Weathering Unexpected Downturns in Agriculture Paul Ellinger - PowerPoint PPT Presentation

Weathering Unexpected Downturns in Agriculture Paul Ellinger University of Illinois pellinge@illinois.edu

Outline • Risks and risk weights • Agricultural producers – Profitability – Asset valuations – Simple shocks • Lenders to Agriculture – Who is financing? – Financial condition – Simple shocks • Discussions Ellinger, 7/20/2011 2 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 Ellinger, 7/20/2011 3 Weathering Unexpected Downturns in Agriculture

Agricultural Weights Risks: different from 1980s? Portfolio / Magnitude Higher or Lower? Weights Different?  Farmers  Lenders  Suppliers  Government  Investors  Insurance Cos.  Consumers  Others Can the “new” risk bearers manage the risks? Ellinger, 7/20/2011 4 Weathering Unexpected Downturns in Agriculture

Profitability Figure 1. U.S. Net Farm Income 1999-2011F 100 90 80 70 60 50 40 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F Net Farm Income Average NFI (2002-2011F) Figure 2. Average Income on Illinois Farms 1999-2010 250,000 200,000 150,000 100,000 50,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Illinois Average Net Farm Income 2001-2010 Average Net Farm Income Illinois Farms Ellinger, 7/20/2011 5 Weathering Unexpected Downturns in Agriculture

25.00 Aggregate Relative Stability Good Times Bad Relative Good Good Times Stability Times Times 20.00 Measures 15.00 10.00 Debt to Asset 5.00 0.00 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 0.30 Relative Stability Good Times Bad Relative Good Good Times Stability Times Times 0.25 0.20 0.15 Debt Coverage 0.10 0.05 0.00 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Ellinger, 7/20/2011 6 Economic Research Service Weathering Unexpected Downturns in Agriculture

How Many Farms Does It Take? Value of Ag Output - $200 Billion Distribution matters 389 Farms 30,495 Farms 34,085 Farms 3,201 Farms 2,000,000 Farms 0% 10% 25% 50% 100% 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 Ellinger, 7/20/2011 8 Weathering Unexpected Downturns in Agriculture

Illinois Farm Records data % revenue drop to reduce repayment capacity to 1.25 benchmark 20.00% 14% 15.00% 10.00% 3% 5.00% 0.00% 2006 2007 2008 2009 2010 -2% -5.00% -5% -7% -10.00% -10% -15.00% -13% -20.00% -19% -20% -25.00% -26% -30.00% 25% percentile 50% percentile Ellinger, 7/20/2011 9 Weathering Unexpected Downturns in Agriculture

Revenue Decline: 50% farms below repayment capacity benchmark (ave: 2006-10) Baseline Large Young Livestock 0% -2% -2% -4% -6% -8% -10% -12% -14% -16% -15% -18% -17% -18% -20% Ellinger, 7/20/2011 10 Weathering Unexpected Downturns in Agriculture

Liquidity: Working Capital to Sales 0.7000 0.59 0.6000 0.56 0.55 0.51 0.5000 0.41 0.4000 0.27 0.3000 0.26 0.23 0.21 0.2000 0.09 0.1000 0.0000 2006 2007 2008 2009 2010 25% percentile 50% percentile Ellinger, 7/20/2011 11 Weathering Unexpected Downturns in Agriculture

Components of Equity Figure 5. Components of Farm Equity 100% 90% 36% 36% 37% 38% 80% 41% 70% 60% 50% 43% 44% 46% 40% 44% 46% 30% 20% 21% 10% 19% 18% 18% 12% 0% 2006 2007 2008 2009 2010 Working Capital Real Estate Other Ellinger, 7/20/2011 12 Weathering Unexpected Downturns in Agriculture

Leverage Changes: 30% Decline in Farmland Prices 0.50 0.45 0.45 0.40 0.35 0.33 0.35 0.31 0.30 0.30 0.30 0.27 0.24 0.25 0.20 0.15 0.10 0.05 0.00 Baseline Young Large Livestock Baseline 30% Reduction Ellinger, 7/20/2011 13 Weathering Unexpected Downturns in Agriculture

Interest Rate Risk: Farmers • Capital values more than cash flows Source: Schnitkey and Sherrick Ellinger, 7/20/2011 14 Weathering Unexpected Downturns in Agriculture

Land Prices: CAP Rates x Cash Rents $6,500 $6,000 $6,000 -$6,500 $5,500 $5,500 -$6,000 Land Value $5,000 $5,000 -$5,500 $4,500 $4,500 -$5,000 $4,000 $4,000 -$4,500 $3,500 $3,500 -$4,000 $3,000 $3,000 -$3,500 $2,500 $195 $2,500 -$3,000 $2,000 $2,000 -$2,500 $169 3.20% 3.70% $145 4.20% Cashrent 4.70% $120 5.20% Cap Rate 5.70% Source: Schnitkey and Sherrick Ellinger, 7/20/2011 15 Weathering Unexpected Downturns in Agriculture

Farm Debt Shares 160,000 Farm Service Agency, 140,000 2,343 Individuals and others, 9,164 120,000 Life insurance Farm Service Agency, companies, 14,246 2,823 Individuals and others, 100,000 11,113 Commercial banks, 80,000 50,338 Commercial banks, 57,027 60,000 40,000 Farm Credit System, 58,423 Farm Credit System, 20,000 39,883 0 Real Estate Non Real Estate Ellinger, 7/20/2011 16 Weathering Unexpected Downturns in Agriculture

How Many Banks Does It Take? % of Commercial Bank Loans to Agriculture Distribution Matters 15 Banks 474 Banks 821 Banks 332 Banks 5,184 Banks 0% 20% 40% 50% 100% Ellinger, 7/20/2011 Weathering Unexpected Downturns in Agriculture

Delinquency Rates: Commercial Banks Delinquency Rate (%) 14 Commercial Real Estate, 12.06 12 Residential Mortgages, 10 9.94 Agr Loans, 9.08 Commercial Real Estate, 8 7.97 Business Loans, 6.37 6 Credit Cards, 5.24 Credit Cards, 4.17 4 Residential Mortgages, Business Loans, 3.01 3.24 Agr Loans, 2.55 2 0 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 Ellinger, 7/20/2011 19 Weathering Unexpected Downturns in Agriculture

Health of Commercial Banks 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 0 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% 0 0 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. Ellinger, 7/20/2011 20 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. Ellinger, 7/20/2011 21 Weathering Unexpected Downturns in Agriculture

Discussion: Weathering Unexpected Downturns Discussion in Agriculture 22