Agriculture and Ag Lending Perspectives and Trends

1. Agriculture and Ag Lending Perspectives and Trends Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Member of Academic Hall of Fame, College of Agriculture & Life Sciences Virginia Tech, Blacksburg, VA (540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | sullylab@vt.edu Macro Clinic Video Blog: www.compeer.com/education Road Warrior of Agriculture: www.cornandsoybeandigest.com Ag Globe Trotter: www.northwestfcs.com Dave’s GPS & Dashboard Indicators: www.farmermac.com February 4, 2019

2. Views from the Road • agriculture is in the 7th year of economic reset • low margins, high volatility • manage & manage around strategy • Business IQ will be a requirement

3. Economic Radar Screen • international trade • USMCA • China’s Belt & Road Initiative • synchronized global economic slowdown • China- slowest growth rate in 28 years • Japan- negative growth rate • Germany – negative growth rate • Central Bank’s stimulus in China • high debt levels in urban real estate in China

4. North America’s Economic Power Block • 28% of the global economy’s GDP • energy & oil • U.S. #1 • Canada #6 • Mexico #8 • 450+ million people • 47% of Mexico’s population is under 25 • ag trading partners: • Canada #1 • Mexico #3

5. Lender Perspectives • many institutions have more reserves toward stressed credits “4 X Rule” • higher short term interest rates • larger number, more zeros and commas • increased consolidation, concentration risk • increase in vendor and non traditional lenders • agribusiness credit issues, third party counter party risk • emotional stress for producers/lenders • unpriced grain/livestock in inventory

6. Producer Cost Concerns • interest rate increase impacting cost of production • family living expenses leveling off- too many generations of people living out of the business • off farm employment and health benefits • working capital- now into equity • bottom third of accounts need accrual adjustments- how quick are they to cash?

7. Drivers of Change on Land Values • interest rates • investor funds • refinancing cycle • baby boomer farmer • relatives who inherit land • supply and demand of commodities

8. U.S. Economy Watch • real estate • fixers and flippers • LA/Bay area • Federal Reserve interest rates • 2 increases/1 decrease • stock market • other

9. Top Five Economic Indicators

10. Yield Curves and Recessions Source: Federal Reserve https://www.newyorkfed.org/medialibrary/media/research/capital_markets/Prob_Rec.pdf

11. Is the New Normal the Old Normal? Source: https://finbin.umn.edu/

12. Median Net Farm Income

13. Mega Trends 2008-2018:Technology & Production Metric Tons Increase Since 2008-2009 til 2018 Source:Kirksville, MO presentation - University of Missouri

14. Net Farm Income, 2017

15. Why Some Businesses Are More Profitable Than Others • These businesses are a “little” better at: • production • marketing • cost control • asset and capital efficiency • utilize the 5% Rule

16. Business IQ: Management FactorsCritical Questions for Crucial Conversations • *Extra Points: • Progressive Business may receive 4 points for #2,6,7,8,14 • Struggling Business attempting turnaround may receive 4 points for #3,5,8,11,12

17. Character CountsCritical Questions & Observations for Customers

18. Trouble Shooting Matrix Insufficient Repayment Capacity Cut Business Cost Reduce Four Largest Expenses: Crop, Feed, Labor, ?? Job Stability/Availability, Job Cost Job Earnings, Skills, Time Management Non-Farm Revenue Sell Capital Assets, Deferred Taxes, Increase Production, Increase Price Increase Income Cut Living Withdrawals Purchase Financial Software, Small Cost Containment Longer Term, Interest Only, Principal/Interest Deferred Restructure Debt Equity Capital, Family Capital, Supplemental Cash Flow Capital Infusion Voluntary, Involuntary, Chapter 7, 11, 12, 13 Bankruptcy

19. The Burn Rate – Working CapitalAdversity vs. Opportunity Defensive “Adversity Oriented” Current Assets: $2,000,000 -Current Liabilities: $1,000,000 = Working Capital: $1,000,000 Projected Loss: $500,000 Working Capital = 2 Years Projected Loss Red < 1.0 Year = Vulnerable Yellow 1.0-3.0 Years = Resilient Green >3.0 Years = Agile Offensive “Opportunity Oriented” Current Assets: $2,000,000 -Current Liabilities: $1,000,000 = Working Capital: $1,000,000 Debt Service(Existing & New) Payments: $200,000 Working Capital = 5Years Total Debt Service Payments Red < 2.5 Years = Vulnerable Yellow 2.5-5.0 Years = Resilient Green >5.0 Years = Agile

20. Burn Rate on Core EquityAdversity vs. Opportunity (Assume $500,000 Earnings Loss & 20% land value decline) Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $2,000,000 = 4.0 Years Earnings Loss¹ $ 500,000 20% Decline Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $1,160,000 = 2.32 Years Earnings Loss¹ $ 500,000 • ¹ Assume Earnings Loss of $500,000 • Red < 4.0 Years = Vulnerable • Yellow 4.0-7.0 Years = Resilient • Green >7.0 Years = Agile

21. Bridge or Pier Concept • Before: Term Debt = $1,000,000 = 4 to 1 EBITDA $250,000 • After: Term Debt = $1,250,000 = 5 to 1 EBITDA $250,000 • no improvement in EBITDA • refinancing using land equity • debt levels higher • owner equity loss, more debt service • water is deeper near the end of pier • the longer the pier, then the narrower the pier

22. What Great Bankers Do: • maintain contact with the customer for variance analysis & projected/actual analysis • go out to the farm for face to face visits • provide expertise in planning & monitoring of business performance • provide sound counsel to preserve wealth in adverse situations • provide facilitation to retain economic & emotional stability • provide tools & education to assist them in preserving equity • have the courage to initiate tough conversations • implement the Six “C’s” of lending • burn the free fuel “A.R.E.”

23. Questions