Transcript Cooperative Network 11-16-2009

Discussion Topics





Where have we been? Where are we going?
Production Ag Financing Update
Capital Markets update for cooperatives
Credit Union and Bank conditions
Questions & answers
Economic Summary and Outlook
Brian Legried
President, Cofina Financial
Agriculture








Demand increase – World wealth increasing
Weather impacts – low stocks
Energy, Bio-fuels – increasing demand
High commodity prices – demand and $$
Grain based balance sheets stressed
Financial markets and economic meltdown
Inventory valuation impacts
What’s next?
U.S. Economy






World demand increase – China, India, U.S.
Housing slowdown / sub-prime mortgage mess
Financial meltdown
Monetary policy recovery steps
Governmental action / stimulus
Recovery? If so, what kind – U, V, L or W?
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
2008
2007
2006
Millions
Housing Starts
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
3-Month Treasury Bill Yield
Interest Rates
Corporate Bonds – Moody’s Seasoned
Dow Jones Industrial Average
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
Considerations
 US / World economic conditions
 Financial markets
 Agriculture
• Production and consumption
• Globalization
• Innovation
Innovation
Weather
Planting Decisions
US Commodity Prices
Government Spending
Trade Policy
Inflation
US Deficit
Interest Rates
Consumer Spending
Investor Confidence
US Growth
Energy Consumption
Unemployment Rate
Strength of $
World Food Demand
World Economic Growth
China Growth
Summary
 Volatility is constant
 Financial position
• Liquidity – working capital needs
• Reserves – balance sheet management
• Margins – compressed
 Demand driven markets are good, but…
 What if?
Agricultural Outlook
Ross B. Anderson
Sr. Vice President and Chief Credit Officer
12
Farm Income Statement
Farm income indicators
2003
2004
2005
2006
2007
2008
Sept
billions $s
Gross farm income
2009AB
260.9
295.6
294.3
291.5
338.7
377.2
334.8
13%
0%
-1%
16%
11%
-11%
Crops
109.9
113.7
111.9
122.5
150.1
183.1
165.0
Livestock and products
105.6
123.6
125.1
118.7
138.6
141.2
119.0
Government payments
16.5
13.0
24.4
15.8
11.9
12.2
12.6
Farm-related income
15.7
17.1
14.2
16.6
16.3
19.8
19.7
Noncash income
14.6
17.3
19.2
21.0
21.1
23.3
20.3
Value of inventory adjustment
-2.4
11.2
-0.4
-3.1
0.6
-2.4
-1.8
200.3
209.8
219.7
232.7
267.5
290.0
280.0
5%
5%
6%
15%
8%
-3%
85.8
74.6
58.8
71.2
87.2
54.8
44%
-13%
-21%
21%
22%
-37%
Total production expenses
NET FARM INCOME 3/ 59.7
2000 2006
2007
2008
2009
2009
Adjusted
Assets
Real estate
946 1,625 1,751 1,692 1,626
946
NonReal estate
257
309
309
1,203 1,923 2,055 2,005 1,935
1,255
Total
298
304
313
Liabilities
Debt
164
203
214
240
234
234
Equity
1,039 1,720 1,841 1,765 1,701
1,021
Total
1,203 1,923 2,055 2,005 1,935
1,255
Debt/equity
15.8
11.7 11.6% 13.6% 13.8%
22.9%
Debt/assets
13.6
10.5 10.4% 12.0% 12.1%
18.6%
Avg. U.S. Cropland Value in $/Acre, Jan. 1, 1999 - 2009
US Farmland Value devided by a rolling 3 Year Average
of Net Farm Income plus Return to Nonoperating
Landlords plus Interest Expense
(P/E Concept)
25
20
15
10
5
0
Price Earnings Ratio 3-Year Rolling Average
Price/Earnings Ratio-One Year
Credit Conditions –
Credit Quality by Commodity
Commodity
Volume as
of 6/30/09
% of
Portfolio
Hogs
Dairy
Poultry
Cow / Calf
Feedlots
Corn & Soybeans
Other Crops
Ethanol
Other Commodities
Total
$3,428
$4,581
$2,128
$4,015
$1,448
$11,535
$16,801
$1,632
$13,113
$58,682
5.8%
7.8%
3.6%
6.8%
2.5%
19.7%
28.6%
2.9%
22.3%
100.0%
YE 2009
% Adverse
11.7%
8.1%
6.5%
1.8%
3.2%
0.7%
1.3%
27.5%
3.9%
4.1%
Projection
15.7%
10.7%
7.5%
3.3%
4.0%
0.9%
2.3%
34.2%
5.0%
5.0%
$ in millions
17
Dairy
 Futures strip:; Dec. ‘09 - $14.82; March ‘10 - $15.19; June ‘10 - $15.58; Dec.
‘10 - $15.72
 Cost of production $15/cwt.
 Weak domestic and foreign demand, Strong dollar, High feed cost
$19 to $12 price
 Kielkopf – “Need to slaughter 225K cows to reduce excess NFDM”
 Two industries – traditional and “factory” dairies


Factory dairies are losing equity at a rapid rate – high volatility in feed
markets
Traditional - less debt, some profits from crop production, less affected
by market volatility for feed costs
• Expect to finance negative cash flows through mid 2010
• Many factory dairies do not have the liquidity and solvency to reach breakeven
next summer
Per Capita Consumption of Meat in Pounds
Pork
Beef
Chicken
Turkey
Total
2006
49
66
87
18
220
2007
51
65
85
18
219
2008
50
63
84
18
215
2009
49
63
80
17
209
2010
48
60
81
17
206
Livestock Overview
09/08
10/08
2010 % Change % Change
2008
2009
26,663
23,367
36,511
26,565
22,766
35,040
26,092
22,365
35,541
-0.4%
-2.6%
-4.0%
-2.1%
-4.3%
-2.7%
Beef Exports
Pork Exports
Broiler Exports
1,888
4,668
6,962
1,744
4,183
6,428
1,905
4,450
6,300
-7.6%
-10.4%
-7.7%
0.9%
-4.7%
-9.5%
Beef Exports
Pork Exports
Broiler Exports
7%
20%
19%
7%
18%
18%
7%
20%
18%
Beef Production
Pork Production
Broiler Production
Pork
 Oversupply due to increased productivity of herd due to effective circo virus
vaccine and genetic improvement
 Exports have been strong, 20% of production
 Vulnerable to global slow down/swine flu scare
 Banes- spring 2008 --- need 10% reduction in sow number; actual only 3%
 Futures strip –Dec. ‘09 - $56.20;
Live
Feb. ‘10 - $61.90;
June ‘10 - $72.35
$41.58
$45.80
$56.42
 Estimated cost of live production $50-51/cwt.
 Expect to finance negative cash flows through Mid 2010
• Many operations have burned liquidity and solvency and do not have the
ability to get to mid-year 2010
Beef
 Feedlots were losing $100-200 per head
 Lower placements put pressure to move from hotel to “owner” role.
Financial capacity to accept risk is often not present.
 Beef is a high price source of protein
• What will financially pressured consumers buy? Beef to chicken
issue.
 South Korean agreement - how fast will it ramp up?
 Limited movement of feedlots to western corn belt (NE) due to
DDGs
• What will feedlots be worth? 65 for sale
 Lower calf prices for cow/calf producer after 5-8 years of good
income will lead to lower profitability
Broilers
 Production - USDA
• ‘07
35,739MM# +1.0%
• ‘08
36,511
+2.1
• ‘09
35,095
-3.9
• ’10
35,541
+1.2
 Value subtraction issue (whole birds vs. further processed)
 World trade/Russian exports
 Cash positive in 2nd quarter, positive net income in 3rd
quarter
 Industry will build equity if they do not crank up production
Ethanol




Mandate =
10.5 BGY in 2009
Current production capacity =
12.5 BGY
Current production =
9.8 BGY 78% of capacity
Forecast is to operate at 10-15 cents per gallon EBITDA
(assumes labor is fixed expense)
 New industry driven by government policy
 Problems caused by market volatility/high feedstock cost (corn)
 Expect several plants to turn more than once
Crops
 Crop producers
• USDA forecasts $20 billion less revenue in 2009 vs. 2008
• Overseas production response to high prices in 2008
• Domestic and foreign demand reduced due to economic
recession and reduced livestock use
• Flattening of demand pressure from ethanol
• Less income, not losses Credit concerns in this segment are
unlikely to show until 2011 or 2012
• A drought in the world can change credit outlook in 90 days
 Crops - two different risk profiles
• Cash renter/operator
• Land owner with low debt load
World Grain Stocks
Stocks
MM Metric Tons
Percent Carry to
Use
04/05
408
20
05/06
389
19
06/07
342
17
07/08
360
17
08/09
440
21
09/10
443
20
World Oilseed Stocks
Stocks
MM Metric Tons
Percent Carry to
Use
04/05
56
19
05/06
54
17
06/07
73
22
07/08
63
19
08/09
55
16
09/10
62
18
US Coarse Grain & Oilseed Stocks
Coarse Grain
Stocks
MM Metric
Tons
Percent Carry Oilseed
to Use
Stocks
MM Metric
Tons
04/05
59
19%
25
16%
05/06
54
17%
22
48%
06/07
36
22%
15
32%
07/08
45
19%
16
13%
08/09
45
16%
16
10%
09/10
32
18%
11
14%
Capital Markets Update and Keys
for Cooperative Financing
Bob Doane
Vice President, CoBank
Total Bank Debt and High-Yield Bond Volume in the Leveraged
Finance Market
Source: S&P/LCD and Merrill Lynch Global High Yield Strategy
750
$675B
$624B
500
$410B
$398B
$389B
$351B
$351B
$307B
$240B
250
$222B
$219B
$201B
$166B
/0
9
10
/9
08
YT
D
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
19
97
0
Institutional
Pro Rata
High-Yield
Percent of Outstanding Leveraged Loans in Payment Default or Bankruptcy
15%
11.3%
12%
10.0%
9.9%
9%
7.0%
7.4%
6%
4.0%
3%
3.6%
2.6%
1.9%
1.0%
1.0%
0.0%
3.7%
0.6%
Y
E1
Y 99
E1 6
Y 99
E1 7
Y 99
E1 8
Y 99
E2 9
Y 00
E2 0
Y 00
E2 1
Y 00
E2 2
Y 00
E2 3
Y 00
E2 4
Y 00
E2 5
Y 00
E2 6
Y 0
10 E2 07
/1 00
6/ 8
20
09
0%
As of
High Yield Bond and Lev. Loan Maturities
350
300
250
200
150
100
50
0
2009
2010
2011
2012
Institutional Loans
($billions)
2013
2014
2015
High Yield Bonds
2016
Loan Spreads Over LIBOR for BB/BBAverage New-Issue Pro Rata & Weighted Average First-Lien
Institutional Spread of BB/BB- Loans
L+600
L+500
L+400
L+300
L+200
Ja
n98
Ju
l- 9
8
Ja
n99
Ju
l- 9
9
Ja
n00
Ju
l- 0
0
Ja
n01
Ju
l- 0
1
Ja
n02
Ju
l- 0
2
Ja
n03
Ju
l- 0
3
Ja
n04
Ju
l- 0
4
Ja
n05
Ju
l- 0
5
Ja
n06
Ju
l- 0
6
Ja
n07
Ju
l- 0
7
Ja
n08
Ju
l- 0
8
Ja
n09
Ju
l- 0
9
L+100
Pro Rata
Institutional
Ja
n9
Ju 8
n9
No 8
v9
Ap 8
r- 9
Se 9
p9
Fe 9
b00
Ju
l- 0
De 0
cM 00
ay
-0
Oc 1
t-0
M 1
ar
-0
Au 2
g02
Ja
n0
Ju 3
n0
No 3
v0
Ap 3
r- 0
Se 4
p0
Fe 4
b05
Ju
l- 0
De 5
cM 05
ay
-0
O 6
ct0
M 6
ar
-0
Au 7
g07
Ja
n0
Ju 8
n0
No 8
v0
Ap 8
r- 0
Se 9
p09
Loan Spreads Over LIBOR for B+/B
Average New-Issue Pro Rata & Weighted Average First-Lien
Institutional Spread of B+/B Loans
L+550
L+450
L+350
L+250
L+150
Pro Rata
Institutional
M
ar
-9
Au 6
g96
Ja
n97
Ju
n9
N 7
ov
-9
7
Ap
r98
Se
p9
Fe 8
b99
Ju
l-9
D 9
ec
-9
M 9
ay
-0
O 0
ct
-0
M 0
ar
-0
Au 1
g01
Ja
n0
Ju 2
n0
N 2
ov
-0
Ap 2
r03
Se
p0
Fe 3
b04
Ju
l-0
D 4
ec
-0
M 4
ay
-0
5
O
ct
-0
M 5
ar
-0
Au 6
g06
Ja
n0
Ju 7
n0
N 7
ov
-0
Ap 7
r08
Se
p08
Fe
b09
Ju
l-0
9
Middle Market Spreads (Cash Flow < $50MM)
L+600
L+500
Institutional
L+400
L+300
Pro Rata
L+200
Ja
M n-9
ay 7
Se -97
p
Ja -97
M n-9
a 8
Sey-98
p
Ja -98
M n-9
a 9
Sey-99
p
Ja -99
M n-0
ay 0
Se -00
p
Ja -00
M n-0
a 1
Sey-01
p
Ja -01
n
M -0
ay 2
Se -02
p
Ja -02
M n-0
ay 3
Se -03
p
Ja -03
M n-0
a 4
Sey-04
p
Ja -04
n
M -0
ay 5
Se -05
p
Ja -05
M n-0
a 6
Sey-06
p
Ja -06
M n-0
a 7
Sey-07
p
Ja -07
M n-0
ay 8
Se -08
p
Ja -08
M n-0
a 9
Sey-09
p09
Secondary Market Trading Spreads By Rating
L+3200
L+3000
L+2800
L+2600
L+2400
L+2200
L+2000
L+1800
L+1600
L+1400
L+1200
L+1000
L+800
L+600
L+400
L+200
L+0
B Loans
All BB/B Loans
BB Loans
Deal Structure Trends
 Lower leverage, higher equity levels required
 Tighter covenants and security packages
• More asset-based financing
• Borrowing bases
 Shorter maturity loans
 Very few dividend recapitalization deals
 Original-issue discounts, higher up-front fees
 Libor floors often set at 2 to 2.5%
 More rigorous excess cash flow sweeps
Commercial Lenders
 Recapitalization process has begun although some commercial banks are likely to remain
under pressure into 2010.
 Banks remain unpredictable (deal by deal for some)

Capital issues

Credit concerns evident in 3Q results (depth/breath of recession remains an issue)

Reformed business strategies

Different personnel, layoffs, restructurings

Market down to a handful of dependable Ag lenders
• Focus on:



Credit quality and risk
Conservative structures (shorter tenors, tighter covenants, Libor floors, borrowing
bases, and collateral packages — back to old school backing)
Higher loan spreads and fees
 Relationships Count

Relationship banks continue to support their core accounts

Ancillary business remains very important
Farm Credit System
 Greater capital conservation
• Focus on pricing (minimum spread thresholds) and structure
(term, collateral and covenants)
• Interested in funded assets that achieve market yields
• Selective with lower hold levels
• Reserving capital for core relationship borrowers
 Ethanol, Dairy, Forest Products and Livestock segments experiencing
credit deterioration
• Farm Credit entered downturn with strong balance sheets and
solid credit quality ratios
 Continued interest in quality credits (all the FCS investors are back,
some not yet at full strength)
Credit Market Outlook
 Global Unwinding of Leverage
• Banks, hedge funds, private equity, and consumers, all in process of

unwinding leverage
• Rapid unwinding of leverage associated with the structured finance
(securitization) industry
• Government sector taking on new debt, risk of crowding-out of private
sector
• Derivative exposure concentrations still unknown
Commercial/investment banks likely to remain under extreme pressure
through 2009 and likely into 2010
• Higher minimum capital requirements for all financial institutions likely
• Need to raise more capital, who will provide it?
• Rethinking risk management models
• Substantial internal restructuring and deleveraging
• How will regulatory environment change?
Credit Market Outlook
 Fundamentals of real estate and consumer credit problems likely to
have a long tail and tied to unemployment dynamics and
deleveraging
 Lender perspective that the economy is poised for recovery. But
will it be a jobless recovery?
 Expectation of higher credit losses in many segments
 Credit spreads likely to tighten from current levels as economy
continues to recover but refinancing calendar likely to put floor on
spreads
 Multiple levels of uncertainty: global economy, role of government
(ownership), credit availability, dollar value, financial strength of
institutions/counterparties, derivative exposure concentrations, risk
management (model) risks, regulatory changes, etc.
1. Key items that lenders typically consider





Management
Board governance
Balance sheet strength
Appropriate risk management competencies and tools
Capacity
• People
• Capacity
• Time
2. Ratios
 Working Capital (Liquidity)
• Current assets - Current liabilities
Factors to Consider:
• Accounts receivable management
• Inventory management
• Types of business lines
• Grain merchandising practices
• Prepayment activity
• Peak seasonal borrowing needs
• Working Capital to Sales Percentage is one component of
Risk Rating
2. Ratios
 Local Leverage
Long Term Debt minus Current Portion Due
Net Worth minus investments in Cooperatives and Other
Entities
 Reasonable Local Leverage
50%
 Minimum Acceptable Level < 80%
2. Ratios
 Debt Service Coverage Ratio
Net Cash Available for Debt Service
Current Portion of Long Term Debt
 Minimum Acceptable Level
> 1.5 : 1
 Optimum Level
> 2.75 : 1
3. Procedures/Policy
 Counter-party risk
• Assessment, due diligence, mitigating factors, contracts,
limits
 Contracts
• Procedures on contract execution and fulfillment
(enforcement)
• Forward contracting limitations
• Pre-pay versus booking contracts
Wrap-up: Rapidly Changing Conditions
 Prepare to manage greater risk associated with increasing
volatility in all markets.
•
•
•
•
•
input risk – availability, price, prepaids, etc.
production risk – weather, technology, etc.
marketing risk –hedging, pricing, consumer
investment risk – realistic assumptions
Regulatory risk – farm programs, regulation
 Develop strategies to secure working capital and remember it
will be resource challenged in the future!
Credit Union and Bank Financial
Update
Bill Raker
President, Federal Employees Credit Union
Credit Unions
 Financial cooperatives
• One vote per member
• Volunteer boards
 State or federal charter & supervision
 Full-service financial providers
 Defined field of membership
• Single employer
• Multiple employer groups
• Organizational
• Community (geographic)
• Trade, Industry, Profession (TIP)
Minnesota’s Credit Unions
 62 Federal (NCUA); 94 State (Dept. Commerce)
 All Federally insured to $250K
 $12.83 B total deposits; ~6.0% of MN market
 $9.86 B total loans; 865,668 total credits
 $14.96 B total assets; 1.5 M members
 10.19% Net Worth; 0.28% ROA [0.93%]
Minnesota’s Credit Unions
 Business loans ~ 8.5% of CUs’ total portfolio
 8 credit unions doing Ag lending
• 2,921 credits
• $285 M total Ag credits
• $168 M largest Ag portfolio; 1,497 credits
 Money to lend – all loan types
 Well-capitalized
Wisconsin’s Credit Unions
 2 Federal (NCUA); 245 State (Dept. of Financial Institutions)
 All Federally insured to $250K
 $17.18 B total deposits; ~14.8% of WI market
 $15.52 B total loans; 1,304,260 total credits
 $20.06 B total assets; 2.2 M members
 10.01% Net Worth; 0.46% ROA [1.35%]
Wisconsin’s Credit Unions
 Business loans ~ 15.5% of CUs’ total portfolio
 16 credit unions doing Ag lending
• 1,741 credits
• $130 M total Ag credits
• $48 M largest Ag portfolio; 571 credits
 Money to lend – all loan types
 Well-capitalized
Minnesota’s “Watch List”*
 CAMEL (Examination) Ratings: 1 – 5
 4 or 5 CAMEL rating is a “watch”
 71 banks – 22% of state’s total banks
• Six failures
 3 credit unions (all are CAMEL 4)
• Two mergers
*Source: Minnesota Department of Commerce
Wisconsin’s “Watch List”*




17 Banks & 5 S&Ls are on the “Problem” list
7 Credit Unions are on the “Problem” list

3 are still “Adequately Capitalized” (> 6%)

2 are “Under Capitalized” (5% – 6%)

2 are “Critically Undercapitalized” (<2%)
1 bank failure since 2007
1 credit union failure since 2007
*Source: IDC Financial Publishing “Corporate Report” magazine and NCUA
National Picture: Banks
 416 (5.1% of total) institutions on FDIC “watch” list –
$300 B in assets -- 15 year high
 120 closures/mergers YTD -- $25+ B cost to FDIC
 40% of net income going into provisions for potential
losses
 Stressed insurance fund
• 12/07
1.22%
• 6/09
0.22%
FDIC Quarterly Bank Report
FDIC Quarterly Bank Report
FDIC Quarterly Bank Report
FDIC Quarterly Bank Report
FDIC Quarterly Bank Report
National Picture: Credit Unions
 ~326 (4.26% of total) CUs on NCUA’s “watch” list – CAMEL
4 or 5
 3,500 (45% of total) CUs with net operating loss through
6/09
 ~135 mergers YTD (includes 21 “failures”) -- $95 M cost to
NCUSIF
 Concentrations: CA, FL, AZ, TX, NE, UT
 NCUSIF fund at 1.30%
Regional/Community Institutions
(Credit unions and banks)
 Financial landscape has changed
 Some institutions still doing relatively well
 Most are experiencing challenges
• Slower loan growth
• Higher than normal delinquencies and losses
• Higher loss provisions – negative earnings
• Falling net worth (capital) ratios
• NCUSIF and FDIC assessments
Loss Mitigation
(What’s changed)
 Refined underwriting guidelines
 Quarterly updates to credit scores
 Reviewing & updating collateral values
 Reducing credit lines on credit cards and HELOC loans
 Re-writes
 Counseling
Current Concerns
(Lingering?)
 Employment
• Lags recovery
• 10%: how long?
 Real estate values
• Bubble has burst
• Residential first, now commercial
• Time to recovery?
 Consumer confidence
• Uncertainty, confusion, lack of trust
 Interest margin
Consumer Behaviors
(Applies to small businesses, too)
 Saving more
 Paying down existing debt faster
 Reluctant to take on new debt
 Refinancing at lower rates
 Cautionary spending
 Consumption (GDP) down; business investment/expansion
down
Getting Credit Today
 Somewhat harder to borrow – tighter standards
 Rates are low – for now
 Credit unions are making loans
 Credit score & BNI score
 Ability to repay
 Higher down payment
 Lower LTV ratios
2010 Outlook?
 Freefall ends
 Modest growth resumes
 Unemployment remains higher than usual
 Little change in short-term rates
 Economy remains fragile
 More regulation
 Government looking to help small businesses
 All eyes on leading indicators
2010 and beyond
 Cost of clean up: the consumer will pay!
• Insurance fund assessments

FDIC – 3 years prepaid premium; 7 years to rebuild

NCUSIF – up to 7 years to payback Treasury loan
• Capital restitution; need to pump up earnings
• Additional provisions for future losses & write-downs
 Regulation
• Consumer “protection” and “safety & soundness”
• Financial industry oversight
 Long-term to full recovery
What to do now
 After the rain, comes the rainbow!
 Protect your good credit
 Deal with volatility
 Have a post-recovery plan