Jason Henderson Vice President and Branch Executive Federal Reserve Bank of Kansas City Omaha Branch January 27, 2010

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1 Jason Henderson Vice President and Branch Executive January 27, 2010 The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

2 The recovery is underway, but risks remain. Ag lending remains robust. Risks to agricultural lending.

3 Real GDP Growth Annual percent change Federal Reserve Projection Central Tendency U W V L Source: Bureau of Economic Analysis Federal Reserve Board of Governors

4 Index Financial Stress Index Source: Federal Reserve Bank of Kansas City

5 Percent Charge off and Delinquency Rates on Commercial Real Estate Loans Source: Federal Reserve Board of Governors

6 Commercial Mortgage Debt Outstanding by Type of Institution Billion dollars Source: Federal Reserve Board of Governors

7 The recovery is underway, but risks remain. Ag lending remains robust.

8 Percent Average Return on Assets (Third Quarter) Source: Board of Governors of the Federal Reserve and FDIC Agricultural banks are banks with agricultural loans accounting for 14% or more of their loan portfolio. Small commercial banks are banks with less than $500 million in assets

9 Total Volume of Non Real Estate Loans to Farmers Billions of Dollars Non Real Estate Loans to Farmers (Number and Average Amount) Millions of Loans Thousands of Dollars Average Loan Amount Number of Loans Source: Federal Reserve Agricultural Finance Databook

10 Diffusion index Farm Capital Spending (Tenth District) Source: FRBKC Agricultural Credit Survey Note: 2009:Q4 data are preliminary with 90 percent of typical respondents reporting

11 Percent Charge off and Delinquency Rates on Agricultural Loans Source: Federal Reserve Board of Governors

12 Collateral Requirements and Loan Maturity on Non Real Estate Loans Diffusion Index Months Average Maturity of Non Real Estate Loans U.S. (Right Axis) Collateral Required Tenth Federal Reserve District (Left Axis) Source: Federal Reserve Bank of Kansas City and Agricultural Finance Databook

13 Profits will demand and profits rebound if the recovery is sluggish?

14 Percent U.S. Unemployment Rate Recessions Source: Bureau of Economic Analysis

15 U.S. Per Capita Expenditures on Beef, Pork, Poultry, and Milk Products Percent change Calculations based on Bureau of Economic Analysis data * The National Bureau of Economic Research indicates the recession started in Dec At the time of publication, the end of the recession has yet to be specified.

16 Real Net Exports of Goods and Services Value of the Dollar Billion dollars (2005=100) Index Value of the Dollar (right axis) Real Net Exports (left axis) Source: Bureau of Economic Analysis

17 Billion dollars U.S. Agricultural Exports Source: USDA

18 Dollars per hundredweight U.S. Livestock Prices and Breakeven Costs Breakeven Costs Cattle Price Breakeven Costs Hog Price Source: USDA and Iowa State University

19 Profits will demand and profits rebound if the recovery is sluggish? Leverage will farmers limit debt growth?

20 Percent of GDP Domestic Debt Outstanding Financial Business Household Nonfinancial Business Source: Federal Reserve Board of Governors

21 Percent U.S. Debt Repayment Capacity Utilization Farmers do not have enough income to service debt Farmers do have enough income to service debt Source: USDA

22 Debt to Asset Ratio Debt to Asset Ratio by Farm Production Sector Source: USDA Tobacco Cotton Peanuts Federal Reserve Bank of Kansas City Omaha Branch

23 Profits will demand and profits rebound if the recovery is sluggish? Leverage will farmers limit debt growth? Collateral will farmland values hold?

24 Cropland Values in Federal Reserve Districts Dollars per acre Source: Federal Reserve Banks of Kansas City, Minneapolis, and Dallas

25 Profits will demand and profits rebound if the recovery is sluggish? Leverage will farmers limit debt growth? Collateral will farmland values hold? Counterparties how do producers identify, document, and manage counterparty risk?

26 Profits will demand and profits rebound if the recovery is sluggish? Leverage will farmers limit debt growth? Collateral will farmland values hold? Counterparties how do producers identify, document, and manage counterparty risk? Interest rates when and how high will interest rates rise during the recovery?

27 Percent Average Interest Rates (Tenth Federal Reserve District) Operating Loans Real Estate Loans Source: Federal Reserve Bank of Kansas City

28 Central Bank 1 2 Short term interest rates Bank Reserves 3 Bank Credit Excess Reserves Long term Interest rates Economic activity Source: Gordon Sellon (2003) Monetary Policy and the Zero Bound: Policy Options When Short Term Rates Reach Zero Economic Review

29 Billion Dollars Federal Reserve Balance Sheet: Assets Source: Federal Reserve Board of Governors

30 Percent Fed Funds Rate and Futures Source: Federal Reserve Board of Governors and CME Group

31 The recovery is underway, but risks remain, especially in commercial real estate. Ag banks are performing better than their peers, but risks are rising. Banks are providing credit to agriculture, but standards are tighter with higher risks. Macroeconomic forces could drive ag markets and lending in the year ahead.

32 For More Information Federal Reserve Bank of Kansas City Omaha Branch