Southern Outlook Conference
Agricultural Outlook
Atlanta, Georgia
September 28, 2009
Bill Melton
Chief Lending Officer
Farm Credit System
Farm Credit System Credit Quality
AgFirst District
AgFirst District Credit Quality
District (Bank & Associations)
Current
Credit
Conditions
Deterioration Began
Early in 2008
March 31, 2008
June 30, 2009
95.79%
89.11%
OAEM
2.67%
5.77%
Adverse
1.54%
5.12%
Delinquencies
1.14%
2.21%
$122.9 million
$642.3 million
$4.7 million
$74.0 million
$17.4 million
$183.5 million
$7.5 million
$101.1 million
Acceptable
Nonaccruals
OPOs
Provisions
(preceding 12 months)
Net Charge-Offs (preceding 12 months)
Challenges
The Speed and Severity of the Economic Correction
• Collapse of Financial & Credit Markets
• The Run Up and Retreat in Commodity Prices During 2008
• Underwriting Standards that Did Not Incorporate
the Depth of the Market Correction
Stages in Loan Deterioration
Challenges
District is Inseparably tied to the General Economy
• 33% of the AgFirst Associations’ borrowers are identified as
highly dependent on non-farm income
• A significant portion of the agricultural real estate is transitional
• Large concentration in forest products
• Decline in housing starts reverberating through industry
• Large concentration in meat/protein sector
Industry Specific Concerns
• Loans dependent on the general economy/housing
– Transitional real estate to high wealth individuals
– Forest products especially sawmills and planer mills
– Landscape nurseries, sod farms, etc
• Meat/protein sector
– Hogs & dairy
• Ethanol
2009/10 Financial Outlook for Farm Credit
• Capital levels may improve with slower growth
-
Strong capital levels will need to support the weaker credit quality
• Credit quality expected to bottom out by year-end
-
But no positive credit quality bounce
• AgFirst’s earnings enhanced by treasury profits
-
However, treasury profit will diminish over time
• Weaker earnings at Associations due to credit quality
issues & low interest rate on equity
-
Level of earnings will impact patronage distributions
2009/10 Financial Outlook for Farm Credit
• Much slower or even negative loan growth
• Recession or effects of recession will continue to
negatively impact the General Economy
• Return to modest Profitability for some sectors of the
Meat Complex
• Tough times to continue for:
– Pork and dairy
– Ethanol production
– Loans tied to the General Economy or Housing
2009 Farm Prices Weakening
Commodity Markets in Transition
2005/06
2006/07
2007/08
2008/09
2009/10
---------- Dollars per bushel ----------
Wheat
3.42
4.26
6.48
6.78
4.50 - 6.00
Corn
2.00
3.04
4.20
4.05
Soybeans
5.65
6.43
10.10
2.75 - 3.75
8.00 - 10.00
10.00
---------- Dollars per ton ----------
Soybean meal
195
205
336
320
250 - 300
---------- Cents per pound ----------
Cotton
47.7
46.5
59.3
2006
2007
2008
49.0
2009
50 - 60
2010
---------- Dollars per cwt. ----------
Cattle
Hogs
85.41
47.26
91.82
47.09
92.27
47.84
84 - 86
40 - 41
88 - 95
45 - 48
79 - 81
80 - 82
80 - 85
80 - 85
---------- Cents per pound ----------
Broilers
Turkeys
64.4
77.0
76.4
82.1
79.7
87.5
---------- Cents per pound ----------
Eggs
Milk
71.8
114.4
128.3
97 - 100
100 - 108
19.13
18.35
12
14 - 16
---------- Dollars per cwt. ----------
12.90
Farm Income Conditions Will be Diverse Again in 2010
Net Income Fa l l s wi th Commodi ty M a rk ets
Billion dollars
Livestock and dairy losses may drive
income back to 2006 levels!
Recovery in 2010 will be limited with grains
complex watching stock buildup and
livestock/dairy completing liquidation
process.
100
80
60
Net Farm Cash Income
40
Net Cash Income less
gov't payments
20
Direct government payments*
0
75
77
79
81
83
85
87
89
91
93
95
97
* emergency payments are striped area of government payments)
99
01
03
05
07
09
Challenges for 2009 & Beyond
• Portfolio Management
– Address Deterioration in Credit Quality
– Maintain Adequate Capital & Liquidity
– Price and Structure loans consistent with risk
• Take advantage of opportunities to improve spreads
• Operating Expense Management
• Human Capital Management
– Effectively Address Retirements/Changes in Leadership
– Improve Diversity
• Remaining Committed to the Cooperative Principles
– Preserving the AgFirst Model
Next 12 Months Most Pressing Challenges
• Managing and servicing weak or nonperforming assets
– Equipping the staff to manage and service a deteriorating portfolio
– Keeping ahead of the curve
• Utilizing an effective strategy that maintain a viable
institution in all environments
• Keeping all constituents well informed
Market Approach in 2009/2010
• Focus on servicing “core agriculture”
– Narrow strike zone
– Take a pause on new lines of business
• Focus on higher-quality loans
– Limit new credit to upper-tiers of “acceptable”
• Addressing concentration by obligor and commodity
• Focus on higher spreads
• Focus on actively managing the loan portfolio
Lessons Learned Confirmed
1. It is practically impossible to underwrite for a “bubble market”
2. Circumstances dictate a guarantor’s ability & willingness to
perform
–
–
When dealing with multiple, limited guarantors, base the loan decision on the
capacity of the weakest guarantor.
Sponsors are supportive as long as the project is performing
3. In widely participated/syndicated loans, a material portion of the
risk is embedded in the composition of the lending group and
the lead lender’s servicing expertise
Exposures to Stressed Sectors
Protein Sectors
Loans Dependent on the General
Economy/Housing
Hogs
$ 835.3 million
Poultry
$3,181.7 million
Timber (Pine & Hardwood)
Dairy
$1,439.7 million
Logging/Sawmills/Planer Mills
$634.5 million
Landscape, Nurseries & Sod
$204.0 million
Ethanol
Ethanol Plants
$2,869.5 million
$307.7 million
Transitional Real Estate
$1,354.0 million
*(included in various SICs including timber)
Strategies Going Forward
• Structure Deals More Conservatively
– Higher liquidity / lower leverage requirements
– No stand-alone project financing without confirmed “take out”
– Collateralize guarantees up-front, if needed
Strategies Going Forward
• Reduce Hold Positions
– Obligor / Industry / Commodity
• Understand Counterparty Relationships
– “Position in Credit”
• Percentage of the deal and who comprises the lender group
– Performance of Servicer (experience / capacity)
Concerns
• Overreaction by everyone in the chain
• Potential for Credit Risk to impact Funding Cost
• Political vulnerability of the Farm Credit System
• Continuation of consolidation & globalization of
Agriculture
Perspective
(in millions)
December 31, 1986
June 30, 2009
$ Amount
% of Total Loans
$ Amount
% of Total Loans
Nonaccruals
$596.1
11.86%
$642.3
2.76%
Nonearning Assets
$662.8
13.19%
$715.3
3.08%
Perspective
District (Bank & Associations)
1986
(e) 2009
Provisions
$187.9 million
$197.6 million
Total Loans
$5.03 billion
$23.07 billion
Perspective
• The nonaccrual volume is contained in a relatively
small number of loans that are widely participated:
– 54% of the District’s nonaccruals are to 10 loans
• The lead lender is responsible for the bulk of the
servicing
Perspective
District (Bank & Associations)
1986
Net Earnings
2008
($329.8) million $363.5 million
(e) 2009
$272.4 million
“Current period earnings are sufficient to fully fund all provisions for
loans/investments and generate estimated net income of $272.4 million”
Ag Sector Balance Sheet Still Solid
Billion dollars
100
80
Net Cash income
60
40
Net Income falls but
balance sheet strong!
20
Percent
20
Debt-to-asset ratio
15
10
08
06
04
02
00
98
96
94
92
88
86
84
82
80
78
76
74
72
70
5
90
Deleveraging is not issue for
much of agriculture!
Summary
• Non-earnings assets could move to 3%-5%
– Higher reserves for loan losses
– More conservative credit underwriting and hold positions
• Weaker Earnings
• Flat to negative growth
• Recovery not expected before 3rd quarter 2010
– Improvement directly tied to recovery of general economy
• Beginning a major structural transformation in global
markets for goods, services and capital
“Thank You”
Eat more pork and drink more milk!