Lending to Agriculture
Joel Lorenzen
Senior Vice President
Chief Credit and Operations Officer
Farm Credit Services Southwest
ASFMRA Annual Meeting
October 2011
 Philosophy and Customers
World Trends
National Issues
Emerging Lending Risks
Underwriting Standards
Successful Producer Strategies
 Philosophy
Sound, Constructive, &Profitable
Types of Customers
Small Operator
Large Integrated Dairy
Agribusinesses
Processors
 Major Products
Long Term Real Estate Loans
Operating Loans
Other Products (No deposits)
 World middle class growth to double from 00’- 30’
 No middle class growth in advanced nations
 China and India account for 70% of growth
 Ability to pay drives commodity prices and transforms
world commodity markets
Potential Implications for Agriculture
 Cotton price impacted by growth in China/India
 Watch for trade protectionism practices
 Exports & world trade increasingly important
 New & Existing Entitlement Programs
 Deficits as % of GDP
 Taxing Implications
 Increased Regulation
 Few in Congress have ever been on a farm
Federal Reserve Strategies
Potential Implications for Agriculture
 Increased US Ag exports
 Federal Agriculture Programs all vulnerable
 Unknown estate and income tax future
 Oil and fertilizer input costs
 Crop prices - as value of $ decreases
 Trillions in cash sitting on sidelines
 Industrial production slowly climbing
 Added risk of uncertainty w/o reward
• General Economy
• Taxes
• Regulatory Increases
Impact on Agriculture
 Slower national economic recovery for jobs
 Low interest rates for ??? long
 Commodity Price Volatility
Real Estate Price Volatility
 Land Values vs. Income Production
 Increased Regulation
Impact on Agriculture
 High potential of boom and bust cycles
 Continued volatility in pricing
 Systemic risk in lending portfolio’s
Water Issues – Especially in the West
Financial Information Requirements
Lending Tied to Production Value

Continued price, cost, and cash flow volatility

Potential agricultural bubble in middle America

Increasing cost structure from regulatory compliance
(taxes, energy, environment, health care etc.).

Slow National Recovery

Weak dollar (favor exports and increase input costs)

Greater tie into global trade and economic policy as
export dependency increases.
Successful Producer Strategies
 Increasing liquidity
 Deleveraging
 Diversified risk management programs
 Managing margins vs. costs
 Improved financial records
 Looking for new opportunities
Capital Markets Update
October 2011
Index

Bank Market Update
 Investment Grade Market Update
 Leveraged Loan Market Update

Interest Rate Update

Commodity Markets
Confidential and Proprietary
12
Market Volatility
5-year Credit Default Swaps
300
High Yield
Investment Grade
Cross Over
800
700
600
This has resulted in widening credit spreads
(top right) and broad-based selling of
leveraged loans (bottom left)
200
500
400
300
100
200
100
0
0
VIX Volatility Index
Average Large Institutional Bid/Ask Spread
90
100
80
70
95
60
50
90
40
Bid
Ask
85
30
20
10
0
80
Confidential and Proprietary
13
Source: S&P LCD, Bloomberg
Cross Over / Invesmtment Grade

Market volatility has increased recently
(bottom right) as a result of sovereign debt
concerns and a weakening economic
outlook.
High Yield

900
Bank Market Overview
Even in light of market volatility, loan volumes
continue to rebound from 2008 lows.
 Although less than 2Q11, 3Q11 volume exceeded
every other quarter since 2Q07.
 Rolling four quarter volume has exceeded $1.5
trillion and is approaching “pre-crisis” levels.
Both investment grade and leveraged loans
experienced growing volumes.
1800
500
1500
400
1200
300
900
200
600
100
300
0
Rolling 4Q Volumes
600
S&P / Fitch
Leveraged or
High Yield
Bank Loan Volumes ($ in Billions)
Quarterly Volumes

Investment Grade / High Yield Distinction
Investment Grade
or High Grade

AAA
Aaa
AA+
Aa1
AA
Aa2
AAAa3
A+
A1
A
A2
AA3
BBB+
Baa1
BBB
Baa2
BBBBaa3
BB+
Ba1
BB
Ba2
BBBa3
B+
B1
B
B2
BB3
CCC+ and Below Caa1 and Below
0
Leveraged
IG
Other
Rolling 4Q Total
Confidential and Proprietary
14
Moody's
Source: Thomson Reuters LPC
Investment Grade: Volume and Tenors
Multi-year liquidity continues to represent the vast majority of the market.

 Multi-year volumes exceeded 364-day volumes by over 5 times YTD 2011.
 Four and five year volumes exceeded three year volumes by 6 times.
The rise of longer tenors are largely a result of:

 Supply: Liquidity is strong, and low investment grade losses are driving risk appetite.
 Demand: Historically attractive upfront / unused fees and relatively low spreads are driving demand.
 Risk Management Focus: Rating agencies value term liquidity. Additionally, term liquidity reduces
exposure to refinancing risks during events / financial shocks.
I-Grade Tenor by Quarter ($ in Billions)
Market Share by Tenor
80%
300
AAA
AA
A
BBB
70%
250
60%
200
4Y
50%
40%
150
30%
100
20%
5Y
1Y
3Y
50
10%
364 day
3 year
4 year
Confidential and Proprietary
0%
2011
2010
2009
2008
2011
2010
2011
2010
2009
2008
2011
2010
2009
2008
0
364-DAY
5 year
15
THREE-YEAR
FOUR-YEAR
Source: Thomson Reuters LPC
FIVE-YEAR
Investment Grade: Multi-Year Pricing

The improvement in liquidity that is driving multi-year tenors and greatly increasing volumes
is also resulting in a reduction in bank loan pricing.

Multi-year drawn and undrawn pricing has tightened to two-year lows.
 BBB multi-year undrawn pricing has fallen 10 basis points since 4Q10, and the average multi-year
drawn pricing is just below 150 basis points for the first time in three years.
 Single A multi-year undrawn is approximately 10 basis points and drawn costs are approximately 70
basis points on recent offerings.
Multi-Year Drawn Pricing (in bps)
Multi-Year Undrawn Pricing (in bps)
300.00
70.00
AA
A
BBB
AA
60.00
A
BBB
250.00
50.00
200.00
40.00
150.00
30.00
100.00
20.00
50.00
10.00
0.00
0.00
Confidential and Proprietary
16
Source: Thomson Reuters LPC
Leveraged Loans: Overview


Corporate Default Rate
While the corporate default rate remains
low, leveraged loan prices have recently
fallen with the economic uncertainty and
flight to quality.
12.00%
10.00%
8.00%
6.00%
While YTD leveraged loan volumes far
exceed last year’s levels, third quarter’s
volumes have slowed from 1H011’s pace.
4.00%
2.00%
0.00%
Leveraged Loans Secondary Bids
Leveraged Loan Volumes ($ in Billions) *
105
600
Pro Rata
Institutional
100
500
95
400
90
85
300
80
200
75
100
70
65
0
60
* Volumes include only “new money” financings
Confidential and Proprietary
17
Source: S&P LCD
Leveraged Loans: Credit Spreads
Secondary Credit Spreads (in bps)

Credit spreads widened significantly during
the height of the credit crisis (top right).
1800
1600
1400

This led to scant origination in leveraged
loans during 2009 (gaps in charts below).
BB-/Ba3
B+/B1
1200
1000
800

While liquidity remains available, continued
macro volatility has impacted leverage
spreads recently.
600
400
200
0
Primary B+/B Rated Loan Spreads (in bps)
Primary BB/BB- Rated Loan Spreads (in bps)
600
700
Pro Rata
Institutional
Pro Rata
Institutional
600
500
500
400
400
300
300
200
200
100
100
0
0
Confidential and Proprietary
18
Source: S&P LCD
B/B2
Interest Rates

Treasury rates recently hit 70 year lows.
Over the past 20 years:
Historic Interest Rates
6
5
 Three Month LIBOR has exceeded its current
level 90% of the time.
Yield (%)
4
 The Five Year Treasury Yield has exceeded
its current level 99% of the time.
3
2
 The 10 Year Treasury Yield has exceeded its
current level 99% of the time.
1
0
Three Month LIBOR
4.5
4.0
 The 10 Year Treasury Yield is ~110 bps
below levels from the start of the year
(~2.24%).
3.5
3.0
 The One Year Forward Curve projects a 10
year yield near 2.74%.
2.5
2.0
1.5
1/3/2011
10/14/2011
One Year Forward
Three Years Forward
1.0
0.5
 The Three Year Forward Curve projects a 10
year yield near 3.34%.
Confidential and Proprietary
10 Year Treasury Yield
Yield Curve: Historical, Current and Forward
The steepness of the yield curve points to
higher future rates.
Yield (%)

Five Year Treasury Yield
0.0
19
Source: Bloomberg
Commodity Market Volatility
Nearby Grain Futures

Grain commodities have been impacted
by lower reported production and stocks.
18.00
Soybeans
16.00
14.00

Increasing livestock prices reflect
increased costs for feed and processing.
12.00
$/Bushel

10.00
8.00
6.00
More closely monitored commodities price
increases an indication of inflation?
4.00
2.00
0.00
Source: USDA Economic Research Service
Livestock Nearby Futures
Gold and Oil Commodities
2000
200
130.00
1800
180
120.00
1600
160
110.00
1400
140
1200
120
1000
100
800
80
600
60
400
Gold
WTI Oil
200
0
Hogs
¢/pound
100.00
$/Barrel
$/Ounce
Cattle
90.00
80.00
70.00
40
60.00
20
50.00
0
40.00
Source: Livestock Marketing Information Center
Source: Bloomberg
Confidential and Proprietary
20
Broilers
Wheat
Corn
Financing Agriculture Panel
Jim Pisani, ARA
Wells Fargo Ag Industries
ASFMRA, October 2011
Agricultural Industries
Internal Agribusiness Consulting Group



Dual roles: quality assurance and relationship
enhancement. Provides support to line groups.
Agricultural portfolio includes companies involved in
supplying, producing, processing, marketing, or
distributing food and fiber products domestically or
internationally.
Ag Industries: production and processors






Strategic evaluation and risk profile.
Commodity updates and industry trends.
Budgeting and downside analysis.
Agricultural appraisals, inspections, collateral monitoring.
Relationship enhancement activities.
Wells Fargo Ag Industries
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Financing Agriculture
Agricultural commodity price volatility:
 Price
volatility is associated with some specialty crops:
 Tree
Fruit.
 Iceberg
Lettuce.
 Other
fresh produce crops.
 Some
seasons in almonds, citrus, and grapes.
 Past
decade in dairy industry: milk.
Wells Fargo Ag Industries
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Fresh Peach Prices 1995-2010
$0.390
$/Lb.
$0.340
$0.290
$0.240
$0.190
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: USDA
Wells Fargo Ag Industries
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Ja
n0
M 7
ar
-0
M 7
ay
-0
7
Ju
l-0
Se 7
p0
N 7
ov
-0
Ja 7
n0
M 8
ar
-0
M 8
ay
-0
8
Ju
l-0
Se 8
p0
N 8
ov
-0
Ja 8
n0
M 9
ar
-0
M 9
ay
-0
9
Ju
l-0
Se 9
p0
N 9
ov
-0
Ja 9
n1
M 0
ar
-1
M 0
ay
-1
0
Ju
l-1
Se 0
p1
N 0
ov
-1
Ja 0
n1
M 1
ar
-1
1
CA Lettuce Prices
$32.00
$27.00
$22.00
$17.00
$12.00
$7.00
Source: WF Ag Industries
Wells Fargo Ag Industries
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California Almond Production & Grower Prices
1,800.0
$3.00
1,600.0
$2.50
1,400.0
Million Lbs.
1,200.0
$2.00
1,000.0
$1.50
800.0
600.0
Production
Grower price
$1.00
400.0
$0.50
200.0
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
$-
1978
-
Source: CA Almond Board
Wells Fargo Ag Industries
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California Navels
100,000
$12.00
90,000
$10.00
80,000
70,000
$8.00
60,000
50,000
$6.00
Production
Fresh Price
40,000
$4.00
30,000
20,000
$2.00
10,000
$-
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
P2
01
1
-
Source: NASS, USDA
Wells Fargo Ag Industries
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Ja
n0
M 2
ay
Se 02
p0
Ja 2
nM 03
ay
Se 03
p0
Ja 3
n0
M 4
ay
-0
Se 4
p0
Ja 4
n05
M
ay
Se 05
p0
Ja 5
nM 06
ay
Se 06
p0
Ja 6
n0
M 7
ay
-0
Se 7
p0
Ja 7
n0
M 8
ay
Se 08
p0
Ja 8
nM 09
ay
Se 09
p0
Ja 9
n1
M 0
ay
-1
Se 0
p1
Ja 0
n1
M 1
ay
-1
1
$/cwt
Dairy – Milk Price Volatility
CA Overbase (2002-2011)
21.00
19.00
17.00
15.00
13.00
11.00
9.00
Source: CDFA
Wells Fargo Ag Industries
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Feed Cost Volatility
Source: USDA
Wells Fargo Ag Industries
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Feed Cost Volatility
CA Alfalfa Hay (Tulare-Hanford-Visalia, delivered basis, premium hay)
$350.00
$300.00
$ Per Ton
$250.00
$200.00
$150.00
$100.00
$50.00
$Source: USDA, AMS
2002
2003
2004
2005
2006
2007
2008
2009
2010
Oct 2011
Wells Fargo Ag Industries
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Financing Agriculture
How does price volatility affect agricultural
operating risk? Qualitative risk ratings:
 Commodity
 Input
Price Risk.
Availability Risk.
 Relative
Costs of Production.
 Industry
Risk.
Operating Risk: The uncertainty surrounding the
projected outcome.
Wells Fargo Ag Industries
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Operating Risk
0.25
Probability
0.2
0.15
0.1
0.05
0
-1600
-950
-650
-350
-50
250
400
Projected
550
750
1150
1450
1750
2400
Cash
Flow ($000)
Wells Fargo Ag Industries - 32
Operating Risk Profiles
0.7
0.5
Lower Risk
0.4
0.3
Higher Risk
0.2
0.1
60
0
-9
50
-6
50
-3
50
-5
0
25
0
40
0
55
0
75
0
11
50
14
50
17
50
24
00
0
-1
Probability
0.6
Projected
Cash Flow ($000)
Wells Fargo Ag Industries
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Operating Risk: Downside Analysis
0.25
Probability
0.2
0.15
0.1
0.05
0
-1600
-950
-650
Worst Case
-350
-50
250
400
Projected
550
750
1150
1450
1750
2400
Cash Flow ($000)
Wells Fargo Ag Industries
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Production Agriculture

Downside analysis compares operating risk profile to
balance sheet capitalization:
 Downside
margin: @risk model or stress variables.
 Compare to liquidity, borrowing capacity, solvency.
 Can calculate downside coverage ratios.
 Can assess changes in operating risk profile:
 Crop
insurance.
 Price risk management tools.
 Crop diversification.
 Can
assess changes in capitalization. Optimize liquidity
allocation.
Wells Fargo Ag Industries
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Dairy Production
Dairy budget: Excellent management tool for
sensitivity analysis and downside projection.
 Can assess impact on gross margin and
breakeven by changing key variables.
 Gross margin projection is subject to variability
due to price volatility in milk and feed.

Wells Fargo Ag Industries
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Dairy Production
Dairy budget downside analysis:
 Stress milk price, production, and feed costs.
 Consider affect of price risk management tools
upon key variables.
 Calculate downside coverage ratios.
 Ag Consultant: assessment of budget variables
and asset value review.
Wells Fargo Ag Industries
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