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Discussion Topics Where have we been? Where are we going? Production Ag Financing Update Capital Markets update for cooperatives Credit Union and Bank conditions Questions & answers Economic Summary and Outlook Brian Legried President, Cofina Financial Agriculture Demand increase – World wealth increasing Weather impacts – low stocks Energy, Bio-fuels – increasing demand High commodity prices – demand and $$ Grain based balance sheets stressed Financial markets and economic meltdown Inventory valuation impacts What’s next? U.S. Economy World demand increase – China, India, U.S. Housing slowdown / sub-prime mortgage mess Financial meltdown Monetary policy recovery steps Governmental action / stimulus Recovery? If so, what kind – U, V, L or W? Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 2008 2007 2006 Millions Housing Starts 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 3-Month Treasury Bill Yield Interest Rates Corporate Bonds – Moody’s Seasoned Dow Jones Industrial Average 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 Considerations US / World economic conditions Financial markets Agriculture • Production and consumption • Globalization • Innovation Innovation Weather Planting Decisions US Commodity Prices Government Spending Trade Policy Inflation US Deficit Interest Rates Consumer Spending Investor Confidence US Growth Energy Consumption Unemployment Rate Strength of $ World Food Demand World Economic Growth China Growth Summary Volatility is constant Financial position • Liquidity – working capital needs • Reserves – balance sheet management • Margins – compressed Demand driven markets are good, but… What if? Agricultural Outlook Ross B. Anderson Sr. Vice President and Chief Credit Officer 12 Farm Income Statement Farm income indicators 2003 2004 2005 2006 2007 2008 Sept billions $s Gross farm income 2009AB 260.9 295.6 294.3 291.5 338.7 377.2 334.8 13% 0% -1% 16% 11% -11% Crops 109.9 113.7 111.9 122.5 150.1 183.1 165.0 Livestock and products 105.6 123.6 125.1 118.7 138.6 141.2 119.0 Government payments 16.5 13.0 24.4 15.8 11.9 12.2 12.6 Farm-related income 15.7 17.1 14.2 16.6 16.3 19.8 19.7 Noncash income 14.6 17.3 19.2 21.0 21.1 23.3 20.3 Value of inventory adjustment -2.4 11.2 -0.4 -3.1 0.6 -2.4 -1.8 200.3 209.8 219.7 232.7 267.5 290.0 280.0 5% 5% 6% 15% 8% -3% 85.8 74.6 58.8 71.2 87.2 54.8 44% -13% -21% 21% 22% -37% Total production expenses NET FARM INCOME 3/ 59.7 2000 2006 2007 2008 2009 2009 Adjusted Assets Real estate 946 1,625 1,751 1,692 1,626 946 NonReal estate 257 309 309 1,203 1,923 2,055 2,005 1,935 1,255 Total 298 304 313 Liabilities Debt 164 203 214 240 234 234 Equity 1,039 1,720 1,841 1,765 1,701 1,021 Total 1,203 1,923 2,055 2,005 1,935 1,255 Debt/equity 15.8 11.7 11.6% 13.6% 13.8% 22.9% Debt/assets 13.6 10.5 10.4% 12.0% 12.1% 18.6% Avg. U.S. Cropland Value in $/Acre, Jan. 1, 1999 - 2009 US Farmland Value devided by a rolling 3 Year Average of Net Farm Income plus Return to Nonoperating Landlords plus Interest Expense (P/E Concept) 25 20 15 10 5 0 Price Earnings Ratio 3-Year Rolling Average Price/Earnings Ratio-One Year Credit Conditions – Credit Quality by Commodity Commodity Volume as of 6/30/09 % of Portfolio Hogs Dairy Poultry Cow / Calf Feedlots Corn & Soybeans Other Crops Ethanol Other Commodities Total $3,428 $4,581 $2,128 $4,015 $1,448 $11,535 $16,801 $1,632 $13,113 $58,682 5.8% 7.8% 3.6% 6.8% 2.5% 19.7% 28.6% 2.9% 22.3% 100.0% YE 2009 % Adverse 11.7% 8.1% 6.5% 1.8% 3.2% 0.7% 1.3% 27.5% 3.9% 4.1% Projection 15.7% 10.7% 7.5% 3.3% 4.0% 0.9% 2.3% 34.2% 5.0% 5.0% $ in millions 17 Dairy Futures strip:; Dec. ‘09 - $14.82; March ‘10 - $15.19; June ‘10 - $15.58; Dec. ‘10 - $15.72 Cost of production $15/cwt. Weak domestic and foreign demand, Strong dollar, High feed cost $19 to $12 price Kielkopf – “Need to slaughter 225K cows to reduce excess NFDM” Two industries – traditional and “factory” dairies Factory dairies are losing equity at a rapid rate – high volatility in feed markets Traditional - less debt, some profits from crop production, less affected by market volatility for feed costs • Expect to finance negative cash flows through mid 2010 • Many factory dairies do not have the liquidity and solvency to reach breakeven next summer Per Capita Consumption of Meat in Pounds Pork Beef Chicken Turkey Total 2006 49 66 87 18 220 2007 51 65 85 18 219 2008 50 63 84 18 215 2009 49 63 80 17 209 2010 48 60 81 17 206 Livestock Overview 09/08 10/08 2010 % Change % Change 2008 2009 26,663 23,367 36,511 26,565 22,766 35,040 26,092 22,365 35,541 -0.4% -2.6% -4.0% -2.1% -4.3% -2.7% Beef Exports Pork Exports Broiler Exports 1,888 4,668 6,962 1,744 4,183 6,428 1,905 4,450 6,300 -7.6% -10.4% -7.7% 0.9% -4.7% -9.5% Beef Exports Pork Exports Broiler Exports 7% 20% 19% 7% 18% 18% 7% 20% 18% Beef Production Pork Production Broiler Production Pork Oversupply due to increased productivity of herd due to effective circo virus vaccine and genetic improvement Exports have been strong, 20% of production Vulnerable to global slow down/swine flu scare Banes- spring 2008 --- need 10% reduction in sow number; actual only 3% Futures strip –Dec. ‘09 - $56.20; Live Feb. ‘10 - $61.90; June ‘10 - $72.35 $41.58 $45.80 $56.42 Estimated cost of live production $50-51/cwt. Expect to finance negative cash flows through Mid 2010 • Many operations have burned liquidity and solvency and do not have the ability to get to mid-year 2010 Beef Feedlots were losing $100-200 per head Lower placements put pressure to move from hotel to “owner” role. Financial capacity to accept risk is often not present. Beef is a high price source of protein • What will financially pressured consumers buy? Beef to chicken issue. South Korean agreement - how fast will it ramp up? Limited movement of feedlots to western corn belt (NE) due to DDGs • What will feedlots be worth? 65 for sale Lower calf prices for cow/calf producer after 5-8 years of good income will lead to lower profitability Broilers Production - USDA • ‘07 35,739MM# +1.0% • ‘08 36,511 +2.1 • ‘09 35,095 -3.9 • ’10 35,541 +1.2 Value subtraction issue (whole birds vs. further processed) World trade/Russian exports Cash positive in 2nd quarter, positive net income in 3rd quarter Industry will build equity if they do not crank up production Ethanol Mandate = 10.5 BGY in 2009 Current production capacity = 12.5 BGY Current production = 9.8 BGY 78% of capacity Forecast is to operate at 10-15 cents per gallon EBITDA (assumes labor is fixed expense) New industry driven by government policy Problems caused by market volatility/high feedstock cost (corn) Expect several plants to turn more than once Crops Crop producers • USDA forecasts $20 billion less revenue in 2009 vs. 2008 • Overseas production response to high prices in 2008 • Domestic and foreign demand reduced due to economic recession and reduced livestock use • Flattening of demand pressure from ethanol • Less income, not losses Credit concerns in this segment are unlikely to show until 2011 or 2012 • A drought in the world can change credit outlook in 90 days Crops - two different risk profiles • Cash renter/operator • Land owner with low debt load World Grain Stocks Stocks MM Metric Tons Percent Carry to Use 04/05 408 20 05/06 389 19 06/07 342 17 07/08 360 17 08/09 440 21 09/10 443 20 World Oilseed Stocks Stocks MM Metric Tons Percent Carry to Use 04/05 56 19 05/06 54 17 06/07 73 22 07/08 63 19 08/09 55 16 09/10 62 18 US Coarse Grain & Oilseed Stocks Coarse Grain Stocks MM Metric Tons Percent Carry Oilseed to Use Stocks MM Metric Tons 04/05 59 19% 25 16% 05/06 54 17% 22 48% 06/07 36 22% 15 32% 07/08 45 19% 16 13% 08/09 45 16% 16 10% 09/10 32 18% 11 14% Capital Markets Update and Keys for Cooperative Financing Bob Doane Vice President, CoBank Total Bank Debt and High-Yield Bond Volume in the Leveraged Finance Market Source: S&P/LCD and Merrill Lynch Global High Yield Strategy 750 $675B $624B 500 $410B $398B $389B $351B $351B $307B $240B 250 $222B $219B $201B $166B /0 9 10 /9 08 YT D 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 19 97 0 Institutional Pro Rata High-Yield Percent of Outstanding Leveraged Loans in Payment Default or Bankruptcy 15% 11.3% 12% 10.0% 9.9% 9% 7.0% 7.4% 6% 4.0% 3% 3.6% 2.6% 1.9% 1.0% 1.0% 0.0% 3.7% 0.6% Y E1 Y 99 E1 6 Y 99 E1 7 Y 99 E1 8 Y 99 E2 9 Y 00 E2 0 Y 00 E2 1 Y 00 E2 2 Y 00 E2 3 Y 00 E2 4 Y 00 E2 5 Y 00 E2 6 Y 0 10 E2 07 /1 00 6/ 8 20 09 0% As of High Yield Bond and Lev. Loan Maturities 350 300 250 200 150 100 50 0 2009 2010 2011 2012 Institutional Loans ($billions) 2013 2014 2015 High Yield Bonds 2016 Loan Spreads Over LIBOR for BB/BBAverage New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of BB/BB- Loans L+600 L+500 L+400 L+300 L+200 Ja n98 Ju l- 9 8 Ja n99 Ju l- 9 9 Ja n00 Ju l- 0 0 Ja n01 Ju l- 0 1 Ja n02 Ju l- 0 2 Ja n03 Ju l- 0 3 Ja n04 Ju l- 0 4 Ja n05 Ju l- 0 5 Ja n06 Ju l- 0 6 Ja n07 Ju l- 0 7 Ja n08 Ju l- 0 8 Ja n09 Ju l- 0 9 L+100 Pro Rata Institutional Ja n9 Ju 8 n9 No 8 v9 Ap 8 r- 9 Se 9 p9 Fe 9 b00 Ju l- 0 De 0 cM 00 ay -0 Oc 1 t-0 M 1 ar -0 Au 2 g02 Ja n0 Ju 3 n0 No 3 v0 Ap 3 r- 0 Se 4 p0 Fe 4 b05 Ju l- 0 De 5 cM 05 ay -0 O 6 ct0 M 6 ar -0 Au 7 g07 Ja n0 Ju 8 n0 No 8 v0 Ap 8 r- 0 Se 9 p09 Loan Spreads Over LIBOR for B+/B Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of B+/B Loans L+550 L+450 L+350 L+250 L+150 Pro Rata Institutional M ar -9 Au 6 g96 Ja n97 Ju n9 N 7 ov -9 7 Ap r98 Se p9 Fe 8 b99 Ju l-9 D 9 ec -9 M 9 ay -0 O 0 ct -0 M 0 ar -0 Au 1 g01 Ja n0 Ju 2 n0 N 2 ov -0 Ap 2 r03 Se p0 Fe 3 b04 Ju l-0 D 4 ec -0 M 4 ay -0 5 O ct -0 M 5 ar -0 Au 6 g06 Ja n0 Ju 7 n0 N 7 ov -0 Ap 7 r08 Se p08 Fe b09 Ju l-0 9 Middle Market Spreads (Cash Flow < $50MM) L+600 L+500 Institutional L+400 L+300 Pro Rata L+200 Ja M n-9 ay 7 Se -97 p Ja -97 M n-9 a 8 Sey-98 p Ja -98 M n-9 a 9 Sey-99 p Ja -99 M n-0 ay 0 Se -00 p Ja -00 M n-0 a 1 Sey-01 p Ja -01 n M -0 ay 2 Se -02 p Ja -02 M n-0 ay 3 Se -03 p Ja -03 M n-0 a 4 Sey-04 p Ja -04 n M -0 ay 5 Se -05 p Ja -05 M n-0 a 6 Sey-06 p Ja -06 M n-0 a 7 Sey-07 p Ja -07 M n-0 ay 8 Se -08 p Ja -08 M n-0 a 9 Sey-09 p09 Secondary Market Trading Spreads By Rating L+3200 L+3000 L+2800 L+2600 L+2400 L+2200 L+2000 L+1800 L+1600 L+1400 L+1200 L+1000 L+800 L+600 L+400 L+200 L+0 B Loans All BB/B Loans BB Loans Deal Structure Trends Lower leverage, higher equity levels required Tighter covenants and security packages • More asset-based financing • Borrowing bases Shorter maturity loans Very few dividend recapitalization deals Original-issue discounts, higher up-front fees Libor floors often set at 2 to 2.5% More rigorous excess cash flow sweeps Commercial Lenders Recapitalization process has begun although some commercial banks are likely to remain under pressure into 2010. Banks remain unpredictable (deal by deal for some) Capital issues Credit concerns evident in 3Q results (depth/breath of recession remains an issue) Reformed business strategies Different personnel, layoffs, restructurings Market down to a handful of dependable Ag lenders • Focus on: Credit quality and risk Conservative structures (shorter tenors, tighter covenants, Libor floors, borrowing bases, and collateral packages — back to old school backing) Higher loan spreads and fees Relationships Count Relationship banks continue to support their core accounts Ancillary business remains very important Farm Credit System Greater capital conservation • Focus on pricing (minimum spread thresholds) and structure (term, collateral and covenants) • Interested in funded assets that achieve market yields • Selective with lower hold levels • Reserving capital for core relationship borrowers Ethanol, Dairy, Forest Products and Livestock segments experiencing credit deterioration • Farm Credit entered downturn with strong balance sheets and solid credit quality ratios Continued interest in quality credits (all the FCS investors are back, some not yet at full strength) Credit Market Outlook Global Unwinding of Leverage • Banks, hedge funds, private equity, and consumers, all in process of unwinding leverage • Rapid unwinding of leverage associated with the structured finance (securitization) industry • Government sector taking on new debt, risk of crowding-out of private sector • Derivative exposure concentrations still unknown Commercial/investment banks likely to remain under extreme pressure through 2009 and likely into 2010 • Higher minimum capital requirements for all financial institutions likely • Need to raise more capital, who will provide it? • Rethinking risk management models • Substantial internal restructuring and deleveraging • How will regulatory environment change? Credit Market Outlook Fundamentals of real estate and consumer credit problems likely to have a long tail and tied to unemployment dynamics and deleveraging Lender perspective that the economy is poised for recovery. But will it be a jobless recovery? Expectation of higher credit losses in many segments Credit spreads likely to tighten from current levels as economy continues to recover but refinancing calendar likely to put floor on spreads Multiple levels of uncertainty: global economy, role of government (ownership), credit availability, dollar value, financial strength of institutions/counterparties, derivative exposure concentrations, risk management (model) risks, regulatory changes, etc. 1. Key items that lenders typically consider Management Board governance Balance sheet strength Appropriate risk management competencies and tools Capacity • People • Capacity • Time 2. Ratios Working Capital (Liquidity) • Current assets - Current liabilities Factors to Consider: • Accounts receivable management • Inventory management • Types of business lines • Grain merchandising practices • Prepayment activity • Peak seasonal borrowing needs • Working Capital to Sales Percentage is one component of Risk Rating 2. Ratios Local Leverage Long Term Debt minus Current Portion Due Net Worth minus investments in Cooperatives and Other Entities Reasonable Local Leverage 50% Minimum Acceptable Level < 80% 2. Ratios Debt Service Coverage Ratio Net Cash Available for Debt Service Current Portion of Long Term Debt Minimum Acceptable Level > 1.5 : 1 Optimum Level > 2.75 : 1 3. Procedures/Policy Counter-party risk • Assessment, due diligence, mitigating factors, contracts, limits Contracts • Procedures on contract execution and fulfillment (enforcement) • Forward contracting limitations • Pre-pay versus booking contracts Wrap-up: Rapidly Changing Conditions Prepare to manage greater risk associated with increasing volatility in all markets. • • • • • input risk – availability, price, prepaids, etc. production risk – weather, technology, etc. marketing risk –hedging, pricing, consumer investment risk – realistic assumptions Regulatory risk – farm programs, regulation Develop strategies to secure working capital and remember it will be resource challenged in the future! Credit Union and Bank Financial Update Bill Raker President, Federal Employees Credit Union Credit Unions Financial cooperatives • One vote per member • Volunteer boards State or federal charter & supervision Full-service financial providers Defined field of membership • Single employer • Multiple employer groups • Organizational • Community (geographic) • Trade, Industry, Profession (TIP) Minnesota’s Credit Unions 62 Federal (NCUA); 94 State (Dept. Commerce) All Federally insured to $250K $12.83 B total deposits; ~6.0% of MN market $9.86 B total loans; 865,668 total credits $14.96 B total assets; 1.5 M members 10.19% Net Worth; 0.28% ROA [0.93%] Minnesota’s Credit Unions Business loans ~ 8.5% of CUs’ total portfolio 8 credit unions doing Ag lending • 2,921 credits • $285 M total Ag credits • $168 M largest Ag portfolio; 1,497 credits Money to lend – all loan types Well-capitalized Wisconsin’s Credit Unions 2 Federal (NCUA); 245 State (Dept. of Financial Institutions) All Federally insured to $250K $17.18 B total deposits; ~14.8% of WI market $15.52 B total loans; 1,304,260 total credits $20.06 B total assets; 2.2 M members 10.01% Net Worth; 0.46% ROA [1.35%] Wisconsin’s Credit Unions Business loans ~ 15.5% of CUs’ total portfolio 16 credit unions doing Ag lending • 1,741 credits • $130 M total Ag credits • $48 M largest Ag portfolio; 571 credits Money to lend – all loan types Well-capitalized Minnesota’s “Watch List”* CAMEL (Examination) Ratings: 1 – 5 4 or 5 CAMEL rating is a “watch” 71 banks – 22% of state’s total banks • Six failures 3 credit unions (all are CAMEL 4) • Two mergers *Source: Minnesota Department of Commerce Wisconsin’s “Watch List”* 17 Banks & 5 S&Ls are on the “Problem” list 7 Credit Unions are on the “Problem” list 3 are still “Adequately Capitalized” (> 6%) 2 are “Under Capitalized” (5% – 6%) 2 are “Critically Undercapitalized” (<2%) 1 bank failure since 2007 1 credit union failure since 2007 *Source: IDC Financial Publishing “Corporate Report” magazine and NCUA National Picture: Banks 416 (5.1% of total) institutions on FDIC “watch” list – $300 B in assets -- 15 year high 120 closures/mergers YTD -- $25+ B cost to FDIC 40% of net income going into provisions for potential losses Stressed insurance fund • 12/07 1.22% • 6/09 0.22% FDIC Quarterly Bank Report FDIC Quarterly Bank Report FDIC Quarterly Bank Report FDIC Quarterly Bank Report FDIC Quarterly Bank Report National Picture: Credit Unions ~326 (4.26% of total) CUs on NCUA’s “watch” list – CAMEL 4 or 5 3,500 (45% of total) CUs with net operating loss through 6/09 ~135 mergers YTD (includes 21 “failures”) -- $95 M cost to NCUSIF Concentrations: CA, FL, AZ, TX, NE, UT NCUSIF fund at 1.30% Regional/Community Institutions (Credit unions and banks) Financial landscape has changed Some institutions still doing relatively well Most are experiencing challenges • Slower loan growth • Higher than normal delinquencies and losses • Higher loss provisions – negative earnings • Falling net worth (capital) ratios • NCUSIF and FDIC assessments Loss Mitigation (What’s changed) Refined underwriting guidelines Quarterly updates to credit scores Reviewing & updating collateral values Reducing credit lines on credit cards and HELOC loans Re-writes Counseling Current Concerns (Lingering?) Employment • Lags recovery • 10%: how long? Real estate values • Bubble has burst • Residential first, now commercial • Time to recovery? Consumer confidence • Uncertainty, confusion, lack of trust Interest margin Consumer Behaviors (Applies to small businesses, too) Saving more Paying down existing debt faster Reluctant to take on new debt Refinancing at lower rates Cautionary spending Consumption (GDP) down; business investment/expansion down Getting Credit Today Somewhat harder to borrow – tighter standards Rates are low – for now Credit unions are making loans Credit score & BNI score Ability to repay Higher down payment Lower LTV ratios 2010 Outlook? Freefall ends Modest growth resumes Unemployment remains higher than usual Little change in short-term rates Economy remains fragile More regulation Government looking to help small businesses All eyes on leading indicators 2010 and beyond Cost of clean up: the consumer will pay! • Insurance fund assessments FDIC – 3 years prepaid premium; 7 years to rebuild NCUSIF – up to 7 years to payback Treasury loan • Capital restitution; need to pump up earnings • Additional provisions for future losses & write-downs Regulation • Consumer “protection” and “safety & soundness” • Financial industry oversight Long-term to full recovery What to do now After the rain, comes the rainbow! Protect your good credit Deal with volatility Have a post-recovery plan