Financial Crisis Impact on Long Term Ag Forecast

1. Financial Crisis Impact on Long Term Ag Forecast Paul N. EllingerUniversity of Illinoispellinge@illinois.edu www.farmdoc.uiuc.edu/ellinger 217-333-5503

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

3. 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

4. What did we learn? How we got here?

6. Farmland Values Good Times Relative Stability Good Times Relative Stability Good Times Bad Times Real (2000=100) Nominal

7. Securitization Accounts for Over 50% of Financial Intermediation

8. 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 8

9. The Fed Has Expanded its Balance Sheet to Extend Credit to Banks Billions of Dollars Federal Reserve Balance Sheet Source: Federal Reserve Board of Governors

10. Credit Availability “Sign Posts”

11. Price of Legacy/Toxic Securities ABX-06-02-AAA ABX-06-02-BBB

12. Outlays & Receipts/GDP Source: CBO

13. Debt / GDP

14. Steps to recovery Source: Morgan Stanley

15. What about Agriculture?

16. Illinois Farmland Prices Good Times Good Times Bad Times Relative Stability Good Times Relative Stability Real (2000=100) Nominal Economic Research Service

17. 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.

18. Is the sky falling?

19. Debt Service to Farm Income Relative Stability Good Times Bad Times Relative Stability Good Times Good Times Economic Research Service

20. Debt to Asset: Illinois Farmers Illinois Average 27% 77% less than 40% Debt to Asset

21. Significance of Farmland Total Assets Used in Farming: United States $2.34 Trillion Trillion Real Estate Assets $2.042 Source: Economic Research Service Real Estate Debt $0.111

22. Total Farm Debt $215 Billion Does not include other sectors of the supply chain Economic Research Service

23. Perspective of $215 Billion Does not include Asset bank commercial paper MM Mutual Fund facility Temporary guarantee for MM funds Source: WSJ

24. Agricultural Financial Markets

25. How Many Farms Does It Take?Value of Ag Output - $200 Billion 389 Farms 30,495 Farms 34,085 Farms 3,201 Farms 2,000,000 Farms 0% 10% 25% 50% 100%

26. How Many Banks Does It Take?% of Commercial Bank Loans to Agriculture 15 Banks 474 Banks 821 Banks 332 Banks 5,184 Banks 0% 20% 40% 50% 100%

27. 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

28. Crisis First Wave Impact on Commercial Banks • Dog bone • Farm and bank size • Regional differences • Fed actions • Insurance & Capital infusions

29. Feedback Loops Impact Commercial Banks General economic downturn Nonfarm income & labor markets Housing valuation Construction and development loans Potential for enhanced documentation/underwriting/regulation Potential exposures to interest rate Deposit insurance premiums 29

31. 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

32. 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

33. 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

34. 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

35. 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

36. Captive Finance Suppliers: Securitization

37. 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

38. 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 38

39. Summary:Other Issues in the Ag Finance Landscape • Some agribusiness financing concerns: • If crisis deepens, domino potential in agriculture

40. Credit Availability in Agriculture: International CollateralFixed v Commodity-Based GovernmentStimulus Local Financial Markets

41. Challenges: Producer Risk Pipeline Commodity price risks Input price risks Cash rent Interest rate risks Counterparty risks Pushed back to producer

42. 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)

43. 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.

44. Longer-term Vision of AgIs there a silver bullet? • Government safety net • Ethanol / renewable fuels • Devalue $ - export driven • General market forces

45. 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

46. Thanks! pellinge@illinois.edu