Credit and Risk Management

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Credit and Risk Management
Cal-Med Workshop Sonoma, California October 26,
2007

• Corny Gallagher
• Agribusiness Executive
• Bank of America

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FARM ASSETS / DEBT

• U.S. (billions) 2005 2006 2007
• Real Estate 1,521 1,635 1,858
• Non RE 284 285 311
• Total Assets 1,805 1,920 2,169
• RE Debt 102 109 112
• Non RE Debt 92 98 102
• Total Debt 194 207 214
• EQUITY 1,612 1,724 1,955
• ROE 4.7 3.9 4.4

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FARM INCOME

• U.S. (billions) 2005 2006 2007
• Crops 116 120 136
• Livestock 125 119 140
• Cash Receipts 241 239 276
• Cash Expenses 196 205 222
• Govt. Payments 24 16 14
• Net Farm Income 77 68 87
• USDA

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FOCUS ON CASH FLOW

• The primary source of repayment of short term
  production loans is from the cash flow of the
  current years crops and livestock sales.
• The primary source of repayment of long term RE
  loans is the net income from the property
  pledged.
• Acres farmed times expected yields times
  forecasted prices determines income forecast.
• Less expected cost to produce the revenue
  determines the net income available to service
  debt.

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BUSINESS SUCCESS CHARACTERISTICS NEEDED TO MANAGE
RISK

• Financial Management
• Equity Capital
• Diversification
• Vertical Integration
• Productivity and Technology
• Marketing
• Succession plan - Sustainabliity

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SUSTAINABILITY

• The Code is conceived around the three Es

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Driving Economic Forces in California Agriculture

• People
• Land
• Air
• Water
• Global Competitiveness

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California at Night
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FARMING IN AN URBAN STATE

• Were not the only ones growing ... competing for
  natural resources
• 36 million (550-600,000/year)
• 55 million by 2050
• Need 7 million homes
• 10 million jobs 12 million
• more motor vehicles

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CALIFORNIA DOMINATES U.S. PRODUCTION OF SPECIALTY
CROPS

• Almonds 100
• Pistachios 100
• Walnuts 100
• Processing Tomatoes 95
• Figs, Dates, Olives, Kiwi 100
• Apricots 95
• Plums/Prunes 97
• Grapes 87
• Vegetables Very high percentage

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FARMER MAC

• Farmer Mac is America's secondary market for
  first mortgage agricultural real estate loans.
• Farmer Mac was created by Congress to improve the
  availability of long-term credit at stable
  interest rates to America's farmers, ranchers and
  rural homeowners, businesses and communities.
• Farmer Mac accomplishes its public policy mission
  primarily by purchasing, or committing to
  purchase, qualified loans from agricultural
  mortgage lenders, thereby replenishing their
  source of funds to make new loans.

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FARMER MAC CREDIT STANDARDS AND GUIDELINES

• The borrowers pro forma debt-to-asset ratio
  should be 50 or less, on a market-value basis.
• Debt coverage ratio on the loan from pledged
  assets must be 1 to 1 or better.
• The borrowers pro forma overall total debt
  service coverage ratio should not be less than
  1.25 to 1, including net income from farm and
  non-farm sources
• Pro forma current ratio should not be less than 1
  to 1.

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FARMER MAC CREDIT STANDARDS AND GUIDELINES

• The loan-to-appraised value (LTV) shall not
  exceed 70, although Farmer Mac has established a
  maximum LTV of 75 in the case of qualified
  facility loans.

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UNIVERSITY OF CALIFORNIA COOPERATIVE
EXTENSION2006SAMPLE COSTS TO ESTABLISHAN
ORCHARD AND PRODUCEALMONDS

• SAN JOAQUIN VALLEY NORTH
• MICRO SPRINKLER IRRIGATION

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COST TO ESTABLISH ALMONDSPER ACRE

• 3 YEAR INPUTS 4,400 6,000
• LAND 7,000 15,000
• TOTAL 11,400 21,000
• 2006 SALES 10,000 25,000
• CURRENT NON AG 30,000

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FORECASTED CASH FLOW

• DRIVERS LOW HIGH AVE
• YIELD 1,700 3,500 2,160
• PRICE (10 YR) 0.86 2.48 1.52
• INCOME 1,462 8,680 3,283
• OP COSTS 1,791 3,673 2,000
• NET INC NEG 5,000 1,283

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FORECASTED DEBT SERVICEPER ACRE- RATE 8 -20
YEARS

• DRIVERS LOW HIGH AVE
• COST 10,000 30,000 15,000
• DEBT 5,000 15,000 10,500
• NET INC NEG 5,000 1,283
• PAYMENT 509 1,527 1,070
• COVERAGE RATIO 1.2 TO 1
• MAX LOAN AT 1 TO 1 12,500 PAY 1273

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SMALL AMOUNT OF CAL-MED LAND IN THE WORLD
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HIGH DENSITY OF PEOPLE IN CAL-MED REGIONS
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Bank of America is one of the largest commercial
bank providers of financial services to the food
products industries in the United States.

• More than 15 billion in commitments to the
  industry sector.
• Clients value our industry knowledge and
  expertise as well as our ability to provide a
  complete range of financial products and
  services.
• We provide long term RE loans with flexible
  terms.