Trends in Financing Agriculture

Trends in Trends in Financing Financing

AgricultureAgriculture

Slide Show #9

AGEC 489/690AGEC 489/690

Spring 2009Spring 2009

Lenders Serving AgricultureLenders Serving Agriculture

Real Estate LendersReal Estate Lenderso Farm Credit System

o Commercial banks

o Life insurance companies

o Farm Service Agency

o Individuals and others

Lenders Serving AgricultureLenders Serving Agriculture

Real Estate LendersReal Estate Lenderso Farm Credit System

o Commercial banks

o Life insurance companies



Nonreal Estate LendersNonreal Estate Lenderso Farm Credit System


o Commercial banks


Detailed coverage in Handouts #7, #8 and #9Detailed coverage in Handouts #7, #8 and #9

Year-end Farm Debt Outstanding in Agriculture

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

2000 2001 2002 2003 2004 2005 2006 2007P

Farm Credit System FSA Banks Life Insurance Individuals and others

Farm Real Estate Debt Shares

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2000 2001 2002 2003 2004 2005 2006 2007P

Farm Credit System FSA Banks Individuals and others

Farm Non-Real Estate Debt Shares

Debt not secured byreal estate mortgage

Debt not secured byreal estate mortgage

Debt secured by real estate mortgage

Debt secured by real estate mortgage

Farm Financial CrisisFarm Financial Crisis

Asian FluAsian Flu

Trends in Key Debt Service Ratios

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

1970

1971

1972

1973

1974

1975

1976

1977

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

De

bt

Bu

rde

n R

ati

o

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Tim

es

Inte

res

t E

arn

ed

Ra

tio

Debt Burden Ratio Times Interest Earned Ratio

Farm financial crisisFarm financial crisis

Farm Debt Burden Ratio

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

1970

1971

1972

1973

1974

1975

1976

1977

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

Rat

io o

f D

ebt

to N

et In

com

e

With Government Payments Without Government Payments

Importance of Government Payments as a StabilizerImportance of Government Payments as a Stabilizer


Net Farm Income and Farm Real Estate Debt

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

1970

1971

1972

1973

1974

1975

1976

1977

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

Ne

t F

arm

Inc

om

e (

Bill

$)

$0

$20

$40

$60

$80

$100

$120

Fa

rm R

ea

l Es

tate

As

se

ts (

Bill

$)

Net Farm Income Real estate debt

Problem in 2009? USDA projects net farm income will fall by 18.1% in 2009Problem in 2009? USDA projects net farm income will fall by 18.1% in 2009

Real Estate Assets and Real Estate Debt

$0

$500

$1,000

$1,500

$2,000

$2,500

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Re

al E

sta

te V

alu

e (

Bill

$)

$0

$20

$40

$60

$80

$100

$120

Re

al E

sta

te D

eb

t (B

ill $

)

Value of Farm Real Estate Real Estate Debt

Rising land values thus far have helped support rising farm debt. Rising land values thus far have helped support rising farm debt.

Farm Financial CrisisFarm Financial Crisis

Impact of rising land values

Impact of rising land values

Problem with this ratio. Only one-third of farmers owe total term debtProblem with this ratio. Only one-third of farmers owe total term debt

Let’s Look at U.S. Let’s Look at U.S. AgricultureAgriculture

Farm financial

crisis

Farm financial

crisis

Ethanolboom

Ethanolboom

0.0

50.0

100.0

150.0

200.0

250.0

300.0Ja

n-0

7

Feb

-07

Mar

-07

Ap

r-07

May

-07

Jun

-07

Jul-

07

Au

g-0

7

Sep

-07

Oct

-07

No

v-07

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Jan

uar

y 20

07 =

100

Corn All wheat Soybeans Fuel Fertilizer All inputs

Source: National Agricultural Statistics Service, USDA.

Recent Monthly Crop Recent Monthly Crop Price TrendsPrice Trends

Profit margins have narrowed considerably and are at further risk if crude oil prices increase.

Profit margins have narrowed considerably and are at further risk if crude oil prices increase.

0.0

50.0

100.0

150.0

200.0

250.0

300.0Ja

n-0

7

Feb

-07

Mar

-07

Ap

r-07

May

-07

Jun

-07

Jul-

07

Au

g-0

7

Sep

-07

Oct

-07

No

v-07

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Jan

uar

y 20

07 =

100

Corn All wheat Soybeans Fuel Fertilizer All inputs


Recent Monthly Crop Recent Monthly Crop Price TrendsPrice Trends

Price/cost ratios for major crops are much different than they were at this time last year, particularly for wheat.

Price/cost ratios for major crops are much different than they were at this time last year, particularly for wheat.

Source: Agricultural Prices, National Agricultural Statistics, USDA

Crop Price Declines From Crop Price Declines From Peak 2008 LevelsPeak 2008 Levels

24.50%-

45.43%-

27.97%-

10.29%-

53.52%-

37.18%-

-60.00% -50.00% -40.00% -30.00% -20.00% -10.00% 0.00%

1

2

3

4

5

6

All crop inputs

Fuel

Fertilizer

Soybeans

All wheat

Corn

Recently Monthly Livestock Recently Monthly Livestock Price TrendsPrice Trends


60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

160.0Ja

n-0

7

Feb

-07

Mar

-07

Ap

r-07

May

-07

Jun

-07

Jul-

07

Au

g-0

7

Sep

-07

Oct

-07

No

v-07

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan

-09

Feb

-09

Jan

uar

y 20

07 =

100

Beef Cattle All Hogs All Milk Poultry and Eggs Feed All livestock inputs

Poultry is the only commodity experiencing a positive price/cost ratio. Of particular concern is the free-fall in milk prices.

Poultry is the only commodity experiencing a positive price/cost ratio. Of particular concern is the free-fall in milk prices.

Livestock Price Declines Livestock Price Declines From Peak 2008 Levels From Peak 2008 Levels

Source: Agricultural Prices, National Agricultural Statistics, USDA

16.65%-

28.22%-

40.72%-

8.18%-

10.44%-

17.22%-

-45.00% -40.00% -35.00% -30.00% -25.00% -20.00% -15.00% -10.00% -5.00% 0.00%

1

2

3

4

5

6

All livestock inputs

Feed

Poultry and eggs

All milk

All hogs

Beef cattle

Macroeconomic Linkages Macroeconomic Linkages to Ag in 2008:to Ag in 2008:Weak dollar (good for Ag!)(good for Ag!)High crude prices (bad for Ag!)(bad for Ag!)Low inflation (good for Ag!)(good for Ag!)Low interest rates (good for Ag!)(good for Ag!)Low unemployment rate (good for (good for

Ag!)Ag!)High consumer income (relatively (relatively

minor positive impact on Ag!)minor positive impact on Ag!)

A Potential 2009 Macro A Potential 2009 Macro Scenario for Ag:Scenario for Ag:Weakened client nationsWeakened client nations (bad for Ag!)(bad for Ag!)Modest rise in oil pricesModest rise in oil prices (bad for Ag (bad for Ag

except biofuel feedstock!except biofuel feedstock!))InflationInflation in check (good for Ag!)(good for Ag!)Interest rates lowInterest rates low (good for Ag!)(good for Ag!)High unemployment rateHigh unemployment rate (bad for Ag!)(bad for Ag!)Falling consumer incomeFalling consumer income (relatively (relatively

minor negative effect on Ag!)minor negative effect on Ag!)

2009 Farm Price and 2009 Farm Price and Income ProspectsIncome Prospects1. Crop prices down from 2008 levels

and unlikely to gain much traction in unlikely to gain much traction in 20092009 unless speculative demand for commodities increases. Biofuel Biofuel feedstock like corn is an exception if feedstock like corn is an exception if crude oil prices rise.crude oil prices rise.

2. Input costs for fuel, fertilizer and other selected inputs have declined declined but can rise if crude prices risebut can rise if crude prices rise.

2009 Farm Price and 2009 Farm Price and Income ProspectsIncome Prospects3.3. Lower feed pricesLower feed prices still leave livestock livestock

producers stressedproducers stressed.4.4. LowerLower net farm income in 2009. USDA

projects 18.1% decline18.1% decline.5.5. Lower crop land appreciationLower crop land appreciation, with

likely declinesdeclines particularly outside the Corn Belt and Northern Plains regions.

6.6. Increased debt repayment stressIncreased debt repayment stress expected, particularly for highly leveraged livestock borrowers.

Net Farm Income and Total Farm Debt

$0

$50

$100

$150

$200

$25019

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Bill

ion

Do

llars

Net Farm Income Total Farm Debt

Source: Economic Research Service. 2009 value is USDA forecast.

Components of Debt Burden RatioComponents of Debt Burden Ratio

Problem of fixity in debt outstanding during volatile periods of net farm income.

Problem of fixity in debt outstanding during volatile periods of net farm income.


Historical Trend in Illinois Crop Land Values

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,00019

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

08

Dol

lars

per

Acr

e

Source: National Agricultural Statistics, USDA.

Land Values Can Fall…Land Values Can Fall…


Biofuels boomBiofuels boom

Percentage Change in Cash Rent per Acre

-20

-15

-10

-5

0

5

10

15

20

25

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

Per

cent

age

Cha

nge

Source: National Agricultural Statistics, USDA.

Recent Cash Rents TrendRecent Cash Rents Trend

Biofuels boomBiofuels boom


2009 Updated Central 2009 Updated Central Illinois Corn BudgetIllinois Corn Budget

Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre

Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre

Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre

Operator & land return $361 per acre





Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses.

Source: Farmdoc Budgets, University of Illinois Extension Service.












Those tenants who had already locked in $350 cash rents would need need $3.90 corn to break even$3.90 corn to break even. If the cost of fertilizer, seed and fuel had not fallen in the last few months, corn prices would had to be had to be $4.65$4.65 to break even.












Those tenants who had already locked in $350 cash rents would need need $3.90 corn to break even$3.90 corn to break even. If the cost of fertilizer, seed and fuel had not fallen in the last few months, corn prices would had to be had to be $4.65$4.65 to break even.

Breakeven here does not Breakeven here does not account for principal account for principal payments on outstanding payments on outstanding term loans or family living term loans or family living expenses.expenses.

Breakeven here does not Breakeven here does not account for principal account for principal payments on outstanding payments on outstanding term loans or family living term loans or family living expenses.expenses.

A Look at Farm Lending A Look at Farm Lending Picture in 2009Picture in 2009In ag, total farm term debt is owed by a In ag, total farm term debt is owed by a

relatively relatively small small number of borrowers. This number of borrowers. This counters the USDA’s rosy debt statements.counters the USDA’s rosy debt statements.

Concern over loans Concern over loans based heavily on off-based heavily on off-farm repayment capacityfarm repayment capacity..

Debt repayment capacity for livestock Debt repayment capacity for livestock borrowers borrowers will be stressedwill be stressed..

Will land values Will land values soften?soften? YESYES. Smaller Smaller gains/declines in Corn Belt and Northern gains/declines in Corn Belt and Northern Plains regions; larger declines are likely in Plains regions; larger declines are likely in other regions.other regions.

Recent Survey ResultsRecent Survey Results2,300 agricultural professionals (including

lenders) were recently surveyed.84% believe farmers will experience financial will experience financial

stress in the next 3 yearsstress in the next 3 years. When lender responseslender responses were sorted out, 54%54%

felt the chance of financial stress is highhigh and 26%26% felt this would be very highvery high.

The cost of inputscost of inputs and volatile pricesvolatile prices are the top 2 reasonstop 2 reasons for financial stress given by all respondents, followed loss of off-farm incomeloss of off-farm income. The lowest ranked reason was declining land values….interestinginteresting.

Recent Survey ResultsRecent Survey ResultsMany farmers responded saying they

faced stricter requirements (e.g., more documentation). 56%56% said requirements changed slightlyslightly while 17%17% reported substantialsubstantial increases.

Farmers responding assessed their financial management skillsfinancial management skills as follows: only 8%8% of farmers participating in this survey

felt they were well equipped well equipped with financial management skills.

74%74% said they were moderately equippedmoderately equipped. 18%18% said they were poorly equipped!poorly equipped!

#7: How will the recession affect off-farm #7: How will the recession affect off-farm incomes and farm family unemployment? incomes and farm family unemployment? Regional variations?Regional variations?

Off-farm income is an important source of internal source of internal financefinance for some farm operators and a basis for making rural home loans.

Potential high stress statesPotential high stress states:: – January 2009 unemployment rates in states like California (10.1%), Michigan (11.6%), Indiana (9.2%), South Carolina (10.4%) and Oregon (9.9%) suggest areas of potential stress from loss in off-farm income.

Potential low stress states:Potential low stress states: January 2009 unemployment rates in states like Iowa (4.8%), Kansas (5.8%), Utah (4.6%), Nebraska (4.3%), and South Dakota (4.4%) suggest less risk of loss in off-farm income. (see (see map)map)

The magnitude of these rates are no doubt lower than no doubt lower than current ratescurrent rates given the jump from 7.6% to 8.1% and future increases in months to come.

10.1%

9.9%

9.4%

11.6%

10.4%

9.7%

8.6%

8.6%

State Level Picture of Unemployment RatesState Level Picture of Unemployment Rates

8.7%

8.6%

8.8%7.9%9.2%

7.8%

7.0%8.0%

4.8%4.3%

4.4%

4.2% 7.6%

6.9%

6.4%

6.4%

5.1%

7.8%

5.6%

6.6% 6.6%

5.8%

5.0%5.1%7.0%

8.7%

Source: Bureau of Labor Statistics, US Department of Labor.

#9: General condition of farmers in Texas? #9: General condition of farmers in Texas? Any problems? What risk management tools Any problems? What risk management tools are they using? Should they be using?are they using? Should they be using?

The drought affecting Texas is the worst since worst since 19181918. First two months of 2009 driest start of any year since records were kept over a century ago.

Weakened economic condition is evidenced by the substantial increase in FSA loan applicationssubstantial increase in FSA loan applications.

Hitting the cattle industrycattle industry hard, with stories of ranchers selling off portions of breeding herds.

Governor Perry asked for state of emergency state of emergency declarationdeclaration for 199 counties.

Farm AssistFarm Assist tool at TAMU used by some. Many should improve understanding of financial statements, pro forma analysis, and benefits from stress testingstress testing to determine potential long run risk and returns when making decisions.

Extent of Current Texas DroughtExtent of Current Texas Drought

I own a farm here that enjoyed three cuttings of coastal hay last year. May only get one this year.

Role of FinancingRole of Financing

Importance of off-farm income by type of farming operation

Importance of off-farm income by type of farming operation

Importance of off-farm income by size of farming operation

Documents

Trends in Financing Agriculture