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The State of Ag Lending February 2009 by Kent Bang, from the Morrison Group's At The Meeting.
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Central Plains Regional Agribusiness The State of Ag Lending
February, 2009
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Overview Share my thoughts regarding the current situation in Financial
Services, also specific to the swine industry This is a volatile, fluid situation, getting more negative Good chance that I will be wrong
Discuss Ag Lenders Background
Lender’s perspective on Agriculture Lending
Before we get into that I would like to put into my perspective some issues and impacts the global economy has: Here are some quotes and predictions from the last year
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Worse Quotes of 2008 “I think this is a case where Freddie Mac and Fannie Mae are
fundamentally sound. They’re not in danger of going under I think they are in good shape going forward.”
Barney Frank (D-Mass) House Financial Services Committee Chairman May 9, 2008
Two months later, the government forced the mortgage giants into conservatorship and pledged to invest up to $100 billion in each.
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Worse Quotes of 2008 “The market is in the process of correcting itself.”
George W. Bush in a March 14, 2008 speech
For the rest of the year, the market kept correcting, and correcting, and correcting.
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Worse Quotes of 2008 Existing-Home Sales to Trend Up in 2008 – Headlines of a
National Association of Realtors press release 12/09/2007
On 12/23/2008, the group said November sales were running at an annual rate of 4.5 million – down 11% from a year earlier – in the worst housing slump since the depression
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Worse Quotes of 2008 “I think you’ll see (oil prices at) $150 a barrel by the end of the
year”
T. Boone Pickens, June 20, 2008
Oil was then around $135 a barrel. By late December, it was below $40.
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Worse Quotes of 2008 “In today’s regulatory environment, it’s virtually impossible to
violate rules.” - Bernard Madoff, money manager 10/20/2007
About a year later, Madoff – who once headed the Nasdaq Stock Market – told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.
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Worse Quotes of 2008 “Never let a serious crisis go to waste. What I mean by that is
it’s an opportunity to do things you couldn’t do before.”
White House Chief of Staff – Rahm Emanuel November, 2008
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Where’s the friggin’ groceries?
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Worse Quotes of 2008: An email from a customer in late 2008:
Dear Mr. Bang;
If I receive a returned check marked “insufficient funds” is that referring to my business or your bank?
Thank you;
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Recession Historically, recessions occur when business over-leverages
during good times and pulls back on employment and investment when conditions turn.
This time, over leveraged consumers caused the recession. Households are struggling with first mortgages, home equity lines of credit, student loans, credit card debt, vehicle loans and leases and other consumer loans.
The root of the problem is the housing boom & subsequent bust
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The Housing Bubble
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The Housing Bubble
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The Housing Issue Mark Zondi – Chief Economist with Moody’s Economist
12 Million homeowners have mortgage debt greater than their home value at the end of 2008
15 million “sketchy” mortgage loans made between 2005 and 2007 • Of these, 40% or 6 million loans will go through foreclosure process
Home values are still falling
Mortgage Crisis Waves • 1. Flippers – 2006 • 2. Subprime with ARM’s repricing in 2007 • 3. Negative Equity and Income Disruptions
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The Housing Issue Causes
Everybody was doing it Leverage Inconsistent and inadequate regulation and oversight
• Mortgage-backed securities Divided so many times that securities were AAA rated. Lender > Investment Bank > Rating Agency > Investor
Forecast of never ending price escalation (self delusion) • Anyone with a ruler could predict that real estate values were going
to continue to go up Availability of Credit
• Foreign capital • Accommodative Monetary Policy
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Housing Crisis Causes Investment Banks went public, adding leverage
Solomon Brothers Merrill Lynch Bear Stearns Morgan Stanley Lehman Brothers Goldman Sachs
Once upon a time there were brothers named Solomon and brothers named Lehman
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Additional Consumer Credit Issues
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Loan-Loss Reserves in Billions (FDIC)
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Impact of Economic Recession Consumers are deleveraging
Lower purchases – increase savings 1st time in 50+ years household debt declined in Q3 2008 Combination of bank conservatism and declining credit worthiness Defaults increasing Non-bank providers (e.g. mortgage companies) exit as market refuses to
fund
Corporations reduce borrowing Choice Capital Markets less accessible Combination of bank conservatism and declining credit worthiness
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Latest Economic Indicators Survey Actual
Non-Farm Payroll -540K -598K Manufacturing Payroll -145K -207K Initial Jobless Claims 620K 627K Continuing Claims 4,830K 4,987K Unemployment 7.5% 7.6% Consumer Credit -3.5B -6.6B Housing Starts 529K 466K
Lowest Housing Starts since before 1970
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Impact of the Economic Recession Think about this!
The nation’s largest credit card issuer (MBNA) The nation’s largest home mortgage company (Countrywide) The nation’s largest investment house (Merrill Lynch)
Were all recently acquired by a large US Bank
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Focus on Agriculture Beef Feedlot
Cattle Fax indicates that feedlot losses were record large in 2008, near $150 per head, with current losses near $250 per head, assuming no risk management
Dairy Producer $10.78 class III Milk in January, USDA forecasts $9.70 to $10.40 for
2009 vs. $14.65 average in 2008. (Predicts lowest prices since 1978) Broiler Industry
Cleveland Research indicates broiler processors made a profit in three weeks during 2008. The industry is bloodied, but reduction in inventory has produced some margins in early 2009.
Swine Industry Significant losses in 2008 amounting to $21.51 per head (Lawrence –
ISU) Using the same data, in the three years (2006-2007-2008) producers lost
money - $0.77 per head
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Macro View of Animal Agriculture (Lawerence – ISU)
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Macro View of Animal Agriculture (Lawerence – ISU)
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Macro View of Animal Agriculture Meat and poultry production
Total Total Meat & Beef Pork Meat Chicken Turkey Poultry Poultry
2007 26.421 21.943 48.683 36.126 5.958 42.582 91.265 2008 26.564 23.348 50.228 36.864 6.263 43.687 93.915 2009 26.110 22.980 49.401 36.175 6.040 42.740 92.141
2009/2008 98.3% 98.4% 98.4% 98.1% 96.4% 97.8% 98.1%
Meat and poultry prices Choice Live Steers Hogs Chickens Turkeys
2007 $ 91.82 $ 47.09 $ 76.40 $ 82.10 2008 $ 92.27 $ 47.84 $ 79.70 $ 87.50 2009 $ 89.00 $ 47.50 $ 84.00 $ 85.50
Source: World Agricultural Supply & Demand Estimates
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Who Lends to U.S. Production Agriculture? Direct Lenders
Farm Credit System • 99 Farm Credit Associations in the U.S. • 5 Farm Credit Banks
Commerical Banks • National Banks • Regional Banks • Community Banks
Non-Banking Entities • Suppliers • Insurance Companies
Secondary market for agriculture mortgage loans Farmer Mac
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Farm Credit System
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Commercial Banks Top 5 U.S. Agricultural Commercial Banks
Wells Fargo Bank of America Bank of the West US Bank, NA Rabobank Many others
Largely funded by: Deposits Fed fund borrowings Bank to bank loans
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Farmer Mac Federal Agricultural Mortgage Corporation
Farmer Mac is a stockholder-owned instrumentality of the U.S. chartered by Congress to establish a secondary market for:
• Agricultural real estate • Rural housing mortgage loans • Rural utilities loans
Total assets (loans) of about $3.0 billion Farmer Mac I – Secondary lending to agricultural loans originated by:
• Commercial Banks • Farm Credit System institutions • Credit Unions • Insurance Companies • Mortgage Bankers
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Farmer Mac Programs Farmer Mac I – Secondary lending to agricultural loans
originated by: Commercial Banks Farm Credit System institutions Credit Unions Insurance Companies Mortgage Bankers
Farmer Mac II – Secondary lending on the USDA guaranteed portion of loans FSA – Farm Ownership and Farm Operating guarantees Rural Development’s Business and Industry guarantees
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Farmer Mac Underwriting Loan to Value
New Facilities <75% Existing Facilities <65%
Maximum Exposure - $15 million Total Debt Coverage - >1.10 Current Ratio - >1.00 Leverage <60% Term: 10 or 12 years Amortization: 10 or 12 years Other
Must be contracted with a processor for the term of the loan Must be non-cancelable and assignable to FAMC All FAMC underwriting standards must be met Operation must conform to all environmental rules and regs
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Ag Lender Issues Impact of “deleveraging” US balance sheets will impact all
Consumer spending declining sharply • Inability to service current debt load • Reduction of net worth (home value / investments) • Fear of future
Business spending has dramatically fallen in an attempt to deleverage their balance sheet
Bank balance sheets • Tier One Capital (Tangible Equity / Risk-based assets) • Lender’s are attempting to guard and build capital
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Ag Lending It is a new world
Syndicated loan market • Dramatically reduced in the 4th Quarter of 2008
Participation in “club deals” has been made significantly more challenging • Reflects the changing strategy in the lending world • Capital preservation to make sure you can take care of clients
Customer lending • Fewer or no exceptions to loan policies
• Change from growth model to risk management model
Challenges in getting a lender to take on a new customer when most are trying to figure out how to take care of their current customers needs.
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Typical Swine Financing Biggest changes:
Larger deals over > $30 million aggregate are harder to get done • Participating lenders are harder to find
Exception to lending policies are going to be rarer • Working capital • Owner Equity • Debt Service Coverage Ratio • Personal liability
Interest Rates • Prime rate adjusted loans are probably history (for a while) • Spread to Libor is up about 100 to 150 basis points over a year ago
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Pork Industry Strengths / Opportunities
Efficient low-cost pig production relative to the rest of the world Efficient low-cost pork processing relative to the rest of the world Reduced trade barriers, growing exports Strong U.S. per capita demand through recession, historically
Weaknesses / Threats Reduced disposable consumer dollars Difficulty in controlling pork supply Ethanol production’s demand for grain Environmental / Political pressure on the industry Threat of foreign animal disease that may interrupt exports
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Defensive Strategies Continually update your budget / projections
Analyze liquidity and equity after projected losses Review loan covenants and communicate with your lender Take action early – soon – now!
Watch for opportunities to lock in profits Reduce risk exposure if you cannot afford the exposure May be behind us, locking in a loss is always difficult
Analyze Debt Structure Leverage or re-leverage fixed assets Structure for “worst case” as it may be difficult once there
Sell underutilized assets Or reduce contract payments
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Watch for indicators Demand, domestic and imports Sow liquidation in North America
Canada 1/01/09 • Breeding Herd down 107,000 sows (7.1%) • Market Inventory down 1,302,000 head (10.6%)
United States 12/01/08 • Breeding Herd down 152,000 sows (2.4%) • Market Inventory down 1,317,000 head (2.1%)
North America • Breeding Herd down 259,000 sows (3.3%) • Market Inventory down 2,619,000 head (3.5%)
Packer / Processor profitability Slaughter capacity changes Cold storage reports Imports of Canadian Pigs
Feeder imports are 516,115 through 2/07/09, down 31% from 2008 Market hogs and sows are 141,036 through 2/07/09, down 66% from 2008
Thank you!
Financing the livestock industry