AGRICULTURAL INCOME AND FINANCE OUTLOOK -- SUMMARY March 11, 2003 March 2003, ERS-AIB-80 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 report will be available electronically about 1 week following this summary release. ----------------------------------------------------------------------- Demand for Farm Credit Increases, But Supply Remains Adequate Financial institutions serving agriculture met the financial challenge presented by lower farm income in 2002 and are expected to make gains in 2003 as farm income rebounds. Total farm business debt at yearend 2002 is estimated at $201.9 billion, up 5.1 percent from a year earlier, and exceeds the previous 1984 nominal peak by 4.2 percent. Farm loan volume held by commercial banks grew 2.3 percent while the Farm Credit System (FCS) portfolio expanded 12.5 percent. Commercial banks and the FCS accounted for 18 and 69 percent, respectively, of the estimated $9.9-billion increase in farm lending in 2002. Commercial banks have gained farm debt market share in 4 of the past 8 years and now hold 39.4 percent of the market. FCS market share grew in 7 of the last 8 years to 30.3 percent at yearend 2002. Total farm business debt is expected to rise about 3.9 percent in 2003, with nonreal and real estate loans increasing about 2.6 percent and 4.9 percent, respectively. This compares with respective gains of 2.3 percent and 7.6 percent the previous year. Commercial bank loans are projected to increase about 2.7 percent, compared with an anticipated 6.9-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 farm loans made in 2002 achieved their lowest levels in decades. The largest declines took place in the shorter-term loans. Interest rates on nonreal estate loans declined 100-200 basis points from 2001 to 2002. Interest rates on real estate loans declined 50-100 basis points. Interest rates are expected to rise somewhat during 2003. Nonreal estate rates are expected to increase 10-20 basis points above their fourth-quarter averages. Rates on real estate loans are expected to rise 25-50 basis points over the same period. Agricultural banks had another solid year in 2002. An annualized mid- 2002 rate of return on assets (ROA) of 1.3 percent is a bit higher than it has typically been since 1992. At 12 percent, return on equity (ROE) was back up from 11.3 percent the prior June to the range prevailing over the last decade. Loans in nonperforming status at midyear were 1.2 percent of total loans, modestly higher than agricultural bank values in recent years. Net charge-offs of farm production loans totaled $162 million on an annualized basis at all commercial banks in the first 6 months of 2002, down from $226 million in the first half of 2001. Loan loss provisions were only 0.4 percent of outstanding loans for agricultural banks, and their strong capital positions will provide a cushion if unexpected problems develop. Only two of the over 2,600 agricultural banks failed in 2002 and only five failed in the prior 8 years. While farm loans outstanding at nonagricultural banks had been increasing fairly steadily through the 1990s, a $0.9-billion decline in farm loans for nonagricultural banks left them with 47.6 percent of commercial bank farm loans, down from 49 percent the previous year. Further, the drop in outstanding farm loans was even higher ($1.4 billion) at nonagricultural banks with assets exceeding $500 million. It is too soon to determine the correct explanation, but some large banks may be consciously reducing their exposure to the farm sector or losing business to the FCS or smaller bank competitors. The financial condition of the FCS was solid going into 2003. Loan volume grew at a fast pace again in 2002, with long term real estate volume up 13 percent and short- and intermediate-term loan volume up 9 percent from September 30, 2001, to September 30, 2002. Loan quality remains high, but some weakening appeared, especially for lending to cooperatives. Profits and at-risk capital continued to grow, fueled by strong portfolio quality and loan growth. Net interest spreads increased relative to the previous year as yields on funds used to finance FCS lending fell faster than rates charged on loans. FCS lending rates fell sharply during the year as short-term interest rates in the economy fell to 40-year lows. Demand for Farm Service Agency (FSA) farm ownership loan guarantees rose 29 percent and farm operating loan guarantees 6 percent in fiscal 2002. Greater demand for farm ownership guarantees was aided by low borrowing rates and greater loan restructuring activity. New direct lending volume changed little from the previous year. Despite widespread weather-related disasters, demand for emergency loans dropped to a near 30-year low. The quality of FSA direct loans continued to improve, but some deterioration in guaranteed loan quality occurred, and significant regional differences were evident in both program areas. Greater lending to targeted groups was evident in fiscal 2002 for both guaranteed and direct lending programs. FSA borrowers benefited from lower borrowing rates in 2002, with direct operating loan rates falling to just 3.25 percent at yearend. The volume of loans purchased or guaranteed by Farmer Mac reached a record of $2.1 billion in 2002. Much of the new volume came through the sale of long-term standby purchase commitments (LTSPC), which totaled $1.2 billion during the year. Through its use of the LTSPC program, the FCS again accounted for much of Farmer Mac’s total loan guarantee volume in 2002. Total outstanding guarantee volume grew to over $5.5 billion at the end of 2002, of which $4.9 billion was associated with the Farmer Mac I program. Farmer Mac II (USDA guaranteed loans) purchases fell again in 2002. Farmer Mac I delinquent loan volume rose to $74 million, but due to the large increase in new loan and guarantee volume, the share of total loan volume that is delinquent fell to 1.5 percent at yearend, a rate slightly above that of retail farm lenders. Farmer Mac profits rose sharply in 2002, with net profits climbing to $21.3 million from $16.3 million in 2001. The rise in net income was driven by increases in net interest income, guarantee fee income, and yield maintenance payments. U.S. agriculture should benefit from expected stronger U.S. growth in the second half of 2003 and into 2004. Stronger U.S. growth will raise the domestic demand for agricultural goods, but more importantly, foreign growth will as well. Agriculture will also benefit from an expected overall weaker dollar in 2003 and 2004 as well as from continued low domestic inflation and interest rates. Given the current expected weak growth in Europe and Japan in 2003, the United States remains the engine for overall stronger world economic growth. Subscribe to ERS’ e-mail notification service at http://www.ers.usda.gov/updates to receive timely notification of publication availability. Printed copies can be purchased from the USDA Order Desk by calling 1-800-999-6779 (specify SUB-AIS-4038). Outside the United States, please call 1-703-605-6220.