Trends in Financing Agriculture

1. Slide Show #9 Trends in Financing Agriculture AGEC 489/690 Spring 2009

2. Real Estate Lenders Farm Credit System Commercial banks Life insurance companies Farm Service Agency Individuals and others Lenders Serving Agriculture

3. Real Estate Lenders Farm Credit System Commercial banks Life insurance companies Farm Service Agency Individuals and others Nonreal Estate Lenders Farm Credit System Farm Service Agency Commercial banks Individuals and others Lenders Serving Agriculture Detailed coverage in Handouts #7, #8 and #9

4. Year-end Farm Debt Outstanding in Agriculture

5. Farm Real Estate Debt Shares

6. Farm Non-Real Estate Debt Shares

7. Debt secured by real estate mortgage Debt not secured by real estate mortgage

8. Farm Financial Crisis

9. Asian Flu

10. Farm financial crisis

11. Importance of Government Payments as a Stabilizer Farm financial crisis

12. Problem in 2009? USDA projects net farm income will fall by 18.1% in 2009

13. Rising land values thus far have helped support rising farm debt.

14. Farm Financial Crisis

15. Impact of rising land values Problem with this ratio. Only one-third of farmers owe total term debt

16. Let’s Look at U.S. Agriculture

17. Ethanol boom Farm financial crisis

18. Recent Monthly Crop Price Trends Source: National Agricultural Statistics Service, USDA. Profit margins have narrowed considerably and are at further risk if crude oil prices increase.

19. Recent Monthly Crop Price Trends Source: National Agricultural Statistics Service, USDA. Price/cost ratios for major crops are much different than they were at this time last year, particularly for wheat.

20. Crop Price Declines From Peak 2008 Levels Source: Agricultural Prices, National Agricultural Statistics, USDA

21. Recently Monthly Livestock Price Trends Source: National Agricultural Statistics Service, USDA. Poultry is the only commodity experiencing a positive price/cost ratio. Of particular concern is the free-fall in milk prices.

22. Livestock Price Declines From Peak 2008 Levels Source: Agricultural Prices, National Agricultural Statistics, USDA

23. Macroeconomic Linkages to Ag in 2008: • Weak dollar(good for Ag!) • High crude prices(bad for Ag!) • Low inflation(good for Ag!) • Low interest rates(good for Ag!) • Low unemploymentrate (good for Ag!) • High consumer income(relatively minor positive impact on Ag!)

24. A Potential 2009 Macro Scenario for Ag: • Weakened client nations(bad for Ag!) • Modest rise in oil prices(bad for Ag except biofuel feedstock!) • Inflation in check (good for Ag!) • Interest rates low(good for Ag!) • High unemployment rate(bad for Ag!) • Falling consumer income(relatively minor negative effect on Ag!)

25. 2009 Farm Price and Income Prospects Crop prices down from 2008 levels and unlikely to gain much traction in 2009 unless speculative demand for commodities increases. Biofuel feedstock like corn is an exception if crude oil prices rise. Input costs for fuel, fertilizer and other selected inputs have declined but can rise if crude prices rise.

26. 2009 Farm Price and Income Prospects Lower feed pricesstill leavelivestock producers stressed. Lower net farm income in 2009. USDA projects 18.1% decline. Lower crop land appreciation, with likely declines particularly outside the Corn Belt and Northern Plains regions. Increased debt repayment stress expected, particularly for highly leveraged livestock borrowers.

27. Components of Debt Burden Ratio Farm financial crisis Source: Economic Research Service. 2009 value is USDA forecast. Problem of fixity in debt outstanding during volatile periods of net farm income.

28. Land Values Can Fall… Farm financial crisis Biofuels boom Source: National Agricultural Statistics, USDA.

29. Recent Cash Rents Trend Farm financial crisis Biofuels boom Source: National Agricultural Statistics, USDA.

30. 2009 Updated Central Illinois Corn Budget Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses. Yield 182 bushels Assumed sales price $4.00 per bu. Other revenue $25 payment Gross revenue $753 per acre Fertilizer $122 per acre Seed $62 per acre Other costs $80 per acre Total direct costs $264 per acre Power costs $76 per acre Overhead $52 per acre Total non-land costs $392 per acre Operator & land return $361 per acre Source: Farmdoc Budgets, University of Illinois Extension Service.

31. 2009 Updated Central Illinois Corn Budget Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses. Yield 182 bushels Assumed sales price $4.00 per bu. Other revenue $25 payment Gross revenue $753 per acre Fertilizer $122 per acre Seed $62 per acre Other costs $80 per acre Total direct costs $264 per acre Power costs $76 per acre Overhead $52 per acre Total non-land costs $392 per acre Operator & land return $361 per acre Those tenants who had already locked in $350 cash rents would need $3.90 corn to break even. If the cost of fertilizer, seed and fuel had not fallen in the last few months, corn prices would had to be $4.65 to break even. Source: Farmdoc Budgets, University of Illinois Extension Service.

32. 2009 Updated Central Illinois Corn Budget Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses. Yield 182 bushels Assumed sales price $4.00 per bu. Other revenue $25 payment Gross revenue $753 per acre Fertilizer $122 per acre Seed $62 per acre Other costs $80 per acre Total direct costs $264 per acre Power costs $76 per acre Overhead $52 per acre Total non-land costs $392 per acre Operator & land return $361 per acre Breakeven here does not account for principal payments on outstanding term loans or family living expenses. Those tenants who had already locked in $350 cash rents would need $3.90 corn to break even. If the cost of fertilizer, seed and fuel had not fallen in the last few months, corn prices would had to be $4.65 to break even. Source: Farmdoc Budgets, University of Illinois Extension Service.

33. A Look at Farm Lending Picture in 2009 In ag, total farm term debt is owed by a relatively small number of borrowers. This counters the USDA’s rosy debt statements. Concern over loans based heavily on off-farm repayment capacity. Debt repayment capacity for livestock borrowers will be stressed. Will land values soften?YES.Smaller gains/declines in Corn Belt and Northern Plains regions; larger declines are likely in other regions.

34. Recent Survey Results 2,300 agricultural professionals (including lenders) were recently surveyed. 84% believe farmers will experience financial stress in the next 3 years. When lender responses were sorted out, 54% felt the chance of financial stress is high and 26% felt this would be very high. The cost of inputs and volatile prices are the top 2 reasons for financial stress given by all respondents, followed loss of off-farm income. The lowest ranked reason was declining land values….interesting.

35. Recent Survey Results Many farmers responded saying they faced stricter requirements (e.g., more documentation). 56% said requirements changed slightly while 17% reported substantial increases. Farmers responding assessed their financial management skills as follows: only 8% of farmers participating in this survey felt they were well equipped with financial management skills. 74% said they weremoderately equipped. 18% said they werepoorly equipped!

36. #7: How will the recession affect off-farm incomes and farm family unemployment? Regional variations? Off-farm income is an important source of internal finance for some farm operators and a basis for making rural home loans. Potential high stress states: – January 2009 unemployment rates in states like California (10.1%), Michigan (11.6%), Indiana (9.2%), South Carolina (10.4%) and Oregon (9.9%) suggest areas of potential stress from loss in off-farm income. Potential low stress states: January 2009 unemployment rates in states like Iowa (4.8%), Kansas (5.8%), Utah (4.6%), Nebraska (4.3%), and South Dakota (4.4%) suggest less risk of loss in off-farm income. (see map) The magnitude of these rates are no doubt lower than current rates given the jump from 7.6% to 8.1% and future increases in months to come.

37. State Level Picture of Unemployment Rates 7.8% 4.2% 7.6% 5.6% 11.6% 6.9% 9.9% 4.4% 6.6% 6.6% 4.8% 4.3% 7.9% 8.8% 9.4% 9.2% 7.0% 5.8% 8.0% 8.7% 9.7% 5.0% 8.6% 10.1% 6.4% 7.0% 5.1% 8.7% 6.4% 7.8% 10.4% 8.6% 5.1% 8.6% Source: Bureau of Labor Statistics, US Department of Labor.

38. #9: General condition of farmers in Texas? Any problems? What risk management tools are they using? Should they be using? The drought affecting Texas is the worst since 1918. First two months of 2009 driest start of any year since records were kept over a century ago. Weakened economic condition is evidenced by the substantial increase in FSA loan applications. Hitting the cattle industry hard, with stories of ranchers selling off portions of breeding herds. Governor Perry asked for state of emergency declaration for 199 counties. Farm Assist tool at TAMU used by some. Many should improve understanding of financial statements, pro forma analysis, and benefits from stress testing to determine potential long run risk and returns when making decisions.

39. Extent of Current Texas Drought I own a farm here that enjoyed three cuttings of coastal hay last year. May only get one this year.

40. Role of Financing

44. Importance of off-farm income by type of farming operation

45. Importance of off-farm income by size of farming operation