Declining prices for crops and livestock have pushed up demand for farm operating loans in the Midwest, creating sharp liquidity pressures for banks that serve the agricultural sector.
Loan/deposit ratios are high at the region's farm-oriented banks, according to surveys continued last month by the Federal Reserve Bank of Chicago and Northwestern National Bank of Minneapolis. The tightness is expected to continue through the year, even as interest rates decline, because deposit growth is expected to be slower than increases in loan demand.
The outlook is more pessimistic in the Upper Midwest, covered by the Northwestern National survey, than in the region studied by the Chicago Fed. Neither study, however, could be described and hopeful.
According to Sung Won Son, senior vice president and chief economist at Northwestern National, the survey of 700 banks indicated that the farm sector won't be able to sustain the Upper Midwest through the recession as it has in the past. In fact, the agricultural sector will suffer more this time than in the 1974-75 downturn, he said.
Crop and livestock prices have dropped significantly in recent weeks, pushing down April's producer price index but putting pressure on farmers to hold their products until prices firm.
However, holding the crops requires financing at interest rates that are still significantly higher than at this time last year. Meanwhile, the cost of fuel, fertilizer and chemicals is continuing to rise, placing the agricultural sector in a sharp cost/price squeeze.
More than 75 percent of the agricultural bankers responding to Northwestern National's survey reported a decline in farm income since the April 1979 survey. Increases were noted only in western Wisconsin and western Montana.
The effect of lower income for farmers already is being felt in farm communities, where retail shopping is slow, farm machinery and equipment sales are down and farmers are holding back on capital expenditures.
Not all of that is voluntary. Nearly 45 percent of the bankers responding had turned down loans due to a lack of funds. Many banks are refusing to give loans for purchases -- such as capital goods -- that can be postponed.
Northwestern National's survey indicated that loan demand will grow slowly, but still outspace deposit growth through the year, keeping pressure on agricultural bank liquidity. The loan/deposit ratio, a measure of liquidity, rose to 67.8 percent last April at banks serving the farm sector.
The same statistic showed a decline in the Fed survey, although the Chicago Fed's measure of loan availability also declined since the same period last year -- a contradictory set of readings.
Fed economist Gary Benjamin said in his report on the survey that overall farm loan demand declined sharply in the first quarter, a contrast from Northwestern National's result.
But the two surveys agreed on the types of loans being sought. Demand for loans to maintain operations is expected to rise, while loans that can be delayed will be put off as long as possible, according to the surveys.
"Rural banks are imposing more stringent collateral requirements on farm borrowers this year and, when necessary, denying or scaling down the loan requests from more than the usual number of farm borrowers," Benjamin reported.