Making Sense of Volatile Times Governor’s Conference on Delaware Agriculture

1. Making Sense of Volatile TimesGovernor’s Conference on Delaware Agriculture Brent Gloy Cornell University February 27, 2009

2. Agenda • Commodity and Financial Markets • Economic Situation • Managing Through Volatile Times

3. Commodity Markets • Where we’re at • Tremendous volatility • Uncertainty still quite high • Very difficult to predict feed grain prices • How we got here • Bubbles pop – financial meltdown • Severe recession

4. Weekly CBOT Corn Prices 2007-2009 Nearly $5 from high to low

5. Weekly CBOT Soybean Prices 2007-2009 Over $8 from high to low

6. Causes of the Volatility • Easy monetary policy (cheap money) • Loose financial regulation (easy to use cheap money) • Worldwide economic expansion • Tremendous run-up in crude oil prices feeds into grain markets • Biofuel policy was additional gas on an inferno

7. When Will it End? • Markets are still in major adjustment • Problem is worldwide • Macro-economic situation is grim • Worldwide economic slowdown reduces demand for protein and grains Bottom Line: It is unlikely that volatility will subside until macro-economic situation stabilizes

8. How did we get here and where are we at?

9. You could see this coming…. “You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise.……. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.” Warren Buffet, 2007 Letter to Shareholders of Berkshire Hathaway

10. The Fed Apparently Adds Social Policy to its Responsibilities….. “If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress? When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.” Excerpted quote from Former Fed Chairman Alan Greenspan. Reported in the New York Times online article “Greenspan Says He Was Mystified by Subprime Market” February 12, 2009

11. Financial Markets Filled with Fear • Banks have taken much more risk than their capital can support • Credit markets begin to fail • Consumers no longer have access to funds to support consumption habits • Structural adjustment of consumption behavior underway Result: severe recession

12. Fed Responds by Aggressively Easing Monetary Policy

13. Unemployment Rate Increases Rapidly

14. Consumers Actually Increase Savings

15. Consumers Have Little Ability to Expand Consumption with Borrowing

16. The Great Crude Oil Bubble Pops

17. According to RFA the current nameplate operating ethanol capacity is 10.3 billion gallons with an additional 1.5 under construction above the current RFS of 10.5 billion gallons

18. Where to From Here • Feed grain prices are falling back to food demand levels • Ethanol will slow until mandate again binds • This year’s plantings are very difficult to project • Operating costs are volatile as well

19. Corn/Soy Budgets for Central Illinois High Productivity Farmland Per Acre Operator and Land Return a Projections use corn = $4/bu and Soy = $8.85/bu Source: University of Illinois Crop Budgets http://www.farmdoc.uiuc.edu/manage/2009_crop_budgets.pdf

20. Will Exports Bail Us Out? ?

21. Where to From Here? • Feed grain stocks-to-use ratios remain relatively tight • Dollar is still at favorable levels • Unlikely that prices will retest previous all time highs in near future • Higher operating costs make a return to corn at sub $3 levels somewhat unlikely Bottom Line: modest feed price relief

22. Where Does this Leave Agriculture? • Most commodities are going to experience difficult financial times in the coming year(s?) • Let’s look at the financial situation in agriculture

23. Very difficult times Debt levels appear low by historical standards

24. The problem is that farm sector assets are dominated by real estate which declines in value during tough times

25. So What Has Been Happening to Land Values?

27. The Financial Situation In Agriculture Now is the time to ask hard questions and make difficult decisions

28. Managing in Volatile Times • Sound risk management is key • Focus on margins – not just price or cost • Cost of risk management will be high • Cost management is critical • Work on records and business analysis – must have good information

29. Records Must Answer • What is my cost of production? • What is my cash flow? • How do the above respond to changes?

30. Managing in Volatile Times • After getting records in order ask: • Am I efficiently using my current resources? • Are there resources that can’t be used efficiently today? • What am I willing to pay to carry these until they can be used efficiently?

31. Managing in Volatile Times • Get debt to manageable levels • Many farms will be forced to rely on credit to make it through these times • Build a good relationship with your lender • Use credit wisely

32. Building a Relationship with Your Lender • Good records are a must • Give lender confidence that you know your business • Give lender confidence that your plan makes sense • Most ag lenders make decisions on factors such as repayment capacity, character, capital, conditions, and collateral

33. Questions Brent Gloy Cornell University www.agfinance.aem.cornell.edu 607-255-9822 bg49@cornell.edu