Credit and Risk Management
Cal-Med Workshop Sonoma, California
October 26, 2007
Corny Gallagher
Agribusiness Executive
Bank of America
FARM ASSETS / DEBT
U.S. ($billions) 2005
2006
2007
•
•
•
•
•
•
1,635
285
1,920
109
98
207
1,858
311
2,169
112
102
214
$1,612
$1,724
$1,955
4.7%
3.9%
Real Estate
1,521
Non RE
284
Total Assets
1,805
RE Debt
102
Non RE Debt
92
Total Debt
194
• EQUITY
• ROE
4.4%
FARM SHORT TERM DEBT $98 BILLION
Individuals and
others
16%
Commercial
banks
53%
Farm Credit
System
28%
Farm Service
Agency
3%
FARM RE DEBT $109 BILLION
Individuals and
others
10%
Farm Credit
System
41%
Life insurance
companies
10%
Commercial
banks
37%
Farm Service
Agency
2%
FARM INCOME
U.S. ($billions)
•
•
•
•
•
•
Crops
Livestock
Cash Receipts
Cash Expenses
Gov’t. Payments
Net Farm Income
USDA
2005 2006 2007
116
125
241
196
24
$77
120
119
239
205
16
$68
136
140
276
222
14
$87
FOCUS ON CASH FLOW
• The primary source of repayment of short term
production loans is from the cash flow of the
current years crops and livestock sales.
• The primary source of repayment of long term RE
loans is the net income from the property pledged.
• Acres farmed times expected yields times
forecasted prices determines income forecast.
• Less expected cost to produce the revenue
determines the net income available to service
debt.
BUSINESS SUCCESS
CHARACTERISTICS NEEDED TO
MANAGE RISK
•
•
•
•
•
•
•
Financial Management
Equity Capital
Diversification
Vertical Integration
Productivity and Technology
Marketing
Succession plan - Sustainabliity
SUSTAINABILITY
• The Code is conceived around the three “E”’s
Driving Economic Forces in California
Agriculture
•
•
•
•
•
People
Land
Air
Water
Global Competitiveness
California at Night
FARMING IN AN URBAN STATE
We’re not the only ones growing ... competing
for natural resources
• 36 million (550-600,000/year)
• 55 million by 2050
• Need: 7 million homes;
10 million jobs; 12 million
more motor vehicles
CALIFORNIA DOMINATES U.S.
PRODUCTION OF SPECIALTY
CROPS









Almonds: 100%
Pistachios: 100%
Walnuts: 100%
Processing Tomatoes: 95%
Figs, Dates, Olives, Kiwi: 100%
Apricots: 95%
Plums/Prunes: 97%
Grapes: 87%
Vegetables: Very high percentage
Figure I.7 - California Harvested Cropland by Crop, 1964, 1982, 2002
3,500
3,000
1964
1982
2002
1,000 Acres
2,500
2,000
1,500
1,000
500
-
Source: Table I.3
Orchards and
Vineyards
Hay
Vegetables
and Melons
Cotton
Rice
Wheat
Other Crops
FARMER MAC
• Farmer Mac is America's secondary market for
first mortgage agricultural real estate loans.
• Farmer Mac was created by Congress to improve
the availability of long-term credit at stable
interest rates to America's farmers, ranchers and
rural homeowners, businesses and communities.
• Farmer Mac accomplishes its public policy
mission primarily by purchasing, or committing to
purchase, qualified loans from agricultural
mortgage lenders, thereby replenishing their
source of funds to make new loans.
FARMER MAC CREDIT STANDARDS
AND GUIDELINES
• The borrower’s pro forma debt-to-asset ratio should be
50% or less, on a market-value basis.
• Debt coverage ratio on the loan from pledged assets
must be 1 to 1 or better.
• The borrower’s pro forma overall total debt service
coverage ratio should not be less than 1.25 to 1,
including net income from farm and non-farm sources;
• Pro forma current ratio should not be less than 1 to 1.
FARMER MAC CREDIT STANDARDS
AND GUIDELINES
• The loan-to-appraised value (“LTV”) shall not
exceed 70%, although Farmer Mac has
established a maximum LTV of 75% in the case
of qualified facility loans.
UNIVERSITY OF CALIFORNIA
COOPERATIVE EXTENSION
2006
SAMPLE COSTS TO ESTABLISH
AN ORCHARD AND PRODUCE
ALMONDS
SAN JOAQUIN VALLEY NORTH
MICRO SPRINKLER IRRIGATION
COST TO ESTABLISH ALMONDS
PER ACRE
•
•
•
•
•
3 YEAR INPUTS $4,400
LAND
$7,000
TOTAL
$11,400
2006 SALES
$10,000
CURRENT NON AG
$6,000
$15,000
$21,000
$25,000
$30,000+
FORECASTED CASH FLOW
•
•
•
•
•
•
DRIVERS
LOW
YIELD
1,700
PRICE (10 YR) $0.86
INCOME
$1,462
OP COSTS $1,791
NET INC
NEG
HIGH
3,500
$2.48
$8,680
$3,673
$5,000
AVE
2,160
$1.52
$3,283
$2,000
$1,283
FORECASTED DEBT SERVICE
PER ACRE- RATE 8 % -20 YEARS
•
•
•
•
•
DRIVERS LOW
COST
$10,000
DEBT $5,000
NET INC NEG
PAYMENT $509
HIGH
$30,000
$15,000
$5,000
$1,527
• COVERAGE RATIO
• MAX LOAN AT 1 TO 1
AVE
$15,000
$10,500
$1,283
$ 1,070
1.2 TO 1
$12,500
PAY $1273
SMALL AMOUNT OF CAL-MED LAND IN
THE WORLD
HIGH DENSITY OF PEOPLE IN CAL-MED
REGIONS
Bank of America is one of the largest commercial
bank providers of financial services to the food
products industries in the United States.
• More than $15 billion in
commitments to the
industry sector.
• Clients value our
industry knowledge and
expertise as well as our
ability to provide a
complete range of
financial products and
services.
• We provide long term RE
loans with flexible terms.