2000 Southern Region Agricultural Outlook Conference

1
2000 Southern Region AgriculturalOutlook
Conference

• September 25-27, 2000
• Atlanta, Georgia
• By Bill Melton

2
Discussion Topic

• Southern Agricultures Current Financial
  Situation
• from
• An Ag Lenders Viewpoint

3
Business Strategy District Structure
AgFirstFarm Credit Bank (including
wholly-ownedsubsidiary Farm CreditFinance Corp.
of Puerto Rico)
27 District Associations Provide credit and
related services to borrowers in 15 states and
Puerto Rico
Borrowers 82,000 farmers, agribusinesses and
rural homeowners
4
Business Strategy AgFirst Farm Credit Bank
There was no annotation for the original map
picture this one was ungrouped, but the original
page is in DISCARDS
Today, AgFirst is the largest single provider of
credit to agriculture in its 15 state region (and
Puerto Rico) through its 27 (1)affiliated
Associations, which are in turn owned by
approximately 82,000 farmers, agribusinesses, and
rural homeowners
AgFirsts growth has led to greater geographic,
customer, and commodity diversification
(1) To be consolidated to 23 Associations as of
January 1, 2001
5
Business Strategy AgFirst FCB Business Profile
Total earning assets 11.1 billion as of 6/30/00

• Direct Lending
• Line of credit extended to member associations
  under General Financing Agreement (GFA)
• Investments
• Liquidity reserve
• Diversify income source
• Participations
• Provide overlines to member associations
• Provide a national reach
• Diversify income source
• Secondary Mortgage Marketing Unit (SMMU)
• Facilitates loans through the FNMA and FAMC
• Diversify income source
• Support Services
• Appraisal review, Portfolio Management, Credit
  Policy Guidance, Information Services,
  Accounting, Marketing, Human Resources,
  Insurance Services

Investments20.4
DirectLending 67.2
SecondaryMortgage2.4
Participations 10.0
Total earning assets 8.9 billion as of 12/31/95
Investments17.0
Participations 8.0
DirectLending 75.0
6
Business Strategy Association Portfolio
Borrower Profile
AgFirst's credit exposure is widely dispersed
through 27 associations that serve 82,000
borrowing entities

• Association customers, while primarily rural and
  rooted in farming, are also predominantly
  part-time farmers and rural homeowners
• Full-time farmers' incomes are significantly
  supported by off-farm income
• Customer size for both full-time and part-time
  farmers indicates a large number of small balance
  loans, which significantly mitigates agricultural
  commodity/industry credit risk

Number of Borrowers 32,000 38,000 12,000 Median
Off-Farm Income 28,000 55,000 45,000 Median
Farm Credit Loan 66,000 36,000 32,000 Median
Total Liabilities 202,000 100,000 61,000 Median
Net Worth 473,000 230,000 74,000 Median Debt
Net Worth .431.00 .431.00 .821.00 Median
Spread on Loan 1.90 2.00 1.30
Customer Segment Full-Time Farmer Part-Time
Farmer Rural Home Owner
Source AgFirst Marketing Department
7
Status of AgFirst FCB

• Combined Income of AgFirst and Affiliated
  Associations as of December 31, 1999 218.2
  Million
• Almost identical to previous years earnings
• Combined income as of June 30, 2000110.5
  million
• An increase of 10 million from the previous year

8
Status of AgFirst FCB

• 11th Consecutive Year Where Earnings Have Been
  Stable or Increasing Over Previous Year
• Despite 11.5 million in merger expenses year to
  date, we expect 2000 earnings to exceed the 1999
  level
• Anticipate an additional 2 million in
  merger/consolidation before year end

9
Status of AgFirst FCB

• Paid Patronage of 1.2 billion to Our
  Stockholders/Borrowers in the last ten years
• Gross Loans of 10.1 Billion as of 8/31/00
• 2.8 average growth for the past 4 years
• Growth in loan volume was flat during the past 12
  months but is beginning to rebound
• As of August 31, 2000, rate of growth is 2.23
• Total Assets of 13.0 Billion as of 8/31/00

10
Credit Conditions AgFirst District

• Permanent capital levels at June 30, 2000,
  averaged 17.6.
• The allowance for loan losses total 261.3
  million and represent 2.85 of total loans.
• Asset quality has remained stable through August
  31, 2000.

11
Association Portfolio Loan Classification Trend
12
Credit Conditions AgFirst District

• Earnings remain strong. As of June 30, 2000, ROA
  averaged 1.99 and ROE averaged 10.08.
• Loan growth increased to 2.23 as of August 31,
  2000. The growth trend is expected to flatten
  out in 2001.
• Drought conditions were most severe in the deep
  South states.

13
Association Portfolio - Loan Size Dist.
Loan Size Distribution by Dollar Volume
Loan Size Distribution by Number of Relationships

• In the district, there are 77 loans that exceed
  10 of the holding Associations capital
• The 77 loans are classified
• 66 Acceptable
• 10 Special Mention
• Only 2 Associations have more than 1 Special
  Mention
• 1 Substandard

• Loan size tracks agricultural demographics
• Significant number of part-time farmers
• Reliance for repayment on non-farm income

14
Market Overview AgFirst District Market Position
Market Share of Non-Real Estate Agricultural Debt

• Dominant lender to agriculture, agribusiness and
  rural residents in the eastern US
• Successfully increased market share through
  several agricultural credit cycles while
  improving credit quality
• A balance between full-time and part-time farmers
  consistent with demographics
• Association originated loan portfolio at 6/30/00
  has a weighted average maturity of 7 years
• Weighted average maturity has declined over time,
  indicative of focus on growing the non-real
  estate portfolio

Source USDA
Association Originated Loan Portfolio
1995 1996 1997 1998 1999 Real Estate
Portfolio 54 52 50 46 47 Non-Real Estate
Portfolio 46 48 50 54 53 Weighted Average
Maturity (yrs) 8.7 8.1 7.7 7.3 7.0
15
Association Portfolio Commodity Diversification
Total Portfolio 9.6 billion
As of June 30, 2000.
16
Association Portfolio Geographic Distribution by
State
17
(No Transcript)
18
Farmers now have a new crop . . . Its called
Mailbox Farming!
Check is in the mail!
19
Market Overview U.S. Farmers Net Cash Income
59.3
59.1
55.2
58.5
57.5
52.8
52.6
54.9
56.8
50.4
51.1
55.3
Preliminary Forecasted Average of
1990-1998
Source USDA 1998
20
Market Overview Government payments as a of
Farm Net Income by Territory
Source USDA 1998
21
Recipients of Government Payments
22
Net Cash Income 8 Principal Crops
( Billions)
Without Government Payment
Crop Year
23
Effect of Government Payments
Average Effective Prices, 1999/2000
Crop Forecast Farm Price Avg. Effective Price 1/
Corn (/bu) 1.90 2.70
Wheat (/bu) 2.55 4.27
Soybeans (/bu) 4.75 5.83
Cotton (/lb) 0.46 2/ 0.79
Rice (/ewt) 6.00 11.95
1/ Production value plus government payments
divided by production. 2/ August-November average
upland cotton price.
24
The Dilemma

• Southern States hardest hit by drought represent
  barely 2 of the U.S. corn average and less than
  9 of the U.S. soybean.

Source AgWeb.com
25
Backdrop for the AgFirst Outlook

• Rising Interest Rates
• Weather Pattern with Extremes
• Low Prices for Many Commodities
• Uncertain Farm Policy for the Long Term
• Loan Demand is Weakening in Some Areas
• Energy Cost have Soared
• Massive Transfer of Wealth Occurring
• IDEAL TIME for Making Poor Decisions!

26
Market Overview OutlookOverview by Commodity
Type
27
Outlook...

• Impact of Stress in Ag Economy Will Not Be Borne
  Equally
• Generally some commodities will always be in its
  down cycle
• This year it is broilers, eggs and dairy
• Regional, the Eastern U.S. is more diverse in its
  production agriculture and less dependent on
  Government support
• Free Trade is Critical to a Healthy Ag Economy
• NAFTA taking hold with Canada and Mexico, our
  best trading partners
• A very positive sign for Ag was the permanent
  Most Favored Nation trading status voted for
  China
• The brightest spots to point to in 2000
• A robust general economy that producers a
  Government surplus
• 24.3 billion in Government assistance already
  approved

28
Outlook

• Continuation of Consolidations within the
  Production Side Processing/Marketing Sector
• Poultry Livestock
• Continuation of Strategic Alliances and Long Term
  Contracts Between Producers and Food Companies
• Tobacco . . . Finally!
• Nursery/Greenhouse Production

29
Outlook

• Continued Consolidation in Banking including the
  Farm Credit System
• Significant merger activity among associations
• 23 associations by year end down from 40 two
  years ago

30
Outlook

• Difficult to impossible to get large confined
  livestock poultry facilities permitted
• Environmental, Land Use, and Food Safety
  Regulations Strictly Enforced
• Interest rates have risen sharply since June 1999
• Energy prices will be a large factor in
  subsequent adjustments
• The Fed appears to have achieved a Soft Landing

31
Early Warning Signals

• Are the Statistics Lying of Just Lagging?
• Low Delinquencies
• Normal Charge-Offs
• Few Foreclosures
• Stable Asset Quality

32
Early Warning Signals

• Net Farm Income buoyed by Government Payments
• Creates a false Ag Economy
• Ag Real Estate Has Held its Value or Risen in
  Value
• Dilemma is that higher land values make price of
  product uncompetitive. Example 4 to 1
  difference in price of acre in Iowa and Brazil.
• Level of Debt Held by Farmers Not Substantially
  Higher, but Becoming Increasingly Dependent on
  Government Assistance for Repayment Capacity

33
Predictions

• East Coast Agriculture Will Fare Better Than the
  Midwest
• Prices for Broilers, Eggs, Dairy and Timber Are
  All Being Negatively Impacted by Supply
• Over-Production Will Again Hurt Hog Prices and
  Keep Dairy Profitability Very Low
• Over-Production will Continue to be a Problem for
  U.S. Agriculture

34
Troubling Signs for Lenders

• Pattern of flipping land by speculators
• Owners cashing out
• Non recourse lending
• No skin in the game 100 financing
• Expansion without regard for business cycle

35
Predictions

• Another Round Of Shake-Out For Farmers and Ag
  Lenders
• Advances in Biotechnology will Ensure Food Supply
  is Not Diminished by Departing Producers
• Consumers may pay up for GMO free products
• In the Long View, Agriculture will Remain Viable
  Profitable for the Low Cost Producers

36
2000 Southern Region Agricultural Outlook
Conference

• Thank You!