Joel Lorenzen Senior Vice President Chief Credit and Operations Officer Farm Credit Services Southwest Lending to Agriculture ASFMRA Annual Meeting October

Joel LorenzenSenior Vice President

Chief Credit and Operations OfficerFarm Credit Services Southwest

Lending to Agriculture

ASFMRA Annual MeetingOctober 2011

Our Future Economic Drivers Philosophy and Customers

World Trends

National Issues

Emerging Lending Risks

Underwriting Standards

Successful Producer Strategies

Philosophy and Customers Philosophy

Sound, Constructive, &Profitable

Types of Customers Small OperatorLarge Integrated DairyAgribusinessesProcessors

Major ProductsLong Term Real Estate LoansOperating LoansOther Products (No deposits)

Emerging World Middle Class Growth

World middle class growth to double from 00’- 30’ No middle class growth in advanced nations China and India account for 70% of growth Ability to pay drives commodity prices and transforms world commodity markets

Potential Implications for Agriculture Cotton price impacted by growth in China/India Watch for trade protectionism practices Exports & world trade increasingly important

U.S. Government Behavior New & Existing Entitlement Programs Deficits as % of GDP Taxing Implications Increased Regulation Few in Congress have ever been on a farmFederal Reserve Strategies

Potential Implications for Agriculture Increased US Ag exports Federal Agriculture Programs all vulnerable Unknown estate and income tax future Oil and fertilizer input costs Crop prices - as value of $ decreases

Capital Business Investments Trillions in cash sitting on sidelines Industrial production slowly climbing Added risk of uncertainty w/o reward

• General Economy• Taxes• Regulatory Increases

Impact on Agriculture Slower national economic recovery for jobs Low interest rates for ??? long

Emerging Lending Risks

Commodity Price VolatilityReal Estate Price Volatility Land Values vs. Income Production Increased Regulation

Impact on Agriculture High potential of boom and bust cycles Continued volatility in pricing Systemic risk in lending portfolio’s

Changing Underwriting

Water Issues – Especially in the WestFinancial Information RequirementsLending Tied to Production Value

Emerging Ag Business Environment

Continued price, cost, and cash flow volatility Potential agricultural bubble in middle America Increasing cost structure from regulatory compliance

(taxes, energy, environment, health care etc.). Slow National Recovery Weak dollar (favor exports and increase input costs) Greater tie into global trade and economic policy as

export dependency increases.

Emerging Ag Business Environment

Successful Producer Strategies Increasing liquidity Deleveraging Diversified risk management programs

Managing margins vs. costs Improved financial records Looking for new opportunities

Capital Markets Update

October 2011

Index

Bank Market Update

Investment Grade Market Update

Leveraged Loan Market Update

Interest Rate Update

Commodity Markets

Confidential and Proprietary 12

0

100

200

300

0

100

200

300

400

500

600

700

800

900

Cros

s Ove

r / In

vesm

tmen

t G

rade

Hig

h Yi

eld

High Yield Investment Grade Cross Over

80

85

90

95

100

Bid Ask

0

10

20

30

40

50

60

70

80

90

Market Volatility


Average Large Institutional Bid/Ask Spread

Source: S&P LCD, Bloomberg

VIX Volatility Index

5-year Credit Default Swaps Market volatility has increased recently

(bottom right) as a result of sovereign debt concerns and a weakening economic outlook.

This has resulted in widening credit spreads (top right) and broad-based selling of leveraged loans (bottom left)

S&P / Fitch Moody'sAAA AaaAA+ Aa1AA Aa2AA- Aa3A+ A1A A2A- A3

BBB+ Baa1BBB Baa2BBB- Baa3BB+ Ba1BB Ba2BB- Ba3B+ B1B B2B- B3

CCC+ and Below Caa1 and Below

Bank Market Overview

Even in light of market volatility, loan volumes continue to rebound from 2008 lows.

Although less than 2Q11, 3Q11 volume exceeded every other quarter since 2Q07.

Rolling four quarter volume has exceeded $1.5 trillion and is approaching “pre-crisis” levels.

Both investment grade and leveraged loans experienced growing volumes.


Bank Loan Volumes ($ in Billions)

Source: Thomson Reuters LPC

Investment Grade / High Yield Distinction

Inve

stm

ent

Gra

de

or

Hig

h G

rad

eL

ever

aged

or

Hig

h Y

ield

0

300

600

900

1200

1500

1800

0

100

200

300

400

500

600

Ro

lling 4

Q V

olu

me

s

Qu

arte

rly

Vo

lum

es

Leveraged IG Other Rolling 4Q Total

0

50

100

150

200

250

300

20

08

20

09

20

10

20

11

20

08

20

09

20

10

20

11

20

10

20

11

20

08

20

09

20

10

20

11

AAA AA A BBB

0%

10%

20%

30%

40%

50%

60%

70%

80%

364-DAY THREE-YEAR FOUR-YEAR FIVE-YEAR

I-Grade Tenor by Quarter ($ in Billions)

364 day 3 year 5 year4 year

Investment Grade: Volume and Tenors

Multi-year liquidity continues to represent the vast majority of the market.

Multi-year volumes exceeded 364-day volumes by over 5 times YTD 2011.

Four and five year volumes exceeded three year volumes by 6 times.

The rise of longer tenors are largely a result of:

Supply: Liquidity is strong, and low investment grade losses are driving risk appetite.

Demand: Historically attractive upfront / unused fees and relatively low spreads are driving demand.

Risk Management Focus: Rating agencies value term liquidity. Additionally, term liquidity reduces exposure to refinancing risks during events / financial shocks.


Market Share by Tenor


3Y

4Y

5Y1Y

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

AA A BBB

0.00

50.00

100.00

150.00

200.00

250.00

300.00

AA A BBB

Investment Grade: Multi-Year Pricing

The improvement in liquidity that is driving multi-year tenors and greatly increasing volumes is also resulting in a reduction in bank loan pricing.

Multi-year drawn and undrawn pricing has tightened to two-year lows.

BBB multi-year undrawn pricing has fallen 10 basis points since 4Q10, and the average multi-year drawn pricing is just below 150 basis points for the first time in three years.

Single A multi-year undrawn is approximately 10 basis points and drawn costs are approximately 70 basis points on recent offerings.


Multi-Year Drawn Pricing (in bps)Multi-Year Undrawn Pricing (in bps)


60

65

70

75

80

85

90

95

100

105

0

100

200

300

400

500

600

Pro Rata Institutional

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Leveraged Loans: Overview

While the corporate default rate remains low, leveraged loan prices have recently fallen with the economic uncertainty and flight to quality.

While YTD leveraged loan volumes far exceed last year’s levels, third quarter’s volumes have slowed from 1H011’s pace.


Corporate Default Rate

Leveraged Loan Volumes ($ in Billions) *

Source: S&P LCD

* Volumes include only “new money” financings

Leveraged Loans Secondary Bids

0

200

400

600

800

1000

1200

1400

1600

1800

BB-/Ba3 B+/B1 B/B2

0

100

200

300

400

500

600

700

Pro Rata Institutional

0

100

200

300

400

500

600Pro Rata Institutional

Leveraged Loans: Credit Spreads

Credit spreads widened significantly during the height of the credit crisis (top right).

This led to scant origination in leveraged loans during 2009 (gaps in charts below).

While liquidity remains available, continued macro volatility has impacted leverage spreads recently.


Primary BB/BB- Rated Loan Spreads (in bps)

Source: S&P LCD

Primary B+/B Rated Loan Spreads (in bps)

Secondary Credit Spreads (in bps)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Yie

ld (%

)

1/3/2011 10/14/2011

One Year Forward Three Years Forward

0

1

2

3

4

5

6

Yie

ld (%

)

Three Month LIBOR Five Year Treasury Yield 10 Year Treasury Yield

Interest Rates

Treasury rates recently hit 70 year lows. Over the past 20 years:

Three Month LIBOR has exceeded its current level 90% of the time.

The Five Year Treasury Yield has exceeded its current level 99% of the time.

The 10 Year Treasury Yield has exceeded its current level 99% of the time.

The steepness of the yield curve points to higher future rates.

The 10 Year Treasury Yield is ~110 bps below levels from the start of the year (~2.24%).

The One Year Forward Curve projects a 10 year yield near 2.74%.

The Three Year Forward Curve projects a 10 year yield near 3.34%.


Yield Curve: Historical, Current and Forward

Historic Interest Rates

Source: Bloomberg

0

20

40

60

80

100

120

140

160

180

200

0

200

400

600

800

1000

1200

1400

1600

1800

2000

$/B

arre

l

$/O

un

ce

Source: Bloomberg

Gold WTI Oil

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

¢/p

oun

d

Source: Livestock Marketing Information Center

Cattle Hogs Broilers

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

$/B

ush

el

Source: USDA Economic Research Service

Soybeans Wheat Corn

Commodity Market Volatility


Grain commodities have been impacted by lower reported production and stocks.

Increasing livestock prices reflect increased costs for feed and processing.

More closely monitored commodities price increases an indication of inflation?

Gold and Oil Commodities Livestock Nearby Futures

Nearby Grain Futures

ASFMRA, October 2011

Financing Agriculture Panel

Jim Pisani, ARAWells Fargo Ag Industries

Internal Agribusiness Consulting Group Dual roles: quality assurance and relationship

enhancement. Provides support to line groups. Agricultural portfolio includes companies involved in

supplying, producing, processing, marketing, or distributing food and fiber products domestically or internationally.

Ag Industries: production and processors Strategic evaluation and risk profile. Commodity updates and industry trends. Budgeting and downside analysis. Agricultural appraisals, inspections, collateral monitoring.

Relationship enhancement activities.

Wells Fargo Ag Industries - 22

Agricultural Industries

Agricultural commodity price volatility:

Price volatility is associated with some specialty crops: Tree Fruit. Iceberg Lettuce. Other fresh produce crops. Some seasons in almonds, citrus, and grapes.

Past decade in dairy industry: milk.


Financing Agriculture

Source: USDAWells Fargo Ag Industries - 24

Fresh Peach Prices 1995-2010

$0.190

$0.240

$0.290

$0.340

$0.390

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$/L

b.

Source: WF Ag IndustriesWells Fargo Ag Industries - 25

CA Lettuce Prices

$7.00

$12.00

$17.00

$22.00

$27.00

$32.00

Jan-0

7

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-07

Jan-0

8

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-08

Jan-0

9

Mar

-09

May

-09

Jul-0

9

Sep-0

9

Nov-09

Jan-1

0

Mar

-10

May

-10

Jul-1

0

Sep-1

0

Nov-10

Jan-1

1

Mar

-11

Source: CA Almond Board


California Almond Production & Grower Prices

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Mil

lio

n L

bs.

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Production

Grower price


California Navels

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

P2011

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Production

Fresh Price

Source: NASS, USDA

Dairy – Milk Price Volatility

Source: CDFAWells Fargo Ag Industries - 28

CA Overbase (2002-2011)

9.00

11.00

13.00

15.00

17.00

19.00

21.00

Jan-

02

May

-02

Sep-0

2

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Sep-0

5

Jan-

06

May

-06

Sep-0

6

Jan-

07

May

-07

Sep-0

7

Jan-

08

May

-08

Sep-0

8

Jan-

09

May

-09

Sep-0

9

Jan-

10

May

-10

Sep-1

0

Jan-

11

May

-11

$/cw

t

Feed Cost Volatility

Wells Fargo Ag Industries - 29Source: USDA

Feed Cost Volatility


CA Alfalfa Hay (Tulare-Hanford-Visalia, delivered basis, premium hay)

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 Oct 2011

$ P

er T

on

Source: USDA, AMS

How does price volatility affect agricultural operating risk? Qualitative risk ratings:

Commodity Price Risk. Input Availability Risk. Relative Costs of Production. Industry Risk.

Operating Risk: The uncertainty surrounding the projected outcome.


Financing Agriculture

0

0.05

0.1

0.15

0.2

0.25

-1600 -950 -650 -350 -50 250 400 550 750 1150 1450 1750 2400

Cash Flow ($000)

Pro

bab

ilit

y

Projected

Operating Risk


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Cash Flow ($000)

Pro

ba

bili

ty Lower Risk

Higher Risk

Projected

Operating Risk Profiles


0

0.05

0.1

0.15

0.2

0.25

-1600 -950 -650 -350 -50 250 400 550 750 1150 1450 1750 2400

Cash Flow ($000)

Pro

ba

bility

ProjectedWorst Case

Operating Risk: Downside Analysis


Downside analysis compares operating risk profile to balance sheet capitalization: Downside margin: @risk model or stress variables. Compare to liquidity, borrowing capacity, solvency. Can calculate downside coverage ratios. Can assess changes in operating risk profile:

Crop insurance. Price risk management tools. Crop diversification.

Can assess changes in capitalization. Optimize liquidity allocation.


Production Agriculture

Dairy Production

Dairy budget: Excellent management tool for sensitivity analysis and downside projection.

Can assess impact on gross margin and breakeven by changing key variables.

Gross margin projection is subject to variability due to price volatility in milk and feed.


Dairy Production

Dairy budget downside analysis: Stress milk price, production, and feed costs. Consider affect of price risk management tools

upon key variables. Calculate downside coverage ratios. Ag Consultant: assessment of budget variables

and asset value review.


Documents

Joel Lorenzen Senior Vice President Chief Credit and Operations Officer Farm Credit Services Southwest Lending to Agriculture ASFMRA Annual Meeting October