Farm Loans to Finance

Farm Loans to Finance Intermediate-Term Investments COMMERCIAL BANK LOANS to finance intermediate-term investments farmers were outsting in the amount $. billion on June, 5. These were loans made to finance purchases investment items with a productive life extending over several years, excluding loans for the purchase real estate. For purposes the 5 Agricultural Loan Survey, loans to finance intermediate-term investments include loans for purchasing livestock other than feeder livestock, machinery equipment, automobiles other consumer durable goods, for improving l buildings. Intermediate-term investment has been increasing in recent years, partly in response to changes in farm technology. These changes also have increased farmers' current expenses for fertilizers, seeds feeds, insecticides, the like. The rate growth has been about the same for bank loans to finance intermediate-term investments as for loans to meet current-expense needs. NOTE. This, the second a series articles reporting the findings the Agricultural Loan Survey made in 5 by the Federal Reserve System, was prepared by Raymond J. Doll, Agricultural Economist the Federal Reserve Bank Kansas City. The first article was published in the Federal Reserve BULLETIN for November 5. Data for the Survey are from a sample about,00 insured commercial banks in all major areas the United States. Nonmember banks as well as member banks the Federal Reserve System reported in the Survey. Loans to finance any given type intermediate-term investment may appropriately have widely varying repayment schedules. The high degree variability in farm income that prevails in many parts the industry should be considered in establishing repayment schedules. Sometimes it is assumed that such schedules should be based on the income anticipated from the specific assets purchased with the borrowed funds. But farmers differ greatly with respect to the income financial reserves they have available for paying loans. A better determination a suitable repayment schedule usually can be made by analyzing the financial condition prospective earnings the borrower than by estimating the useful life or contribution to earnings the asset purchased. Some bank loans to finance intermediateterm investments have been written on a short-term basis similar to that applied to current-expense loans. Many these have then been renewed because funds for payment have not been available at maturity. Use this method would seem unrealistic if at the time the note was made it was relatively certain that funds for payment would not be available at maturity. It appears, however, that extensive use the note renewal method may be influenced by regional variability in income. In the Kansas City Federal Reserve District, a region where farm income fluctuates greatly, banks

0 FEDERAL RESERVE BULLETIN JANUARY 5 reported that more than half the dollar volume their for intermediate-term investment purposes (excluding dem loans) had maturities six months or less, while in the San Francisco District, where income has been less variable, banks had a much smaller proportion such short maturities. RELATIVE IMPORTANCE AND SIZE Loans to finance intermediate-term investments accounted for one-third the dollar volume outsting commercial bank loans to farmers at mid-5. This proportion varied regionally. It was larger in the Northeast the Minneapolis Federal Reserve District where dairying is important than it was in other areas. There was also substantial variability in average size debt per borrower on loans to finance intermediate-term investments among Federal Reserve districts. This average varied from a high $, per borrower in the San Francisco District to a low $, in the St. Louis District (Table ). Nearly half all farm borrowers had loans to finance intermediate-term investments, although these loans accounted for only about a third the dollar amount all farm loans. The difference arises largely from the fact that some borrowers having such also had loans for other farm purposes. Of the farmers borrowing to finance intermediate-term investments, the 80 per cent who had no current-expense or farm real estate accounted for $. billion the $. billion intermediate-type debt outsting. Probably these figures reflect in part the fact that some banks customarily write one note to cover funds used for several purposes. Respondents in the Survey were instructed to indicate the one purpose for which the largest portion each loan was used. The average size note outsting on June, 5 to finance intermediate-term investments was $,. The comparable figure for all other types farm loans as a group was $,58 or, if loans to purchase TABLE LOANS TO FINANCE INTERMEDIATE-TERM INVESTMENTS COMPARED WITH ALL FARM LOANS, JUNE, 5 BY FEDERAL RESERVE DISTRICT [Loans outsting at insured commercialtbanks] Number borrowers Total amount outsting Average size debt per borrower Federal Reserve district purposes (In thouss) Intermediate-term investments In thouss As a percentage all borrowers farm loans (In millions dollars) Intermed iate-term investment loans In millions dollars As a percentage all farm loans purposes Intermediate -term investments districts. Boston New York... Philadelphia.. Clevel Richmond... Atlanta Chicago St. Louis Minneapolis.. Kansas City... Dallas San Francisco.,8 9 0 5 9 9 0 5 9 5,08 8 8 8 0 9 8 9 5 5,050 5 8 9 9 9 9 8 89 0 8 8 9 8 9 $,,,,,8,5,59,5,08,9,080, 5, $,5,,55,80,505,,,,,,999,0, NOTE. Details may not check because rounding.

FARM LOANS TO FINANCE INTERMEDIATE-TERM INVESTMENTS real estate are excluded, $,50. When to finance intermediate-term investments are classified by purpose, those written for improving l buildings for buying livestock averaged considerably larger than for other agricultural purposes, those written for buying machinery were smaller, those for consumer durable goods were the smallest, with their outsting balances averaging only $. About half both dollar amount number to finance intermediateterm investments were made for the purpose buying machinery equipment. Notes to buy livestock other than feeder stock accounted for more than one-fourth the dollar volume about one-sixth the number, while to improve l buildings accounted for about one-fifth the dollar volume one-tenth the number (Table ). The average size note outsting for intermediate-term investment purposes was considerably larger in the San Francisco, Dallas, Kansas City Federal Reserve Districts than in the rest the country. The Dallas Kansas City Districts also had a larger proportion total made for the purpose buying livestock a smaller proportion to buy machinery than the rest the country. A large proportion the written to finance intermediate-term investments were small in size. Almost two-thirds had outsting balances less than $,000, although in dollar volume they accounted for only one-fifth the total. The were a smaller average size if written to finance the purchase consumer durable goods or machinery equipment than if written to finance the purchase livestock or to improve l buildings. TABLE SIZE OF NOTES TO FINANCE INTERMEDIATE-TERM INVESTMENTS, JUNE, 5 Purpose balance outsting purposes $50-99 $,000-,999 $0,000 over. Purchase other than feeder livestock $50-99, $,000-,999, $0,000 over Purchase machinery equipment $50-99 $,000-,999 $0,000 over, Purchase autos other consumer durable goods... $50-99 $,000-,999 $0,000 over Improvement l buildings $50-99 $,000-,999 $0,000 over,5 88 50 9 Number 5 9 5 9 9 5 5 9 C ) C ) 8 05 5 0) C ) 0) 8 Amount outsting In millions dollars 9 8 50 8 5 Less than one after rounding. NOTE. Details may not check because rounding. 8 8 5 5 0 0) 9 9 5 In thouss Percentage distribution Percentage distribution 5 8 05 0) There was a tendency for written to finance intermediate-term investments to be relatively more important in the medium small net worth groups. Individuals with net worths less than $5,000 accounted for 5 per cent the dollar volume these loans, but for only 8 per cent farm loans made for all purposes.

FEDERAL RESERVE BULLETIN JANUARY 5 MATURITY AND RENEWAL TABLE The most common maturities for to finance intermediate-term investments were six months one year. About per cent had maturities longer than one year as compared with 9 per cent the dollar volume farm written for all purposes. MATURITY OF NOTES TO FINANCE INTERMEDIATE- TERM INVESTMENTS, JUNE, 5 Original maturity maturities. Dem. month.. months. months. 9 months. year months. 8 months. years years 5 years.. -0 years Over 0 years. maturities. Dem month.. months. months. 9 months. year months. 8 months. years years -5 years.. -0 years Over 0 years. purposes Purchase other than feeder livestock Purchase machinery equipment Purchase autos other consumer durable goods Improvement l buildings Amount outsting, in millions dollars,85 8 0 8 0 9 50 0 9 8 5 0 55 5 8 5 j 9 8 Percentage distribution within groups 5 5 0 8 5 9 5 8 9 0 0 8 Loans are classified under the nearest maturity listed for example, 5-month -month loans are included with -month loans. NOTE. Details may not check because rounding. Maturities tended to vary by purpose loan within the intermediate-term investment category (Table ). A larger proportion the dollar volume made for improving l buildings for buying autos other consumer durables was written with maturities more than a year than was the case for written for buying livestock. The proportion with maturities more than a year was substantially larger for buying machinery equipment than it was for buying livestock but somewhat smaller than for the other intermediate-term purposes. Maturities made to finance intermediate-term investments varied significantly by Federal Reserve district. In the northeast districts, more than a fourth the dollar volume all such was on a dem basis, about the same proportion matured in one to six months. In the Kansas City District, more than half had maturities one to six months, the Dallas District also had a relatively large proportion with short maturities. In the San Francisco District, on the other h, less than per cent the dollar volume had maturities one to six months. Renewals have ten been used in financing projects where repayment extends over periods more than six months or a year, especially in areas where income is more variable than is average for the nation. Of the dollar amount intermediate-term investment financing outsting at mid-5, per cent had been renewed one or more times. This compares with per cent all farm loans made for other than intermediateterm purposes (Table ). Planned renewals were more important in the intermediateterm field than for the other financing per cent compared with per cent. Use renewals for financing interme-

FARM LOANS TO FINANCE INTERMEDIATE-TERM INVESTMENTS TABLE RENEWAL STATUS OF FARM LOANS, JUNE, 5 Purpose renewal status Intermediate-term investment purposes total Renewed Planned Other renewals Not renewed other purposes total... Renewed Planned Other renewals Not renewed Number (In thouss),5 9 0 9, 9, Amount outsting (In millions dollars) 8 99 9,0,5, 95, NOTE. Details may not check because rounding. Average size note $,,09,88,99,088,58,90,05,,90 diate-term investments tended to be more important in Federal Reserve districts where maturities were relatively short. In the Kansas City District, where short-term maturities were most prevalent, 5 per cent the dollar volume outsting had been renewed. In the San Francisco District, on the other h, where maturities were relatively long, only per cent the dollar volume had been renewed. Planned renewals also were more frequent in the areas where short-term maturities predominated. Although a considerable proportion the loans made for financing intermediate-term investments had short maturities, a substantial number borrowers with such loans had been in debt to the bank continuously since 5 or earlier. Of the borrowers who at mid-5 owed on made for intermediate-term investments (excluding borrowers who also had additional for real estate or current-expense purposes), about one-third had been in debt to the bank since 5 or before; one-tenth had been in debt back to 5; one-third had been out debt to the bank for the last time in 55, only about one-fifth had been out debt within the first half 5. These proportions were practically the same among borrowers who had current-expense loans outsting at mid-5. It is apparent that many farm borrowers require continuous access to credit in order to carry on their farming operations. METHOD OF REPAYMENT Most farm loans outsting on June, 5 about 0 per cent the dollar volume were made with terms specifying that they be repaid in a single payment at maturity. The remainder carried provision for repayment by instalments. By definition, a major part the intermediate-term financing would be used to pay for durable or semidurable types investment. Since instalment financing has been most prevalent in the durable goods field, it would be expected that provision for instalment repayment would be more prevalent among to finance intermediate-term investments than among for current-expense purposes. Of the total dollar volume outsting loans made for intermediateterm investments, per cent provided for instalment repayment. Instalment loans in agriculture frequently vary from the more conventional type used in the consumer credit field. Monthly repayment is not appropriate for much agriculture outside the dairy egg production sectors. Payments need to be adapted to the income flow on the particular farm that is being financed. Consequently instalment loans with irregular payments are much more prevalent in agriculture than in the consumer credit field. As would be expected, instalment loans were usually not renewed. The ones renewed, however, were larger in size than those that were not renewed. Notes payable in instalments made up a greater proportion the large ($,000 or more in size)

FEDERAL RESERVE BULLETIN JANUARY 5 TABLE 5 REPAYMENT METHOD OF NOTES TO FINANCE INTERMEDIATE-TERM INVESTMENTS, JUNE, 5 Number (In thouss) Amount outsting (In millions dollars) Average size Maturity Total Instalment Singlepayment Total Instalment Singlepayment Instalment Singlepayment maturities Dem months or less.. 9 months- year.. months-5 years Over 5 years,5 0 0 9 5 5 95 95 9 5 9 99 8 0 9 $,,0,,5,, $, 88 8,,9 $,,0,,9,509,000 Dem were all classified as single-payment in the Survey. than the small ($999 or less). The proportion written with provision for instalment repayment also varied with maturity. Provision for instalment repayment was associated with that had long maturities. Three-fourths the dollar volume to finance intermediateterm investments made with provision for instalment repayment had maturities months or more, 8 per cent had maturities 9 or months, while per cent had maturities months or less (Table 5). ACQUIRED LOANS In recent years, many commercial banks have followed the practice acquiring farmers' from merchants dealers. To a large extent, these were originally taken by the merchant or dealer to finance the sale some intermediate-term investment item. Twenty-three per cent the dollar volume all commercial bank made to finance intermediate-term investments outsting at mid-5 had been acquired from merchants dealers. Of the acquired, over two-thirds the dollar volume provided for instalment repayment (Table ). NOTE. Details may not check because rounding. There was substantial variation in maturity between the acquired from merchants dealers those made direct. Almost two-thirds the acquired but only slightly more than a fourth the direct loans were written with maturities longer than one year. Acquired tended to be longer term instalment direct TABLE NOTES ACQUIRED BY BANKS FROM MERCHANTS OR DEALERS [Loans for intermediate-term farm investment purposes outsting at insured commercial banks, June, 5] Repayment method Number (in thouss) : repayment methods Instalment payments Single payment Amount outsting (in milions dollars): repayment methods Instalment payments Single payment Average size note (in dollars) : repayment methods Instalment payments Single payment Total, acquired direct,5 0 9 99,,, Acquired loans 59 90 8 Direct loans 95 8 5,9 880,,,0 NOTE. Details may not check because rounding. Acquired as a percentage total

FARM LOANS TO FINANCE INTERMEDIATE-TERM INVESTMENTS loans to be shorter term. The latter were ten renewed at maturity. The practice acquiring from merchants dealers the maturities acquired varied among Federal Reserve districts. In the San Francisco District, more than one-third the dollar volume all intermediate-type was acquired from merchants dealers, while in the Philadelphia, Clevel, Kansas City, Dallas Districts only about one-eighth the dollar volume outsting was so acquired. The large proportion acquired in the San Francisco District may partly explain the significantly longer maturities there. However, both acquired direct loans in that District bore longer maturities than corresponding types loans for the country as a whole. BORROWER CHARACTERISTICS Distribution the number borrowers according to net worth was not substantially different for those borrowing for intermediate-term investment purposes than for borrowers for all farm purposes. However, the dollar volume tended to be relatively more important for intermediate-type loans than for all farm loans in the small medium net worth groups, less important in the large net worth groups. The relatively large average size loan for purchasing real estate feeder livestock probably caused loans for all farm purposes to be more important in the larger net worth categories. The net worth group having the largest dollar amount loans to finance intermediate-term investments was the $0,000- $,999 group (Table ), which also had the largest number the loans outsting. The next largest number was in the $,000-$9,999 net worth group, but the dollar amount outsting there was smaller TABLE NET WORTH AND AGE OF BORROWERS FOR INTER- MEDIATE-TERM INVESTMENTS, JUNE, 5 Net worth net worth groups.. Under $,000 $,000-9,999 $0,000-,999 $5,000-99,999 $,000 over Not ascertained * Under $,000 $,000-9,999 $0,000-,999 $5,000-99,999 $,000 over Not ascertained ages 55 55 8 8 80 88 8,,0, 8 Under Age borrower - 5 over Amount outsting (In millions dollars) 0 95 5 8 0 8 9 Average size note net worth groups.. $, $,0 $, $, 55 95,,9 8 9 90,,0,9 898 95,,08,0 8 Age not ascertained For purchased where the bank did not know the characteristics the borrower, data on net worth, age borrower, type farm were not required. Includes $9 million loans to corporate farms. Too few for significant average. NOTE. Details may not check because rounding. because the smaller average size loan. In the $5,000-$99,999 net worth bracket the number outsting was significantly smaller than for either the two preceding brackets, but the dollar volume was large because large average size. The average size note for farmers in the highest net worth group was about times larger than the average size for the lowest net worth group. Within most net worth groups, the younger borrowers tended to be larger. The greatest proportion large net worths was in the age group 5 over. The net worth a relatively large number farm borrowers under years age was less than $0,000. General type farms had the largest dollar 8

FEDERAL RESERVE BULLETIN JANUARY 5 TABLE 8 TYPE OF FARM RELATED TO LOANS TO FINANCE INTERMEDIATE-TERM INVESTMENTS, JUNE, 5 Type farm Number borrowers (In thouss) purposes Intermediate-term investment Amount outsting (In millions dollars) purposes Intermediate-term investment Average indebtedness per borrower for intermediateterm investment Intermediate-term investment as a percentage total for all purposes Number borrowers Amount indebtedness types. Meat-animal Dairy Poultry Cash grain Cotton Other major product. General Not ascertained,8 5 8 985 99,08 85 5 55 8 5,050 9 9 58 8,9 9 90 0 $,5,,8,,8,,,8 9 8 50 9 8 5 5 i See Table, note. NOTE. Details may not check because rounding. volume loans for intermediate-term purposes outsting at mid-5 accounted for about 5 per cent the dollar volume all such loans (Table 8). Dairy farms were next in importance, with per cent, meat-animal farms third, with per cent. General type farms also had the largest number outsting, but meat-animal farms had the largest average size note. Distribution credit for financing intermediate-term investments among types farms differed from the distribution total farm credit in that dairy farms used relatively more credit for this purpose than other types farms, meat-animal, cotton, other major product farms used relatively less. SECURITY The most common type security used in financing intermediate-term investments was the chattel mortgage. Sixty-five per cent the number per cent the dollar volume such loans were thus secured. Sixteen per cent dollar volume was secured by real estate mortgages, per cent was unsecured, per cent was endorsed. The remaining per cent was secured in other ways. The average size note varied with the type security used. Loans secured by real estate mortgages were largest, while endorsed loans were smallest. Of the loans for the purpose improving l buildings, per cent the dollar amount was secured by real estate mortgage, per cent was unsecured, the remaining per cent was secured by chattel mortgage or in other ways. For each the other purpose groups, however, the major part was secured by chattel mortgage. INTEREST RATES The interest rate on outsting loans to finance intermediate-term investments averaged. per cent, which was higher than the. per cent average for all types farm loans. The intermediate-type loans had higher interest rates than other farm loans within each size group. Relevant to this difference is the fact that loans to finance intermediate-term investments are ten repayable in instalments. Interest oi> such loans is charged either on the original amount throughout the life

FARM LOANS TO FINANCE INTERMEDIATE-TERM INVESTMENTS TABLE 9 INTEREST RATES ON NOTES TO FINANCE INTERMEDIATE-TERM INVESTMENTS, JUNE, 5 BY PURPOSE AND SIZE OF NOTE [Average annual rate at insured commercial banks, in per cent] Purpose loan loans Under $50 $50- $99 $500- $999 Size note $,000- $,999 $,000- $,999 $5,000- $9,999 $0,000- $,999 $5,000 over intermediate-term investment purposes.. Purchase other than feeder livestock Purchase machinery equipment Purchase autos other consumer durable goods Improvement l buildings... 8.5 5.8 8...8 0.0. 8...8 9.8.8..8.5 8.8...5. 8...8.. 8..0 5.9 5.9. a 5. 5.. ( ) 5. 5. 5..0 5. When originally made or (if renewed) when last renewed. Too few for significant average. the loan or on the current unpaid balance. The interest rate for instalment loans with interest charged on the original amount was 0.8 per cent, which compares with per cent on instalment with interest charged on the unpaid balance. per cent for single-payment. Inclusion many instalment loans with interest charged on the original amount partly explains the high average interest rate on loans made for financing intermediate-term investments. Rates averaged higher on loans for financing automobiles other consumer durables than on loans for other intermediate-term investment purposes (Table 9). Part this variation can be attributed to the difference in size note in the proportion loan volume that was financed by the instalment plan. Sixty-two per cent the dollar volume loans made to finance auto other consumer durables was instalment financing. This compares with 8 per cent loans made to improve l buildings, per cent loans made to buy machinery equipment, per cent loans made to buy livestock. Loans for intermediate-term purposes that were purchased by banks from dealers had an average interest rate 8. per cent, compared with a rate. per cent for loans for these purposes that were made direct. The difference is apparently related to the fact that more the acquired had interest charged on the original amount. Forty per cent the loans to buy autos other consumer durable goods machinery equipment (which had higher average interest rates than loans for other purposes) were purchased, as compared with only per cent the outsting held that were made for all other agricultural purposes. The influence on interest rates factors such as maturity, security, net worth the borrower will be analyzed in a subsequent article.