ABA Agriculture & Agribusiness Financing Subcommittee Meeting

Transcription

1 ABA Agriculture & Agribusiness Financing Subcommittee Meeting Impact of 2012/2013 Drought on Syndicated Agribusiness Finance Transactions and Related Agribusiness Finance Legal Developments Presented by: Arleen Nand, Faegre Baker Daniels LLP Miko Hernandez, Faegre Baker Daniels LLP Daniel Dvorak, Faegre Baker Daniels LLP April 5, 2013

2 North American Drought Background Information 2

3 North American Drought Began Spring of 2012 Most severe and extensive drought in at least 25 years At its peak, covered 80% of the contiguous United States Of area affected, 62% is designated as at least moderate drought (D1) conditions Severe decline in winter snowpack and spring rainfall January 3, 2012 July 3,

4 United States Drought Monitor as of August 2012 August 21, 2012, valid 7 a.m. EDT 4

5 United States Drought Monitor as of April

6 Impact on Commodity Prices Corn Soybeans Price of corn increased 35% from June 18 to August 29, 2012 Both corn and soybeans hit record highs in 2012 Corn above $8.00 per bushel Soybeans above $16.00 per bushel 6

7 Financial Impact Predicted to cause the US to lose $75 $150 billion Estimated $35 billion impact in the Midwest already On track to become the costliest natural disaster in US history Over 2,000 counties across 36 states have been declared primary natural disaster areas as of September 12, 2012 Drought is impacting 70-75% of corn and soybean production; 67% of cattle production Food prices are expected to rise Corn and soybean crops are among the heaviest hit Cattle numbers in US have decreased substantially January 1, 2013 inventories of all cattle and calves (89.3 million head) is at lowest level since January 1, 1952 (88.1 million head) Retail food price increases of 3-4% are expected in 2013 Beef, pork, poultry and dairy products 7

8 Global Effects of Drought Background 8

9 Global Impact Global food prices increased due to reduced US output US export more wheat, corn and soybeans than any other country Over 50% for corn and nearly 50% of soybean market Drought also impacted Kazakhstan, Russia and Ukraine wheat produce Combined these countries produce approximately 25% of world s wheat exports Inflating global wheat prices 9

10 Global Impact Rising middle class around the world has led to growing demand for meat and protein, and countries dependent on inexpensive food stock from US Lower and middle income importing countries with large populations are experiencing social unrest and conflict 10

11 Anticipated Impact Of 2012 / 2013 Drought on Agribusiness Finance as of March

12 Business Operations Grain Handling Decreased yields and merchandising opportunities Fertilizer Aggressive planting anticipated for spring 2013, which may boost spring fertilizer applications Ethanol Anticipate deferred amortization payment requests General Increase in Commodity Prices / Inputs Risk mitigated, to some extent, by crop insurance 12

13 Credit Underwriting Syndicated vs. Bilateral Credit Facilities If a syndicated credit deteriorates as a result of drought-related - anticipate required lender votes on various financial covenant defaults; appetite of commercial banks for increased risk will drive required lender approval Risk Ratings Possible increased risk ratings (and thus, increased reserve requirements) for ethanol credits in particular Since the drought s impact on agribusiness borrowers will vary by geography, the risk rating analysis will vary by geography too. Special Assets Groups For ethanol credits in particular, borderline credits may be moved more quickly to the special assets group / workout divisions of various ag lenders 13

14 Documentation Issues for Agricultural Lenders Rightsizing Capacity Applicable to revolving facilities that fund the working capital needs of agribusiness borrowers Increased Availability Streamlined accordion feature will allow for quick access to credit 14

15 Forward Cash Contracts 15

16 Forward Cash Contracts Forward Cash Contract A transaction in which a seller agrees to deliver a specific commodity to a buyer at some point in the future. For example, farm agrees in writing with a grain elevator to deliver 10,000 bushels of corn on November 1 st. Agribusiness lenders often lend against the value of forward cash contracts as contract receivables Advance rates range from 60-80% depending on a variety of factors, including age of underlying crop. 16

17 Forward Cash Contracts Producer/Seller s likelihood of delivery on Forward Cash Contract can be significantly impacted by drought Buyer has remedies for Seller s failure to deliver (for example, Seller can be made liable for the cost of cover, Buyer can exercise rights of set-off, etc.). Some forward cash contracts specify a particular crop as the subject of the forward sale, and therefore destruction of that crop due to drought or other adverse weather conditions can operate to excuse Seller s performance. Most standardized forward cash contracts do not specify any particular crop (See Conagra, Inc. v. Bartlett Partnership, 540 N.W.2d 333 (Neb. 1995)). 17

18 Printz Bankruptcy Case 2012 Illinois bankruptcy case (In re Robert J. Printz and Julie M. Printz, 478 B.R. 876 (Bankr. C.D. Ill. 2012)). Deals with priority of competing liens held by Trainor Grain & Supply Company (a forward cash contract purchaser and aginput financer) and CNH Capital America (a secured lender) in assets of debtor farmer. Facts: Printz (farmer/producer) granted CNH a security interest in 2009 and 2010 crops, and their proceeds, together with several other asset categories, including accounts, to secure operating loans. Printz also granted Trainor a security interest in 2009 and 2010 crops to secure ag-input loans, and Trainor entered into several forward cash contracts to purchase crops from Printz. 18

19 Printz Bankruptcy Case Facts (continued): Both creditors had perfected their security interest by filing, and CNH held prior filing. When Printz failed to pay Trainor amounts due on ag-input loans, Trainor set off amounts Trainor owed Printz for delivery of crops under forward cash contracts. Contracts each contained right of set off in favor of Trainor. 19

20 Printz Bankruptcy Case Argument and Analysis: CNH argued that it held a prior, perfected security interest in the crops and their proceeds, as well as all of Printz s accounts. Therefore, Trainor purchased crops subject to CNH s security interest, and should not have been permitted to set off amounts owed on forward cash contracts. Trainor argued that because CNH failed to follow the requirements of the Food Security Act by providing Trainor with notice of its security interest, Trainor, as a purchaser of farm products in the ordinary course from a farming operating, took the crops free of CNH s security interest. Court agrees with Trainor s argument, but analysis continues, as Court also holds that FSA provides only that Trainor takes the farm products free of CNH s security interest, but not the proceeds of those farm products, which were applied by Trainor through set off to reduce Printz s loan obligations. 20

21 Printz Bankruptcy Case Argument and Analysis (continued): Court then turns to analysis of Trainor s set off rights under forward cash contracts Trainor argues that CNH, as Printz s assignee with respect to the forward cash contracts, is subject to all of the terms of such contracts between the account debtor (Trainor) and the assignee (Printz), including Trainor s set off rights (UCC 9-404(a)). As a result, CNH s security interest in the Printz s accounts created by the forward cash contracts should be subject to the Trainor s contractual set off rights. 21

22 Printz Bankruptcy Case Argument and Analysis (Continued): Court holds that because CNH s security interest in Printz s accounts arose prior to the existence of the forward cash contracts, CNH did not have a security interest in Printz s accounts arising from the contracts. Court finds that CNH never specifically purchased or took a security interest in the accounts receivable credit by those precise contracts. (emphasis in original). As a result, CNH was not Printz s assignee under forward cash contracts, and is not subject to Trainor s set off rights. Court orders Trainor to turn over proceeds to CNH. 22

23 Printz Bankrupcty Case Takeaways: If lending to a farming operating, carefully follow procedures of Food Safety Act. Though not outcome determinative in Printz case, had CNH properly notified Trainor of its prior security interest in the crops and their proceeds, the Court would never have reached the set off analysis. If accounts form a material portion of collateral pool, continually review related contracts for set off rights, or secure agreement of account debtors not to assert contractual rights or defenses against assignees. Above all: Courts can be unpredictable, and may rely on strained analysis to reach preferred results. 23

24 Related Issues Impacting Agricultural and Agribusiness Finance 24

25 Ethanol Mandate - Renewable Fuels Standard Increased push for regulatory changes relating to EPA ethanol use requirements (in light of increased corn prices resulting from the drought) Renewable Fuels Standard (RFS) requires transportation fuel sold in the US to contain a minimum volume of renewable fuels Renewable fuels are blended into transportation fuel in increasing amount each year, 13 billion gallons in 2012, escalating to 36 billion gallons by 2022 Policy channeled 40% of US corn into gasoline and away from food in % of all food found in the supermarket contains corn Diverted approximately 50% of the US corn supply from animal feedlots to ethanol refineries 25

26 Ethanol Mandate - Renewable Fuels Standard Fight between farmers who grow corn and other farmers who need to buy corn for livestock Livestock producers petitioned to waive or suspend requirement 26

27 Ethanol Mandate - Renewable Fuels Standard EPA unlikely waiver or suspend RFS as petitions must demonstrate that implementation of the mandate itself was causing economic harm not just contributing to it EPA could issue a waiver on its own if it found the RFS to be severely harming the economy or the environment Even without RFS, 1/3 of US gasoline supply must use ethanol to meet unrelated clean air rules in California and in the East Coast No other available substance can oxygenate gasoline as effectively or at its price Political costs too high to abandon RFS Gasoline refinery have been overhauled to rely on ethanol to produce fuel to meet air quality standards Abandoning the program would lead to increased gas prices 27

28 Crop Insurance Farming s like going to Vegas said Jeff Boedeker, a local farmer and rancher based in Waukomis who spends $35,000 a year for crop insurance 28

29 Crop Insurance Federal crop insurance program is a subsidized insurance program The crop insurance program is authorized by the Federal Crop Insurance Act (FCIA). The crop insurance program is administered by the Federal Crop Insurance Corporation (FCIC) FCIC possess a broad range of powers to implement the crop insurance program, including the power to issue regulations, establish prices, terms and conditions for federal crop insurance contracts and to oversee the delivery of crop insurance to eligible producers 29

30 Crop Insurance Drought effect on US farmers minimized by crop insurance 85% of US crops are insured Crop insurance payout As of March 25, 2013, more than $16.1 billion in crop insurance payout has been sent to farmers for 2012 ($10 billion in 2011) Crop insurance is purchased from private insurance companies BUT the federal government subsidizes the premiums by 62% and pick up tabs when the claims exceed the premiums leading to an estimated $12 billion federal tab in 2012 Nineteen states have loss ratios exceeding 1.05 meaning that for every $1 paid in premiums, companies are paying out $1.05 in indemnities Illinois has the highest loss ratio at 3.81 States with high loss ratios include Missouri, Kentucky, Nebraska, Iowa, Indiana, Kansas, South Dakota, New Mexico, New Hampshire, New York, Wisconsin, Texas, Colorado, Massachusetts, Tennessee, Wyoming, Michigan and Ohio Nationally, the loss ratio is

31 Crop Insurance Arguments to maintain crop insurance Manage risk producers need safety net or will not invest large sunk costs into fields Farmers would want disaster aid anyway after droughts or floods so argument that it is more efficient to stick with current plan (no calls for disaster bills) Farmers can only buy insurance that covers from 50 percent to 85 percent of the revenue they would have earned and pay premiums based on their coverage 31

32 Crop Insurance Arguments to stop or curtail crop insurance subsidies Fast growing subsidy (in 2000 federal crop insurance cost was only $951 million) Benefits insurers (industry protection) Encourages farmers to expand into marginal lands and plant crops that might not be viable Fraud Recent $100 million scheme among insurance agents, claims adjuster, brokers and farmers in North Carolina 32

33 Duckworth Bankruptcy Case 2012 Illinois bankruptcy case (In re Duckworth, No (Bankr. C.D. Ill. Mar. 22, 2012)) Deals with priority of competing liens held by State Bank of Toulon ( Bank ) and Michlig AgriCenter, Inc. ( Company ) in crop insurance proceeds of debtor farmer. Facts: Farmer executed promissory notes for a revolving line of credit from Bank. Farmer then granted a security interest in crops and several other asset categories. Farmer also executed an agreement to purchase insurance to protect Bank s interest in the collateral. Bank filed a UCC Financing Statement and a Notice to Buyer of Security Interests Farm Products. 33

34 Duckworth Bankruptcy Case Facts (continued): Farmer executed an agreement for an open line of credit from Company to pay farm operating expenses. Farmer then signed an agreement to secure all debts by granting a security interest in crops and proceeds from crops. Farmer then executed several documents to assign Company his rights under two crop insurance policies. The two crop insurance policies were provided under the federal program administered by the Federal Crop Insurance Corporation. Both insurance policies included a provision that all assignments were required to be on the insurer s form or approved in writing by the insurer. 34

35 Duckworth Bankruptcy Case Argument and Analysis: Company argued that Bank s security interest in the crop insurance proceeds by following Article 9 procedures was ineffective because a federal statute provides the exclusive method for obtaining such security interest. Whether an assignment accepted by a federal crop insurer is the exclusive method by which a creditor may obtain a security interest in insurance proceeds had not been addressed yet by the Seventh Circuit so the Court adopted the reasoning of a decision from the Fifth Circuit, see In re Cook, 169 F.3d 271 (5th Cir. 1999), where the same issue was addressed. 35

36 Duckworth Bankruptcy Case Argument and Analysis (continued): In Cook the Fifth Circuit determined that the Federal Crop Insurance Act contained provisions that expressly pre-empted security interests in the imposition and enforcement of liens. The Fifth Circuit held that FCIA pre-empted state law with respect to the method by which a lien on an insured s right to proceeds under a federal crop insurance policy may be created. 36

37 Duckworth Bankruptcy Case Argument and Analysis (Continued): The Court agreed with the holding and the reasoning of the Fifth Circuit. The Court holds that Bank had no lien against the crop insurance policies or the undisbursed proceeds because Bank did not follow the authorized procedure outlined in FCIA Takeaways: If loan is secured by crop insurance proceeds, then be aware that the FCIA will apply and its provisions will preempt state law. Review insurance policy and comply with the insurance policy assignment provisions to properly secure insurance proceeds. 37