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Southern Outlook ConferenceAgricultural Outlook
Atlanta, Georgia September 28, 2009
Bill MeltonChief Lending Officer
Farm Credit System
Farm Credit System Credit Quality
AgFirst District
AgFirst District Credit Quality
District (Bank & Associations)
March 31, 2008 June 30, 2009
Acceptable 95.79% 89.11%
OAEM 2.67% 5.77%
Adverse 1.54% 5.12%
Delinquencies 1.14% 2.21%
Nonaccruals $122.9 million $642.3 million
OPOs $4.7 million $74.0 million
Provisions (preceding 12 months) $17.4 million $183.5 million
Net Charge-Offs (preceding 12 months) $7.5 million $101.1 million
Current Credit
Conditions Deterioration Began
Early in 2008
Challenges
The Speed and Severity of the Economic Correction
• Collapse of Financial & Credit Markets • The Run Up and Retreat in Commodity Prices During 2008• Underwriting Standards that Did Not Incorporate
the Depth of the Market Correction
Stages in Loan Deterioration
Challenges
District is Inseparably tied to the General Economy
• 33% of the AgFirst Associations’ borrowers are identified as highly dependent on non-farm income
• A significant portion of the agricultural real estate is transitional • Large concentration in forest products
• Decline in housing starts reverberating through industry
• Large concentration in meat/protein sector
Industry Specific Concerns
• Loans dependent on the general economy/housing– Transitional real estate to high wealth individuals– Forest products especially sawmills and planer mills– Landscape nurseries, sod farms, etc
• Meat/protein sector– Hogs & dairy
• Ethanol
2009/10 Financial Outlook for Farm Credit
• Capital levels may improve with slower growth- Strong capital levels will need to support the weaker credit quality
• Credit quality expected to bottom out by year-end- But no positive credit quality bounce
• AgFirst’s earnings enhanced by treasury profits- However, treasury profit will diminish over time
• Weaker earnings at Associations due to credit quality issues & low interest rate on equity
- Level of earnings will impact patronage distributions
2009/10 Financial Outlook for Farm Credit • Much slower or even negative loan growth• Recession or effects of recession will continue to
negatively impact the General Economy• Return to modest Profitability for some sectors of the
Meat Complex• Tough times to continue for:
– Pork and dairy– Ethanol production– Loans tied to the General Economy or Housing
Broilers---------- Cents per pound ----------
Turkeys
CattleHogs
---------- Dollars per cwt. ----------
Milk---------- Dollars per cwt. ----------
Commodity Markets in Transition
Wheat
Corn
Soybeans
---------- Dollars per bushel ----------
Cotton---------- Cents per pound ----------
---------- Dollars per ton ----------
Soybean meal
Eggs---------- Cents per pound ----------
2005/06
5.65
47.7
195
3.42
2.00
2006
64.477.0
47.2685.41
12.90
2006/07
6.43
46.5
205
4.26
3.04
71.8
2007
76.4 82.1
47.0991.82
19.13
2007/08
10.10
59.3
336
6.48
4.20
114.4
2008/09
10.00
49.0
320
6.78
4.05
2008
79.7 87.5
47.84 92.27
18.35
128.3
2009/10
8.00 - 10.00
50 - 60
250 - 300
4.50 - 6.00
2.75 - 3.75
2009
79 - 81 80 - 82
40 - 41 84 - 86
12
97 - 100
2010
80 - 85 80 - 85
45 - 48 88 - 95
14 - 16
100 - 108
2009 Farm Prices Weakening
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 090
20
40
60
80
100
Billion dollars
Net Income Falls with Commodity Markets
Net Farm Cash Income
Net Cash Income less gov't payments
Direct government payments*
* emergency payments are striped area of government payments)
Farm Income Conditions Will be Diverse Again in 2010
Livestock and dairy losses may drive income back to 2006 levels!
Recovery in 2010 will be limited with grains complex watching stock buildup and livestock/dairy completing liquidation
process.
Challenges for 2009 & Beyond• Portfolio Management
– Address Deterioration in Credit Quality– Maintain Adequate Capital & Liquidity– Price and Structure loans consistent with risk
• Take advantage of opportunities to improve spreads
• Operating Expense Management• Human Capital Management
– Effectively Address Retirements/Changes in Leadership– Improve Diversity
• Remaining Committed to the Cooperative Principles– Preserving the AgFirst Model
Next 12 Months Most Pressing Challenges
• Managing and servicing weak or nonperforming assets– Equipping the staff to manage and service a deteriorating portfolio– Keeping ahead of the curve
• Utilizing an effective strategy that maintain a viable institution in all environments
• Keeping all constituents well informed
Market Approach in 2009/2010
• Focus on servicing “core agriculture”– Narrow strike zone– Take a pause on new lines of business
• Focus on higher-quality loans– Limit new credit to upper-tiers of “acceptable”
• Addressing concentration by obligor and commodity• Focus on higher spreads • Focus on actively managing the loan portfolio
Lessons Learned Confirmed1. It is practically impossible to underwrite for a “bubble market”
2. Circumstances dictate a guarantor’s ability & willingness to perform
– When dealing with multiple, limited guarantors, base the loan decision on the capacity of the weakest guarantor.
– Sponsors are supportive as long as the project is performing
3. In widely participated/syndicated loans, a material portion of the risk is embedded in the composition of the lending group and the lead lender’s servicing expertise
Exposures to Stressed Sectors Protein Sectors
Hogs $ 835.3 million
Poultry $3,181.7 million
Dairy $1,439.7 million
EthanolEthanol Plants $307.7 million
Loans Dependent on the General Economy/Housing
Timber (Pine & Hardwood) $2,869.5 million
Logging/Sawmills/Planer Mills $634.5 million
Landscape, Nurseries & Sod $204.0 million
Transitional Real Estate $1,354.0 million *(included in various SICs including timber)
Strategies Going Forward
• Structure Deals More Conservatively
– Higher liquidity / lower leverage requirements– No stand-alone project financing without confirmed “take out”– Collateralize guarantees up-front, if needed
Strategies Going Forward• Reduce Hold Positions
– Obligor / Industry / Commodity
• Understand Counterparty Relationships– “Position in Credit”
• Percentage of the deal and who comprises the lender group
– Performance of Servicer (experience / capacity)
Concerns
• Overreaction by everyone in the chain
• Potential for Credit Risk to impact Funding Cost
• Political vulnerability of the Farm Credit System
• Continuation of consolidation & globalization of Agriculture
Perspective(in millions) December 31, 1986 June 30, 2009
$ Amount % of Total Loans $ Amount % of Total Loans
Nonaccruals $596.1 11.86% $642.3 2.76%
Nonearning Assets $662.8 13.19% $715.3 3.08%
Perspective
District (Bank & Associations)
1986 (e) 2009
Provisions $187.9 million $197.6 million
Total Loans $5.03 billion $23.07 billion
Perspective
• The nonaccrual volume is contained in a relatively small number of loans that are widely participated:– 54% of the District’s nonaccruals are to 10 loans
• The lead lender is responsible for the bulk of the servicing
PerspectiveDistrict (Bank & Associations)
1986 2008 (e) 2009
Net Earnings ($329.8) million $363.5 million $272.4 million
““Current period earnings are sufficient to fully fund all provisions for Current period earnings are sufficient to fully fund all provisions for loans/investments and generate estimated net income of $272.4 loans/investments and generate estimated net income of $272.4
millionmillion””
20
40
60
80
100
Net Cash income
Debt-to-asset ratio
5
10
15
20
Billion dollars
Percent
Net Income falls but balance sheet strong!
Deleveraging is not issue for much of agriculture!
Ag Sector Balance Sheet Still Solid
Summary• Non-earnings assets could move to 3%-5%
– Higher reserves for loan losses – More conservative credit underwriting and hold positions
• Weaker Earnings• Flat to negative growth• Recovery not expected before 3rd quarter 2010
– Improvement directly tied to recovery of general economy
• Beginning a major structural transformation in global markets for goods, services and capital
“Thank You” Eat more pork and drink more milk!