Plunging prices are making it harder for Midwest farmers to repay bank loans, according to the Federal Reserve Bank of Chicago.
Sharp declines in livestock and crop prices have forced farmers to request loan extensions, which could hamper bank earnings in the third and fourth quarters. Banks may be forced to restructure these debts and bulk up loan-loss reserves. Higher chargeoffs are also anticipated for the second half of 1998, economists said.
"Prices scare the heck out of us," said John H. Colvin, president and chief executive officer of North Salem State Bank in Indiana. "We expect to see some loan problems this fall."
"If the prices don't go up for corn and soybeans, we expect to see some loan repayment problems later this year and into 1999," agreed James E. Caspary, president and CEO of First National Bank of Clifton in Illinois.
According to data the Chicago Fed collected from banks in Illinois, Indiana, Iowa, Michigan, and Wisconsin, loan repayments in the first quarter fell to the lowest point since spring 1995. The problem was worst in Illinois and Iowa.
In April hog prices fell 35%; soybeans, 24%; wheat, 21%; and corn, 16%, compared with the year before.
The Chicago Fed said hog prices are down sharply because of gains in the supply of hogs on farms in Illinois, Indiana, and Iowa. Southeast Asia's economic ills also have suppressed farm exports in recent months.
Moreover, a drop in farm income and cash from the government is predicted this year.
The Department of Agriculture projects a 7% to 8% drop in farmers' net income, to $52 billion this year, compared with 1997. Government payments are predicted to fall 17% below the 1990-1996 average of $8.9 billion per year.
Even if the problem worsens, Chicago Fed economist Michael A. Singer said he does not expect bankers to panic. "Bankers have seen this cycle before," said Mr. Singer.
Despite loan repayment problems, farmland values rose 2% in the first quarter as investors shifted funds from financial assets into real assets such as land, the Chicago Fed said.