Fed survey reveals optimism among ag lenders

Northwestern Financial Review, Mar 15-Mar 31, 2004 by Hilgert, Jackie

Ag lenders doing business in croplands across the upper reaches of the Midwest are looking forward to the growing season with optimism. Ag business is generally healthy according to a recently-released agricultural credit conditions survey put out by the Minneapolis Federal Reserve Bank. The report indicates farm incomes, loan repayment levels, corn yields and dairy prices all increased during the previous year with a drop in soybean yields the only dry spot to be found in the Ninth District during the final quarter of 2003.

In the western portions of the district, however, mad cow disease threatens the livelihood of both beef producers and their lenders. Several survey respondents from South Dakota expressed alarm about how the mad cow scare might affect their area. "The survey was conducted the week before and the week after mad cow was discovered in Washington," said Tobias Madden, economist for the Minneapolis Fed. Many of the comments Madden reviewed expressed "major concern about decreases in cattle prices."

"Prices dropped $20 per hundred weight," reported one South Dakota lender. The full effect of closed Asian markets and variable demand for beef domestically may not be fully realized for months.

Shawn Dutton, president of Button State Bank, Dutton, Mont., said he attended the first few cattle auctions immediately after Bovine Spongiform Encephalopathy was discovered in Washington state and said buyers were tentative - at first. "I don't foresee it as a long-term problem and my producers are saying that as well," Dutton said. "Every one of my producers has been selling every one of his cattle for the last four to five years because of the drought," he said. The cattle numbers weren't there to begin with. "Maybe we would have seen more gain without mad cow, but we haven't seen much drop," Dutton said.

The rest of the news coming out of the fourth-quarter survey translates into general optimism. Loan demand through the end of 2003 remained steady for more than 75 of the 130 ag lenders who participated in the Fed survey; about 25 lenders reported increases in loan demand. Three-quarters of the lenders surveyed said demand for renewals or extensions remained constant.

An increase in farm income during the fourth quarter was reported by more than half of participating lenders. Only 8 percent reported below-normal levels of income, the lowest figure in nearly 10 years.

Capital spending stayed fairly stable last year but rose in Montana where tax law changes allowed for more depreciation. Household spending was strong as well, with one-third of lenders seeing an increase and 61 percent reporting no change. Spending increases typically follow increases to income and 94 percent of lenders expect spending will remain constant or increase in 2004.

Land values are up for both farms and ranches. Ranchland values were up 25 percent across the district while farmland prices rose 16 percent from a year ago.

Profitability gains lead to optimism as spring approaches, Madden said. "One-third of the lenders who responded said their customers will be more profitable in 2004," he said. "Only one-fifth said they believed their customers will be less profitable."

By Jackie Hilgert