Demand for Farm Credit Rose in Midwest

CHICAGO - A survey by the Federal Reserve Bank of Chicago showed credit demand in the district's agricultural banks continuing to strengthen during the second quarter.

Gary Benjamin, Chicago Fed vice president and economic adviser, said this was the consensus of more than 400 bankers responding to the survey.

Loan-to-deposit ratios rose seasonally and reached the highest level in a decade. But with ample funds for lending and a general easing in credit markets, interest rates charged by banks on farm loans continued to move down, Mr. Benjamin said.

Payments Lag

The survey also found more widespread evidence of a slower repayment rate on existing farm loans.

"About 29% of the bankers indicated the second-quarter rate of repayments was down from a year ago, while only 3% reported an increase," Mr. Benjamin said. "The slower repayments were noted by bankers throughout the district," especially in the hard-hit dairy state of Wisconsin.

Despite higher loan-to-deposit ratios, he said it appears that agricultural banks have ample funds for lending to farmers. About 30% indicated the availability of funds exceeded the year-earlier level, while only 8% reported a decline.

Cost of Funds Declines

Interest rates on farm loans continued to drift lower during the spring, reflecting both the ample funds for lending and the prevailing downtrend in overall market rates of interest, Mr. Benjamin said.

"The latest evidence of a firming in farm loan demand extends a trend that began in 1988," he said.

"Forty-three percent of the bankers indicated loan demand in the second quarter was up from the year earlier, 13% noted a weaker demand, and 45% said farm loan demand was unchanged."

The continued firming was reported by banks in each of the five states in the district - Illinois, Iowa, Indiana, Wisconsin, and Michigan. Mr. Benjamin said the responses of Iowa bankers reflected a particularly high measure of demand.

Lower Prices, Less U.S. Aid

He said a number of developments affecting cash flows of farmers likely contributed to the sustained strength in demand for farm loans. Sharply lower milk prices, lower corn and soybean prices, and lower government payments to feed grain participants meant farmers had to rely more on borrowing to cover their cash outlays for operating and capital expenditures.

In addition, Mr. Benjamin said, operating expenses were up slightly during the quarter.

"A 3.5% rise in the combined corn and soybean acreage planted in district states this year translated into larger purchases of seed, fertilizer, chemicals, and fuel," he said.

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