Transcript Southern Agriculture`s Current Financial Situation

2000 Southern Region Agricultural
Outlook Conference
September 25-27, 2000
Atlanta, Georgia
By: Bill Melton
Discussion Topic
“Southern Agriculture’s Current
Financial Situation”
from
An Ag Lender’s Viewpoint
Business & Strategy
District Structure
AgFirst
Farm Credit Bank
(including wholly-owned
subsidiary Farm Credit
Finance Corp. of Puerto Rico)
27 District Associations
Provide credit and related services to borrowers in
15 states and Puerto Rico
Borrowers
82,000 farmers, agribusinesses and rural homeowners
Business & Strategy
AgFirst Farm Credit Bank
Today, AgFirst is the largest single provider of credit to agriculture in its 15 state region (and
Puerto Rico) through its 27 (1)affiliated Associations, which are in turn owned by approximately
82,000 farmers, agribusinesses, and rural homeowners
1916
The Federal Land Bank of Columbia was one of 12 banks established by Congress to
provide a dependable source of long-term credit to American agriculture
1933
By another act of Congress, the Federal Intermediate Credit Bank of Columbia was
formed as a vehicle to fund short- and intermediate-term credit to agriculture. See 1
1988
The Federal Land Bank of Columbia and Federal Intermediate Credit Bank of
Columbia merged to form the Farm Credit Bank of Columbia
1993
The Federal Intermediate Credit Bank of Jackson merged into the Farm Credit Bank of
Columbia. See 2
1994
Four associations, formerly affiliated with the Farm Credit Bank of Louisville, reaffiliated to the Farm Credit Bank of Columbia. See 3
1995
The Farm Credit Banks of Columbia and Baltimore consolidated to form AgFirst Farm
Credit Bank. See 4
CHATTANOOGA
AgFirst’s growth has led to greater geographic, customer, and commodity diversification
(1) To be consolidated to 23 Associations as of January 1, 2001
Business & Strategy
AgFirst FCB Business Profile
Total earning assets: $11.1 billion as of 6/30/00

Direct Lending
Line of credit extended to member
associations under General Financing
Agreement (GFA)

Investments
Liquidity reserve
Diversify income source

Participations
Provide overlines to member associations
Provide a national reach
Diversify income source

Secondary
Mortgage
2.4%
Support Services
Appraisal review, Portfolio Management,
Credit Policy Guidance, Information Services,
Accounting, Marketing, Human Resources, &
Insurance Services
Direct
Lending
67.2%
Participations
10.0%
Total earning assets: $8.9 billion as of 12/31/95
Secondary Mortgage Marketing Unit
(SMMU)
Facilitates loans through the FNMA and FAMC
Diversify income source

Investments
20.4%
Investments
17.0%
Participations
8.0%
Direct
Lending
75.0%
Business & Strategy
Association Portfolio Borrower Profile
AgFirst's credit exposure is widely dispersed through 27 associations that serve 82,000 borrowing entities
 Association customers, while primarily rural and rooted in farming, are also predominantly part-time farmers
and rural homeowners
 Full-time farmers' incomes are significantly supported by off-farm income
 Customer size for both full-time and part-time farmers indicates a large number of small balance loans, which
significantly mitigates agricultural commodity/industry credit risk
Customer Segment
Full-Time Farmer
Part-Time Farmer
Rural Home Owner
Number of Borrowers
32,000
38,000
12,000
Median Off-Farm Income
$28,000
$55,000
$45,000
Median Farm Credit Loan
$66,000
$36,000
$32,000
Median Total Liabilities
$202,000
$100,000
$61,000
Median Net Worth
$473,000
$230,000
$74,000
Median Debt: Net Worth
.43:1.00
.43:1.00
.82:1.00
Median Spread on Loan
1.90%
2.00%
1.30%
Source: AgFirst Marketing Department
Status of AgFirst FCB

Combined Income of AgFirst and Affiliated
Associations as of December 31, 1999 $218.2 Million

Almost identical to previous year’s earnings

Combined income as of June 30, 2000…$110.5 million

An increase of $10 million from the previous year
Status of AgFirst FCB

11th Consecutive Year Where Earnings Have
Been Stable or Increasing Over Previous Year

Despite $11.5 million in merger expenses year to date,
we expect 2000 earnings to exceed the 1999 level

Anticipate an additional $2 million in merger/consolidation
before year end
Status of AgFirst FCB


Paid Patronage of $1.2 billion to Our
Stockholders/Borrowers in the last ten years
Gross Loans of $10.1 Billion as of 8/31/00


2.8% average growth for the past 4 years
Growth in loan volume was flat during the past 12
months but is beginning to rebound


As of August 31, 2000, rate of growth is 2.23%
Total Assets of $13.0 Billion as of 8/31/00
Credit Conditions – AgFirst District



Permanent capital levels at June 30, 2000,
averaged 17.6%.
The allowance for loan losses total $261.3
million and represent 2.85% of total loans.
Asset quality has remained stable through
August 31, 2000.
Baltimore merger
Jun-00
Feb-
Oct-99
Jun-99
Feb-
OAEM
Oct-98
Jun-98
Feb-
Oct-97
Acceptable
Jun-97
Feb-
Oct-96
Jun-96
Feb-
Oct-95
Jun-95
Feb-
Oct-94
Jun-94
Feb-
Oct-93
Jun-93
Feb-
Oct-92
Jun-92
Feb-
Oct-91
Jun-91
Feb-
Oct-90
Jun-90
Feb-
Oct-89
Association Portfolio
Loan Classification Trend
Substandard
100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Credit Conditions – AgFirst District



Earnings remain strong. As of June 30,
2000, ROA averaged 1.99% and ROE
averaged 10.08%.
Loan growth increased to 2.23% as of
August 31, 2000. The growth trend is
expected to flatten out in 2001.
Drought conditions were most severe in
the deep South states.
Association Portfolio -
($ millions)
2,500
6/30/2000
Total Volum e= $9,624m m
1,500
1,138
1,000
900
1,182 1,079
828
214
500


$0 - $100,000
$100,000 $500,000
$500,000 $1 million
$1 million $5 million
>$5 million
In the district, there are 77 loans that
exceed 10% of the holding Association’s
capital
The 77 loans are classified:

66 Acceptable

10 Special Mention


60,602
60,000
2,350
2,000
0
Loan Size Distribution by Number of Relationships
70,000
6/30/1996
Total Volum e= $8,616m m
2,994
(# of Relationships)
3,500
3,000
Loan Size Distribution by Dollar Volume
3,732 3,823
4,000
Loan Size Dist.
Only 2 Associations have more than 1
Special Mention
1 Substandard
50,000
40,000
30,000
18,930
20,000
2,082
10,000
0



6/30/2000
Total Relationships = 82,532
$0 - $100,000
$100,000 $500,000
$500,000 $1 million
852
$1 million $5 million
Loan size tracks agricultural demographics
Significant number of part-time farmers
Reliance for repayment on non-farm income
66
>$5 million
Market Overview
AgFirst District Market Position





Dominant lender to agriculture,
agribusiness and rural residents in the
eastern US
Successfully increased market share
through several agricultural credit cycles
while improving credit quality
A balance between full-time and parttime farmers – consistent with
demographics
Association originated loan portfolio at
6/30/00 has a weighted average maturity
of 7 years
Weighted average maturity has declined
over time, indicative of focus on growing
the non-real estate portfolio
40%
35
30
25
20
15
Market Share of
Non-Real Estate Agricultural Debt
27.8%
30.7%
27.8%
34.0%
32.8%
35.9%
10
5
0
1993
1994
AgFirst District
1995
1996
1997
1998
Commercial Banks
FSA
Others
Source: USDA
Association Originated Loan Portfolio
1995
1996
1997
1998
1999
Real Estate Portfolio
54%
52%
50%
46%
47%
Non-Real Estate Portfolio
46%
48%
50%
54%
53%
8.7
8.1
7.7
7.3
7.0
Weighted Average Maturity (yrs)
Association Portfolio
Commodity Diversification
Total Portfolio: $9.6 billion
Country Home Loans
6.3%
Fruits/Citrus/Vegs
6.5%
Tobacco
5.7%
Landlords
5.2%
Nursery
4.5%
Field Crops
6.6%
Other Animals
4.4%
Swine
4.3%
Dairy
7.3%
Other
4.2%
Cotton
3.3%
Grain
8.9%
Poultry
14.7%
Timber
9.1%
Beef
9.1%
As of June 30, 2000.
Association Portfolio
Geographic Distribution by State
25%
12/31/95
12/31/96
12/31/97
15%
12/31/98
12/31/99
10%
Tennessee
Puerto Rico
Kentucky
Alabama
Maryland
Pennsylvania
0%
Georgia
5%
NC
(% of Portfolio Outstanding)
20%
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Farmers now have a new crop . . .
Its called “Mailbox Farming”!
Check is in
the mail!
Market Overview
U.S. Farmers’ Net Cash Income
7.3
43.2
45.3
19
94
45.9
19
93
19
91
19
92
42.2
46.0
7.9
$58.5
7.5
$54.9
51.0
$56.8
$55.3
12.2
50.2
$59.1
42.7
22.7
36.4
24.3
32.5
20
00
**
8.2
43.5
19
90
13.4
$57.5
7.3
19
98
19
99
*
9.3
9.2
$51.1
$52.6
19
97
$50.4
$59.3
19
95
19
96
$55.2
$52.8
Direct Government Payments ($ billions)
Net Cash Income, excluding Direct Government Payments
* Preliminary
Source: USDA 1998
** Forecasted
Average of 1990-1998
Market Overview
Government payments as a % of Farm Net
Income by Territory
45%
40%
40
35
41%
43%
30%
30
22%
25
20
13%
15
10
8%
8%
5
0
CoBank
Source: USDA 1998
Western
AgFirst
Texas
Wichita
AgAmerica AgriBank
US
Composite
Recipients of Government Payments
80%
74%
70%
60%
50%
42%
40%
34.7%
30%
20%
10%
0%
18.9%
8.2%
8% 6%
7%
Less than
$50,000
50,000 $99,999
% of Farm
15%
10%
$100,000 $249,999
% of Gross Sales
22.9%
15%
5%
$250,000 $499,999
15%
10.6%
2%
$500,000 $999,999
1%
4.7%
$1 Million
and Over
% of Government Payment
Net Cash Income – 8 Principal Crops
30
($ Billions)
25
20
15
10
Without Government
Payment
5
0
1988 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002
Crop Year
Effect of Government Payments
Average Effective Prices, 1999/2000
Crop
Forecast Farm Price Avg. Effective Price 1/
Corn ($/bu)
1.90
2.70
Wheat ($/bu)
2.55
4.27
Soybeans ($/bu)
4.75
5.83
Cotton ($/lb)
0.46 2/
0.79
Rice ($/ewt)
6.00
11.95
1/ Production value plus government payments divided by production.
2/ August-November average upland cotton price.
“The Dilemma”
“Southern States hardest hit by drought
represent barely 2% of the U.S. corn
average and less than 9% of the U.S.
soybean.”
Source: AgWeb.com
Backdrop for the AgFirst Outlook







Rising Interest Rates
Weather Pattern with Extremes
Low Prices for Many Commodities
Uncertain Farm Policy for the Long Term
Loan Demand is Weakening in Some Areas
Energy Cost have Soared
Massive Transfer of Wealth Occurring
IDEAL TIME for Making Poor Decisions!
Market Overview & Outlook
Overview by Commodity Type
Commodity
or
Industry
Meat Complex
Significant segments:
Pork, Broilers, Eggs,
Dairy
Grain Complex
No significant segment
Green Complex
Significant segments,
Nursery, Greenhouse, Sod,
Recreational Property,
Timber
Fruits/Vegetables
Significant segments,
Citrus, Fresh Vegetables
Sugar
Government
Support/
Regulations
Outlook
Growth in
Loan Demand
Significant company
consolidation; vertical
integration; drive to
compete worldwide
Direct support very limited
absent dairy. Regulations
as to food safety and
environment becoming
more stringent; cash
basis accounting is key.
Near term – very large
production in U.S.,
expansion based on
cheap grain. Long term –
growth in exports is key.
+
Production units
consolidating. Biotech
boosts yields. Genetic
modification will regain
momentum.
Support is fueled by midwest dominance in grains
and political factors and
will continue.
Near term – over
production and price
pressure. Long term –
U.S. competitiveness
wins out.
Economic growth
stimulates demand at
double digit rate.
No support. Limited
regulations.
U.S. economic growth to slow
sooner rather than later. Sector
growth is geographically driven
on East Coast and will
outperform the economy
++
Little impact directly.
New crop insurance is
available. Food safety
concerns continue.
Consolidation of production
units. More fresh
consumption
vs. processed.
–
Near term – difficult
market. Long term – huge
integrated producers are
globally competitive.
Neutral
General Trend
Globalization of production
and distribution. NAFTA
shifting production.
Less U.S. Producer
protection
Very important – support
of prices since same is
true worldwide.
Neutral
Outlook...

Impact of Stress in Ag Economy Will Not Be Borne Equally

Generally some commodities will always be in its down cycle



This year it is broilers, eggs and dairy
Regional, the Eastern U.S. is more diverse in its production
agriculture and less dependent on Government support
Free Trade is Critical to a Healthy Ag Economy



NAFTA taking hold with Canada and Mexico, our best trading
partners
A very positive sign for Ag was the permanent “Most Favored
Nation” trading status voted for China
The brightest spots to point to in 2000


A robust general economy that producers a Government surplus
$24.3 billion in Government assistance already approved
Outlook…

Continuation of Consolidations within the
Production Side & Processing/Marketing Sector


Poultry & Livestock
Continuation of Strategic Alliances and Long
Term Contracts Between Producers and Food
Companies


Tobacco . . . Finally!
Nursery/Greenhouse Production
Outlook…

Continued Consolidation in Banking
including the Farm Credit System
Significant merger activity among associations

23 associations by year end; down from 40 two years ago
Outlook…



Difficult to impossible to get large confined livestock &
poultry facilities permitted
Environmental, Land Use, and Food Safety Regulations
Strictly Enforced
Interest rates have risen sharply since June 1999


Energy prices will be a large factor in subsequent adjustments
The Fed appears to have achieved a “Soft Landing”
Early Warning Signals

Are the Statistics Lying of Just Lagging?
Low Delinquencies
 Normal Charge-Offs
 Few Foreclosures
 Stable Asset Quality

Early Warning Signals

Net Farm Income buoyed by Government Payments


Creates a false Ag Economy
Ag Real Estate Has Held its Value or Risen in Value
 Dilemma is that higher land values make price of product
uncompetitive. Example: 4 to 1 difference in price of acre in Iowa
and Brazil.

Level of Debt Held by Farmers Not Substantially Higher, but
Becoming Increasingly Dependent on Government Assistance
for Repayment Capacity
Predictions


East Coast Agriculture Will Fare Better Than the
Midwest
Prices for Broilers, Eggs, Dairy and Timber Are
All Being Negatively Impacted by Supply


Over-Production Will Again Hurt Hog Prices and Keep Dairy
Profitability Very Low
Over-Production will Continue to be a Problem for U.S.
Agriculture
Troubling Signs for Lenders





Pattern of “flipping land” by speculators
Owners cashing out
Non recourse lending
No “skin in the game” – 100% financing
Expansion without regard for business
cycle
Predictions


Another Round Of Shake-Out For Farmers and Ag
Lenders
Advances in Biotechnology will Ensure Food Supply is
Not Diminished by Departing Producers


Consumers may “pay up” for GMO free products
In the Long View, Agriculture will Remain Viable &
Profitable for the Low Cost Producers
2000 Southern Region
Agricultural Outlook Conference
Thank You!