Southern Outlook ConferenceAgricultural Outlook

Atlanta, Georgia September 28, 2009

Bill MeltonChief Lending Officer

Farm Credit System

Farm Credit System Credit Quality

AgFirst District

AgFirst District Credit Quality

District (Bank & Associations)

March 31, 2008 June 30, 2009

Acceptable 95.79% 89.11%

OAEM 2.67% 5.77%

Adverse 1.54% 5.12%

Delinquencies 1.14% 2.21%

Nonaccruals $122.9 million $642.3 million

OPOs $4.7 million $74.0 million

Provisions (preceding 12 months) $17.4 million $183.5 million

Net Charge-Offs (preceding 12 months) $7.5 million $101.1 million

Current Credit

Conditions Deterioration Began

Early in 2008

Challenges

The Speed and Severity of the Economic Correction

• Collapse of Financial & Credit Markets • The Run Up and Retreat in Commodity Prices During 2008• Underwriting Standards that Did Not Incorporate

the Depth of the Market Correction

Stages in Loan Deterioration

Challenges

District is Inseparably tied to the General Economy

• 33% of the AgFirst Associations’ borrowers are identified as highly dependent on non-farm income

• A significant portion of the agricultural real estate is transitional • Large concentration in forest products

• Decline in housing starts reverberating through industry

• Large concentration in meat/protein sector

Industry Specific Concerns

• Loans dependent on the general economy/housing– Transitional real estate to high wealth individuals– Forest products especially sawmills and planer mills– Landscape nurseries, sod farms, etc

• Meat/protein sector– Hogs & dairy

• Ethanol

2009/10 Financial Outlook for Farm Credit

• Capital levels may improve with slower growth- Strong capital levels will need to support the weaker credit quality

• Credit quality expected to bottom out by year-end- But no positive credit quality bounce

• AgFirst’s earnings enhanced by treasury profits- However, treasury profit will diminish over time

• Weaker earnings at Associations due to credit quality issues & low interest rate on equity

- Level of earnings will impact patronage distributions

2009/10 Financial Outlook for Farm Credit • Much slower or even negative loan growth• Recession or effects of recession will continue to

negatively impact the General Economy• Return to modest Profitability for some sectors of the

Meat Complex• Tough times to continue for:

– Pork and dairy– Ethanol production– Loans tied to the General Economy or Housing

Broilers---------- Cents per pound ----------

Turkeys

CattleHogs

---------- Dollars per cwt. ----------

Milk---------- Dollars per cwt. ----------

Commodity Markets in Transition

Wheat

Corn

Soybeans

---------- Dollars per bushel ----------

Cotton---------- Cents per pound ----------

---------- Dollars per ton ----------

Soybean meal

Eggs---------- Cents per pound ----------

2005/06

5.65

47.7

195

3.42

2.00

2006

64.477.0

47.2685.41

12.90

2006/07

6.43

46.5

205

4.26

3.04

71.8

2007

76.4 82.1

47.0991.82

19.13

2007/08

10.10

59.3

336

6.48

4.20

114.4

2008/09

10.00

49.0

320

6.78

4.05

2008

79.7 87.5

47.84 92.27

18.35

128.3

2009/10

8.00 - 10.00

50 - 60

250 - 300

4.50 - 6.00

2.75 - 3.75

2009

79 - 81 80 - 82

40 - 41 84 - 86

12

97 - 100

2010

80 - 85 80 - 85

45 - 48 88 - 95

14 - 16

100 - 108

2009 Farm Prices Weakening

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 090

20

40

60

80

100

Billion dollars

Net Income Falls with Commodity Markets

Net Farm Cash Income

Net Cash Income less gov't payments

Direct government payments*

* emergency payments are striped area of government payments)

Farm Income Conditions Will be Diverse Again in 2010

Livestock and dairy losses may drive income back to 2006 levels!

Recovery in 2010 will be limited with grains complex watching stock buildup and livestock/dairy completing liquidation

process.

Challenges for 2009 & Beyond• Portfolio Management

– Address Deterioration in Credit Quality– Maintain Adequate Capital & Liquidity– Price and Structure loans consistent with risk

• Take advantage of opportunities to improve spreads

• Operating Expense Management• Human Capital Management

– Effectively Address Retirements/Changes in Leadership– Improve Diversity

• Remaining Committed to the Cooperative Principles– Preserving the AgFirst Model

Next 12 Months Most Pressing Challenges

• Managing and servicing weak or nonperforming assets– Equipping the staff to manage and service a deteriorating portfolio– Keeping ahead of the curve

• Utilizing an effective strategy that maintain a viable institution in all environments

• Keeping all constituents well informed

Market Approach in 2009/2010

• Focus on servicing “core agriculture”– Narrow strike zone– Take a pause on new lines of business

• Focus on higher-quality loans– Limit new credit to upper-tiers of “acceptable”

• Addressing concentration by obligor and commodity• Focus on higher spreads • Focus on actively managing the loan portfolio

Lessons Learned Confirmed1. It is practically impossible to underwrite for a “bubble market”

2. Circumstances dictate a guarantor’s ability & willingness to perform

– When dealing with multiple, limited guarantors, base the loan decision on the capacity of the weakest guarantor.

– Sponsors are supportive as long as the project is performing

3. In widely participated/syndicated loans, a material portion of the risk is embedded in the composition of the lending group and the lead lender’s servicing expertise

Exposures to Stressed Sectors Protein Sectors

Hogs $ 835.3 million

Poultry $3,181.7 million

Dairy $1,439.7 million

EthanolEthanol Plants $307.7 million

Loans Dependent on the General Economy/Housing

Timber (Pine & Hardwood) $2,869.5 million

Logging/Sawmills/Planer Mills $634.5 million

Landscape, Nurseries & Sod $204.0 million

Transitional Real Estate $1,354.0 million *(included in various SICs including timber)

Strategies Going Forward

• Structure Deals More Conservatively

– Higher liquidity / lower leverage requirements– No stand-alone project financing without confirmed “take out”– Collateralize guarantees up-front, if needed

Strategies Going Forward• Reduce Hold Positions

– Obligor / Industry / Commodity

• Understand Counterparty Relationships– “Position in Credit”

• Percentage of the deal and who comprises the lender group

– Performance of Servicer (experience / capacity)

Concerns

• Overreaction by everyone in the chain

• Potential for Credit Risk to impact Funding Cost

• Political vulnerability of the Farm Credit System

• Continuation of consolidation & globalization of Agriculture

Perspective(in millions) December 31, 1986 June 30, 2009

$ Amount % of Total Loans $ Amount % of Total Loans

Nonaccruals $596.1 11.86% $642.3 2.76%

Nonearning Assets $662.8 13.19% $715.3 3.08%

Perspective

District (Bank & Associations)

1986 (e) 2009

Provisions $187.9 million $197.6 million

Total Loans $5.03 billion $23.07 billion

Perspective

• The nonaccrual volume is contained in a relatively small number of loans that are widely participated:– 54% of the District’s nonaccruals are to 10 loans

• The lead lender is responsible for the bulk of the servicing

PerspectiveDistrict (Bank & Associations)

1986 2008 (e) 2009

Net Earnings ($329.8) million $363.5 million $272.4 million

““Current period earnings are sufficient to fully fund all provisions for Current period earnings are sufficient to fully fund all provisions for loans/investments and generate estimated net income of $272.4 loans/investments and generate estimated net income of $272.4

millionmillion””

20

40

60

80

100

Net Cash income

Debt-to-asset ratio

5

10

15

20

Billion dollars

Percent

Net Income falls but balance sheet strong!

Deleveraging is not issue for much of agriculture!

Ag Sector Balance Sheet Still Solid

Summary• Non-earnings assets could move to 3%-5%

– Higher reserves for loan losses – More conservative credit underwriting and hold positions

• Weaker Earnings• Flat to negative growth• Recovery not expected before 3rd quarter 2010

– Improvement directly tied to recovery of general economy

• Beginning a major structural transformation in global markets for goods, services and capital

“Thank You” Eat more pork and drink more milk!