trends in financing agriculture
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Trends in Trends in Financing Financing
AgricultureAgriculture
Slide Show #9
AGEC 489/690AGEC 489/690
Spring 2009Spring 2009
Lenders Serving AgricultureLenders Serving Agriculture
Real Estate LendersReal Estate Lenderso Farm Credit System
o Commercial banks
o Life insurance companies
o Farm Service Agency
o Individuals and others
Lenders Serving AgricultureLenders Serving Agriculture
Real Estate LendersReal Estate Lenderso Farm Credit System
o Commercial banks
o Life insurance companies
o Farm Service Agency
o Individuals and others
Nonreal Estate LendersNonreal Estate Lenderso Farm Credit System
o Farm Service Agency
o Commercial banks
o Individuals and others
Detailed coverage in Handouts #7, #8 and #9Detailed coverage in Handouts #7, #8 and #9
Year-end Farm Debt Outstanding in Agriculture
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
2000 2001 2002 2003 2004 2005 2006 2007P
Farm Credit System FSA Banks Life Insurance Individuals and others
Farm Real Estate Debt Shares
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2000 2001 2002 2003 2004 2005 2006 2007P
Farm Credit System FSA Banks Individuals and others
Farm Non-Real Estate Debt Shares
Debt not secured byreal estate mortgage
Debt not secured byreal estate mortgage
Debt secured by real estate mortgage
Debt secured by real estate mortgage
Farm Financial CrisisFarm Financial Crisis
Asian FluAsian Flu
Trends in Key Debt Service Ratios
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
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1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
De
bt
Bu
rde
n R
ati
o
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Tim
es
Inte
res
t E
arn
ed
Ra
tio
Debt Burden Ratio Times Interest Earned Ratio
Farm financial crisisFarm financial crisis
Farm Debt Burden Ratio
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
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1988
1989
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1999
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2001
2002
2003
2004
2005
2006
2007
2008
2009
Rat
io o
f D
ebt
to N
et In
com
e
With Government Payments Without Government Payments
Importance of Government Payments as a StabilizerImportance of Government Payments as a Stabilizer
Farm financial crisisFarm financial crisis
Net Farm Income and Farm Real Estate Debt
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
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1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Ne
t F
arm
Inc
om
e (
Bill
$)
$0
$20
$40
$60
$80
$100
$120
Fa
rm R
ea
l Es
tate
As
se
ts (
Bill
$)
Net Farm Income Real estate debt
Problem in 2009? USDA projects net farm income will fall by 18.1% in 2009Problem in 2009? USDA projects net farm income will fall by 18.1% in 2009
Real Estate Assets and Real Estate Debt
$0
$500
$1,000
$1,500
$2,000
$2,500
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
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84
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99
20
00
20
01
20
02
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03
20
04
20
05
20
06
20
07
20
08
Re
al E
sta
te V
alu
e (
Bill
$)
$0
$20
$40
$60
$80
$100
$120
Re
al E
sta
te D
eb
t (B
ill $
)
Value of Farm Real Estate Real Estate Debt
Rising land values thus far have helped support rising farm debt. Rising land values thus far have helped support rising farm debt.
Farm Financial CrisisFarm Financial Crisis
Impact of rising land values
Impact of rising land values
Problem with this ratio. Only one-third of farmers owe total term debtProblem with this ratio. Only one-third of farmers owe total term debt
Let’s Look at U.S. Let’s Look at U.S. AgricultureAgriculture
Farm financial
crisis
Farm financial
crisis
Ethanolboom
Ethanolboom
0.0
50.0
100.0
150.0
200.0
250.0
300.0Ja
n-0
7
Feb
-07
Mar
-07
Ap
r-07
May
-07
Jun
-07
Jul-
07
Au
g-0
7
Sep
-07
Oct
-07
No
v-07
Dec
-07
Jan
-08
Feb
-08
Mar
-08
Ap
r-08
May
-08
Jun
-08
Jul-
08
Au
g-0
8
Sep
-08
Oct
-08
No
v-08
Dec
-08
Jan
-09
Feb
-09
Jan
uar
y 20
07 =
100
Corn All wheat Soybeans Fuel Fertilizer All inputs
Source: National Agricultural Statistics Service, USDA.
Recent Monthly Crop Recent Monthly Crop Price TrendsPrice Trends
Profit margins have narrowed considerably and are at further risk if crude oil prices increase.
Profit margins have narrowed considerably and are at further risk if crude oil prices increase.
0.0
50.0
100.0
150.0
200.0
250.0
300.0Ja
n-0
7
Feb
-07
Mar
-07
Ap
r-07
May
-07
Jun
-07
Jul-
07
Au
g-0
7
Sep
-07
Oct
-07
No
v-07
Dec
-07
Jan
-08
Feb
-08
Mar
-08
Ap
r-08
May
-08
Jun
-08
Jul-
08
Au
g-0
8
Sep
-08
Oct
-08
No
v-08
Dec
-08
Jan
-09
Feb
-09
Jan
uar
y 20
07 =
100
Corn All wheat Soybeans Fuel Fertilizer All inputs
Source: National Agricultural Statistics Service, USDA.
Recent Monthly Crop Recent Monthly Crop Price TrendsPrice Trends
Price/cost ratios for major crops are much different than they were at this time last year, particularly for wheat.
Price/cost ratios for major crops are much different than they were at this time last year, particularly for wheat.
Source: Agricultural Prices, National Agricultural Statistics, USDA
Crop Price Declines From Crop Price Declines From Peak 2008 LevelsPeak 2008 Levels
24.50%-
45.43%-
27.97%-
10.29%-
53.52%-
37.18%-
-60.00% -50.00% -40.00% -30.00% -20.00% -10.00% 0.00%
1
2
3
4
5
6
All crop inputs
Fuel
Fertilizer
Soybeans
All wheat
Corn
Recently Monthly Livestock Recently Monthly Livestock Price TrendsPrice Trends
Source: National Agricultural Statistics Service, USDA.
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
160.0Ja
n-0
7
Feb
-07
Mar
-07
Ap
r-07
May
-07
Jun
-07
Jul-
07
Au
g-0
7
Sep
-07
Oct
-07
No
v-07
Dec
-07
Jan
-08
Feb
-08
Mar
-08
Ap
r-08
May
-08
Jun
-08
Jul-
08
Au
g-0
8
Sep
-08
Oct
-08
No
v-08
Dec
-08
Jan
-09
Feb
-09
Jan
uar
y 20
07 =
100
Beef Cattle All Hogs All Milk Poultry and Eggs Feed All livestock inputs
Poultry is the only commodity experiencing a positive price/cost ratio. Of particular concern is the free-fall in milk prices.
Poultry is the only commodity experiencing a positive price/cost ratio. Of particular concern is the free-fall in milk prices.
Livestock Price Declines Livestock Price Declines From Peak 2008 Levels From Peak 2008 Levels
Source: Agricultural Prices, National Agricultural Statistics, USDA
16.65%-
28.22%-
40.72%-
8.18%-
10.44%-
17.22%-
-45.00% -40.00% -35.00% -30.00% -25.00% -20.00% -15.00% -10.00% -5.00% 0.00%
1
2
3
4
5
6
All livestock inputs
Feed
Poultry and eggs
All milk
All hogs
Beef cattle
Macroeconomic Linkages Macroeconomic Linkages to Ag in 2008:to Ag in 2008:Weak dollar (good for Ag!)(good for Ag!)High crude prices (bad for Ag!)(bad for Ag!)Low inflation (good for Ag!)(good for Ag!)Low interest rates (good for Ag!)(good for Ag!)Low unemployment rate (good for (good for
Ag!)Ag!)High consumer income (relatively (relatively
minor positive impact on Ag!)minor positive impact on Ag!)
A Potential 2009 Macro A Potential 2009 Macro Scenario for Ag:Scenario for Ag:Weakened client nationsWeakened client nations (bad for Ag!)(bad for Ag!)Modest rise in oil pricesModest rise in oil prices (bad for Ag (bad for Ag
except biofuel feedstock!except biofuel feedstock!))InflationInflation in check (good for Ag!)(good for Ag!)Interest rates lowInterest rates low (good for Ag!)(good for Ag!)High unemployment rateHigh unemployment rate (bad for Ag!)(bad for Ag!)Falling consumer incomeFalling consumer income (relatively (relatively
minor negative effect on Ag!)minor negative effect on Ag!)
2009 Farm Price and 2009 Farm Price and Income ProspectsIncome Prospects1. Crop prices down from 2008 levels
and unlikely to gain much traction in unlikely to gain much traction in 20092009 unless speculative demand for commodities increases. Biofuel Biofuel feedstock like corn is an exception if feedstock like corn is an exception if crude oil prices rise.crude oil prices rise.
2. Input costs for fuel, fertilizer and other selected inputs have declined declined but can rise if crude prices risebut can rise if crude prices rise.
2009 Farm Price and 2009 Farm Price and Income ProspectsIncome Prospects3.3. Lower feed pricesLower feed prices still leave livestock livestock
producers stressedproducers stressed.4.4. LowerLower net farm income in 2009. USDA
projects 18.1% decline18.1% decline.5.5. Lower crop land appreciationLower crop land appreciation, with
likely declinesdeclines particularly outside the Corn Belt and Northern Plains regions.
6.6. Increased debt repayment stressIncreased debt repayment stress expected, particularly for highly leveraged livestock borrowers.
Net Farm Income and Total Farm Debt
$0
$50
$100
$150
$200
$25019
7019
7119
7219
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
09
Bill
ion
Do
llars
Net Farm Income Total Farm Debt
Source: Economic Research Service. 2009 value is USDA forecast.
Components of Debt Burden RatioComponents of Debt Burden Ratio
Problem of fixity in debt outstanding during volatile periods of net farm income.
Problem of fixity in debt outstanding during volatile periods of net farm income.
Farm financial crisisFarm financial crisis
Historical Trend in Illinois Crop Land Values
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,00019
7019
7119
7219
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
08
Dol
lars
per
Acr
e
Source: National Agricultural Statistics, USDA.
Land Values Can Fall…Land Values Can Fall…
Farm financial crisisFarm financial crisis
Biofuels boomBiofuels boom
Percentage Change in Cash Rent per Acre
-20
-15
-10
-5
0
5
10
15
20
25
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Per
cent
age
Cha
nge
Source: National Agricultural Statistics, USDA.
Recent Cash Rents TrendRecent Cash Rents Trend
Biofuels boomBiofuels boom
Farm financial crisisFarm financial crisis
2009 Updated Central 2009 Updated Central Illinois Corn BudgetIllinois Corn Budget
Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre
Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre
Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre
Operator & land return $361 per acre
Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre
Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre
Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre
Operator & land return $361 per acre
Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses.
Source: Farmdoc Budgets, University of Illinois Extension Service.
2009 Updated Central 2009 Updated Central Illinois Corn BudgetIllinois Corn Budget
Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre
Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre
Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre
Operator & land return $361 per acre
Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre
Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre
Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre
Operator & land return $361 per acre
Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses.
Source: Farmdoc Budgets, University of Illinois Extension Service.
Those tenants who had already locked in $350 cash rents would need need $3.90 corn to break even$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 had to be $4.65$4.65 to break even.
2009 Updated Central 2009 Updated Central Illinois Corn BudgetIllinois Corn Budget
Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre
Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre
Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre
Operator & land return $361 per acre
Yield 182 bushelsAssumed sales price $4.00 per bu.Other revenue $25 paymentGross revenue $753 per acre
Fertilizer $122 per acreSeed $62 per acreOther costs $80 per acreTotal direct costs $264 per acre
Power costs $76 per acreOverhead $52 per acreTotal non-land costs $392 per acre
Operator & land return $361 per acre
Returns to land must cover principal payments on outstanding term loans as well as cash rent or its equivalent and family living expenses.
Source: Farmdoc Budgets, University of Illinois Extension Service.
Those tenants who had already locked in $350 cash rents would need need $3.90 corn to break even$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 had to be $4.65$4.65 to break even.
Breakeven here does not Breakeven here does not account for principal account for principal payments on outstanding payments on outstanding term loans or family living term loans or family living expenses.expenses.
Breakeven here does not Breakeven here does not account for principal account for principal payments on outstanding payments on outstanding term loans or family living term loans or family living expenses.expenses.
A Look at Farm Lending A Look at Farm Lending Picture in 2009Picture in 2009In ag, total farm term debt is owed by a In ag, total farm term debt is owed by a
relatively relatively small small number of borrowers. This number of borrowers. This counters the USDA’s rosy debt statements.counters the USDA’s rosy debt statements.
Concern over loans Concern over loans based heavily on off-based heavily on off-farm repayment capacityfarm repayment capacity..
Debt repayment capacity for livestock Debt repayment capacity for livestock borrowers borrowers will be stressedwill be stressed..
Will land values Will land values soften?soften? YESYES. Smaller Smaller gains/declines in Corn Belt and Northern gains/declines in Corn Belt and Northern Plains regions; larger declines are likely in Plains regions; larger declines are likely in other regions.other regions.
Recent Survey ResultsRecent Survey Results2,300 agricultural professionals (including
lenders) were recently surveyed.84% believe farmers will experience financial will experience financial
stress in the next 3 yearsstress in the next 3 years. When lender responseslender responses were sorted out, 54%54%
felt the chance of financial stress is highhigh and 26%26% felt this would be very highvery high.
The cost of inputscost of inputs and volatile pricesvolatile prices are the top 2 reasonstop 2 reasons for financial stress given by all respondents, followed loss of off-farm incomeloss of off-farm income. The lowest ranked reason was declining land values….interestinginteresting.
Recent Survey ResultsRecent Survey ResultsMany farmers responded saying they
faced stricter requirements (e.g., more documentation). 56%56% said requirements changed slightlyslightly while 17%17% reported substantialsubstantial increases.
Farmers responding assessed their financial management skillsfinancial management skills as follows: only 8%8% of farmers participating in this survey
felt they were well equipped well equipped with financial management skills.
74%74% said they were moderately equippedmoderately equipped. 18%18% said they were poorly equipped!poorly equipped!
#7: How will the recession affect off-farm #7: How will the recession affect off-farm incomes and farm family unemployment? incomes and farm family unemployment? Regional variations?Regional variations?
Off-farm income is an important source of internal source of internal financefinance for some farm operators and a basis for making rural home loans.
Potential high stress statesPotential 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: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 (see map)map)
The magnitude of these rates are no doubt lower than no doubt lower than current ratescurrent rates given the jump from 7.6% to 8.1% and future increases in months to come.
10.1%
9.9%
9.4%
11.6%
10.4%
9.7%
8.6%
8.6%
State Level Picture of Unemployment RatesState Level Picture of Unemployment Rates
8.7%
8.6%
8.8%7.9%9.2%
7.8%
7.0%8.0%
4.8%4.3%
4.4%
4.2% 7.6%
6.9%
6.4%
6.4%
5.1%
7.8%
5.6%
6.6% 6.6%
5.8%
5.0%5.1%7.0%
8.7%
Source: Bureau of Labor Statistics, US Department of Labor.
#9: General condition of farmers in Texas? #9: General condition of farmers in Texas? Any problems? What risk management tools Any problems? What risk management tools are they using? Should they be using?are they using? Should they be using?
The drought affecting Texas is the worst since worst since 19181918. 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 applicationssubstantial increase in FSA loan applications.
Hitting the cattle industrycattle industry hard, with stories of ranchers selling off portions of breeding herds.
Governor Perry asked for state of emergency state of emergency declarationdeclaration for 199 counties.
Farm AssistFarm Assist tool at TAMU used by some. Many should improve understanding of financial statements, pro forma analysis, and benefits from stress testingstress testing to determine potential long run risk and returns when making decisions.
Extent of Current Texas DroughtExtent of Current Texas Drought
I own a farm here that enjoyed three cuttings of coastal hay last year. May only get one this year.
Role of FinancingRole of Financing
Importance of off-farm income by type of farming operation
Importance of off-farm income by type of farming operation
Importance of off-farm income by size of farming operation
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