The farm economy in the first half the the 1990s.
Consumers have been the chief beneficiaries of these developments. On average, retail food prices have risen at a pace significantly slower than that of prices in general in the first half of the 1990s. The occasional bouts of upward price pressure that have occurred this decade have tended to be relatively mild and of limited duration. Sustained shocks to food prices, like those of the 1970s, have not emerged.
Farmers, for their part, have gone through some ups and downs in the 1990s, but these fluctuations have been small compared with the huge cycle of boom and bust that the farm sector went through in the 1970s and 1980s. With prices of farm products declining in the 1990s, real net farm income has dropped back somewhat since the start of this decade; however, the level of income has remained well above the lows of a decade ago. The aggregate farm balance sheet also is in better condition than it was ten years ago. Farmers are not nearly so deeply in debt as they were midway through the 1980s, and the value of farm assets, which consists mainly of land, has been relatively stable in real terms in recent years. Problems in servicing debt, which were so much in evidence in the 1980s, have largely receded, and the financial institutions that are most heavily involved in farm lending have generally been prospering.
Farm production was disrupted at times by bad weather in the first half of the 1990s. In 1993, the Midwest had another of its recurrent crop failures, this one caused by flood rather than drought, as most of the others of the past quarter-century have been. Other regions of the country were afflicted by droughts from time to time in the first half of the 1990s--water shortages were a constant concern of producers in parts of the West. Crops in California were hurt by a severe freeze early in the decade, and growers in Florida had to cope with destruction caused by Hurricane Andrew in 1992 and Hurricane Gordon in 1994. Farmers in all regions struggled with a variety of pests. Overall, however, the losses of output to weather and infestations were not unusually large compared with the losses that occurred in previous decades.
Adapting successfully to ongoing changes in technology has continued to be one of the biggest challenges facing producers this decade. The productive potential of farming, lifted by a variety of technical innovations, apparently has continued to climb in the 1990s. These advances in efficiency are creating new profit opportunities for aggressive producers; however, farmers who lag in adopting the new technologies are being squeezed. The livestock industry, in particular, seems to be going through a period of unusually rapid change at present, with intense competition among producers for a share of the market. Livestock and crop producers alike are also having to adjust to a changing business climate, one in which public concerns abut food safety and the environment have led to increased regulation of farming. On a more positive note for producers, the first half of the 1990s has brought gradual progress toward the liberalization of world trade in agriculture; for example, increased trade with Mexico resulting from the North American Free Trade Agreement has been a recent bright spot in a farm export picture that has been lackluster in many other respects.
Amidst these underlying changes in the farm economy in the first half of the 1990s, familiar questions remained at the fore: What was produced? Who bought it? At what prices did the output change hands? How large were the profits of producers? And finally, what happened to the financial conditions of farmers and farm lenders? These are the chief topics that are dealt with in the remainder of this article.
CROP PRODUCTION, CONSUMPTION, AND INVENTORIES
Crop production has been volatile in the 1990s, around a rising trend (chart 1). Crops of moderate size in 1990 and 1991 were followed by a large harvest in 1992. Then in 1993, floods in the Midwest kept millions of acres out of production and reduced the yields on acres that were planted, and drought hurt the crops in other regions, especially the Southeast. This year, however, the weather was favorable from the outset: Planting conditions were ideal in the spring of 1994. Large proportions of the crops were rated in good-to-excellent condition from the beginning of the crop cycle, and favorable growing conditions continued throughout the cycle. Summer was distinctive mainly for the absence of the temporary weather "scares" that usually show up at one time or another during the growing season, even in years of good crops. Autumn weather permitted the harvest of the crops to move forward at roughly a normal pace, and production rebounded, apparently enough to permit some rebuilding of inventories. Among major crops, new highs in production were set in 1994 for corn, soybeans, and cotton. By contrast, output of wheat fell short of the results achieved in 1992 and 1993; production of wheat in some foreign countries is also down this year, and prices of that crop have been firm.
Acres planted to crops increased only a small amount in 1994 (chart 2), but yields per acre soared to levels well above long-run trends. Production of corn per acre harvested was about 13 percent above the long-run trend projected by the Department of Agriculture at the start of the 1994 crop cycle. Per-acre production of soybeans this past year exceeded the pre-season trend estimate by more than 18 percent, and cotton yields were also above trend. Wheat again was an exception; its yield in 1994 was good but not spectacular.
Looking past the recent volatility in annual outcomes, the trend in growth of crop production appears to have picked up in the first half of the 1990s (table 1). Corn, wheat, and soybeans have all recorded increases in production of at least moderate proportions in the first half of this decade, and cotton production has made sizable gains. Yields have moved up, on average, for all four of these crops in the 1990s, while changes in acreage have been mixed.
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The pickup in production has been accompanied by increases in consumption of farm products, and inventories of crops have remained at levels well below those of the mid-1980s. In fact, in some recent years, the ratios of inventories to consumption have dipped to levels toward the low end of the ranges of recent decades. Stockpiles of farm products owned or financed by the U.S. government have been drawn down from the high levels of the mid-1980s, and private businesses have not felt compelled to build large stocks either. Increased efficiency in transportation and better inventory management may have reduced the volume of agricultural stocks needed to sustain the normal business operations of private users. Also, precautionary holding of farm inventories has probably been damped in recent years by a perception among users that spare agricultural productive capacity in this country and abroad could be brought on line fairly quickly if conditions warranted. Indeed, the huge harvests that were realized in 1992 and 1994 underscore the degree to which productive potential may have advanced, even without tapping much additional acreage.
Over the past quarter-century, aggregate output of livestock products, measured in terms of constant 1987 dollars, has trended up at a rate of 1 percent a year, about in line with the rate of growth of the U.S. population. In the 1990s, however, constant-dollar output of livestock has been rising faster than the growth of the population, and the gain this past year appears to have been especially large (table 2 and chart 3). Although some of the step-up in production is being absorbed in the form of increased exports, growth of supply seems to have pushed ahead of the growth of demand in recent quarters, and prices of livestock products have dropped sharply.
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The increase in the output of livestock products has been underpinned by a sustained expansion of livestock herds so far this decade. The size of the cattle herd, after declining fairly sharply from 1984 to 1988, turned up during 1989, and growth of the herd since 1989 has averaged about 1 percent a year, with progressively larger gains in recent years. The number of beef cows, an indicator of the capital stock available to support further increases in production, increased 3 percent during 1993, and continued rapid growth in the number of these animals was evident in a survey of producers that was conducted in mid-1994. Beef production lagged behind growth in the size of the cattle herd in 1992 and 1993 but caught up in 1994. Output of beef in the first half of this year was more than 6 1/2 percent above the level of a year earlier, and, although the year-to-year rate of gain has since slowed, the rise for 1994 as a whole will likely be around 5 percent, the largest annual increase since 1976.
Hog producers have also been boosting output in the 1990s. The number of hogs and pigs on farms has grown at an annual rate of about 2 1/2 percent during the first half of the decade. Herds have increased in every recent year but 1993, and the contraction of herds in that year was unusually mild compared with the steep selloffs that have periodically occurred in this industry in the past. Pork production has moved up with the growth of herds over the past five years, rising at an average rate of about 2 percent. By comparison, production had changed little, on net, over the course of the 1980s. The structure of the pork industry is changing rapidly at present, with large, vertically integrated firms gaining market share at the expense of smaller businesses. Costs of production per unit of output apparently have been trending down, at least among the operations that are the most technologically advanced.
Output of other livestock products has moved up this decade along with production of beef and pork. Poultry production has increased at an average rate of about 5 3/4 percent in the 1990s, faster even than the rapid pace of the two previous decades. At retail, the mix of poultry products continues to expand, and the willingness of consumers to absorb big increases in output does not yet seem to have reached its limit. Output of milk has risen at about the rate of population growth over the first half of the 1990s, and the gain this past year was larger than average. Production of eggs also recorded a relatively large advance this past year.
The sustained large increases in the output of livestock products in the 1990s is to some extent a reflection of favorable relationships that persisted--until recently--between livestock prices and feed prices. Also, output of livestock apparently is being bolstered by rapid increases in efficiency. On balance, female animals in the breeding herds produce more young than they once did, and larger proportions of young animals survive to maturity. Livestock that are bound for slaughter gain weight faster than they did in the past and grow larger in size. Over the past quarter-century, growth in the output of meat has thus been sustained with relatively little change in the size of herds. Similarly, milk production has continued to expand despite an ever-dwindling number of cows in the nation's dairy herds. Egg and poultry production also has risen, even though the number of hens is smaller than it was a quarter-century ago.
Although further increases in efficiency may be in store in the livestock industry in coming years, gains in output as large as those of 1994 are not likely to persist. Prices have fallen sharply this past year for a wide range of livestock products, and in parts of the industry, some producers have reportedly been incurring large losses in recent months. Adjustments in the industry to restrain the growth of output almost surely will be forthcoming, but the timing, magnitude, and composition of those prospective adjustments is not yet clear.
DOMESTIC DEMAND FOR FOOD
In the long run, real expenditures for food tend to track the growth of the U.S. population. However, over shorter periods these outlays often display mild cyclicality that is seemingly related to conditions in the general economy. For example, over the three years starting in 1989--a period of slow economic growth that encompassed a recession--real outlays for food changed little on net (chart 4 and table 3). With unemployment on the rise during much of that period and income growth sluggish, many households were likely eager to economize on outlays for food along with other outlays. The mix of food purchases was adjusted accordingly, with items of lower cost being substituted for more expensive alternatives.
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The process works in reverse when the economy is strengthening, as it has been in the past three years. With unemployment falling, real incomes growing more briskly than before, and consumer confidence on the upswing, total consumer spending has picked up appreciably since 1991, and a little of that pickup has spilled into the food sector. Total real outlays for food moved up about 1 1/2 percent during the four quarters of both 1992 and 1993, and, based on preliminary data, these outlays increased at an average annual rate of about 1 percent over the first three quarters of 1994. Employment growth in the food industries has also picked up, reinforcing the impression of faster expansion that is evident in the data on consumer expenditures.
Much of the step-up in growth of expenditures for food during the past three years has consisted of increased purchases of prepared meals. In the aggregate, these outlays jumped 4 percent in real terms during 1992, 2 3/4 percent in 1993, and 3 3/4 percent at an annual rate over the first three quarters of 1994. During the 1989--91 period, spending on purchased meals had declined slightly--a reflection, no doubt, of the tendency of households to eat out less often or to go to less expensive places during periods of rising unemployment and sluggish income growth.
In contrast to the sharp swings in spending for purchased meals in recent years, relatively little variation has been evident in the real expenditures on food for off-premise consumption, a category that consists mainly of the foods purchased at grocery stores. During the 1989--91 period, these outlays increased at an average rate of about 1/4 percent a year, and their rate of increase in the more recent three-year period has been about 1/2 percent a year. Both rates of growth are a little below the long-run trend.
Determining exactly how much the farm sector might have benefited from the 1992--94 pickup in food expenditures is difficult, because many economic linkages lie between, for example, the fastfood customer and the farmer who produces corn or wheat. However, the increases in expenditure must have translated into at least a moderate rise in demand at the farm level, keeping farm markets somewhat stronger than they would have been otherwise.
In recent decades, with the trend in growth of domestic demand for farm output tied largely to the rate of increase in the population, producers have looked to exports for the market growth needed to support expansion of domestic output. And, over time, exports have in fact increased substantially. Valued in terms of 1987 prices, real exports of farm products have risen at an average rate of about 4 percent over the past quarter-century, resulting in a cumulative gain of about 175 percent (chart 5). Most of the growth, however, took place from 1969 to 1980, a period during which real agricultural exports trended up at an annual rate of about 9 percent. Growth from 1980 to the most recent annual peak in 1992 was much less, only about 1 percent a year. Since 1992, real farm exports have fallen on net. The constant-dollar value of farm exports declined 3 percent in 1993, and exports of these products in the first three quarters of 1994 were little changed from the 1993 average.
Structural change in world agriculture has had a major effect on U.S. exports over the past ten to fifteen years. During that span a number of countries that once were major buyers of bulk commodities such as grains and oilseeds have boosted production of these crops considerably, and some have themselves become net exporters; U.S. exports of grains and oilseeds have declined accordingly. From the latter half of the 1970s to the first half of the 1990s, the annual average of corn exports by U.S. producers fell about 20 percent. Exports of soybeans, which had reached levels of around 900 million bushels a year on three occasions in the late 1970s and early 1980s, averaged about 650 million bushels a year in the first four marketing years of the 1990s. Wheat exports, too, have remained well below previous highs.
Despite the declines in exports of grains and oilseeds, structural change in world agriculture has not worked entirely against U.S. producers. Exports of horticultural products--mainly fruits and vegetables--have been rising rapidly in recent years and now account for nearly 20 percent of the total value of farm exports. Growth in the exports of livestock products has also been fairly brisk in recent years. These products have benefited from rapid increases in demand in the surging economies of Asia. Shipments to Mexico have also been trending up rapidly, with an additional lift this past year resulting from the implementation of trade reforms mandated by the North American Free Trade Agreement.
Weakness in the economies of a number of foreign countries have added to problems faced by U.S. exporters in recent years. Stretches of slow growth or recession have taken place in many foreign industrial countries since 1990. Moreover, the countries of Eastern Europe and the former Soviet Union have reduced their herds of livestock; feed requirements in those countries and the imports of grain have also dropped. Total U.S. exports of farm products in the 1990s appear to have been relatively unaffected by fluctuations in the exchange value of the U.S. dollar, which have been much smaller in this decade than they were in the 1980s.
FARM PRICES AND FARM PRODUCTIVITY
Over the year ended in October 1994, the index of prices received by farmers fell 9 percent (table 4 and chart 6). With this decline, farm prices overall have now fallen in three of the past five years, and the average rate of decline over the five-year period has been about 2 1/2 percent at an annual rate. By contrast, farm prices had risen sharply over the three years ended in 1989. Increases in crop and livestock prices exceeded the rate of inflation in the late 1980s, but during the 1990s, livestock prices have dropped sharply and crop prices have edged down, on net.
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Lifted by the poor harvest of 1993, the prices of crops actually started out in 1994 well above the levels of a year earlier. However, they began to weaken in the second quarter as planting progressed, and big price declines set in around mid-year. In the third quarter of 1994, the index of prices received for crops was about 3 percent below its year-earlier level, and by October the gap had widened to about 7 1/2 percent. Price indexes for feed grains and oilseeds have declined appreciably over the past year as output of those crops has rebounded. Fruit prices in October were also down considerably from those of a year earlier. By contrast, the prices of food grains--mainly wheat--have been boosted by the recent tightening of world markets for that product, and cotton prices have been lifted by increases in both domestic use and exports.
Price increases for feeds and oilseeds after the floods of 1993, while sizable, were not as large as the increases have been on some past occasions. In spot markets, the twelve-month percentage change in soybean prices hit a peak of nearly 30 percent in mid-1993, when the floods were still in progress, and the year-to-year rate of rise in corn prices peaked around the start of 1994 at more than 40 percent. In the 1970s and 1980s, the twelvemonth increases in these prices sometimes reached maximums of 50 percent to 100 percent in response to shortfalls in supply or surges in demand. Sluggish exports this past year no doubt took some of the edge off the markets. Availability of alternative feeds may also have affected grain and oilseed prices. For example, output of hay was little affected by the floods of 1993; in earlier years of poor crops--caused mainly by drought rather than floods--hay often suffered along with other feeds. Range conditions across the United States also held up well in 1993, further reducing the pressures on available supplies of grains and oilseeds.
Livestock prices held close to the levels of a year earlier during the first quarter of 1994, but dropped substantially during the second quarter as production gains mounted. The speed and magnitude of the price declines seem to have caught markets by surprise. Early in 1994, for example, futures contracts for live hogs were generally selling at prices well above those at which corresponding contracts had closed out in the previous year; traders seemed to be anticipating that the poor crop of 1993 would induce at least some downward adjustment of pork production in 1994, in turn triggering upward pressure on prices. Instead, production advanced, and, after the first quarter, most futures contracts closed out at prices much lower than those seen in 1993. Similarly, although the markets were expecting early in 1994 that cattle prices would stay below the levels reached during 1993, traders did not anticipate the degree of weakness that actually developed. After trading in a fairly narrow range through the first quarter of 1994, cattle prices plunged, dropping by mid-June to levels about 15 percent below prices at which the June futures contract had been trading in early April. After the second quarter, cattle prices fluctuated, but remained in a range well below that of a year earlier. For livestock in total, prices received by farmers in October 1994 were at the lowest level this decade, down about 11 percent from the level of a year earlier and more than 15 percent from the level at the start of the 1990s.
Prices of Farm Inputs
The slippage in farm product prices this past year has been accompanied by a moderate pickup in farm input prices. As of October, the prices of production inputs purchased from the nonfarm sector of the economy were about 3 3/4 percent above the level of a year earlier; by comparison, these prices had increased about 2 percent in both 1992 and 1993. Although the prices of some key inputs, such as fuels and chemicals, have been relatively stable this past year, the prices of some other inputs have moved up at a fairly brisk pace. The index of prices paid for fertilizer rose about 9 1/2 percent from October 1993 to October 1994, and the price index for building and fencing materials rose about 4 percent. Prices of some types of machinery have also risen substantially over the past year.
On average, farmers' terms of trade with the nonfarm sector have slipped appreciably this decade. Part of the slippage in the terms of trade probably reflects cyclical or random influences that could be reversed in the future. However, some of the slippage may also reflect the persistence of secular processes that have led to sustained declines in the relative prices of farm products. Over the past quarter-century, for example, the prices of inputs purchased from the nonfarm sector have risen at an average rate of about 5 1/2 percent a year, similar to the rates of increase in broad inflation measures. By comparison, increases in the index of prices received by farmers averaged 3 1/2 percent a year over the same period.
The gap of 2 percentage points between the average rise in prices paid and the average rise in prices received is probably in large part a reflection of differences in the long-run trends of productivity in the farm and nonfarm sectors (chart 7). Labor productivity in farming has risen at a much faster pace than nonfarm labor productivity since World War II; moreover, although the growth of output per hour in the nonfarm sector has slowed from the rapid pace achieved early in the postwar period, little or no slowdown is evident in the growth of output per hour in the farm sector. A large portion of the advance in farm productivity probably has shown through into the price of farm output, holding down its trend relative to that of prices in general.
The climb in farm productivity, which still appears to have considerable momentum, is probably also keeping in motion several other processes that have brought about enormous changes in the structure of the farming industry in this century. Producers who are the first to adopt new production techniques push down their costs and earn larger-than-average profits. Farmers who lag in the adoption of these techniques find themselves saddled with higher-than-average costs and often are unable to compete effectively with the more efficient producers. Overall, fewer labor inputs are required to produce the level of farm output that can be absorbed in domestic and foreign markets, and the number of farms shrinks as the less efficient producers leave the industry (chart 8).
Meanwhile, whatever productivity gains are not passed on into the prices of farm products tend to be transformed, over time, into higher prices for land, the productive factor that is most inelastic in supply and a factor that is frequently in demand by the producers doing the innovating. Land values thus tend to hold up better than farm product prices--even apart from any increment to demand coming from nonfarm buyers--and farmers who have acquired land may end up with considerable wealth, even as they struggle from year to year to stay competitive with other producers.
Consumer food prices, after rising somewhat faster than general inflation during the latter part of the 1980s, have slowed in the 1990s to a pace well below that of "core" inflation as approximated by the rate of change in the CPI excluding food and energy (chart 9). Retail prices of meats and related products have risen at an average rate of less than 2 percent a year so far this decade; in the past four years, these prices have changed little, on net. The price increases for other foods have been subdued as well, limited both by ample supplies of raw inputs from the farm sector and by slow rates of increase in the costs of nonfarm inputs that enter into the production of food. Apart from short-run swings in the volatile prices of fresh fruits and vegetables, the only food category to show a price rise of much consequence since 1990 is coffee, the price of which has soared in recent months in response to freeze damage to the crop in Brazil.
The floods and droughts of 1993 turned out to have had only a small and relatively brief effect on the CPI for food in that year, and almost no effect appears to have carried into 1994. A run-up in the prices of fruits and vegetables in the second half of 1993 proved to be of relatively brief duration. Poultry prices also picked up, but only moderately. Food prices in total accelerated in 1993, but the rate of rise for food over the four quarters of that year remained below the rate of core inflation. Since the end of 1993, the year-to-year rate of rise in food prices has dropped back, on net, despite the past year's surge in coffee prices; food prices in October were only 2.4 percent above the level of a year earlier.
Just as in many past periods, the trends in food price inflation in the first half of the 1990s probably have been shaped at least as much by the trends in general inflation as by developments in the farm sector. By far the dominant share of value added in the production of food now comes from labor and other nonfarm inputs, and the prices of these inputs typically are determined by forces like those at work in other sectors of the economy. The CPI for food away from home, a food category that is dominated by nonfarm inputs and that makes up nearly 40 percent of total food in the CPI, has risen at rates of less than 2 percent in each of the past three years. Small increases have also been reported in the prices of many of the more heavily processed foods that are marketed through grocery stores and other such outlets. Fluctuations in farm prices in the 1990s probably have left, at most, only a small imprint on the retail prices of these foods.
FARM INCOME AND FARM EXPENSES
Net farm income, adjusted for inflation, moved up sharply in the latter half of the 1980s and peaked in 1989. It since has traced out a sawtooth pattern, falling somewhat on net (table 5 and chart 10). Gross income, adjusted for inflation, declined moderately over the first half of the decade. However, real production expenses have also fallen, helping to blunt the downward pressures on net returns.
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The decline since the start of this decade in real gross income, adjusted for inflation, is largely a reflection of the fall in the relative price of farm products since 1990, which has more than offset increases in the volume of output. In addition, government payments to farmers in the first half of the 1990s have been lower, in real terms, than those made during the second half of the 1980s. Efforts of the federal government to reduce the size of its budget deficit have been a restraining influence on farm subsidies in recent years, and diminished financial strains in the farm sector have made the case for heavy subsidies less compelling than it seemed to be in the 1980s. In only one recent year--1993--did the annual level of inflation-adjusted subsidies approach the average for the second half of the 1980s; much of the jump in that year consisted of increased "deficiency" payments to producers of feed grains, the prices of which had dropped appreciably after the big harvest of 1992. Payments to producers affected by natural calamities were large in late 1993 and early 1994; otherwise they were relatively small in the first half of the 1990s.
Farmers have had considerable success in cutting their production costs over the past decade. After adjustment for inflation, farm production expenses in the first half of the 1990s were about 25 percent lower than they had been in the first half of the 1980s, when real expenses were at their high of the past quarter-century and net farm income was at its low.(1) Real outlays for intermediate inputs of nonfarm origin have declined a third in the past decade. Costs of production have been restrained by cutbacks in acres planted, adoption of farming practices that require fewer inputs per acre, and increased efficiency in livestock production. Producers have also benefited from declines in real interest outlays, which, in the first half of the 1990s, have been barely a third of what they were in the first half of the 1980s. Farmers are carrying considerably less nominal debt than they were in the first half of the 1980s, and the interest rates on farm debt are lower than they were a decade ago, despite some increases this past year. Consumption of farm capital, adjusted for inflation, has been cut roughly in half since the first half of the 1980s, when depreciation charges were still reflecting the using up of sizable capital investments made during the boom of the 1970s.
While further reductions in real production costs may be forthcoming as farm productivity continues to advance, future gains may not be as large as those already achieved. Indeed, most of the cost reductions of the past decade already were in place by 1990; subsequent reductions have been smaller and less widespread than those of the late 1980s.
FARM ASSETS AND FARM DEBT
After tracing out an enormous cycle of boom and bust in the 1970s and 1980s, the farm balance sheet has been relatively stable in real terms in the first half of the 1990s (chart 11). Declines much smaller than those of the 1980s were apparent in the real value of both assets and debt from 1989 to 1992. Small increases since have shown up on the asset side of the ledger, and the real value of farm debt now appears to be flattening out; indeed, some lenders have been reporting large increases in farm loan volume in recent quarters.
The big changes in the farm balance sheet during the 1970s and 1980s were associated with major shifts in perceptions of the long-run prospects for farming. In the 1970s, secular trends that had made farming a sector of slow growth seemed to be giving way to more expansive trends, the chief manifestation of which was a surge in the exports of farm products. In expectation of continued large increases in exports, farmers bid up the prices of land and invested heavily in new equipment. All told, the inflation-adjusted value of farm assets climbed about 70 percent over the course of the decade.
Expectations of the 1970s were dashed in the 1980s, however. Exports faltered in the first half of the decade, farm prices fell sharply in relative terms, incomes were squeezed, and the farm balance sheet tilted into severe contraction. After peaking around the start of the 1980s, asset values plunged for several years, eventually reversing entirely the big run-up of the previous decade. Farm debt, measured in real terms, followed a path roughly similar to that of farm assets, first rising by a huge amount in the 1970s and then falling precipitously in the 1980s, to levels that were somewhat lower than those that had preceded the boom.
Of the relatively small changes in assets and debt that have been observed in this decade, the prevalent tendency recently seems to have been toward expansion, rather than contraction. In 1993, the value of farm real estate rose a bit faster than the rate of inflation, only the second year in the past thirteen in which real estate values have increased in real terms. More recent indicators seem to suggest that the upswing in real estate values may have continued in 1994. At the end of the third quarter, for example, land prices in the Chicago Federal Reserve District were 7 percent above the level of a year earlier, exceeding the rise in the general price level by several percentage points. Small-to-moderate increases in the inflation-adjusted prices of various types of farm land also have been reported this year in the Minneapolis, Kansas City, and Dallas Federal Reserve Districts.
Farm investment in fixed capital, which fell substantially during the 1980s, rebounded moderately in the first half of the 1990s. Over the past five years, total purchases of tractors and other farm machinery by private firms (some may have been nonfarm businesses) were roughly 20 percent greater than in the second half of the last decade (chart 12). On an annual basis, purchases were relatively strong in 1990 and through much of 1994; weaker results were recorded in the three intervening years. Some of the purchases made this decade no doubt were prompted by the need to replace aging equipment that may have been purchased during the agricultural boom of the 1970s. At the same time, however, the higher level of capital expenditures probably has also added to productive potential in farming.
THE RECENT EXPERIENCE OF FARM LENDERS
Improvement in the farm economy that began to be visible in about 1986 or 1987 translated, over time, into stronger conditions at the financial institutions that are most heavily involved in farm lending. Commercial banks and institutions of the Farm Credit System (FCS) regained their footing by the end of the 1980s, and in the first half of the 1990s both types of institutions have generally prospered. Problem loans have been few in number at these institutions in recent years, profits have been sizable, and capital has been shored up considerably. Among other lenders, vestiges of the financial difficulties of the 1980s seem to be confined largely to the ongoing efforts of the Farmers Home Administration, the government lender of last resort, to work through its volume of problem loans, many of which have been on the agency's books for several years.
The volume of farm loans outstanding at commercial banks bottomed out in 1987 (chart 13). Since that time, nominal loan volume at banks has grown at an average rate of more than 6 percent a year, a rate that implies hefty gains in real terms as well. Early in the farm recovery, when total farm debt was continuing to decline in nominal terms, banks gained market share at the expense of other farm lenders. More recently, as nominal farm debt has tilted gradually upward, banks have continued to expand faster than other farm lenders. The volume of farm loans held by banks as of mid-1994 was about 9 percent above the level of a year earlier.
In recent quarters, some of the growth in the volume of loans at commercial banks likely was associated with purchases of farm machinery and equipment. According to survey data, the volume of these loans fell from about $6 billion in 1983 to roughly $2 billion in 1988. However, this segment of the farm loan market, after remaining fairly flat since 1988, expanded sharply in the first half of 1994, before dropping back in the third quarter. Even if lending to support the purchase of machinery is subpar in the final quarter of 1994, the total volume of loans made for this purpose during 1994 as a whole may turn out to be the largest annual total in nearly a decade.
Agricultural loans at commercial banks apparently have improved significantly in quality in the past several years. Loans for farm production that are in nonaccrual status now amount to about 1 percent of such loans outstanding. This rate of delinquency is far lower than the 6 percent rate that prevailed at the height of the farm financial difficulties in the mid-1980s.
Another perspective on agricultural lending by commercial banks is afforded by examining the characteristics and performance of agricultural banks.(2) Profits for these banks have been quite high in recent years; indeed, for the past five years profits for agricultural banks have been running at more than 1 percent of assets, a rate that was last seen in the 1970s and one that is considered very good in the rest of the banking industry.
Agricultural banks have used part of the profits earned in recent years to build capital, and the ratio of bank capital to bank assets has been 11 percent or more in the past couple of years. Although this level of capitalization is somewhat high compared with that of other banks, agricultural banks, by definition, lend extensively to crop and livestock enterprises that often experience fluctuations in their ability to repay loans because of wide swings in production and income. The extensive capitalization of agricultural banks in recent years, coupled with the diminution of problem loans, has left banks less vulnerable to failure than they were, on average, in the mid-1980s. Only five agricultural banks failed in 1993, and as this article went to press in mid-November, none had failed in 1994.
At the FCS, profits soared to nearly 2 percent of assets in 1993, and data through midyear suggest that profitability should be high again in 1994 (chart 14). The main contributor to the surge in profits in 1993 was a rise in net interest income; the System's cost of funds dropped sharply last year, while rates charged on loans came down less. This year, net interest margins have narrowed somewhat as the System's cost of funds has moved up with increases in rates of interest in the general economy. The System's profitability has also been enhanced in recent years by improvement in the quality of its loan portfolio: Its volume of nonaccrual loans has dropped steadily, and charge-offs have become almost negligible.
With profits at high levels, the FCS has taken the opportunity to build capital in recent years. Since the System returned to profitability in 1988, its capital ratio (augmented by its reserve for loan losses) has roughly doubled, and the ratio now stands at 14 1/2 percent. At midyear, total capital amounted to more than 500 percent of the System's nonperforming loans, compared with about 200 percent in mid-1991.
In contrast to commercial banks and the Farm Credit System, the Farmers Home Administration (FmHA) is still dealing with a large volume of problem loans left from the 1980s. This government agency is charged with lending to farmers who are unable to get credit from commercial lenders. It also lends to rural communities for development and to farmers who have suffered losses from natural disaster. The agency was saddled with a substantial portion of the farm loan problems that arose in the mid-1980s, and it has since been attempting to collect or write off its stock of bad loans. At the end of 1993, the FmHA held about $13 billion in farm loans, roughly half of the maximum amount that it held in the mid-1980s, and about 30 percent of its farm loan portfolio was in delinquent status.
Events in farming in the first half of the 1990s have reflected the interplay of long-run trends, cyclical tendencies in supply and demand, and the largely random variations in weather conditions that have occurred from year to year. Outcomes over the second half of the decade will be shaped by similar forces.
Some trends that have been especially robust in recent decades almost surely will persist through the second half of the decade and on into the next century. Productivity in farming still appears to be trending up rapidly, reducing the volume of farm inputs that is needed to achieve a given level of output. Consequently, labor requirements in farming and the number of farms seem likely to decline further unless the demand for farm output starts to grow appreciably faster than it has historically. On that score, the growth of farm exports should hold up better over the long run than it has recently, with the potential for gain linked both to cyclical improvement in foreign economies and to gradual liberalization of world markets. However, with other countries competing hard for market share, sustained large increases in U.S. farm exports may still be difficult to achieve. In the domestic economy, expenditures for food are likely to move up over time at a pace roughly in line with the rate of population growth; if past trends hold, a disproportionate share of the increase in these expenditures will probably go to restaurants and other businesses that sell prepared meals.
In farming, increases in productive potential probably will continue to take place for both crops and livestock. Actual output, however, may at times grow faster or slower than potential output. Crop production, in particular, will more than likely continue to bounce around from year to year in response to changing weather conditions. Increases in yields likely will keep the trend in crop production pointed upward nevertheless. Livestock production, while trending up, almost surely will slow from the very rapid pace of 1994; occasional spells of flatness or decline in meat production in the second half of the 1990s would not be surprising, in view of cyclical swings that output of beef and pork has often exhibited in the past.
Given the declines in farm prices of recent months, farm income may well be heading into the second half of the 1990s on a weak note, but the potential for ups and downs of prices and production make it difficult to predict how long any spell of weakness might persist. Fortunately, farm balance sheets at mid-decade are much stronger than they were in the mid-1980s, and commercial producers probably are fairly well positioned to ride out a limited period of sluggishness in prices and incomes. Financial institutions that are most heavily involved in farm lending also appear to be in a position to withstand a spell of adversity, as the buffers protecting these institutions from failure have been raised considerably over the past several years.
(1.)"Real" in this case refers to the nominal flow of outlays for these inputs, adjusted for the change in the general price level. Either a reduction in physical volume of the input or a reduction in the relative price of the input will work in the direction of reducing the "real" level of outlays, as thus defined.
(2.)We define an agricultural bank as a commercial bank whose ratio of farm loans to total loans is greater than the unweighted average of such ratios at all banks. This average has been about 16 percent since the mid 1980s.
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|Publication:||Federal Reserve Bulletin|
|Date:||Dec 1, 1994|
|Previous Article:||Minutes of the Federal Open Market Committee Meeting held on August 16, 1994.|
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