Financial Crisis Impact on Long Term Ag Forecast
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Paul N. EllingerUniversity of Illinois
[email protected]/ellinger
217-333-5503
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 2
Economic Conditions
• Surging commodity prices• Increasing oil prices• Low and declining value of dollar• High ag exports• Inflationary pressures• Negative real interest rates• Increasing capital gains
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Reflection
June 2008: – Corn Price: $ 7.47 / bu.– Soybean Price: $15.16 / bu.– Oil Futures: $138.36 / barrel– Gasoline $4.05 / gallon– Fed Funds 2%– Dow Ind. 12,630– GM Stock $18/share– Lehman Bros. $36/share
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Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 4
What did we learn? How we got here?
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Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Farmland ValuesRelative Stability
Relative Stability
Good Times
Good Times
Bad TimesGood Times
Real (2000=100)
Nominal
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Securitization Accounts for Over 50% of Financial Intermediation
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Innovations: Summary
• Securitization, CDOs, and CDSs and use of leverage expanded the migration and impact of what started in housing– Beyond commercial banks– Beyond U.S.– Beyond housing
• Financial sector reliance on short-term debt
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Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
The Fed Has Expanded its Balance Sheet to Extend Credit to Banks
0
400
800
1,200
1,600
2,000
2,400
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Short-term Lending to Financial Firms
Rescue Operations
Operations Focused on Broader Credit Conditions
Other Assets
Treasury Portfolio
Billions of Dollars
Source: Federal Reserve Board of Governors
Federal Reserve Balance Sheet
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Credit Availability “Sign Posts”
050
100150200250300350400450500
1/2/
2006
4/2/
2006
7/2/
2006
10/2
/200
6
1/2/
2007
4/2/
2007
7/2/
2007
10/2
/200
7
1/2/
2008
4/2/
2008
7/2/
2008
10/2
/200
8
1/2/
2009
4/2/
2009
# Month LIBOR_OIS Swap SpreadTED Spread (3 M LIBOR- # M T BILL)
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Price of Legacy/Toxic Securities
0
20
40
60
80
100
7/19
/200
6
9/19
/200
6
11/1
9/20
06
1/19
/200
7
3/19
/200
7
5/19
/200
7
7/19
/200
7
9/19
/200
7
11/1
9/20
07
1/19
/200
8
3/19
/200
8
5/19
/200
8
7/19
/200
8
9/19
/200
8
11/1
9/20
08
1/19
/200
9
3/19
/200
9
ABX-06-02-AAA
ABX-06-02-BBB
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 12
Outlays & Receipts/GDP
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
estim
ate
2012
estim
ate
2014
estim
ate10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
Receipts OutlaysSource: CBO
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 13
Debt / GDP
2008 2009 2010 2011 2012 20130.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Debt held by Public / GDP
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Steps to recovery
Source: Morgan Stanley
What about Agriculture?
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 16
Illinois Farmland Prices
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Real (2000=100)
Nominal
Relative Stability
Relative Stability
Good Times Good Times
Good Times
Bad Times
Economic Research Service
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 17
Farmland Price Headlines• "...quarterly decrease of 6% (...in 2009) ... the largest quarterly decline since 1985"
(Chicago Fed AgLetter).
• "It's Confirmed: Farmland Prices are Correcting". Continuing with an attribution to USDA, "...both Bloomberg and the WSJ are reporting the first annual drop in U.S. farmland prices in 20 years of an average of -3.2%". (www.seekingalpha.com)
• Various sources have cited declines in Iowa farmland values from last year ranging from about 5% to nearly 7.6% (HPJ Land Journal, ISU Ag Decision Maker, others).
• In its mid-2009 survey, the Illinois Society of Professional Farm Managers and Rural Appraisers found high quality land to be down 2.38%, lower quality land off 5.6%, and were among the first to note evidence of expectations of declining cash rents.
• USDA sources show farmland values in Illinois down .4% from the same period in 2008, with steeper declines in IN and IA, though surveyed cash rents paid were still up into 2009 from a year earlier.
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 18
Is the sky falling?
Dow Index
Case-Shiller House Price Index/year
Chicago House Price Index
Illinois Farmland Total return
1999-2008 1.10% 5.89% 3.00% 12.70%2007 6.20% -10.30% -4.70% 16.20%2008 -45.50% -21.40% -15.40% 18.90%
2009 to date 4.90% -7.10% -9.90% -0.50%
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 19
Debt Service to Farm Income
0.00
0.05
0.10
0.15
0.20
0.25
0.30
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Relative Stability Relative Stability
Good Times Good Times
Good Times
Bad Times
Economic Research Service
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Debt to Asset: Illinois Farmers
Illinois Average27%
77% less than 40% Debt to Asset
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Significance of Farmland
Total Assets Used in Farming: United States
Source: Economic Research Service
$2.34 Trillion
Real Estate Assets $2.042
Real Estate Debt $0.111
Trillion
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 22
Total Farm Debt
Economic Research Service
$215 Billion
Does not include other sectors of the supply chain
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 23
Perspective of $215 Billion
Does not include Asset bank commercial paper MM Mutual Fund facilityTemporary guarantee for MM fundsSource: WSJ
Agricultural Financial Markets
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
How Many Farms Does It Take?Value of Ag Output - $200 Billion
30,495 Farms
50%0% 10%
389 Farms
100%
2,000,000 Farms25%
3,201 Farms
34,085 Farms
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
How Many Banks Does It Take?% of Commercial Bank Loans to Agriculture
474 Banks
50%0% 20%
15 Banks
100%
5,184 Banks40%
332 Banks
821 Banks
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Commercial Banks Health/Losses
• 89 Bank failures : 2009
• 416 Banks on FDIC Problem bank list 76 on 12/31/07
largest since June 1994
• Undercapitalized 33 banks lending to agriculture
Only 13 on 6/30/2008
• Construction and Development Real Estate
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Crisis First Wave Impact on Commercial Banks
• Dog bone– Farm and bank size
• Regional differences• Fed actions
– Insurance & Capital infusions
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Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Feedback Loops Impact Commercial Banks
General economic downturnNonfarm income & labor marketsHousing valuationConstruction and development loansPotential for enhanced documentation/underwriting/regulationPotential exposures to interest rateDeposit insurance premiums
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Wells Fargo Bank 2,633,000$ 5,751,000$ 8,384,000$ Bank Of America 1,619,432 1,601,725 3,221,157 Bank Of The West 821,074 1,923,390 2,744,464 Us Bank 782,071 1,048,474 1,830,545 Rabobank 1,296,619 521,831 1,818,450 Regions Bank 766,606 428,349 1,194,955 M&I Marshall & Ilsley Bank 759,927 412,099 1,172,026 Wachovia Bank 515,000 552,000 1,067,000 First National Bank Of Omaha 45,328 765,398 810,726 New Frontier Bank 331,896 448,742 780,638 Keybank Na 197,496 486,497 683,993 Citizens Business Bank 163,101 445,896 608,997 Jpmorgan Chase Bank 161,000 433,000 594,000 Fulton Bank 393,013 118,466 511,479 Fifth Third Bank 133,854 369,597 503,451
10,619,417$ 15,306,464$ 25,925,881$ % of all commercial banks 17% 26% 21%
Loans Secured by Farm Real Estate ($000)
Nonreal Estate Agricultural
Loans ($000)Total Agricultural
Loans ($000)
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Banks Participating in TARP
• 400 Firms (530 Banks)• 6% of banks lending to Agriculture• 24% of Agricultural Volume • 0.09% ROA TARP Banks• 0.42% ROA NonTARP Banks
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 32
Farm Credit System
• Government Sponsored Entity (GSE)• Strong capital position • Acquires funds via capital markets
– Unintended consequences of gov’t actions– Funding costs spreads have increased– Longer term bonds
• Key lenders to elevators/input suppliers• Growth in some assn. slowed by Farmer Mac
limitations
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 33
Farmer Mac
• Another agricultural GSE• Guarantee portfolio quality remains strong• Focus on increasing capital• $65 Million infusion from Farm Credit System
– Investments in Fannie and Lehman, impairment losses $97 million
• Similar issues in funding to Farm Credit System
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 34
Insurance Companies
• Typically, larger real estate loans – Dependence on larger farms access to
working capital• Some evidence of scaling back new
lending – capital and earnings related
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 35
Captive Finance Suppliers• Asset back security market dried up
• TALF (Treasury Asset Backed Securities Facility) is now assisting
• Commercial paper more limited
• Input suppliers facing cash flow stresses of volatile product prices
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 36
Captive Finance Suppliers: Securitization
CNH CAT DE Total0
500,000,000
1,000,000,000
1,500,000,000
2,000,000,000
2,500,000,000
3,000,000,000
3,500,000,000
4,000,000,000
Average (01-07) 2008
Secu
ritiza
tion
Issua
nce
Volu
me
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 37
Summary: Agricultural Lenders- Shorter term
• Current financial health, in general, strong
• Credit generally availability for traditional farmers
• Farmer earnings/payback in Midwest relatively secure– Grain farmers v protein markets
• Increased risk spreads, partially offset by cost of funds declining
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 38
Summary: Agricultural Lenders- Shorter term, cont.
• Longer term fixed-rate financing may be limited
• Largest impact on credit availability will likely be the affects the economic crisis has on profit margins and land values
• Operating lenders may feel impact first if cash rents don’t adjust
• Require additional documentation
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 39
Summary:Other Issues in the Ag Finance Landscape
• Some agribusiness financing concerns: • If crisis deepens,
domino potential in agriculture
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Credit Availability in Agriculture: International
GovernmentStimulus
CollateralFixed v Commodity-Based
Local Financial Markets
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Challenges: Producer Risk Pipeline
• Commodity price risks • Input price risks• Cash rent • Interest rate risks• Counterparty risks
Pushed back to producer
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 42
Short Term Illinois ForecastCentral IL High Quality
• 2009 Projected Returns Before Land and Management Returns – ~ $200 / acre (200 bu/acre @ $3.25)
• 2010 Projected Returns Before Land and Management Returns– ~ $300 / acre (192bu/acre @ $3.75)
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
What have we learned?
• Real estate prices can fall.• Low documentation loans often don’t work.• Credit spreads can widen quickly.• In crisis, diversification does not work well.• Pain can be severe.• Lack of regulatory “sympathy” to smaller
institutions.• Total agricultural debt low relative to others.
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Longer-term Vision of AgIs there a silver bullet?
• Government safety net
• Ethanol / renewable fuels
• Devalue $ - export driven
• General market forces
Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast
Summary
• No silver bullets
• Manage in a volatile market– More winners and more losers
• Understand and estimate your risk
• Be very careful on interest rate risk