The State of Ag Lending February 2009

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The State of Ag Lending February 2009 by Kent Bang, from the Morrison Group's At The Meeting.

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The State of Ag Lending February 2009

  1. 1. Central Plains Regional Agribusiness The State of Ag Lending February, 2009
  2. 2. 2 Overview Share my thoughts regarding the current situation in Financial   Services, also specific to the swine industry   This is a volatile, fluid situation, getting more negative   Good chance that I will be wrong Discuss Ag Lenders     Background Lender’s perspective on Agriculture Lending   Before we get into that I would like to put into my perspective   some issues and impacts the global economy has:   Here are some quotes and predictions from the last year
  3. 3. 3 Worse Quotes of 2008 “I think this is a case where Freddie Mac and Fannie Mae are   fundamentally sound. They’re not in danger of going under I think they are in good shape going forward.”   Barney Frank (D-Mass) House Financial Services Committee Chairman May 9, 2008   Two months later, the government forced the mortgage giants into conservatorship and pledged to invest up to $100 billion in each.
  4. 4. 4 Worse Quotes of 2008 “The market is in the process of correcting itself.”     George W. Bush in a March 14, 2008 speech   For the rest of the year, the market kept correcting, and correcting, and correcting.
  5. 5. 5 Worse Quotes of 2008 Existing-Home Sales to Trend Up in 2008 – Headlines of a   National Association of Realtors press release 12/09/2007   On 12/23/2008, the group said November sales were running at an annual rate of 4.5 million – down 11% from a year earlier – in the worst housing slump since the depression
  6. 6. 6 Worse Quotes of 2008 “I think you’ll see (oil prices at) $150 a barrel by the end of the   year”   T. Boone Pickens, June 20, 2008   Oil was then around $135 a barrel. By late December, it was below $40.
  7. 7. 7 Worse Quotes of 2008 “In today’s regulatory environment, it’s virtually impossible to   violate rules.” - Bernard Madoff, money manager 10/20/2007   About a year later, Madoff – who once headed the Nasdaq Stock Market – told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.
  8. 8. 8 Worse Quotes of 2008 “Never let a serious crisis go to waste. What I mean by that is   it’s an opportunity to do things you couldn’t do before.” White House Chief of Staff – Rahm Emanuel November, 2008
  9. 9. 9 Where’s the friggin’ groceries?
  10. 10. 10 Worse Quotes of 2008: An email from a customer in late 2008:   Dear Mr. Bang; If I receive a returned check marked “insufficient funds” is that referring to my business or your bank? Thank you;
  11. 11. 11 Recession Historically, recessions occur when business over-leverages   during good times and pulls back on employment and investment when conditions turn. This time, over leveraged consumers caused the recession.   Households are struggling with first mortgages, home equity lines of credit, student loans, credit card debt, vehicle loans and leases and other consumer loans. The root of the problem is the housing boom & subsequent bust  
  12. 12. 12 The Housing Bubble
  13. 13. 13 The Housing Bubble
  14. 14. 14 The Housing Issue Mark Zondi – Chief Economist with Moody’s Economist     12 Million homeowners have mortgage debt greater than their home value at the end of 2008   15 million “sketchy” mortgage loans made between 2005 and 2007 •  Of these, 40% or 6 million loans will go through foreclosure process   Home values are still falling   Mortgage Crisis Waves •  1. Flippers – 2006 •  2. Subprime with ARM’s repricing in 2007 •  3. Negative Equity and Income Disruptions
  15. 15. 15 The Housing Issue Causes     Everybody was doing it   Leverage   Inconsistent and inadequate regulation and oversight •  Mortgage-backed securities Divided so many times that securities were AAA rated.     Lender > Investment Bank > Rating Agency > Investor   Forecast of never ending price escalation (self delusion) •  Anyone with a ruler could predict that real estate values were going to continue to go up   Availability of Credit •  Foreign capital •  Accommodative Monetary Policy
  16. 16. 16 Housing Crisis Causes Investment Banks went public, adding leverage     Solomon Brothers   Merrill Lynch   Bear Stearns   Morgan Stanley   Lehman Brothers   Goldman Sachs Once upon a time there were brothers named Solomon and brothers named Lehman
  17. 17. 17 Additional Consumer Credit Issues
  18. 18. 18 Loan-Loss Reserves in Billions (FDIC)
  19. 19. 19 Impact of Economic Recession Consumers are deleveraging     Lower purchases – increase savings   1st time in 50+ years household debt declined in Q3 2008   Combination of bank conservatism and declining credit worthiness   Defaults increasing   Non-bank providers (e.g. mortgage companies) exit as market refuses to fund Corporations reduce borrowing     Choice   Capital Markets less accessible   Combination of bank conservatism and declining credit worthiness
  20. 20. 20 Latest Economic Indicators Survey Actual Non-Farm Payroll -540K -598K Manufacturing Payroll -145K -207K Initial Jobless Claims 620K 627K Continuing Claims 4,830K 4,987K Unemployment 7.5% 7.6% Consumer Credit -3.5B -6.6B Housing Starts 529K 466K Lowest Housing Starts since before 1970
  21. 21. 21 Impact of the Economic Recession Think about this!     The nation’s largest credit card issuer (MBNA)   The nation’s largest home mortgage company (Countrywide)   The nation’s largest investment house (Merrill Lynch)   Were all recently acquired by a large US Bank
  22. 22. 22 Focus on Agriculture Beef Feedlot     Cattle Fax indicates that feedlot losses were record large in 2008, near $150 per head, with current losses near $250 per head, assuming no risk management Dairy Producer     $10.78 class III Milk in January, USDA forecasts $9.70 to $10.40 for 2009 vs. $14.65 average in 2008. (Predicts lowest prices since 1978) Broiler Industry     Cleveland Research indicates broiler processors made a profit in three weeks during 2008. The industry is bloodied, but reduction in inventory has produced some margins in early 2009. Swine Industry     Significant losses in 2008 amounting to $21.51 per head (Lawrence – ISU)   Using the same data, in the three years (2006-2007-2008) producers lost money - $0.77 per head
  23. 23. 23 Macro View of Animal Agriculture (Lawerence – ISU)
  24. 24. 24 Macro View of Animal Agriculture (Lawerence – ISU)
  25. 25. 25 Macro View of Animal Agriculture Meat and poultry production Total Total Meat & Beef Pork Meat Chicken Turkey Poultry Poultry 2007 26.421 21.943 48.683 36.126 5.958 42.582 91.265 2008 26.564 23.348 50.228 36.864 6.263 43.687 93.915 2009 26.110 22.980 49.401 36.175 6.040 42.740 92.141 2009/2008 98.3% 98.4% 98.4% 98.1% 96.4% 97.8% 98.1% Meat and poultry prices Choice Live Steers Hogs Chickens Turkeys 2007 $ 91.82 $ 47.09 $ 76.40 $ 82.10 2008 $ 92.27 $ 47.84 $ 79.70 $ 87.50 2009 $ 89.00 $ 47.50 $ 84.00 $ 85.50 Source: World Agricultural Supply & Demand Estimates
  26. 26. 26 Who Lends to U.S. Production Agriculture? Direct Lenders     Farm Credit System •  99 Farm Credit Associations in the U.S. •  5 Farm Credit Banks   Commerical Banks •  National Banks •  Regional Banks •  Community Banks   Non-Banking Entities •  Suppliers •  Insurance Companies Secondary market for agriculture mortgage loans     Farmer Mac
  27. 27. 27 Farm Credit System
  28. 28. 28 Commercial Banks Top 5 U.S. Agricultural Commercial Banks     Wells Fargo   Bank of America   Bank of the West   US Bank, NA   Rabobank   Many others Largely funded by:     Deposits   Fed fund borrowings   Bank to bank loans
  29. 29. 29 Farmer Mac Federal Agricultural Mortgage Corporation     Farmer Mac is a stockholder-owned instrumentality of the U.S. chartered by Congress to establish a secondary market for: •  Agricultural real estate •  Rural housing mortgage loans •  Rural utilities loans   Total assets (loans) of about $3.0 billion   Farmer Mac I – Secondary lending to agricultural loans originated by: •  Commercial Banks •  Farm Credit System institutions •  Credit Unions •  Insurance Companies •  Mortgage Bankers
  30. 30. 30 Farmer Mac Programs Farmer Mac I – Secondary lending to agricultural loans   originated by:   Commercial Banks   Farm Credit System institutions   Credit Unions   Insurance Companies   Mortgage Bankers Farmer Mac II – Secondary lending on the USDA guaranteed   portion of loans   FSA – Farm Ownership and Farm Operating guarantees   Rural Development’s Business and Industry guarantees
  31. 31. 31 Farmer Mac Underwriting Loan to Value     New Facilities <75%   Existing Facilities <65% Maximum Exposure - $15 million   Total Debt Coverage - >1.10   Current Ratio - >1.00   Leverage <60%   Term: 10 or 12 years   Amortization: 10 or 12 years   Other     Must be contracted with a processor for the term of the loan   Must be non-cancelable and assignable to FAMC   All FAMC underwriting standards must be met   Operation must conform to all environmental rules and regs
  32. 32. 32 Ag Lender Issues Impact of “deleveraging” US balance sheets will impact all     Consumer spending declining sharply •  Inability to service current debt load •  Reduction of net worth (home value / investments) •  Fear of future   Business spending has dramatically fallen in an attempt to deleverage their balance sheet   Bank balance sheets •  Tier One Capital (Tangible Equity / Risk-based assets) •  Lender’s are attempting to guard and build capital
  33. 33. 33 Ag Lending It is a new world     Syndicated loan market •  Dramatically reduced in the 4th Quarter of 2008   Participation in “club deals” has been made significantly more challenging •  Reflects the changing strategy in the lending world •  Capital preservation to make sure you can take care of clients   Customer lending •  Fewer or no exceptions to loan policies •  Change from growth model to risk management model Challenges in getting a lender to take on a new customer when   most are trying to figure out how to take care of their current customers needs.
  34. 34. 34 Typical Swine Financing Biggest changes:     Larger deals over > $30 million aggregate are harder to get done •  Participating lenders are harder to find   Exception to lending policies are going to be rarer •  Working capital •  Owner Equity •  Debt Service Coverage Ratio •  Personal liability   Interest Rates •  Prime rate adjusted loans are probably history (for a while) •  Spread to Libor is up about 100 to 150 basis points over a year ago
  35. 35. 35 Pork Industry Strengths / Opportunities     Efficient low-cost pig production relative to the rest of the world   Efficient low-cost pork processing relative to the rest of the world   Reduced trade barriers, growing exports   Strong U.S. per capita demand through recession, historically Weaknesses / Threats     Reduced disposable consumer dollars   Difficulty in controlling pork supply   Ethanol production’s demand for grain   Environmental / Political pressure on the industry   Threat of foreign animal disease that may interrupt exports
  36. 36. 36 Defensive Strategies Continually update your budget / projections     Analyze liquidity and equity after projected losses   Review loan covenants and communicate with your lender   Take action early – soon – now! Watch for opportunities to lock in profits     Reduce risk exposure if you cannot afford the exposure   May be behind us, locking in a loss is always difficult Analyze Debt Structure     Leverage or re-leverage fixed assets   Structure for “worst case” as it may be difficult once there Sell underutilized assets     Or reduce contract payments
  37. 37. 37 Watch for indicators Demand, domestic and imports   Sow liquidation in North America     Canada 1/01/09 •  Breeding Herd down 107,000 sows (7.1%) •  Market Inventory down 1,302,000 head (10.6%)   United States 12/01/08 •  Breeding Herd down 152,000 sows (2.4%) •  Market Inventory down 1,317,000 head (2.1%)   North America •  Breeding Herd down 259,000 sows (3.3%) •  Market Inventory down 2,619,000 head (3.5%) Packer / Processor profitability   Slaughter capacity changes   Cold storage reports   Imports of Canadian Pigs     Feeder imports are 516,115 through 2/07/09, down 31% from 2008   Market hogs and sows are 141,036 through 2/07/09, down 66% from 2008
  38. 38. Thank you! Financing the livestock industry

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