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Financial Markets Presentation


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Financial Markets Presentation

  1. 1. The Financial Markets of the Food and Agribusiness Sector By: Zahid Afzal Keith Hunt Laura Wilder Atul Chaven
  2. 2. Agricultural Financial Markets
  3. 3. Financial Crisis At A Glance <ul><li>Spill over effect from declining housing price </li></ul><ul><li>Increased subprime delinquencies and global credit freeze </li></ul><ul><li>Reorganize large financial institutions </li></ul><ul><li>35% decline in stock indices </li></ul>
  4. 4. Agricultural Financial Market <ul><li>Agriculture lenders are mostly in strong financial health </li></ul><ul><li>Agriculture has low debt to asset ratio </li></ul><ul><li>2007 Farm Lending </li></ul>Debt Asset Debt-to-Asset $ 211 Billion $ 2.2 Trillion 9.6%
  5. 5. Agricultural Financial Market <ul><li>According to FDIC to be defined as an Agricultural Bank 25% of its loan portfolio has to be in Agriculture </li></ul><ul><li>The primary lenders in agriculture are </li></ul><ul><li>- Commercial banks </li></ul><ul><li>- The Farm Credit System </li></ul><ul><li>- Insurance companies </li></ul><ul><li>- Farm Service Agencies </li></ul><ul><li>- Captive finance companies </li></ul>
  6. 6. Agricultural Financial Market
  7. 7. Agricultural Financial Market
  8. 8. Agricultural Financial Market <ul><li>Commercial Bank (First Half of 2008) </li></ul><ul><ul><li>Only 5% had negative income </li></ul></ul><ul><ul><li>50% reported net income higher than previous 6 months. </li></ul></ul><ul><ul><li>Most of them are communal bank lending from deposits. </li></ul></ul><ul><ul><li>Over 78% of the volume and over 93% of the banks are from those less than $10 billion in asset size. </li></ul></ul>
  9. 9. Commercial Banks
  10. 10. Commercial Bank- Risks <ul><li>Large banks exposed to the financial stresses occurring in the credit markets </li></ul><ul><ul><li>Holds 20% of total farm debt </li></ul></ul><ul><ul><li>Also heavily involved in structured securities </li></ul></ul><ul><li>Their agricultural activities are not protected from the effects of the current financial crisis. </li></ul>
  11. 11. Commercial Bank- Risks
  12. 12. Agricultural Financial Market <ul><li>Farm Credit System </li></ul><ul><ul><li>Chartered in 1916 </li></ul></ul><ul><ul><li>Cooperatively-owned, government sponsored entity (GSE) that has a mandate to serve agriculture. </li></ul></ul><ul><ul><li>It is a nationwide network comprised of five Farm Credit Banks. </li></ul></ul><ul><ul><li>Provide funding to 92 associations that directly lend to farmers. </li></ul></ul><ul><ul><li>Uses the capital markets to acquire funds by issuing consolidated system-wide FCS bonds and notes. </li></ul></ul>
  13. 13. Agricultural Financial Market <ul><li>Commodity Credit Corporation (CCC) </li></ul><ul><ul><li>Provides interim financing during harvest. </li></ul></ul><ul><ul><li>Two Types of Loan </li></ul></ul><ul><ul><li>Nonrecourse Marketing Assistance Loan : Available for farm-stored and warehouse-stored eligible commodities </li></ul></ul><ul><ul><li>Recourse Marketing Loans : Available for those commodities ineligible for a nonrecourse loan </li></ul></ul>
  14. 14. Credit Market Problem & Price <ul><li>Movement of Agricultural Futures Prices since Spring and Summer 2008 Price Peaks </li></ul>Peak Oct 10 Contract Price Decline Futures Contract Date Price Date Price     Dec 2008 Corn June $7.99/bu Oct. 10 $4.08/bu $3.91/bu 48.90% Nov. 2008 Soybean July $16.37/bu Oct. 10 $9.10/bu $7.27/bu 44.40% Dec. 2008 Wheat March $12.75/bu Oct. 10 $5.63/bu $7.12/bu 55.80% Dec 2008 Live Cattle June $115.00/cwt Oct. 10 $91.30/cwt $23.70/cwt 20.60% Dec. 2008Lean Hog June $79.00/cwt 10-Oct $59.87/cwt $19.13/cwt 24.20%
  15. 15. Financial Crisis & Crop Price <ul><li>Reasons for Price Decline </li></ul><ul><li>larger U.S. crop prospects than feared when flooding peaked in June. </li></ul><ul><li>record large wheat, feed grain, and soybean crops outside of the U.S. </li></ul><ul><li>Problems in the credit market and poor domestic economic performance. </li></ul><ul><li>Finally global economic downturn due to financial crisis decreased export. </li></ul>
  16. 16. Financial Crisis & Crop Price <ul><li>Slowing economic growth decreased DEMAND growth that agricultural commodities have enjoyed for the past two years in both the food and biofuels sectors. </li></ul><ul><ul><li>Price = f (demand) </li></ul></ul><ul><li>Impact of oil price. </li></ul><ul><ul><li>Price instability </li></ul></ul><ul><ul><li>Land used for production: Corn Vs Wheat </li></ul></ul><ul><li>Futures Market </li></ul>
  17. 17. Affects of the Financial Crisis on the United States Supply Chain
  18. 18. U.S. Supply Chain <ul><li>Producer </li></ul><ul><li>Processor/Manufacturer </li></ul><ul><li>Retailer </li></ul>
  19. 19. Producer <ul><li>Types of Producers </li></ul><ul><ul><ul><li>Grain </li></ul></ul></ul><ul><ul><ul><li>Meat </li></ul></ul></ul><ul><ul><ul><li>Dairy </li></ul></ul></ul>
  20. 20. Grain Industry <ul><li>Corn </li></ul><ul><li>Wheat </li></ul><ul><li>Soybeans </li></ul>
  21. 21. Input Costs
  22. 22. Corn <ul><li>Price Use </li></ul><ul><li>Qd= f(use, GDP) </li></ul><ul><li>Qs= f(ac. plt, storage, weather) </li></ul>
  23. 23. Wheat <ul><li>Price Use </li></ul><ul><li>Qd= f(use in feed, GDP) </li></ul><ul><li>Qs= f(ac. plt, storage, weather) </li></ul>
  24. 24. Soybeans <ul><li>Price Use </li></ul><ul><li>Qd= f( use, GDP) </li></ul><ul><li>Qs= f( ac. plt., storage, weather) </li></ul>
  25. 25. Changes in the Industry
  26. 26. Meat Industry <ul><li>Cattle </li></ul><ul><li>Poultry </li></ul>
  27. 27. Meat Industry
  28. 28. Exchange Rate
  29. 29. Trade <ul><li>Exports </li></ul><ul><li>Imports </li></ul>
  30. 30. What the future holds? <ul><li>Risk Management </li></ul><ul><ul><ul><li>Provide protection against volatile markets. </li></ul></ul></ul>
  31. 31. Risk Management <ul><li>Puts and Calls </li></ul><ul><li>Future markets </li></ul><ul><li>Hedging </li></ul>
  32. 32. Financing and Agribusiness Firms
  33. 33. Overview <ul><li>Effects of Financial Crisis via Financial Ratios </li></ul><ul><ul><li>Evaluate 3 major agribusiness firms </li></ul></ul><ul><ul><ul><li>Kroger, ADM, and John Deere </li></ul></ul></ul><ul><li>Feedback from Industry Professionals </li></ul><ul><li>Impact on New Graduates </li></ul>
  34. 34. Agribusiness Companies <ul><li>Kroger Co. </li></ul><ul><ul><li>3 rd largest grocer in the world </li></ul></ul><ul><ul><li>Largest U.S. grocer chain </li></ul></ul><ul><li>Deere & Co. </li></ul><ul><ul><li>John Deere is the world’s leader in farm equipment </li></ul></ul><ul><li>Archer Daniels Midland Company </li></ul><ul><ul><li>ADM is a leader in the international Agribusiness </li></ul></ul>
  35. 35. Financial Ratios <ul><li>Current Ratio </li></ul><ul><ul><li>Current Assets/Current Liabilities </li></ul></ul><ul><ul><li>Measures a firms ability to repay their short-term debt </li></ul></ul><ul><ul><li>Ratio should be around 1 or greater </li></ul></ul>Current Ratio Chart 2009 1.0 2.0 2.0 1.2 2.0 1.0 0.9 Benchmark CR Industry CR ADM Industry CR John Deere Industry CR Kroger
  36. 36. Financial Ratios <ul><li>Debt to Equity Ratio </li></ul><ul><ul><li>Debt/Equity </li></ul></ul><ul><ul><li>Evaluates the amount of financing which is done via debt versus equity </li></ul></ul><ul><ul><ul><li>Debt financing is bank loans, etc. </li></ul></ul></ul><ul><ul><ul><li>Equity financing is sale of stock, etc. </li></ul></ul></ul>Debt to Equity Ratio Chart 2009 0.63 0.61 2.84 3.95 0.52 1.56 Industry Ratio ADM Industry Ratio John Deere Industry Ratio Kroger
  37. 37. Financial Ratios <ul><li>Historical Debt to Equity Chart </li></ul>0.61 3.95 1.56 2009 .50 2.63 1.65 2006 .47 3.14 1.43 2007 .82 3.43 1.65 2008 ADM John Deere Kroger Year
  38. 38. Financial Ratios <ul><li>Interest Coverage Ratio </li></ul><ul><ul><li>EBIT/Interest Expense </li></ul></ul><ul><ul><li>Greater than 1.5, firm can cover their debt </li></ul></ul><ul><ul><li>1.5 or lower, firm is burdened by debt </li></ul></ul><ul><ul><li>Less than 1, firm not generating enough revenue to satisfy interest expense </li></ul></ul>Interest Coverage Ratio Chart 2009 Industry Ratio ADM Industry Ratio John Deere Industry Ratio Kroger 16.5 23 1.3 3.6 58.2 5.1
  39. 39. Financial Ratios <ul><li>Historic Interest Coverage Ratio Chart </li></ul>5.1 2.7 4.9 2008 4.9 2.1 4.0 2006 4.6 2.3 4.6 2007 23 3.6 5.1 2009 ADM John Deere Kroger Year
  40. 40. More Agribusiness Firms <ul><li>Cargill </li></ul><ul><ul><li>Privately held international producer and marketer of food, agricultural, financial and industrial products and services </li></ul></ul>
  41. 41. Industry Feedback <ul><li>Cargill </li></ul><ul><ul><li>Business model set with future goals, 2015 vision </li></ul></ul><ul><ul><li>Customer buying practices have changed </li></ul></ul><ul><ul><ul><li>Premium customers moving to mid-line or economy feeds </li></ul></ul></ul><ul><ul><ul><li>Cattle producers have decreased purchases </li></ul></ul></ul><ul><ul><ul><ul><li>Due to shrinking of herd due to economy and drought </li></ul></ul></ul></ul>
  42. 42. Industry Feedback <ul><li>Effect on Supply Chain </li></ul><ul><ul><li>Shift in demand to lower grade feed </li></ul></ul><ul><ul><ul><li>Changes inputs to feed production for Cargill </li></ul></ul></ul><ul><ul><ul><li>Shift away from higher cost ingredients </li></ul></ul></ul><ul><ul><ul><li>Causes shortage of midrange ingredients in short-run </li></ul></ul></ul><ul><ul><ul><li>Creates surplus of higher cost ingredients </li></ul></ul></ul><ul><ul><ul><li>If firm further up the supply chain specializes in higher cost ingredients, could be damaging if production line is not adaptable </li></ul></ul></ul>
  43. 43. Impact on Us <ul><li>Firms are doing everything they can to ride out the current recession </li></ul><ul><li>Top cutbacks in new hires </li></ul><ul><li>Internship programs have been scaled back or deleted completely </li></ul><ul><li>There is hope! </li></ul><ul><ul><li>Always positions for highly skilled motivated workers </li></ul></ul>
  44. 44. Indian Financial Market
  45. 45. Impact of the Global Financial Crisis on India <ul><li>How India is different </li></ul><ul><ul><li>No direct exposure to the sub-prime mortgage. </li></ul></ul><ul><ul><li>Recent growth has been driven predominantly by domestic consumption and domestic investment. </li></ul></ul>
  46. 46. Why Has India Been Hit By the Crisis? <ul><li>India's two-way trade (merchandize exports plus imports) grew from 21% to 35% from 1997-98 to 2007-08. </li></ul><ul><li>  </li></ul><ul><li>Indian corporate sector's access to external funding has substantially increased. -Between 2003-08, the share of investment in India's GDP rose by 11 percentage points. </li></ul><ul><li>India received capital inflows amounting to over 9% of GDP where as account deficit in the balance of payment was only 1.5% of GDP. </li></ul>
  47. 47. Why Has India Been Hit By the Crisis? <ul><li>Corporations were converting the funds raised locally into foreign currency to meet their external obligations.  </li></ul><ul><li>The foreign exchange market came under pressure because of reversal of capital flows as part of the global deleveraging process. </li></ul><ul><ul><li>Both these factors put downward pressure on the rupee. </li></ul></ul><ul><ul><li>The Reserve Bank's intervention in the foreign exchange market to manage the volatility in the rupee further added to liquidity tightening.  </li></ul></ul>
  48. 48. Why Has India Been Hit By the Crisis?
  49. 49. Why Has India Been Hit By the Crisis?
  50. 50. Why Has India Been Hit By the Crisis? <ul><li>The United States, European Union and the Middle East, which account for three quarters of India's goods and services trade are in a synchronized down turn. </li></ul><ul><ul><li>Service export growth is also likely to slow in the near term as the recession deepens and financial services firms – traditionally large users of outsourcing services – are restructured. </li></ul></ul><ul><li>Remittances from migrant workers too are likely to slow as the Middle East adjusts to lower crude prices and advanced economies go into a recession. </li></ul><ul><li>India’s GDP growth estimate for the current fiscal (2008-09) has been downgraded from 8 per cent to 7.4 per cent and, for the next financial year (2009-10), from 8.5 per cent to 7 per cent. </li></ul>
  51. 51. Future outlook for India? <ul><li>Real GDP growth has moderated in the first half of 2008/09 </li></ul><ul><li>The services sector is slowing down. </li></ul><ul><ul><li>Mainly in - construction, transport and communication, trade, hotels and restaurants sub-sectors </li></ul></ul><ul><li>For the first time in seven years, exports have declined in absolute terms for three months in a row during October-December 2008. </li></ul><ul><li>Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. </li></ul>
  52. 52. Future outlook for India?
  53. 53. Future outlook for India? <ul><li>The decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies </li></ul><ul><ul><li>As a result the government would have more infrastructure spending. </li></ul></ul>
  54. 54. Current Government Strategy <ul><li>Stimulus package </li></ul><ul><li>Interest rate </li></ul>
  55. 55. Effect on Agriculture <ul><li>Production level </li></ul><ul><li>- Subsidized </li></ul><ul><li>Post harvest </li></ul><ul><li>- Global demand </li></ul><ul><li>-Domestic demand. </li></ul>
  56. 56. Gold Market In India <ul><li>Largest consumer in the world. </li></ul><ul><li>India used to called ‘Golden Bird’. </li></ul><ul><li>Culture. </li></ul><ul><li>Best investment over stock. </li></ul><ul><li>Western countries like U.S. looking gold as a second option for stock? </li></ul>
  57. 57. Gold Market In India
  58. 58. References <ul><li>Financial Markets References </li></ul><ul><li>Good, D., Irwin, S. “Implications of Credit Market Problems for Crop Prices.” IFEU 08-03, Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign, October 2008. </li></ul><ul><li>Paulson, N. “The Current Financial Crisis: How Did We Get Here?” IFEU 08-01, Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign, October 2008. </li></ul><ul><li>Ellinger, P., Sherrick, B. “Financial Markets in Agriculture” IFEU 08-02, Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign, October 2008. </li></ul><ul><li>“ How the Financial Crisis May Impact Agriculture and Food Systems” Farm Foundation Forum, National Press Club, Washington, D.C. 11/18/ 2008 </li></ul><ul><li>Financial Analysis References </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>Financial Reporting, Financial Statement Analysis, and Valuation, Stickney, Brown, & Wahlen, 6 th Edition </li></ul><ul><li>Stotler, Ruthie, Cargill Representative, Personal Interview, April 7, 2009 </li></ul><ul><li>India References </li></ul><ul><li> </li></ul><ul><li>http:// =410 </li></ul><ul><li>http:// =Trend%20and%20Progress%20of%20Banking%20in%20India </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>http:// </li></ul><ul><li> </li></ul>