Financial Crisis Impact on Long Term Ag Forecast 1 Paul N. Ellinger University of Illinois...

Financial Crisis Impact on Long Term Ag Forecast

1

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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What did we learn? How we got here?


Farmland ValuesRelative Stability

Relative Stability

Good Times

Good Times

Bad TimesGood Times

Real (2000=100)

Nominal


Securitization Accounts for Over 50% of Financial Intermediation


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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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


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 Spread

TED Spread (3 M LIBOR- # M T BILL)


Price of Legacy/Toxic Securities

0

20

40

60

80

100

7/1

9/2

00

6

9/1

9/2

00

6

11

/19

/20

06

1/1

9/2

00

7

3/1

9/2

00

7

5/1

9/2

00

7

7/1

9/2

00

7

9/1

9/2

00

7

11

/19

/20

07

1/1

9/2

00

8

3/1

9/2

00

8

5/1

9/2

00

8

7/1

9/2

00

8

9/1

9/2

00

8

11

/19

/20

08

1/1

9/2

00

9

3/1

9/2

00

9

ABX-06-02-AAA

ABX-06-02-BBB


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


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


Steps to recovery

Source: Morgan Stanley

What about Agriculture?


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


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.


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%


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



Debt to Asset: Illinois Farmers

Illinois Average27%

77% less than 40% Debt to Asset


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


Total Farm Debt


$215 Billion

Does not include other sectors of the supply chain


Perspective of $215 Billion

Does not include Asset bank commercial paper MM Mutual Fund facilityTemporary guarantee for MM fundsSource: WSJ

Agricultural Financial Markets


How Many Farms Does It Take?Value of Ag Output - $200 Billion

30,495 Farms

50%0% 10%

389 Farms

100%

2,000,000 Farms

25%

3,201 Farms

34,085 Farms


How Many Banks Does It Take?% of Commercial Bank Loans to Agriculture

474 Banks

50%0% 20%

15 Banks

100%

5,184 Banks

40%

332 Banks

821 Banks


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


Crisis First Wave Impact on Commercial Banks

• Dog bone– Farm and bank size

• Regional differences• Fed actions

– Insurance & Capital infusions

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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)


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


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


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


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


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


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


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


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


Summary:Other Issues in the Ag Finance Landscape

• Some agribusiness financing concerns: • If crisis deepens,

domino potential in agriculture


Credit Availability in Agriculture: International

GovernmentStimulus

CollateralFixed v Commodity-Based

Local Financial Markets


Challenges: Producer Risk Pipeline

• Commodity price risks • Input price risks• Cash rent • Interest rate risks• Counterparty risks

Pushed back to producer


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)


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.


Longer-term Vision of AgIs there a silver bullet?

• Government safety net

• Ethanol / renewable fuels

• Devalue $ - export driven

• General market forces


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

Thanks!

[email protected]

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Financial Crisis Impact on Long Term Ag Forecast 1 Paul N. Ellinger University of Illinois...

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