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Financial Crisis Impact on Long Term Ag Forecast 1 Paul N. Ellinger University of Illinois 217-333-5503.

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Presentation on theme: "Financial Crisis Impact on Long Term Ag Forecast 1 Paul N. Ellinger University of Illinois 217-333-5503."— Presentation transcript:

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

2 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 2

3 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Reflection June 2008: –Corn Price: $ 7.47 / bu. –Soybean Price: $15.16 / bu. –Oil Futures:$ / barrel –Gasoline $4.05 / gallon –Fed Funds2% –Dow Ind.12,630 –GM Stock$18/share –Lehman Bros.$36/share 3

4 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 4 What did we learn? How we got here?

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6 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Farmland Values Relative Stability Good Times Bad TimesGood Times Real (2000=100) Nominal

7 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Securitization Accounts for Over 50% of Financial Intermediation

8 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast The Fed Has Expanded its Balance Sheet to Extend Credit to Banks Billions of Dollars Source: Federal Reserve Board of Governors Federal Reserve Balance Sheet

10 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Credit Availability “Sign Posts”

11 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Price of Legacy/Toxic Securities ABX AAA ABX BBB

12 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Outlays & Receipts/GDP 12 Source: CBO

13 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Debt / GDP 13

14 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Steps to recovery Source: Morgan Stanley

15 What about Agriculture?

16 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Illinois Farmland Prices 16 Real (2000=100) Nominal Relative Stability Good Times Bad Times Economic Research Service

17 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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. 17

18 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Is the sky falling? 18

19 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Debt Service to Farm Income 19 Relative Stability Good Times Bad Times Economic Research Service

20 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Debt to Asset: Illinois Farmers Illinois Average 27% 77% less than 40% Debt to Asset

21 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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

22 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 22 Total Farm Debt Economic Research Service $215 Billion Does not include other sectors of the supply chain

23 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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

26 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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

27 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Commercial Banks Health/Losses 89 Bank failures : 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Crisis First Wave Impact on Commercial Banks Dog bone –Farm and bank size Regional differences Fed actions –Insurance & Capital infusions 28

29 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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

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31 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 36 Captive Finance Suppliers: Securitization

37 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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

39 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 39 Summary: Other Issues in the Ag Finance Landscape Some agribusiness financing concerns: If crisis deepens, domino potential in agriculture

40 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Credit Availability in Agriculture: International Government Stimulus Collateral Fixed v Commodity-Based Local Financial Markets

41 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Challenges: Producer Risk Pipeline Commodity price risks Input price risks Cash rent Interest rate risks Counterparty risks Pushed back to producer

42 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Short Term Illinois Forecast Central IL High Quality 2009 Projected Returns Before Land and Management Returns –~ $200 / acre (200 $3.25) 2010 Projected Returns Before Land and Management Returns –~ $300 / acre $3.75) 42

43 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast Longer-term Vision of Ag Is there a silver bullet? Government safety net Ethanol / renewable fuels Devalue $ - export driven General market forces

45 Ellinger: CBAI Convention: Survive and Thrive Financial Crisis Impact on Long-term Ag Forecast 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! 46


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