2. 2
Overview
Share my thoughts regarding the current situation in Financial
Services, also specific to the swine industry
This is a volatile, fluid situation, getting more negative
Good chance that I will be wrong
Discuss Ag Lenders
Background
Lender’s perspective on Agriculture Lending
Before we get into that I would like to put into my perspective
some issues and impacts the global economy has:
Here are some quotes and predictions from the last year
3. 3
Worse Quotes of 2008
“I think this is a case where Freddie Mac and Fannie Mae are
fundamentally sound. They’re not in danger of going under I
think they are in good shape going forward.”
Barney Frank (D-Mass) House Financial Services Committee Chairman
May 9, 2008
Two months later, the government forced the mortgage giants into
conservatorship and pledged to invest up to $100 billion in each.
4. 4
Worse Quotes of 2008
“The market is in the process of correcting itself.”
George W. Bush in a March 14, 2008 speech
For the rest of the year, the market kept correcting, and correcting, and
correcting.
5. 5
Worse Quotes of 2008
Existing-Home Sales to Trend Up in 2008 – Headlines of a
National Association of Realtors press release 12/09/2007
On 12/23/2008, the group said November sales were running at an
annual rate of 4.5 million – down 11% from a year earlier – in the worst
housing slump since the depression
6. 6
Worse Quotes of 2008
“I think you’ll see (oil prices at) $150 a barrel by the end of the
year”
T. Boone Pickens, June 20, 2008
Oil was then around $135 a barrel. By late December, it was below $40.
7. 7
Worse Quotes of 2008
“In today’s regulatory environment, it’s virtually impossible to
violate rules.” - Bernard Madoff, money manager 10/20/2007
About a year later, Madoff – who once headed the Nasdaq Stock Market
– told investigators he had cost his investors $50 billion in an alleged
Ponzi scheme.
8. 8
Worse Quotes of 2008
“Never let a serious crisis go to waste. What I mean by that is
it’s an opportunity to do things you couldn’t do before.”
White House Chief of Staff – Rahm Emanuel November, 2008
10. 10
Worse Quotes of 2008:
An email from a customer in late 2008:
Dear Mr. Bang;
If I receive a returned check marked “insufficient funds” is that
referring to my business or your bank?
Thank you;
11. 11
Recession
Historically, recessions occur when business over-leverages
during good times and pulls back on employment and
investment when conditions turn.
This time, over leveraged consumers caused the recession.
Households are struggling with first mortgages, home equity
lines of credit, student loans, credit card debt, vehicle loans and
leases and other consumer loans.
The root of the problem is the housing boom & subsequent bust
14. 14
The Housing Issue
Mark Zondi – Chief Economist with Moody’s Economist
12 Million homeowners have mortgage debt greater than their home
value at the end of 2008
15 million “sketchy” mortgage loans made between 2005 and 2007
• Of these, 40% or 6 million loans will go through foreclosure process
Home values are still falling
Mortgage Crisis Waves
• 1. Flippers – 2006
• 2. Subprime with ARM’s repricing in 2007
• 3. Negative Equity and Income Disruptions
15. 15
The Housing Issue
Causes
Everybody was doing it
Leverage
Inconsistent and inadequate regulation and oversight
• Mortgage-backed securities
Divided so many times that securities were AAA rated.
Lender > Investment Bank > Rating Agency > Investor
Forecast of never ending price escalation (self delusion)
• Anyone with a ruler could predict that real estate values were going
to continue to go up
Availability of Credit
• Foreign capital
• Accommodative Monetary Policy
16. 16
Housing Crisis Causes
Investment Banks went public, adding leverage
Solomon Brothers
Merrill Lynch
Bear Stearns
Morgan Stanley
Lehman Brothers
Goldman Sachs
Once upon a time there were brothers named
Solomon and brothers named Lehman
19. 19
Impact of Economic Recession
Consumers are deleveraging
Lower purchases – increase savings
1st time in 50+ years household debt declined in Q3 2008
Combination of bank conservatism and declining credit worthiness
Defaults increasing
Non-bank providers (e.g. mortgage companies) exit as market refuses to
fund
Corporations reduce borrowing
Choice
Capital Markets less accessible
Combination of bank conservatism and declining credit worthiness
21. 21
Impact of the Economic Recession
Think about this!
The nation’s largest credit card issuer (MBNA)
The nation’s largest home mortgage company (Countrywide)
The nation’s largest investment house (Merrill Lynch)
Were all recently acquired by a large US Bank
22. 22
Focus on Agriculture
Beef Feedlot
Cattle Fax indicates that feedlot losses were record large in 2008, near
$150 per head, with current losses near $250 per head, assuming no risk
management
Dairy Producer
$10.78 class III Milk in January, USDA forecasts $9.70 to $10.40 for
2009 vs. $14.65 average in 2008. (Predicts lowest prices since 1978)
Broiler Industry
Cleveland Research indicates broiler processors made a profit in three
weeks during 2008. The industry is bloodied, but reduction in inventory
has produced some margins in early 2009.
Swine Industry
Significant losses in 2008 amounting to $21.51 per head (Lawrence –
ISU)
Using the same data, in the three years (2006-2007-2008) producers lost
money - $0.77 per head
26. 26
Who Lends to U.S. Production Agriculture?
Direct Lenders
Farm Credit System
• 99 Farm Credit Associations in the U.S.
• 5 Farm Credit Banks
Commerical Banks
• National Banks
• Regional Banks
• Community Banks
Non-Banking Entities
• Suppliers
• Insurance Companies
Secondary market for agriculture mortgage loans
Farmer Mac
28. 28
Commercial Banks
Top 5 U.S. Agricultural Commercial Banks
Wells Fargo
Bank of America
Bank of the West
US Bank, NA
Rabobank
Many others
Largely funded by:
Deposits
Fed fund borrowings
Bank to bank loans
29. 29
Farmer Mac
Federal Agricultural Mortgage Corporation
Farmer Mac is a stockholder-owned instrumentality of the U.S. chartered
by Congress to establish a secondary market for:
• Agricultural real estate
• Rural housing mortgage loans
• Rural utilities loans
Total assets (loans) of about $3.0 billion
Farmer Mac I – Secondary lending to agricultural loans originated by:
• Commercial Banks
• Farm Credit System institutions
• Credit Unions
• Insurance Companies
• Mortgage Bankers
30. 30
Farmer Mac Programs
Farmer Mac I – Secondary lending to agricultural loans
originated by:
Commercial Banks
Farm Credit System institutions
Credit Unions
Insurance Companies
Mortgage Bankers
Farmer Mac II – Secondary lending on the USDA guaranteed
portion of loans
FSA – Farm Ownership and Farm Operating guarantees
Rural Development’s Business and Industry guarantees
31. 31
Farmer Mac Underwriting
Loan to Value
New Facilities <75%
Existing Facilities <65%
Maximum Exposure - $15 million
Total Debt Coverage - >1.10
Current Ratio - >1.00
Leverage <60%
Term: 10 or 12 years
Amortization: 10 or 12 years
Other
Must be contracted with a processor for the term of the loan
Must be non-cancelable and assignable to FAMC
All FAMC underwriting standards must be met
Operation must conform to all environmental rules and regs
32. 32
Ag Lender Issues
Impact of “deleveraging” US balance sheets will impact all
Consumer spending declining sharply
• Inability to service current debt load
• Reduction of net worth (home value / investments)
• Fear of future
Business spending has dramatically fallen in an attempt to deleverage
their balance sheet
Bank balance sheets
• Tier One Capital (Tangible Equity / Risk-based assets)
• Lender’s are attempting to guard and build capital
33. 33
Ag Lending
It is a new world
Syndicated loan market
• Dramatically reduced in the 4th Quarter of 2008
Participation in “club deals” has been made significantly more challenging
• Reflects the changing strategy in the lending world
• Capital preservation to make sure you can take care of clients
Customer lending
• Fewer or no exceptions to loan policies
• Change from growth model to risk management model
Challenges in getting a lender to take on a new customer when
most are trying to figure out how to take care of their current
customers needs.
34. 34
Typical Swine Financing
Biggest changes:
Larger deals over > $30 million aggregate are harder to get done
• Participating lenders are harder to find
Exception to lending policies are going to be rarer
• Working capital
• Owner Equity
• Debt Service Coverage Ratio
• Personal liability
Interest Rates
• Prime rate adjusted loans are probably history (for a while)
• Spread to Libor is up about 100 to 150 basis points over a year ago
35. 35
Pork Industry
Strengths / Opportunities
Efficient low-cost pig production relative to the rest of the world
Efficient low-cost pork processing relative to the rest of the world
Reduced trade barriers, growing exports
Strong U.S. per capita demand through recession, historically
Weaknesses / Threats
Reduced disposable consumer dollars
Difficulty in controlling pork supply
Ethanol production’s demand for grain
Environmental / Political pressure on the industry
Threat of foreign animal disease that may interrupt exports
36. 36
Defensive Strategies
Continually update your budget / projections
Analyze liquidity and equity after projected losses
Review loan covenants and communicate with your lender
Take action early – soon – now!
Watch for opportunities to lock in profits
Reduce risk exposure if you cannot afford the exposure
May be behind us, locking in a loss is always difficult
Analyze Debt Structure
Leverage or re-leverage fixed assets
Structure for “worst case” as it may be difficult once there
Sell underutilized assets
Or reduce contract payments
37. 37
Watch for indicators
Demand, domestic and imports
Sow liquidation in North America
Canada 1/01/09
• Breeding Herd down 107,000 sows (7.1%)
• Market Inventory down 1,302,000 head (10.6%)
United States 12/01/08
• Breeding Herd down 152,000 sows (2.4%)
• Market Inventory down 1,317,000 head (2.1%)
North America
• Breeding Herd down 259,000 sows (3.3%)
• Market Inventory down 2,619,000 head (3.5%)
Packer / Processor profitability
Slaughter capacity changes
Cold storage reports
Imports of Canadian Pigs
Feeder imports are 516,115 through 2/07/09, down 31% from 2008
Market hogs and sows are 141,036 through 2/07/09, down 66% from 2008