up more than 1 percent in 1999. Life insurance companies report adequate funds for credit applications that meet their quality standards. Their farm lending is forecast to increase nearly 2 percent in 2000. Farmer Mac purchased or guaranteed more than $1.2 billion in loans during 1999, up sharply from the $424 million recorded in 1998. The majority of the big volume increase came from the issuance of long-term standby purchase commitments and loan swaps. Several Farm Credit System associations were prominent users of these programs. The quality of Farmer Mac's loans and the loans it has guaranteed remained sound in 1999, with just less than 1 percent of its volume delinquent at yearend. This issue of Agricultural Income and Finance Situation and Outlook Report features a special article that details financial stress in agriculture, as reported by farm banks during 1982-99. Printed copies of the Agricultural Income and Finance Situation and Outlook Report will be available in about 2 weeks. For more information, contact Steve Koenig (202) 694-5353. Full text of the report also will be available on the ERS website at www.ers.usda.gov. END_OF_FILE