[PPT] - Weathering Unexpected Downturns in Agriculture Paul Ellinger PowerPoint Presentation

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Weathering Unexpected Downturns in Agriculture

Paul Ellinger University of Illinois pellinge@illinois.edu

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Outline

Risks and risk weights
Agricultural producers

– Profitability – Asset valuations – Simple shocks

Lenders to Agriculture

– Who is financing? – Financial condition – Simple shocks

Discussions

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Quotes

Robert Shiller:

farmland is a dark horse bubble candidate partially because the environment is similar to the 1970s in the U.S. when a food price scare sparked the last farmland bubble.

Sheila Bair (FDIC Chair):

signs of instability exist in farmland markets and require close monitoring

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Agricultural Weights Risks:

different from 1980s?

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Portfolio / Magnitude Higher or Lower? Weights Different?  Farmers  Lenders  Suppliers  Government  Investors  Insurance Cos.  Consumers  Others Can the “new” risk bearers manage the risks?

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Profitability

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30 40 50 60 70 80 90 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F

Figure 1. U.S. Net Farm Income 1999-2011F

Net Farm Income Average NFI (2002-2011F)

50,000 100,000 150,000 200,000 250,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 2. Average Income on Illinois Farms 1999-2010

Illinois Average Net Farm Income 2001-2010 Average Net Farm Income Illinois Farms

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

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Aggregate Measures

0.00 5.00 10.00 15.00 20.00 25.00 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Relative Stability Relative Stability Good Times Good Times Good Times Bad Times

0.00 0.05 0.10 0.15 0.20 0.25 0.30 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Relative Stability Relative Stability Good Times Good Times Good Times Bad Times

Economic Research Service

Debt to Asset Debt Coverage

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

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

Distribution matters

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Farm Financial Conditions

Briggeman: 2008 & 2011

– Debt Utilization – Leverage – Net Worth

Extensions: Sources of loan repayment

– Cash Flow and Earnings – Liquidity – Equity

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Illinois Farm Records data

% revenue drop to reduce repayment capacity to 1.25 benchmark

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3%

13%
7%

14%

5%
10%
26%
20%
2%
19%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%

0.00% 5.00% 10.00% 15.00% 20.00%

2006 2007 2008 2009 2010 25% percentile 50% percentile

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Revenue Decline:

50% farms below repayment capacity benchmark (ave: 2006-10)

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15%
18%
17%
2%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%

0% Baseline Large Young Livestock

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Liquidity: Working Capital to Sales

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0.09 0.23 0.27 0.21 0.26 0.41 0.51 0.55 0.56 0.59 0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000 0.7000 2006 2007 2008 2009 2010 25% percentile 50% percentile

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Components of Equity

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12% 19% 21% 18% 18% 46% 44% 43% 44% 46% 41% 37% 36% 38% 36% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2006 2007 2008 2009 2010

Figure 5. Components of Farm Equity

Working Capital Real Estate Other

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Leverage Changes: 30% Decline in Farmland Prices

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0.24 0.30 0.30 0.31 0.27 0.45 0.33 0.35 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Baseline Young Large Livestock Baseline 30% Reduction

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Interest Rate Risk: Farmers

Capital values more than cash flows

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Source: Schnitkey and Sherrick

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Land Prices: CAP Rates x Cash Rents

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$120 $145 $169 $195

$2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500

3.20% 3.70% 4.20% 4.70% 5.20% 5.70% Cashrent Land Value Cap Rate

$6,000 -$6,500 $5,500 -$6,000 $5,000 -$5,500 $4,500 -$5,000 $4,000 -$4,500 $3,500 -$4,000 $3,000 -$3,500 $2,500 -$3,000 $2,000 -$2,500

Source: Schnitkey and Sherrick

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Farm Credit System, 58,423 Farm Credit System, 39,883 Commercial banks, 50,338 Commercial banks, 57,027 Life insurance companies, 14,246

Individuals and others, 9,164 Individuals and others, 11,113 Farm Service Agency, 2,343 Farm Service Agency, 2,823

20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000

Real Estate Non Real Estate

Farm Debt Shares

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

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

Distribution Matters

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Delinquency Rates: Commercial Banks

Agr Loans, 9.08 Agr Loans, 2.55 Business Loans, 6.37 Business Loans, 3.01 Residential Mortgages, 3.24 Residential Mortgages, 9.94 Credit Cards, 5.24 Credit Cards, 4.17 Commercial Real Estate, 12.06 Commercial Real Estate, 7.97

2 4 6 8 10 12 14

Delinquency Rate (%)

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Financial Health: Commercial Banks

Profitability: ROA 2010 Q4= 0.88 Failed Banks 2010- 2011Q1

1.2 billion of ag loans (1% @ banks)

Commercial Banks: Problem Ag Loans / Equity

68 banks > 20% 232 banks > 10% (1.5% ag loans) (4.7% ag loans) GA, FL, OK, NE

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Health of Commercial Banks

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Table 1. Distribution of Agricultural Loans at Commercial Banks By Equity/Asset Ratio December 2010 Large Banks 1 Other Banks Equity to Assets Share Number Share Number less than 4% 0.6% 86 4-8% 1.2% 8 7.0% 714 8-12% 16.5% 33 56.0% 3605 > 12% 6.0% 22 12.7% 1235

1 Banks with assets exceeding $10 billion.

Table 2. Distribution of Agricultural Loans at Commercial Banks By Equity/Asset Ratio Shock Equity 10% of Ag Loans December 2010 Large Banks 1 Other Banks Equity to Assets Share Number Share Number less than 4% 4.2% 182 4-8% 1.2% 8 32.6% 1644 8-12% 16.6% 34 32.7% 2902 > 12% 5.9% 21 6.9% 912

1 Banks with assets exceeding $10 billion.

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Ellinger, 7/20/2011

Weathering Unexpected Downturns in Agriculture

Health of Farm Credit System

ROA 2011Q1=2.19%
Capital to assets ratio for FCS associations exceeded 17% with

nonperforming loans at 2.39% of gross loan volume.

16 FCS associations nonaccrual / loans > 5% (Q4 2010)

– 5 FL, 3 TX, 2 GA and all others in south

Ethanol, hogs, dairy, forestry, and poultry are the portfolio

segments experiencing the most stress across the Farm Credit

System. Cumulatively, these segments represent about 1/5 of

Farm Credit System’s portfolio.

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Discussion

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Discussion:

Weathering Unexpected Downturns in Agriculture