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?

Housing Starts

00.20.40.60.8

11.21.41.61.8

2006

2007

2008

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-

09

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Mill

ions

3-Month Treasury Bill Yield

Interest Rates

Corporate Bonds – Moody’s Seasoned

Dow Jones Industrial Average

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

Considerations

US / World economic conditions

Financial markets

Agriculture

• Production and consumption

• Globalization

• Innovation

Trade PolicyTrade Policy

Strength of $Strength of $

US Commodity PricesUS Commodity Prices

Investor ConfidenceInvestor Confidence

Consumer SpendingConsumer Spending

China GrowthChina Growth

US GrowthUS Growth

Government SpendingGovernment Spending

Inflation Inflation

US DeficitUS Deficit Interest RatesInterest RatesWorld Food DemandWorld Food Demand

Unemployment RateUnemployment Rate

Planting DecisionsPlanting Decisions

WeatherWeatherInnovationInnovation

Energy ConsumptionEnergy Consumption

World Economic GrowthWorld Economic 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. AndersonSr. Vice President and Chief Credit

Officer

13

Farm Income Statement

Farm income indicators 2003 2004 2005 2006 2007 2008 2009AB

billions $s Sept

Gross farm income 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

Total production expenses 200.3 209.8 219.7 232.7 267.5 290.0 280.0

5% 5% 6% 15% 8% -3%

NET FARM INCOME 3/ 59.7 85.8 74.6 58.8 71.2 87.2 54.844% -13% -21% 21% 22% -37%

2000 2006 2007 2008 20092009 Adjusted

Assets

Real estate 946 1,625 1,751 1,692 1,626 946

NonReal estate 257 298 304 313 309 309

Total 1,203 1,923 2,055 2,005 1,935  1,255

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

Credit Conditions – Credit Quality by Commodity

Volume as % of YE 2009Commodity of 6/30/09 Portfolio % Adverse Projection

Hogs $3,428 5.8% 11.7% 15.7%Dairy $4,581 7.8% 8.1% 10.7%Poultry $2,128 3.6% 6.5% 7.5%Cow / Calf $4,015 6.8% 1.8% 3.3%Feedlots $1,448 2.5% 3.2% 4.0%Corn & Soybeans $11,535 19.7% 0.7% 0.9%Other Crops $16,801 28.6% 1.3% 2.3%Ethanol $1,632 2.9% 27.5% 34.2%Other Commodities $13,113 22.3% 3.9% 5.0%Total $58,682 100.0% 4.1% 5.0%

$ in millions

18

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

09/08 10/082008 2009 2010 % Change % Change

Beef Production 26,663 26,565 26,092 -0.4% -2.1%Pork Production 23,367 22,766 22,365 -2.6% -4.3%Broiler Production 36,511 35,040 35,541 -4.0% -2.7%

Beef Exports 1,888 1,744 1,905 -7.6% 0.9%Pork Exports 4,668 4,183 4,450 -10.4% -4.7%Broiler Exports 6,962 6,428 6,300 -7.7% -9.5%

Beef Exports 7% 7% 7%Pork Exports 20% 18% 20%Broiler Exports 19% 18% 18%

Livestock Overview

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 $41.58

Feb. ‘10 - $61.90; $45.80

June ‘10 - $72.35 $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

StocksMM 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

StocksMM 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 GrainStocksMM Metric Tons

Percent Carry to Use

OilseedStocksMM 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 DoaneVice President, CoBank

$351B

$410B

$351B

$240B

$307B

$389B

$624B

$675B

$166B

$398B

$201B

$222B $219B

0

250

500

750

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YTD 1

0/9/

09

Institutional Pro Rata High-Yield

Total Bank Debt and High-Yield Bond Volume in the Leveraged Finance MarketSource: S&P/LCD and Merrill Lynch Global High Yield Strategy

0.0%1.0%1.0%

11.3%

3.7%

0.6%

1.9%

3.6%

7.4%

10.0%

4.0%

9.9%

7.0%

2.6%

0%

3%

6%

9%

12%

15%

As of

Percent of Outstanding Leveraged Loans in Payment Default or Bankruptcy

High Yield Bond and Lev. Loan Maturities

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016

Institutional Loans High Yield Bonds

($billions)

Loan Spreads Over LIBOR for BB/BB-

Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of BB/BB- Loans

L+100

L+200

L+300

L+400

L+500

L+600

Pro Rata Institutional

Loan Spreads Over LIBOR for B+/B

Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of B+/B Loans

L+150

L+250

L+350

L+450

L+550

Pro Rata Institutional

Middle Market Spreads (Cash Flow < $50MM)

L+200

L+300

L+400

L+500

L+600

Institutional

Pro Rata

Secondary Market Trading Spreads By Rating

L+0L+200L+400L+600L+800

L+1000L+1200L+1400L+1600L+1800L+2000L+2200L+2400L+2600L+2800L+3000L+3200

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.

Management

Board governance

Balance sheet strength

Appropriate risk management competencies and tools

Capacity

• People

• Capacity

• Time

1. Key items that lenders typically consider

Working Capital (Liquidity)

• Current assets - Current liabilitiesFactors 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

2. Ratios

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 RakerPresident, 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