Download Lenders Serving Agriculture Real Estate Lenders

Slide Show #9
Trends in
Financing
Agriculture
AGEC 489/690
Spring 2009
Lenders Serving Agriculture
 Real Estate Lenders
o Farm Credit System
o Commercial banks
o Life insurance companies
o Farm Service Agency
o Individuals and others
Lenders Serving Agriculture
 Real Estate Lenders
o Farm Credit System
o Commercial banks
o Life insurance companies
o Farm Service Agency
o Individuals and others
 Nonreal Estate Lenders
o Farm Credit System
o Farm Service Agency
o Commercial banks
o Individuals and others
Detailed coverage in Handouts #7, #8 and #9
Year-end Farm Debt Outstanding in Agriculture
Farm Real Estate Debt Shares
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2000
2001
Farm Credit System
2002
2003
FSA
Banks
2004
2005
Life Insurance
2006
2007P
Individuals and others
Farm Non-Real Estate Debt Shares
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2000
2001
2002
Farm Credit System
2003
FSA
2004
2005
2006
Banks
Individuals and others
2007P
Debt secured by
real estate mortgage
Debt not secured by
real estate mortgage
Farm Financial Crisis
Asian Flu
Debt Burden Ratio
Farm financial crisis
Times Interest Earned Ratio
2006
2007
2005
2003
2004
2001
2002
2000
1998
1999
1996
1997
1995
1993
1994
1991
1992
1990
1988
1989
1987
1985
1986
1983
1984
1982
1980
1981
1978
1979
1977
1975
1976
1973
1974
1972
1970
1971
Debt Burden Ratio
16.00
9.00
14.00
8.00
12.00
7.00
10.00
6.00
8.00
5.00
4.00
6.00
3.00
4.00
2.00
2.00
1.00
0.00
0.00
Times Interest Earned Ratio
Trends in Key Debt Service Ratios
Importance of Government Payments as a Stabilizer
Farm Debt Burden Ratio
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
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
Ratio of Debt to Net Income
45.00
With Government Payments
Farm financial crisis
Without Government Payments
Net Farm Income
2001
2002
2003
2004
2005
2006
2007
2008
1993
1994
1995
1996
1997
1998
1999
2000
1986
1987
1988
1989
1990
1991
1992
1978
1979
1980
1981
1982
1983
1984
1985
1970
1971
1972
1973
1974
1975
1976
1977
Net Farm Income (Bill $)
$100
$90
$80
$100
$70
$60
$80
$50
$60
$40
$30
$40
$20
$10
$20
$0
$0
Real estate debt
Problem in 2009? USDA projects net farm income will fall by 18.1% in 2009
Farm Real Estate Assets (Bill $)
Net Farm Income and Farm Real Estate Debt
$120
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
Real Estate Value (Bill $)
$2,500
$120
$2,000
$100
$1,500
$80
$60
$1,000
$40
$500
$20
$0
$0
Value of Farm Real Estate
Real Estate Debt
Rising land values thus far have helped support rising farm debt.
Real Estate Debt (Bill $)
Real Estate Assets and Real Estate Debt
Farm Financial Crisis
Impact of rising
land values
Problem with this ratio. Only one-third of farmers owe total term debt
Let’s Look at U.S.
Agriculture
Ethanol
boom
Farm
financial
crisis
Recent Monthly Crop
Price Trends
January 2007 = 100
300.0
250.0
200.0
150.0
100.0
50.0
Corn
All wheat
Soybeans
Fuel
Fertilizer
All inputs
Source: National Agricultural Statistics Service, USDA.
Profit margins have narrowed considerably and are at further
risk if crude oil prices increase.
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
0.0
Recent Monthly Crop
Price Trends
January 2007 = 100
300.0
250.0
200.0
150.0
100.0
50.0
Corn
All wheat
Soybeans
Fuel
Fertilizer
All inputs
Source: National Agricultural Statistics Service, USDA.
Price/cost ratios for major crops are much different than they
were at this time last year, particularly for wheat.
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
0.0
Crop Price Declines From
Peak 2008 Levels
37.18%-
Fuel
6
53.52%-
Fertilizer
5
10.29%-
All crop inputs
27.97%-
Soybeans
-50.00%
-40.00%
-30.00%
-20.00%
2
24.50%-
Corn
-60.00%
3
45.43%-
All wheat
4
1
-10.00%
0.00%
Source: Agricultural Prices, National Agricultural Statistics, USDA
Recently Monthly Livestock
Price Trends
160.0
150.0
January 2007 = 100
140.0
130.0
120.0
110.0
100.0
90.0
80.0
Beef Cattle
All Hogs
All Milk
Poultry and Eggs
Feed
All livestock inputs
Source: National Agricultural Statistics Service, USDA.
Poultry is the only commodity experiencing a positive price/cost
ratio. Of particular concern is the free-fall in milk prices.
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
60.0
Jan-07
70.0
Livestock Price Declines
From Peak 2008 Levels
17.22%-
Feed
6
10.44%-
All livestock inputs
5
8.18%-
Poultry and eggs
40.72%-
All milk
3
28.22%-
All hogs
2
16.65%-
Beef cattle
4
-45.00% -40.00% -35.00% -30.00% -25.00% -20.00% -15.00% -10.00%
Source: Agricultural Prices, National Agricultural Statistics, USDA
1
-5.00%
0.00%
Macroeconomic Linkages
to Ag in 2008:
Weak dollar (good for Ag!)
High crude prices (bad for Ag!)
Low inflation (good for Ag!)
Low interest rates (good for Ag!)
Low unemployment rate (good for
Ag!)
High consumer income (relatively
minor positive impact on Ag!)
A Potential 2009 Macro
Scenario for Ag:
Weakened client nations (bad for Ag!)
Modest rise in oil prices (bad for Ag
except biofuel feedstock!)
Inflation in check (good for Ag!)
Interest rates low (good for Ag!)
High unemployment rate (bad for Ag!)
Falling consumer income (relatively
minor negative effect on Ag!)
2009 Farm Price and
Income Prospects
1. Crop prices down from 2008 levels
and unlikely to gain much traction in
2009 unless speculative demand for
commodities increases. Biofuel
feedstock like corn is an exception if
crude oil prices rise.
2. Input costs for fuel, fertilizer and
other selected inputs have declined
but can rise if crude prices rise.
2009 Farm Price and
Income Prospects
3. Lower feed prices still leave livestock
4.
5.
6.
producers stressed.
Lower net farm income in 2009. USDA
projects 18.1% decline.
Lower crop land appreciation, with
likely declines particularly outside the
Corn Belt and Northern Plains regions.
Increased debt repayment stress
expected, particularly for highly
leveraged livestock borrowers.
Components of Debt Burden Ratio
Net Farm Income and Total Farm Debt
$250
Billion Dollars
Farm financial crisis
$200
$150
$100
$50
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
$0
Net Farm Income
Total Farm Debt
Source: Economic Research Service. 2009 value is USDA forecast.
Problem of fixity in debt outstanding during volatile periods of
net farm income.
Land Values Can Fall…
Historical Trend in Illinois Crop Land Values
$5,000
Farm financial crisis
$4,000
$3,000
$2,000
$1,000
$0
Biofuels boom
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
Dollars per Acre
$6,000
Source: National Agricultural Statistics, USDA.
Recent Cash Rents Trend
Percentage Change in Cash Rent per Acre
25
Farm financial crisis
15
10
5
-10
-15
-20
Source: National Agricultural Statistics, USDA.
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
-5
1982
0
1981
Percentage Change
20
Biofuels boom
2009 Updated Central
Illinois Corn Budget
Yield
Assumed sales price
Other revenue
Gross revenue
182 bushels
$4.00 per bu.
$25 payment
$753 per acre
Fertilizer
Seed
Other costs
Total direct costs
$122 per acre
$62 per acre
$80 per acre
$264 per acre
Power costs
Overhead
Total non-land costs
$76 per acre
$52 per acre
$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.
2009 Updated Central
Illinois Corn Budget
Yield
Assumed sales price
Other revenue
Gross revenue
182 bushels
$4.00 per bu.
$25 payment
$753 per acre
Fertilizer
Seed
Other costs
Total direct costs
$122 per acre
$62 per acre
$80 per acre
$264 per acre
Power costs
Overhead
Total non-land costs
$76 per acre
$52 per acre
$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.
Those tenants who had
already locked in $350
cash rents would need
$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
$4.65 to break even.
Source: Farmdoc Budgets, University of Illinois Extension Service.
2009 Updated Central
Illinois Corn Budget
Yield
182 bushels Returns to land must
Breakeven
here
does
not
cover
principal payments
Assumed sales price
$4.00
per bu.
Other revenue
$25 principal
payment on outstanding term loans
account for
Gross revenue
$753 per acre as well as cash rent or its
payments on outstanding
equivalent and family
expenses.
Fertilizer term loans
$122
acre living
orperfamily
living
Seed
$62 per acre
Other costsexpenses.$80 per acre Those tenants who had
Total direct costs
$264 per acre already locked in $350
cash rents would need
Power costs
$76 per acre $3.90 corn to break even.
Overhead
$52 per acre If the cost of fertilizer, seed
Total non-land costs
$392 per acre and fuel had not fallen in
the last few months, corn
Operator & land return $361 per acre prices would had to be
$4.65 to break even.
Source: Farmdoc Budgets, University of Illinois Extension Service.
A Look at Farm Lending
Picture in 2009
In ag, total farm term debt is owed by a
relatively small number of borrowers. This
counters the USDA’s rosy debt statements.
Concern over loans based heavily on offfarm repayment capacity.
Debt repayment capacity for livestock
borrowers will be stressed.
Will land values soften? YES. Smaller
gains/declines in Corn Belt and Northern
Plains regions; larger declines are likely in
other regions.
Recent Survey Results
 2,300 agricultural professionals (including
lenders) were recently surveyed.
 84% believe farmers will experience
financial stress in the next 3 years.
 When lender responses were sorted out,
54% felt the chance of financial stress is
high and 26% felt this would be very high.
 The cost of inputs and volatile prices are
the top 2 reasons for financial stress given
by all respondents, followed loss of offfarm income. The lowest ranked reason
was declining land values….interesting.
Recent Survey Results
 Many farmers responded saying they
faced stricter requirements (e.g., more
documentation). 56% said requirements
changed slightly while 17% reported
substantial increases.
 Farmers responding assessed their
financial management skills as follows:
 only 8% of farmers participating in this survey
felt they were well equipped with financial
management skills.
 74% said they were moderately equipped.
 18% said they were poorly equipped!
#7: How will the recession affect off-farm
incomes and farm family unemployment?
Regional variations?
 Off-farm income is an important source of internal
finance for some farm operators and a basis for
making rural home loans.
 Potential 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: 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 offfarm income. (see map)
 The magnitude of these rates are no doubt lower
than current rates given the jump from 7.6% to
8.1% and future increases in months to come.
State Level Picture of Unemployment Rates
7.8%
4.2%
5.6%
4.4%
9.9%
6.6%
11.6%
6.9%
6.6%
4.3%
4.8%
7.9%
8.8%
9.2%
9.4%
5.8%
10.1%
7.6%
7.0%
5.1%
7.0%
8.0%
8.7%
5.0% 6.4% 8.6%
6.4%
9.7%
8.7%
7.8%
5.1%
10.4%
8.6%
8.6%
Source: Bureau of Labor Statistics, US Department of Labor.
#9: General condition of farmers in Texas?
Any problems? What risk management
tools are they using? Should they be using?
 The drought affecting Texas is the worst since
1918. 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 applications.
 Hitting the cattle industry hard, with stories of
ranchers selling off portions of breeding herds.
 Governor Perry asked for state of emergency
declaration for 199 counties.
 Farm Assist tool at TAMU used by some. Many
should improve understanding of financial
statements, pro forma analysis, and benefits from
stress testing to determine potential long run risk
and returns when making decisions.
Extent 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 Financing
Importance of offfarm income by type
of farming operation
Importance of off-farm income by size of farming operation