Outline

1
Outline

• Class Logistics
• Pictures
• Chapters 1 2
• Uniqueness of Agricultural Finance
• Market Dimensions
• Institutional Characteristics and Developments
• Read Chapter 3 for MondayNotes available by
  Sunday noon

2
Understanding financial markets in agriculture
3
Uniqueness of Agricultural Finance
4
Uniqueness of Agricultural Financing (cont.)
5
Market Dimensions

• Farm Sector Balance Sheet as Context
• Total debt
• Market shares
• Growth rates

6
Farm Sector Balance Sheet size
7
Farm Sector Assets
8
U.S. Farm Sector Real Estate Debt
90.8 Billion Total
9
U.S. Farm Sector Non Real Estate Debt
81.7 Billion Total
10
Illinois Farm Debt, Million
(million)
year
11
Market, Shares Illinois Farm Debt, January 1,
1999
12
Illinois Farm Real Estate Debt
percentage
13
Illinois Non Real Estate Farm Debt
shares
14
Average Annual Growth Rates, 1996-98
15
Financial Markets and Institutions

• Commercial banking
• Farm Credit System
• Agribusiness financing
• Life Insurance Companies
• Government Credit
• FSA
• IFDA
• Farmer Mac
• Equity capital

16
Issues Commercial Banking

• Regulatory change
• Interest rate and pricing
• Geographic liberalization
• Products and services
• Concern that consolidation in banking could
  reduced ag lending
• Reduced sources of funds

17
Commercial Banking (cont.)

• Community Banks
• Strong market niches in agricultural and rural
  banking
• Driven by information, local relationships, and
  personalized service
• Viability of well-managed, strongly capitalized
  banks
• Access to products and services from larger
  banks, regional and national markets, and other
  institutions

18
IssuesFarm Credit System

• Chartered Agricultural Lender
• Government sponsored entity
• Not a government entity
• Issues
• Capital
• Inter-system Competition
• Consolidation

19
Agribusiness Financing

• Oldest form of credit
• Historically strong
• Machinery and equipment
• Some operating credit
• Recent boost and new players
• John Deere
• Pioneer
• Growmark
• Telmark

20
Agribusiness Financing (cont.)

• Competitive factors
• Relationship to merchandising
• Funding cost
• Streamlined credit evaluations
• Geographic dispersion and size
• Customer relationships and information
• Delivery costs
• Regulation Market place
• Partnering

21
Agribusiness Financing (cont.)

• Potential bundling of finance with new, hi-tech
  inputs
• Old idea
• Refueled
• Regulate the unregulated?
• Subject to competition
• No deposits, payments system, monetary policy
  relationship

22
Life Insurance Companies

• Seven companies active in farm real estate
  lending 20 hold farm mortgages
• Operate nationally recent trends to West and
  Southeast
• Prefer large, lower risk loans
• Above 500,000
• Average 684,000
• Greater emphasis on loans to agribusinesses,
  timber and specialty enterprises

23
Government Credit Programs Farm Service Agency
(old FmHA)

• Lender of last resort
• Credit elsewhere test and graduation
• Direct loan programs operating and farm
  ownership loans
• Guaranteed loan programs 90 guaranteed
• Annual appropriations often loaned out
• Emergency loans credit disciplines vs. welfare
• Loan approval process bureaucracy some
  streamlining
• Outlook long-standing, well-conceived program,
  but vulnerable to crises, downturns and political
  whims.

24
Government Credit ProgramsIllinois Farm
Development Authority

• State credit program, comparable to FSA
• Targets young, potentially viable and distressed
  farms and agribusinesses
• Active loan guarantee program
• Works primarily with smaller community banks

25
Farmer Mac

• Securitization concept
• Buy loans from lenders
• Pool purchased loans into security
• Sell the security to investors

26
Equity Capital

• Equity capital dominates farm financial
  structures
• Farm equity is immobile
• Lack of equity markets hampers risk pricing,
  although agricultures systematic risk is low
• New equity channels may arise, reflecting
  changing contractual arrangements in agriculture

27
Terms

• Risk aversion
• Risk premium
• Risk dominance