Farm Futures - Farm Credit Illinois

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A LOOK AT THE LENDING

ENVIRONMENT TODAY VERSUS

THE 80’S AND WHY

CHARACTER IS THE

FOUNDATION OF THE 5 C’S OF

CREDIT

S teve n A . Wit g e s

Re g iona l Vice -

P r e side nt

Far m C r e dit S e r v ice s of I llinois

 Bonnie &

 Fish &

 Burger &

 Cheese &

 Peanut Butter &

 Farmer

WORD ASSOCIATION

 Clyde

 Chips

 Fries

 Crackers

 Jelly

 CEO

OBJECTIVES

 Challenge our Thinking

 Who is FCS of Illinois

 Mid-80’s overview

 Lending environment today versus 80’s.

 The character factor of the 5 C’s of credit

 Are we in a farm real estate bubble?

 Closing thoughts

INTRODUCTION

 FCS of Illinois - Southern 60 Counties of

Illinois

 15 Branch offices

 Headquarter office – Mahomet

 199 employees

 $3.3 Billion assets

 49M crop insurance premium; 1.2 million acres

Farm

Credit

Services of Illinois

THE MID 80’S

 Typical Day

 Calling and/or meeting with delinquent accounts

 Reconstructing financial statements

 Occasional operating loan renewal

 Busy work as required by regulator

 Credit quality – well below 25% acceptable paper

 Frequent acquired property land auctions

Land Values

Interest Rates

Collateral Advance Rates

Politics

LENDING ENVIRONMENT

80’S VS TODAY

80s Today

Aggressive

Russian Embargo

More disciplined

Ethanol, Farm Bill

LENDING ENVIRONMENT

80’S VS TODAY

Loan Documentation

Farm Income

Risk Management

Risk profiles of loan

Portfolio

80s Today

Weak financial analysis

Character: good guys, good family

Weak commodity prices

Weak earnings

5 C’s of Credit: Capital,

Capacity, Conditions,

Collateral, Character

Strong commodity prices

Strong earnings

Basic production guarantee crop insurance

Revenue products

Fixed interest rates

Limited knowledge of

Portfolio quality

Annual financials

More sophisticated measurements

THE 5 C’S OF CREDIT

 Character

 Capital

 Capacity

 Collateral

 Conditions

CHARACTER (CEO) – KEY QUALITIES

 Financial Management

 Risk Management

 Marketing Skills

 Production

 Relationship Management

FINANCIAL MANAGEMENT

 Annual financial statements coinciding with tax year-end.

 Accrual based income statements

 Understanding of how decisions impact balance sheet.

 Historical information = tremendous value

 Financial GPS

RISK MANAGEMENT

 Crop insurance

 Revenue products/GRIP

 Cost of doing business

 Fixed rate interest products

 Be aware of greed factor?

 Liquidity management

 Managing volatility

 Self reliance

MARKETING

 Break Evens; written plans

 Eliminating emotions

 The search for right advice

 Use of trusted market advisors

 Remove emotion?

 Consistent approach

 Discipline, focus

 Singles, & doubles vs home runs

PRODUCTION

 Adaptation to technology

 Cost effectiveness

 Efficiency of operations

 Cost to produce a $1 of revenue

RELATIONSHIP MANAGEMENT

 Communication

 Lender

 Suppliers

 Landlords

 Life Skills

 Employee Management

 Coaching up or down?

 Emotional Intelligence Quotient (EQ)

 Self assessment

 Empathy

 Little things

 Feedback

Are we in a Farm

Land Real

Estate

Bubble?

ASSET BUBBLES

 Asset Bubble: When the value of an asset isn’t supported by economic fundamentals. Accelerated by the availability of capital to ‘inflate’ the bubble.

 Bubble Burst: When it’s recognized that factors don’t support asset value. Debt capital cannot be repaid ‘according to terms’, and equity capital, wealth, is erased.

ARE WE THERE?

 Real estate values are high, but is it a bubble?

 Current debt is supported by consistent & strong earnings.

Debt to income multiple is at historic lows.

 Interest rates are low. Increases will decrease profits and will most likely lead to contracting values.

 If not, what are the influencing factors around a potential bubble?

 How well will we manage a potential return to more moderate profit levels?

 Political impact?

 Other investment opportunities?

CLOSING THOUGHTS

 Remain optimistic about agriculture

 Land values have climbed to levels many thought was unimaginable

 Today there are differences from the 80’s:

 Much improved revenue protection products

 Fixed rate interest options

 A more business minded clientele

 We need to be prepared for some degree of adversity; working capital is king!!

 What we do during the good times can prepare us for tougher times

 Some unbeknownst to us today will likely surface

CONTACT INFORMATION

 FCS of Illinois Association Website: www.fcsillinois.com

 Email: steve.witges@fcsillinois.com

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