 Where have we been? Where are we going?
 Production Ag Financing Update
 Capital Markets update for cooperatives
 Credit Union and Bank conditions
 Questions & answers

 Demand increase – World wealth increasing
 Weather impacts – low stocks
 Energy, Bio-fuels – increasing demand
 High commodity prices – demand and $$
 Grain based balance sheets stressed
 Financial markets and economic meltdown
 Inventory valuation impacts
 What’s next?

 World demand increase – China, India, U.S.
 Housing slowdown / sub-prime mortgage mess
 Financial meltdown
 Monetary policy recovery steps
 Governmental action / stimulus
 Recovery? If so, what kind – U, V, L or W?

1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000

 US / World economic conditions
 Financial markets
 Agriculture
• Production and consumption
• Globalization
• Innovation

Innovation
Planting Decisions
Government Spending
US Deficit
Trade Policy
Inflation
Interest Rates
Weather
US Commodity Prices
Strength of $
World Food Demand
Consumer Spending
US Growth
World Economic Growth
Investor Confidence
Energy Consumption
Unemployment Rate
China Growth

 Volatility is constant
 Financial position
• Liquidity – working capital needs
• Reserves – balance sheet management
• Margins – compressed
 Demand driven markets are good, but…
 What if?

12

Farm income indicators billions $s
2003 2004 2005 2006 2007 2008
Sept
2009AB
Gross farm income
Crops
Livestock and products
Government payments
Farm-related income
Noncash income
Value of inventory adjustment
Total production expenses
NET FARM INCOME 3/
260.9
109.9
105.6
16.5
15.7
14.6
-2.4
200.3
59.7
209.8
5%
85.8
44%
295.6
13%
113.7
123.6
13.0
17.1
17.3
11.2
219.7
5%
74.6
-13%
294.3
0%
111.9
125.1
24.4
14.2
19.2
-0.4
232.7
6%
58.8
-21%
291.5
-1%
122.5
118.7
15.8
16.6
21.0
-3.1
267.5
15%
71.2
21%
338.7
16%
150.1
138.6
11.9
16.3
21.1
0.6
290.0
8%
87.2
22%
377.2
11%
183.1
141.2
12.2
19.8
23.3
-2.4
280.0
-3%
54.8
-37%
334.8
-11%
165.0
119.0
12.6
19.7
20.3
-1.8

2000 2006 2007 2008 2009
Assets
Real estate 946 1,625 1,751 1,692 1,626
NonReal estate 257 298 304 313 309
Total 1,203 1,923 2,055 2,005 1,935
Liabilities
Debt
Equity
Total
Debt/equity
Debt/assets
164
1,039 1,720 1,841 1,765 1,701
1,203 1,923 2,055 2,005 1,935
15.8
13.6
203 214 240 234
11.7 11.6% 13.6% 13.8%
10.5 10.4% 12.0% 12.1%
2009
Adjusted
946
309
1,255
234
1,021
1,255
22.9%
18.6%

Avg. U.S. Cropland Value in $/Acre, Jan. 1, 1999 - 2009

US Farmland Value devided by a rolling 3 Year Average of Net Farm Income plus Return to Nonoperating
Landlords plus Interest Expense
(P/E Concept)
15
10
5
0
25
20
Price Earnings Ratio 3-Year Rolling Average Price/Earnings Ratio-One Year

Credit Conditions –
Credit Quality by Commodity
Commodity
Volume as of 6/30/09
Hogs
Dairy
Poultry
Cow / Calf
Feedlots
Corn & Soybeans
Other Crops
Ethanol
$3,428
$4,581
$2,128
$4,015
$1,448
$11,535
$16,801
$1,632
Other Commodities $13,113
Total $58,682
% of YE 2009
Portfolio % Adverse Projection
5.8% 11.7% 15.7%
7.8% 8.1% 10.7%
3.6% 6.5% 7.5%
6.8% 1.8% 3.3%
2.5% 3.2% 4.0%
19.7% 0.7% 0.9%
28.6% 1.3% 2.3%
2.9% 27.5% 34.2%
22.3% 3.9%
100.0% 4.1%
5.0%
5.0%
$ in millions
17

 Futures strip:; Dec. ‘09 - $14.82; March ‘10 - $15.19; June ‘10 - $15.58; Dec.
‘10 - $15.72
 Cost of production $15/cwt.
 Weak domestic and foreign demand, Strong dollar, High feed cost
$19 to $12 price
 Kielkopf – “Need to slaughter 225K cows to reduce excess NFDM”
 Two industries – traditional and “factory” dairies

Factory dairies are losing equity at a rapid rate – high volatility in feed markets

Traditional - less debt, some profits from crop production, less affected by market volatility for feed costs
• Expect to finance negative cash flows through mid 2010
• Many factory dairies do not have the liquidity and solvency to reach breakeven next summer

2006
2007
2008
2009
2010
Per Capita Consumption of Meat in Pounds
50
49
48
Pork
49
51
63
63
60
Beef
66
65
Chicken
87
85
84
80
81
Turkey
18
18
18
17
17
Total
220
219
215
209
206

Livestock Overview
09/08 10/08
2008 2009 2010 % Change % Change
Beef Production 26,663
Pork Production 23,367
Broiler Production 36,511
26,565
22,766
35,040
26,092
22,365
35,541
-0.4% -2.1%
-2.6% -4.3%
-4.0% -2.7%
Beef Exports
Pork Exports
Broiler Exports
Beef Exports
Pork Exports
Broiler Exports
1,888
4,668
6,962
1,744
4,183
6,428
1,905
4,450
6,300
7%
20%
19%
7%
18%
18%
7%
20%
18%
-7.6% 0.9%
-10.4% -4.7%
-7.7% -9.5%

 Oversupply due to increased productivity of herd due to effective circo virus vaccine and genetic improvement
 Exports have been strong, 20% of production
 Vulnerable to global slow down/swine flu scare
 Banes- spring 2008 --- need 10% reduction in sow number; actual only 3%
 Futures strip –Dec. ‘09 - $56.20; Live $41.58
Feb. ‘10 - $61.90; $45.80
June ‘10 - $72.35
 Estimated cost of live production $50-51/cwt.
$56.42
 Expect to finance negative cash flows through Mid 2010
• Many operations have burned liquidity and solvency and do not have the ability to get to mid-year 2010

 Feedlots were losing $100-200 per head
 Lower placements put pressure to move from hotel to “owner” role.
Financial capacity to accept risk is often not present.
 Beef is a high price source of protein
• What will financially pressured consumers buy? Beef to chicken issue.
 South Korean agreement - how fast will it ramp up?
 Limited movement of feedlots to western corn belt (NE) due to
DDGs
• What will feedlots be worth? 65 for sale
 Lower calf prices for cow/calf producer after 5-8 years of good income will lead to lower profitability

 Production - USDA
• ‘07 35,739MM# +1.0%
• ‘08
• ‘09
• ’10
36,511
35,095
35,541
+2.1
-3.9
+1.2
 Value subtraction issue (whole birds vs. further processed)
 World trade/Russian exports
 Cash positive in 2nd quarter, positive net income in 3rd quarter
 Industry will build equity if they do not crank up production

 Mandate = 10.5 BGY in 2009
 Current production capacity = 12.5 BGY
 Current production = 9.8 BGY 78% of capacity
 Forecast is to operate at 10-15 cents per gallon EBITDA
(assumes labor is fixed expense)
 New industry driven by government policy
 Problems caused by market volatility/high feedstock cost (corn)
 Expect several plants to turn more than once

Crops
 Crop producers
• USDA forecasts $20 billion less revenue in 2009 vs. 2008
• Overseas production response to high prices in 2008
• Domestic and foreign demand reduced due to economic recession and reduced livestock use
• Flattening of demand pressure from ethanol
• Less income, not losses Credit concerns in this segment are unlikely to show until 2011 or 2012
• A drought in the world can change credit outlook in 90 days
 Crops - two different risk profiles
• Cash renter/operator
• Land owner with low debt load

04/05
05/06
06/07
07/08
08/09
09/10
World Grain Stocks
Stocks
MM Metric Tons
Percent Carry to
Use
408
389
342
360
440
443
20
19
17
17
21
20

04/05
05/06
06/07
07/08
08/09
09/10
World Oilseed Stocks
Stocks
MM Metric Tons
Percent Carry to
Use
56
54
73
63
55
62
19
17
22
19
16
18

04/05
05/06
06/07
07/08
08/09
09/10
US Coarse Grain & Oilseed Stocks
Coarse Grain
Stocks
MM Metric
Tons
Percent Carry to Use
Oilseed
Stocks
MM Metric
Tons
45
45
32
59
54
36
19%
17%
22%
19%
16%
18%
16
16
11
25
22
15
16%
48%
32%
13%
10%
14%

Bob Doane
Vice President, CoBank

Total Bank Debt and High-Yield Bond Volume in the Leveraged
Finance Market
Source: S&P/LCD and Merrill Lynch Global High Yield Strategy
750
$675B
$624B
500
$351B
$410B
$351B
250
$240B $222B
$201B
$307B
$398B $389B
$219B
$166B
0
1997 1998 1999 2000 2001 2002 2003 2004 2005
Institutional Pro Rata High-Yield
2006 2007 2008
Y
TD
1
0/
9/
09

Percent of Outstanding Leveraged Loans in Payment Default or Bankruptcy
15%
11.3%
12%
9%
7.0%
7.4%
6%
3%
4.0%
3.6%
2.6%
1.9%
3.7%
0.6%
0.0%
0%
6 7 8 9 0 1 2 3 4
Y
E199 E199 E199
Y
E200 E200 E200
Y Y Y
5 6 7
10/
8
200
9
As of

350
300
250
200
150
100
50
0
2009 2010 2011 2012 2013 2014
Institutional Loans High Yield Bonds
2015 2016
($billions)

Average New-Issue Pro Rata & Weighted Average First-Lien
Institutional Spread of BB/BB- Loans
L+600
L+500
L+400
L+300
L+200
L+100
Ja n-
98
Ju l-9
8
Ja n-
99
Ju l-9
9
Ja n-
00
Ju l-0
0
Ja n-
01
Ju l-0
1
Ja n-
02
Ju l-0
2
Ja n-
03
Ju l-0
3
Ja n-
04
Ju l-0
4
Ja n-
05
Ju l-0
5
Ja n-
06
Ju l-0
6
Ja n-
07
Ju l-0
7
Ja n-
08
Ju l-0
8
Ja n-
09
Ju l-0
9
Pro Rata Institutional

Average New-Issue Pro Rata & Weighted Average First-Lien
Institutional Spread of B+/B Loans
L+550
L+450
L+350
L+250
L+150
Ja n-
98
Ju n-
98
N ov
-9
8
A pr
-9
9
Se p-
99
Fe b-
00
Ju l-0
0
D ec
-0
0
M ay
-0
1
O ct
-0
1
M ar
-0
2
A ug
-0
2
Ja n-
03
Ju n-
03
N ov
-0
3
A pr
-0
4
Se p-
04
Fe b-
05
Ju l-0
5
D ec
-0
5
M ay
-0
6
O ct
-0
6
M ar
-0
7
A ug
-0
7
Ja n-
08
Ju n-
08
N ov
-0
8
A pr
-0
9
Se p-
09
Pro Rata Institutional

L+600
L+500
Institutional
L+400
L+300
Pro Rata
L+200
M ar
-9
6
Au g-
96
Ja n-
97
Ju n-
97
N ov
-9
7
Ap r-
98
Se p-
98
Fe b-
99
Ju l-9
9
D ec
-9
9
M ay
-0
0
O ct
-0
0
M ar
-0
1
Au g-
01
Ja n-
02
Ju n-
02
N ov
-0
2
Ap r-
03
Se p-
03
Fe b-
04
Ju l-0
4
D ec
-0
4
M ay
-0
5
O ct
-0
5
M ar
-0
6
Au g-
06
Ja n-
07
Ju n-
07
N ov
-0
7
Ap r-
08
Se p-
08
Fe b-
09
Ju l-0
9

L+3200
L+3000
L+2800
L+2600
L+2400
L+2200
L+2000
L+1800
L+1600
L+1400
L+1200
L+1000
L+800
L+600
L+400
L+200
L+0
Ja n-
97
M ay-
97
Se p-
97
Ja n-
98
M ay-
98
Se p-
98
Ja n-
99
M ay-
99
Se p-
99
Ja n-
M
00 ay-
00
Se p-
00
Ja n-
01
M ay-
01
Se p-
01
Ja n-
M
02 ay-
02
Se p-
02
Ja n-
03
M ay-
03
Se p-
03
Ja n-
M
04 ay-
04
Se p-
04
Ja n-
05
M ay-
05
Se p-
05 n-
Ja
06
M ay-
06
Se p-
06
Ja n-
07
M ay-
07
Se p-
07 n-
Ja
08
M ay-
08
Se p-
08
Ja n-
09
M ay-
09
Se p-
09
B Loans
All BB/B Loans
BB Loans

 Lower leverage, higher equity levels required
 Tighter covenants and security packages
• More asset-based financing
• Borrowing bases
 Shorter maturity loans
 Very few dividend recapitalization deals
 Original-issue discounts, higher up-front fees
 Libor floors often set at 2 to 2.5%
 More rigorous excess cash flow sweeps

Commercial Lenders
 Recapitalization process has begun although some commercial banks are likely to remain under pressure into 2010.
 Banks remain unpredictable (deal by deal for some)



Capital issues
Credit concerns evident in 3Q results (depth/breath of recession remains an issue)
Reformed business strategies

Different personnel, layoffs, restructurings

Market down to a handful of dependable Ag lenders
• Focus on:


Credit quality and risk
Conservative structures (shorter tenors, tighter covenants, Libor floors, borrowing bases, and collateral packages — back to old school backing)

Higher loan spreads and fees
 Relationships Count


Relationship banks continue to support their core accounts
Ancillary business remains very important

 Greater capital conservation
• Focus on pricing (minimum spread thresholds) and structure
(term, collateral and covenants)
• Interested in funded assets that achieve market yields
• Selective with lower hold levels
• Reserving capital for core relationship borrowers
 Ethanol, Dairy, Forest Products and Livestock segments experiencing credit deterioration
• Farm Credit entered downturn with strong balance sheets and solid credit quality ratios
 Continued interest in quality credits (all the FCS investors are back, some not yet at full strength)

 Global Unwinding of Leverage
• Banks, hedge funds, private equity, and consumers, all in process of unwinding leverage
• Rapid unwinding of leverage associated with the structured finance
(securitization) industry
• Government sector taking on new debt, risk of crowding-out of private sector
• Derivative exposure concentrations still unknown
 Commercial/investment banks likely to remain under extreme pressure through 2009 and likely into 2010
• Higher minimum capital requirements for all financial institutions likely
• Need to raise more capital, who will provide it?
• Rethinking risk management models
• Substantial internal restructuring and deleveraging
• How will regulatory environment change?

 Fundamentals of real estate and consumer credit problems likely to have a long tail and tied to unemployment dynamics and deleveraging
 Lender perspective that the economy is poised for recovery. But will it be a jobless recovery?
 Expectation of higher credit losses in many segments
 Credit spreads likely to tighten from current levels as economy continues to recover but refinancing calendar likely to put floor on spreads
 Multiple levels of uncertainty: global economy, role of government
(ownership), credit availability, dollar value, financial strength of institutions/counterparties, derivative exposure concentrations, risk management (model) risks, regulatory changes, etc.

 Management
 Board governance
 Balance sheet strength
 Appropriate risk management competencies and tools
 Capacity
• People
• Capacity
• Time

 Working Capital (Liquidity)
• Current assets - Current liabilities
Factors to Consider:
• Accounts receivable management
• Inventory management
• Types of business lines
• Grain merchandising practices
• Prepayment activity
• Peak seasonal borrowing needs
• Working Capital to Sales Percentage is one component of
Risk Rating

 Local Leverage
Long Term Debt minus Current Portion Due
Net Worth minus investments in Cooperatives and Other
Entities
 Reasonable Local Leverage 50%
 Minimum Acceptable Level < 80%

 Debt Service Coverage Ratio
Net Cash Available for Debt Service
Current Portion of Long Term Debt
 Minimum Acceptable Level > 1.5 : 1
 Optimum Level > 2.75 : 1

 Counter-party risk
• Assessment, due diligence, mitigating factors, contracts, limits
 Contracts
• Procedures on contract execution and fulfillment
(enforcement)
• Forward contracting limitations
• Pre-pay versus booking contracts

 Prepare to manage greater risk associated with increasing volatility in all markets.
• input risk – availability, price, prepaids, etc.
• production risk – weather, technology, etc.
• marketing risk –hedging, pricing, consumer
• investment risk – realistic assumptions
• Regulatory risk – farm programs, regulation
 Develop strategies to secure working capital and remember it will be resource challenged in the future!

 Financial cooperatives
• One vote per member
• Volunteer boards
 State or federal charter & supervision
 Full-service financial providers
 Defined field of membership
• Single employer
• Multiple employer groups
• Organizational
• Community (geographic)
• Trade, Industry, Profession (TIP)

 62 Federal (NCUA); 94 State (Dept. Commerce)
 All Federally insured to $250K
 $12.83 B total deposits; ~6.0% of MN market
 $9.86 B total loans; 865,668 total credits
 $14.96 B total assets; 1.5 M members
 10.19% Net Worth; 0.28% ROA [0.93%]

 Business loans ~ 8.5% of CUs’ total portfolio
 8 credit unions doing Ag lending
• 2,921 credits
• $285 M total Ag credits
• $168 M largest Ag portfolio; 1,497 credits
 Money to lend – all loan types
 Well-capitalized

 2 Federal (NCUA); 245 State (Dept. of Financial Institutions)
 All Federally insured to $250K
 $17.18 B total deposits; ~14.8% of WI market
 $15.52 B total loans; 1,304,260 total credits
 $20.06 B total assets; 2.2 M members
 10.01% Net Worth; 0.46% ROA [1.35%]

 Business loans ~ 15.5% of CUs’ total portfolio
 16 credit unions doing Ag lending
• 1,741 credits
• $130 M total Ag credits
• $48 M largest Ag portfolio; 571 credits
 Money to lend – all loan types
 Well-capitalized

 CAMEL (Examination) Ratings: 1 – 5
 4 or 5 CAMEL rating is a “watch”
 71 banks – 22% of state’s total banks
• Six failures
 3 credit unions (all are CAMEL 4)
• Two mergers
*Source: Minnesota Department of Commerce

 17 Banks & 5 S&Ls are on the “Problem” list
 7 Credit Unions are on the “Problem” list

3 are still “Adequately Capitalized” (> 6%)

2 are “Under Capitalized” (5% – 6%)

2 are “Critically Undercapitalized” (<2%)
 1 bank failure since 2007
 1 credit union failure since 2007
*Source: IDC Financial Publishing “Corporate Report” magazine and NCUA

 416 (5.1% of total) institutions on FDIC “watch” list –
$300 B in assets -- 15 year high
 120 closures/mergers YTD -- $25+ B cost to FDIC
 40% of net income going into provisions for potential losses
 Stressed insurance fund
• 12/07 1.22%
• 6/09 0.22%

FDIC Quarterly Bank Report

FDIC Quarterly Bank Report

FDIC Quarterly Bank Report

FDIC Quarterly Bank Report

FDIC Quarterly Bank Report

 ~326 (4.26% of total) CUs on NCUA’s “watch” list – CAMEL
4 or 5
 3,500 (45% of total) CUs with net operating loss through
6/09
 ~135 mergers YTD (includes 21 “failures”) -- $95 M cost to
NCUSIF
 Concentrations: CA, FL, AZ, TX, NE, UT
 NCUSIF fund at 1.30%

Regional/Community Institutions
(Credit unions and banks)
 Financial landscape has changed
 Some institutions still doing relatively well
 Most are experiencing challenges
• Slower loan growth
• Higher than normal delinquencies and losses
• Higher loss provisions – negative earnings
• Falling net worth (capital) ratios
• NCUSIF and FDIC assessments

(What’s changed)
 Refined underwriting guidelines
 Quarterly updates to credit scores
 Reviewing & updating collateral values
 Reducing credit lines on credit cards and HELOC loans
 Re-writes
 Counseling

(Lingering?)
 Employment
• Lags recovery
• 10%: how long?
 Real estate values
• Bubble has burst
• Residential first, now commercial
• Time to recovery?
 Consumer confidence
• Uncertainty, confusion, lack of trust
 Interest margin

(Applies to small businesses, too)
 Saving more
 Paying down existing debt faster
 Reluctant to take on new debt
 Refinancing at lower rates
 Cautionary spending
 Consumption (GDP) down; business investment/expansion down

 Somewhat harder to borrow – tighter standards
 Rates are low – for now
 Credit unions are making loans
 Credit score & BNI score
 Ability to repay
 Higher down payment
 Lower LTV ratios

 Freefall ends
 Modest growth resumes
 Unemployment remains higher than usual
 Little change in short-term rates
 Economy remains fragile
 More regulation
 Government looking to help small businesses
 All eyes on leading indicators

 Cost of clean up: the consumer will pay!
• Insurance fund assessments

FDIC – 3 years prepaid premium; 7 years to rebuild

NCUSIF – up to 7 years to payback Treasury loan
• Capital restitution; need to pump up earnings
• Additional provisions for future losses & write-downs
 Regulation
• Consumer “protection” and “safety & soundness”
• Financial industry oversight
 Long-term to full recovery

 After the rain, comes the rainbow!
 Protect your good credit
 Deal with volatility
 Have a post-recovery plan