New York Bankers Association
2013 Northeast Agri-Business Seminar
July 12, 2013
Washington
Outlook: What’s
Ahead for
Agricultural
Bankers?
Photo Credit:
South Dakota State Historical Society
Banks are Returning to Profitability
Quarterly Return on Assets
2.0%
1.0%
0.0%
-1.0%
-2.0%
1984 1988 1992 1996 2000 2004 2008 2012
Source: Federal Deposit Insurance Corporation
Net Charge-Off Rate
Asset Quality Improving
3%
2%
1%
0%
1984 1988 1992 1996 2000 2004 2008 2012
Source: Federal Deposit Insurance Corporation
Outstanding Bank Credit to Farmers
($Billions)
Farmland Loans
Farmland Production Loans
$67
$38
$47
$41
$47
$45
$49
$48
$52
$53
$54
$57
$57
$64
$67
$68
$60
$60
$59
$61
$69
$74
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Farm Debt = RE $153 B + Non RE $115.9 B = $268.9 B
Source: Federal Deposit Insurance Corporation
Total Farm Debt is from USDA/ERS 2/13
Biggest Drought in Years, Slight Dip In
Income
USDA, Economic Research Service
February 2013
Corn Stays King
(Any farmers still wondering if crop insurance is
worth it in Iowa or Illinois?)
USDA, Economic Research Service
All the Makings of a Hyper Competitive Marketplace
90%
270,000 farms
account for 80+
percent of
production, and
owe
approximately
60% of all farm
debt – where do
your farm and
ranch customers
land on this
spectrum?
Source: USDA, ARMS
80%
70%
Farms
Production
Assets
1,344,031
Debt
270,795
60%
50%
40%
577,028
30%
20%
10%
0%
Rural Residence
Small farms whose
operators report they
are retired or they had
a major occupation
other than farming.
Intermediate
Commercial
Farms with
Farms with sales
sales less than
Farm
Businesses
greater
than
$250,000 whose $250,000.
operators report
farming as their
major
occupation.
Farming Isn’t the Only Thing Consolidating
Number of FDIC Insured Institutions
17,325
“Shrinkage!”
George Costanza
7,436
Source: FDIC
Farm Sector Debt to Asset Ratio
25%
Debt to Asset Ratio
20%
15%
10%
5%
0%
1970
1976
1982
1988
Source: Economic Research Service, USDA. Data as of August 28, 2012.
* Forecast
1994
2000
2006 2012f*
What was once a small farmer owned
cooperative…
If You Added the 2011 year end
Balance Sheets of all1,538 Banks
the FDIC Defined in 2011 as a
“Farm Bank” and Compared it to the
year end 2011 Balance Sheet of the
Farm Credit System, What Does
That Comparison Look Like?
FCS is Larger than All 1,538
Farm Banks Combined
Total Assets, $ Billions
$300
$240 B
$222 B
$200
$100
$0
Farm Credit System
FDIC Farm Banks
Source: FDIC & FCS 12/31/11
FCS Made $1.2 Billion More Net Income
Than 1,538 Farm Banks Combined in 2011
$3.5 B
$3.2 B
Net Income YTD
3Q'12
$ Millions
$3,000
$2.1 B
$2.3 M
$2,000
$1,000
$0
Farm Credit System
Source: FDIC & FCS
FDIC Farm Banks
The Farm Credit System Paid A
Substantially Lower Tax Burden Than Banks
2011 Effective Tax Rate
32.9%
30%
30.0%
20%
10%
6.4%
0%
Farm Credit
System
FDIC Farm
Banks
Source: FDIC & FCS
All Banks
Return on Assets YTD 3Q12
FCS’s Tax Advantage Helped
It Earn A Greater Return on Assets Than 1,538
Farm Banks, Or Any Bank
2%
2.0%
0.9%
1%
1.0%
0%
Farm Credit
System
FDIC Farm Banks
Source: FDIC & FCS
All Banks
FCS’s Tax Advantage Helped
It Earn A Greater Return on Equity Than Banks
Return on Equity YTD 3Q12
13.2%
12%
8.3%
9.0%
8%
4%
0%
Farm Credit System
FDIC Farm Banks
Source: FDIC & FCS
All Banks
2012 Results for the FCS
• Net Income was $4.5 billion – the first $4
billion year.
• Total loans outstanding grew $17.2 billion
– real estate lending grew $7.6 billion
• Total tax rate for the entire System was
5.12% - lowest level in 4 years
• CoBank paid 74% of the entire tax bill for
the FCS. Their tax rate was 16.1%
• Without CoBank, the tax rate for the rest
of FCS was 1.7%.
Analysis completed by Bert Ely March 2013
Farm Credit East 2012 Performance
• Loan portfolio: 52% NY, 14% NJ, 8% MA, 7% CT,
19% other states
• $4.868 billion total assets
• $109.5 million net income
• ROA 2.36
• ROE 13.09
• 15.62 permanent capital ratio
• $639 thousand in taxes, .58% tax rate
• $40 million in patronage dividends paid
2012 Annual Report Farm Credit East
Land Fever All Over?
Corn Belt is the Hot Zone
Comparing
2012 to
2011
USDA National Agricultural Statistics Service
August 2012
The Hot Zone
Bad Moon Rising?
“We must not ignore the possibility that the
low-interest rate policy may be creating
incentives that lead to future financial
imbalances. Prices of assets such as bonds,
agricultural land, and high-yield and leveraged
loans are at historically high levels. A sharp
correction in asset prices could be
destabilizing…”
Esther George, President and CEO
Federal Reserve of Kansas City
January 10, 2013 speech
“US Economy and Monetary Policy”
January 10, 2013 speech
What Did the June House Vote Look
Like?
• Republicans: 62 No, 172 Yes
• Democrats: 171 No, 24 Yes
• Total votes needed to pass: 218
• Kind Amendment (Ron Kind, D-Wisconsin) would have capped crop insurance subsidy
@ $250,000 AGI, and total subsidy could not
exceed $50,000. Failed 217 to 210. This will
be revisited when we ultimately get to a Farm
Bill.
What Is the Primary Driver of Farm Bill
Failure?
• Nearly 1 in 6 Americans receive SNAP
benefits
• 23% of the population of the District of
Columbia receives SNAP benefits
• 22% in Mississippi – largest state population
• One in five receive SNAP benefits in Oregon,
New Mexico, Louisiana, Tennessee, Georgia,
and Kentucky
• 47.5 million Americans in total receive
nutrition assistance
Wall Street Journal
July 8, 2013
What Is the Primary Driver of Farm Bill
Failure?
• Senate passed bill – reduces spending on
SNAP by approximately $4 billion over 10
years.
• House Ag Committee passed bill would reduce
spending by approximately $20 billion over 10
years.
• Last minute amendment on House floor added
a “workfare” requirement to the bill, which
passed.
• The bill failed to pass the House shortly after.
What is the Real Money in Any Farm
Bill?
Congressional Research Service
7/12
Does Anyone Remember When Loan
Rates Meant Something?
USDA/ERS
February 2013
Bottom Line on a 2013 Farm Bill
• Latest House plan is to split farm and nutrition titles
and try to pass the farm part by end of July. Dairy
title remains a problem. Supply management piece
was stripped on the floor in June (is still in Senate
bill). Latest is the House would also repeal the
1949 Act poison pill. As of this writing, all is in flux.
• Passing an extension of the 2008 legislation in
January 2013 did not seem hard to do, and no
apparent consequences: no tractorcades
• High commodity prices have tamed sense of
urgency – the mighty farm lobby?
ABA and the Farm Bill
• We support having a new Farm Bill – we favor
certainty
• Protect Crop Insurance• Oppose income means testing
• Oppose caps on the subsidy
• Eliminate FSA borrower term limits or modify the
15 year limitation is some way
• Increase the FSA Guaranteed FO program funding
level
• We joined 500+ groups on July 2 urging House
passage.
Why is FSA Out of Money?
• In FY 12 the FSA Guaranteed loan programs
saw a borrower fee increase to 150bps
• G-FO now fully fee funded, G-OL still needs an
appropriation- both programs have an annual
spending cap – “Program Funding Level”
• US government running on a “continuing
resolution” that limits the amount of money they
can spend or obligate
• At the end of FY 12 there was a huge backlog of
unfunded deals - $300 million
Why is FSA Out of Money?
• When FY 13 money was released, FSA was
only allowed $600 million - $300 went out the
door immediately because of the 2012
backlog.
• ABA tried to get the program funding limit
pushed up from the current $1.5 billion.
• The House Continuing Resolution raised the
funding level to $2 billion. The Senate kept it
at $1.5 billion. Congress adopted the Senate
CR.
FSA Funding Woes for the Rest of 2013
• The math on 2013 G-FO not good
• April, 2013 $383,000,000+ backlog waiting for
funding. Funding released mid April with
passage of CR
• $586 million was made available in Mid April, all
funds gone before the end of April.
• USDA estimates the backlog at the end of FY 13
could be $600 million+
• FY 14: lather, rinse, repeat if we do not have an
actual budget.
How Do We Fix FSA FO Funding Woes in
the Future?
• We hope there will be a real budget passed
for FY 14. Don’t hold your breath.
• House Ag Appropriations calls for $2 billion in
authority, plus a $500 million kicker. Has not
come to the floor yet.
• We have gotten some pushback from some
members of Congress who wonder if FSA
has the capacity to increase their program
funding levels.
• Become a PLP lender
March 12, 2013 slide prep
One More FSA Guaranteed Lending
Issue Worth Your Attention
• New loan pricing policy effective May 2013
• At closing your guaranteed loans must
confirm to one of 2 indices.
• No more than 650 bps above 3 month LIBOR
for variable rate loans
• No more than 550 bps above 10 year
Treasuries for loans with a 5+ year fixed rate
• OR, you can use your risked based pricing
matrix as long as it is “formal” and “written”.
• May no longer use POYA Index
FSA Interim Rule published March 4, 2012
You may file a comment letter as late as June 3, 2013
Market Yield on U.S. Treasury
10-yr Securities
16
U.S. 10-yr Treasury
14
12
How can anyone with 20 years or
less experience not believe that
interest rates will stay low forever?
Are your customers asking for help?
10
8
6
4
2
0
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Federal Reserve
ABA National Agricultural Bankers
Conference
“We Can’t
Dream
Big
Enough”
The first 150
to register
receives a
copy of Orion
Samuelson’s
book!
November 10-13, 2013. Hyatt Regency. Minneapolis
John Blanchfield
ABA Center for
Agriculture
And Rural
Banking
American Bankers
Association
Washington, DC
jblanchf@aba.com