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Ag credit conditions continue to slip in Midwest

Powerhouse ag states see higher loan renewals and extensions on non-real estate ag loans during third quarter.

For the third quarter of 2016, most indicators of the agricultural credit conditions in the Federal Reserve Bank's Seventh District were more negative than those of a year ago, according to the latest agricultural newsletter from the Federal Reserve Bank of Chicago, Ill.

Representing the agricultural powerhouse states of Iowa, Illinois, Indiana, Wisconsin and Michigan, the Seventh District’s demand for non-real estate loans compared with a year ago was stronger in the third quarter of 2016. A survey of bankers in the district found that 47% observed higher demand, while 15% observed lower demand. The survey found that 13% of agricultural banks in the district had more funds available to lend during the third quarter than a year ago, while 10% indicated that their banks had less.

Loan renewals and extensions on non-real estate agricultural loans were much higher in the third quarter of 2016 relative to the same quarter of 2015, with 49% of responding bankers observing more of these types and just 1% observing fewer. Collateral re­quirements for loans in the third quarter of 2016 tightened relative to the the year-ago quarter, as 25% of respondents reported that their banks required more collateral, and none reported that their banks required less.

As of Oct. 1, 2016, the average interest rates on agricultural loans were 4.87% for operating loans, 4.95% for feeder cattle loans and 4.57% for farm real estate loans — their lowest values of the year thus far.

Survey respondents expected both crop and livestock operations to struggle in terms of net cash farm earnings this fall and winter relative to a year ago. According to responding bankers, hog, cattle and dairy farmers should expect to face lower prospects for net cash earnings this fall and winter, making this the second year in a row in which all of them have a negative outlook.

Forced sales or liquidations of farm assets among financially distressed farmers are anticipated to increase in the next three to six months relative to a year earlier, according to 63% of the responding bankers. None foresaw a decrease in these measures, the report noted.

The "AgLetter" noted that agricultural land values for the Seventh District remained on a down­ward trend in the third quarter of 2016, falling 3% from a year ago. Year-over-year decreases in “good” agricultural land values for Illinois, Iowa and Michigan outweighed increases in such values for Indiana and Wisconsin.

Moreover, according to the 208 agricultural bankers who responded to the Oct. 1 survey, district farmland values decreased 1% in the third quarter from the second quarter. A majority of the survey respondents see the downward trend for agricultural land values continuing into the fourth quarter of 2016, with 58% of bankers anticipating a decrease in farmland values in the final quarter of 2016 and less than 1% anticipating an increase.

The 1% decrease in the Seventh District’s agricultural land values from the second to third quarters was led by a 3% quarterly decrease for Michigan. Increased pessimism about farmland values in Michigan may partly stem from poorer weather this summer, compared with nearly ideal growing conditions in much of the rest of the district.

Illinois, Iowa and Wisconsin are expected to set records for corn yields, while only Michigan is not expected to see record soybean yields. “Bumper harvests should provide some protection for farmers’ revenues, but falling corn prices have pulled the rug out from beneath their feet,” the report stated.

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