Quarterly Report on FCS Condition

September 12, 2019

Dennis A. ShieldsHal Johnson

FCA Board Meeting September 2019

1

Topics for Open Session

▶ Economic Conditions Affecting the Farm Credit System▪Macroeconomic conditions▪Farm income and government payments▪Farm sector debt servicing and leverage

▶ FCS Condition and Performance▪System growth ▪Loan portfolio▪Earnings and capital▪Financial Institution Rating System (FIRS)

2

Economic Conditions Affecting the Farm Credit System

Dennis A. ShieldsChief Economist

Office of Regulatory Policy

3

Slower economic growth expected for key U.S. agricultural export markets

-2

0

2

4

6

8

World U.S. Canada Mexico Japan SouthKorea

Europe China

Real gross domestic product per capita

2018 2019F 2020F% change

4

Source: USDA/ERS using data and forecasts from Global Insight, International Monetary Fund, and Oxford Economics.

Economic concerns

5

▶ Trade war triggers recession ▶ Uncertainty reduces business investment ▶ Consumer spending and slowdown in industrial production▶ Inverted yield curve ▶ Rising consumer, business, and government debt▶ Relative interest rates and impact on value of U.S. dollar

China’s retaliatory tariffs reduce (and re-direct) U.S. agricultural exports

China now accounts for only 5% of U.S. ag. exports, down from 16% in 2017

Fiscal year U.S. agricultural export value ($bil.)

Source: USDA. 6

020406080

100120140

2017 2018 2019F 2020F

China Mexico Canada Other

Market Facilitation Program payments represent sizable support for U.S. farm sector Ratio of estimated 2019 MFP payments to

total agricultural sales by county

Source: FCA analysis of USDA payment rates, acreage, production; and county sales and income from 2017 Census of Agriculture.

Impact of 2019 MFP payments

Ratio of payments

to sales

Ratio of payment to net

cash income

U.S. total 3.7% 16.5%

FCS district (geographic) footprint using county estimates

AgriBank 5.4% 22.0%

Texas 4.4% 22.1%

AgFirst 2.5% 8.9%

CoBank 1.8% 9.9%

7

1.75

-0.91

0.29

-2.00

-1.00

0.00

1.00

2.00

2018 2019F

$/bu.

With MFP of $1.18 per bu.

Average crop margins are lifted by Market Facilitation Program payments

Kansas wheat

Source: FCA using data from USDA, Iowa State University, and Kansas State University data.Note: Includes 2018 MFP per-bushel payments of $1.65 for soybeans, $0.01 for corn, and $0.14 for wheat. The 2019 rates are estimated by dividing average per-acre payment by average state yield. 8

-1.40

-0.41

0.86

-2.00

-1.00

0.00

1.00

2.00

2018 2019F

$/bu.

0.310.00

0.41

-2.00

-1.00

0.00

1.00

2.00

2018 2019F

$/bu.

Iowa cornIowa soybeans

With MFP of $0.35 per bu.

With MFP of $0.99 per bu.

Crop insurance indemnities flow into areas with poor planting weather

Source: FCA analysis of USDA/RMA data. Note: Total liability is amount equal to a complete crop loss (after deductible is incurred).

Corn and soybean indemnities as a share of total liability

9

Geographic footprint $ mil.

FCS of America $575

Compeer $275

AgCountry $226

Mid-America $153

U.S. total $1,680

Indemnities as of 8/26/19

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

2017 18 19 20 21 22

Wheat

$5.50/bu.

$3.20

$3.40

$3.60

$3.80

$4.00

2017 18 19 20 21 22

Corn

$3.70/bu.

$7.50

$8.00

$8.50

$9.00

$9.50

2017 18 19 20 21 22

Soybeans

$8.40/bu.

Crop prices are projected to remain weak

Source: Food & Agricultural Policy Research Institute baseline projections (assumes current policies), 8/28/19. 10

Farm price ($/bu.)Farm Bill reference price ($/bu.) that triggers Price Loss Coverage payments

Livestock margins to remain near break-even

▶ Cow-calf producer margins to remain near break-even

▶ Hog producer returns to slide with uncertain prospects for exports to China

▶ Dairy margins to improve in late 2019, but pressure remains on high-cost producers

11

0

20

40

60

80

100

120

140

0

50

100

150

1998 01 04 07 10 13 16 19F

1998-2018 average

= $106 bil.

Expected farm income approaches “average” with help from Market Facilitation Program

Source: USDA/ERS, August 30, 2019; FCA analysis of USDA forecasts and subsequent revisions.

U.S. net cash farm income

12

$ billion in 2019 dollars

2019 forecast is $112.6 billion.

Based on USDA’s historical forecast accuracy, it could be as low as $106 billion or as high as $127 billion.

MFP payments

0.0

1.0

2.0

3.0

4.0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

1970-2018 average = 2.5

2019F = 3.2

2012 = 2.0

1981 = 3.5

Caution ahead: U.S. farm sector debt-to-income remains historically high

Source: USDA/ERS, August 30, 2019.Note: Income before interest expense.

Debt / net cash farm income

13

RatioWithout MFP payments, the debt-to-income ratio in 2019 would be 3.4.

2019F

Debt-to-income ratio has deteriorated in the Midwest since 2012

Source: FCA analysis of data from 2012 and 2017 Census of Agriculture.Note: Income before interest expense. 14

Relatively flat

Improved by at least 5Improved by 1 to less than 5

Deteriorated by at least 5

Deteriorated by 1 to less than 5

Point change in county debt-to-income ratio from 2012 to 2017

Data unavailable

0%

5%

10%

15%

20%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

1970-2018 average = 10.6% 2006 = 7.4%

1985 = 16.1%

U.S. farm sector real estate leverage rises toward historical average

Source: USDA/ERS, August 30, 2019; FCA analysis of USDA forecasts and subsequent revisions.

Real estate debt / real estate assets

15

2019 forecast is 10.0%.

Based on USDA’s historical forecast accuracy, the 2019 ratio could be as low as 9.0% or as high as 11.2%.

2019F

Change in real estate leverage is a mixed bag across counties in the Midwest

Source: FCA analysis of data from 2012 and 2017 Census of Agriculture. 16

Relatively flat

Improved by at least 5Improved by 2.5 to < 5

Deteriorated by at least 5

Deteriorated by 2.5 < 5

Percentage-point change in debt-to-asset ratio from 2012 to 2017

0

8

16

24

32

40

$0

$2

$4

$6

$8

$10

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Iowa land value / Iowa net cash farm income (ratio)

Iowa agricultural land including buildings ($/acre)

Caution ahead: Iowa land values are elevated relative to the state’s net cash income

$1,000 / acre

Source: FCA analysis of USDA/NASS land values and USDA/ERS net cash farm income by state. 17

Ratio of land value to income

2019F

Concluding comments

▶ Unprecedented weather in 2019 is colliding with agricultural trade policy▶ Trade-related payments prop up farm income in the short run▶ Farm sector debt-to-income is high, but leverage is near average with room

to grow as long as land values hold

Risks ahead▶ Any potential price reversal from smaller 2019 U.S. crops will be affected

by current trade policy environment and competitor production▶ A severe global recession would reduce demand for agricultural products ▶ A shift toward major government payments creates a major downside risk

for farm borrowers and lenders when discretionary support is discontinued 18

Questions

THANK YOU

19

Farm Credit System Condition and Performance

as of June 30, 2019

Hal JohnsonSr. Financial AnalystOffice of Examination

20

Topics

▶ System growth

▶ Portfolio credit quality

▶ Earnings

▶ Capital

▶ FIRS

21

System reports little growth in the 1st half of 2019

Source: FCS Information Statements 22

283304

315 320 320 330 334349 353

221236

244 249 250 259 262273 276

2.0%4.0%

1.1% 2.3%

-0.7%

2.7%0.1%

3.0%1.5%

-0.2%

3.2%0.8%

Total FCS Assets Total Gross Loans% change Qtr-over-Qtr Loans

Total Assets6/30/19

$352.5billion

+1.1% Qtr +1.0% YTD

Gross Loans6/30/19

$276.2billion

+0.8% Qtr +1.0% YTD

0.7%1.7%

-2.5%

1.3%0.8%1.7%

-4.9%

4.7%

1.0% 0.9%

-2.0%

6.6%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Total LoanPortfolio

RE Mortgage(46%)

Prod. &Intermediate

(19%)

Agribusiness(18%)

Jun-17 Jun-18 Jun-19

Loan Growth by Loan Type% change year-to-date through June

Credit risk rises; producers challenged by low margins and market uncertainty

Source: FCS Information Statements 23

0.55%

1.99%

2.65%2.22%

1.53%0.92% 0.77% 0.76% 0.89%

0%

1%

2%

3%

4%

5%

0.43%0.68%

0.42%0.23% 0.32% 0.22%

0.36%

0.0%

0.5%

1.0%

1.5%

$2.450 YTD Chg. + $252M or 11.5%

billion Yr. over Yr. + $49M or 2.0%

YE '18 0.31%

Q2 '18 0.28%

(1) accruing loans 30 days or more past due as a % of accruing loans

Nonperforming Loans

Delinquencies (1) 0.36%

Nonperforming Loans as a % of Gross Loans

Delinquencies as a % of Accruing Loans

Despite some deterioration in portfolio quality, the level of credit risk is manageable

Source: FCS Information Statements 24

7.2

7.5

12.0

5.0

2.9

6.5

7.0

10.6

4.5

2.4

6.2

6.2

10.6

4.6

2.3

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

TotalPortfolio

Real EstateMortgage

Production &Intermediate

Agribusiness

Rural Infrastructure

Jun-19 Jun-18 Jun-17

% of Loans Classified less than Acceptable

3.4

9.6

3.6

7.2

1.5

5.2

1.8

3.6

0

4

8

12

16

% Less than Acceptable % Substandard/Doubtful

System’s financial condition is sound

Source: FCS Information Statements

Q2 '19 Q2 '18

2.00% 2.13%

Q2 '19 Q2 '18

2.40% 2.44%

Net Interest Spread(YTD annualized)

Net Interest Margin(YTD annualized)

25

1,986 2,119

2,246 2,341 2,273 2,337 2,466

2,649 2,668

234 67 41

(35)

50 160 117 87 66

System Net Income

Provision for Loan Losses

System Earningsyear-to-date through June

4.06 3.79 3.59 3.46 3.41 3.48 3.75 4.21 4.46

1.38 1.08 0.95 0.96 1.01 1.17 1.502.09 2.46

2.68 2.71 2.64 2.50 2.40 2.31 2.25

2.12 2.00

2.86 2.87 2.78 2.64 2.55 2.49 2.48 2.46 2.40

2011 2012 2013 2014 2015 2016 2017 2018 YTD '19

Rate: Earning AssetsRate: Interest-Bearing Liabilities% Net Interest Spread% Net interest Margin

Capital and Liquidity- as of June 30, 2019 -

▶ Retained earnings as a percentage of total capital equaled 79.1% of total capital

▶ The System’s liquidity position equaled 178 days of coverage

▶ Days of available liquidity for the 4 funding banks ranged from 147 to 235 days

Source: FCS Information Statements Note: Restricted capital represents capital associated with the Insurance Fund. 26

31.8 35.1

37.5 40.6

44.7 47.8

51.4 54.5

57.3 61.2

14.7%

15.2%15.9%

16.3%16.8% 16.9%

16.3%17.0% 17.2% 17.4%

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

System CapitalTotal Capital less RestrictedCapital-to Asset-Ratio

Capital-to-Asset Ratio

Total System Capital ($B)

The System continues to maintain its strong capital position

System FIRS ratings

FIRS Ratings▶ Composite FIRS ratings reflect

the System’s solid financial performance and acceptable portfolio credit quality

▶ Over 91% of System Banks and Associations have a Composite FIRS rating of 1 or 2

▶ Institutions rated 3 or lower account for less than 2.5% of System assets

Composite FIRS RatingsFarm Credit System Banks and Associations

Source: FCA’s FIRS ratings database27

37 43 44 46 44 39 34 31

38 31 32 29 3129 32 35

11 8 4 3 25 7 6

0

10

20

30

40

50

60

70

80

90

100

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-19N

umbe

r of R

ated

Inst

itutio

ns

1 Rated 2 Rated 3 Rated or lower

Summary and final points

▶ Challenges for the farm economy▪Trade policy uncertainties, slowing global economic

growth, low margins, production concerns, existing stocks

▶ Rising credit risk underscores the significant operating difficulties facing System borrowers

▶ System institutions are financially sound, strongly capitalized and well-positioned to support agricultural producers

28

Questions

THANK YOU

29