Finding the New, New Normal in Agriculture

Transcription

1 Finding the New, New Normal in Agriculture Policy. Economy. Practices John M. Blanchfield 2016 Utah Bankers Ag Outlook and Conference January 28, 2016

2 New Congress, New Ag Leadership With the 114 th Congress, leadership of the House and Senate Agriculture Committees changed. House Ag Committee Chairman is K. Michael Conaway, (R-TX) and Chairman of the Senate Ag Committee is Pat Roberts, (R-KS). Mr. Conaway is in his 6 th term. He is a CPA. Mr. Roberts served 8 terms in the House, and was first elected to the Senate in 1996.

3 Policy 2014 Farm Bill in place farmers are still learning the system 23,000 eligible dairy farmers pulled $100 out of their pockets to sign up for dairy price margin protection. 23,000 did not. ARC/PLC decisions were made by April 7, This was tough because it is a 5+ year decision SNAP program spending down some, but still going to be the centerpiece for reform efforts on the Republican side Administration seems to be willing to use crop insurance subsidies as a bargaining chip on any SNAP reductions 2016 is a Presidential election year. Don t expect much action in ag

4 Policy Crop Insurance allies have rallied to fight any subsidy reductions (Farmer 20%, Feds 80% is current policy more or less). Crop Insurance survived 2016 budget fight Big question is: Is the 2014 Farm Bill robust enough for a downturn? First ARC/PLC payments didn t arrive until October payments not until October 2016 and they should be big, but Farm Bill has some quirks that will result in declining payments over time if prices continue to stay depressed.

5 How has Crop Insurance Performed over the last 9 Years? farmdoc Daily, University of Illinois, Professor Gary Schnitkey. June 2, 2015 Lost money Made money

6 Federal Crop Insurance Costs Will Continue to be a Target for Budget Cutters Source: GAO Report: Federal Crop Insurance: In Areas With Higher Crop Production Risks, Costs are Greater, and Premiums May Not Cover Expected Losses. Report released 2/15

7 The SNAP Program Will Continue to Occupy the Attention of the Agriculture Committees We have to create an urban-rural alliance to pass the next farm bill that is not based on SNAP. K. Michael Conaway, Chairman House Agriculture Committee February 3, Quoted by DTN.

8 What did farmers in Utah choose? ARC vs. PLC Sign Ups. Utah went PLC by 82% Source: farmdoc daily, University of Illinois, Schnitkey, Coppess, Paulson and Zulauf. June 16, 2015

9 Where did crop production go? Wheat did almost a 50/50 between ARC and PLC Source: farmdoc daily, University of Illinois, Schnitkey, Coppess, Paulson and Zulauf. June 16, 2015

10 What Did the 2014 Farm Bill Pay in Crop Supports in 2015? $5.201 Billion paid through December ,000 farms got some money 9 states received more than $200 Million, 14 states more than $100 million ARC-CO was the winning hand in 2015 Corn was the winning crop with $3.75 Billion paid, 71% of all the 2015 payments made under the 2014 Farm Bill Source: USDA, Farm Service Agency john.blanchfield@verizon.net

11 What Did Utah Get Out of the 2014 Farm Bill in 2015? $115,000 from PLC (no PLC payment on wheat) $2,706,341 from ARC-CO Three (3) farms got PLC 1,070 farms got ARC-CO Compare to Iowa where ARC-CO paid $908,914,323 to 118,506 farms. Iowa was the #1 recipient of Farm Bill Payments in 2015 Source: USDA, Farm Service Agency

12 Farm Economy Headlines Net farm and net cash income declines in 2015 Second year in a row of decline (is there a bottom?) No region escapes income decline in 2015 Leveling, or declining farm real estate values 2014 Farm Bill payments didn t show up until October payments not until October 2016 How big is the farmer cash reserve, and how long to burn through it?

13 Is it Deja or Is it Vu? Over 87 years of data, 2015 net farm income is now estimated to be the 12th lowest. In other words, in 87 years (1929 to today) there have been 75 years with inflation adjusted net farm income higher than the current 2015 estimate. Only two other years have experienced real net farm income declines more significant than 2015: -46% in 1980 and -42% in Source: David Widmar and Brent Gloy, posted August 31, 2015

14 New Numbers in February Including 2016 Estimate Net cash income down 21% Net farm income down 36% - largest drop since 1983 Source: USDA, Economic Research Service. 8/25/15 release

15 No Region Escapes Income Declines in 2015

16 Farming s Fortress Balance Sheet Kevin Patrick, ERS. Outlook Presentation 2/19/15

17 One Major Expense that Is Not Expected to Decline yet. Family Living/Acre Professor Gary Schnitkey, University of IL 2014 Illinois Farm Economics Summit December, 2014

18 What is Happening With Farm Debt? Farm Debt at Commercial Banks. Percent Change from Previous Year Federal Reserve of Kansas City Ag Finance Databook July, 2015

19 Outstanding Bank Credit to Farmers Note Surge in 2014 $ Billions Farmland Loans Farm Production Loans $38 $41 $45 $48 $53 $57 $64 $67 $68 $69 $74 $78 $84 $47 $47 $49 $52 $54 $57 $60 $60 $59 $61 $67 $71 $ Source: FDIC

20 How Long Does This Trend Last? Non Real Estate Secured Farm Loan Interest Rates Federal Reserve Bank of Kansas City Ag Finance Databook July, 2015

21 Think There is any Downside Risk Here? Utah +49% Rabobank AgFocus July

22 Iowa: 2015 was second year in a row that prices declined. Prices for all land declined 3.9% from Iowa land values off nearly 13% from 2013 peak of $8716 per acre. Released on December 14, This survey has been done annually by Iowa State University since 1941 Source: Iowa State University, Center for Ag and Rural Development

23 USDA projects a 2015 increase in payments as a result of lower crop prices In 2005 net cash income was around $85 billion. About 30% was from payments. Farmers owed $100B to banks Net cash income is projected at $89 billion. Payments will be about 14% of net cash income. Farmers owe $162B to banks.

24 Deja Vu Anyone? Rob Johansson, Acting Chief Economist, USDA. Outlook Presentation 2/19/15

25 China Slowdown Will Mean A Lot to US Agriculture Rob Johansson, Acting Chief Economist, USDA. Outlook Presentation 2/19/15

26 Best Practices From the Regulator s Perspective Constructively working with borrowers often benefits the bank and the borrower. Lending decisions that are not publicly perceived as favorable to the community may have a significant effect on the bank s Ag lending activities. Comptroller s Handbook, Agricultural Lending. Issued May 28, 2014 John.blanchfield@verizon.net

27 Align Policy With the Situation: the Regulator s Perspective A bank s Ag Loan Policy should address: Ag lending objectives and risk appetite Acceptable types of Ag loans and lending territory Underwriting standards Ag credit administration Pricing, structure, covenants and documentation How loans are to be serviced Risk mitigation practices How/who the department is supervised Comptroller s Handbook, Agricultural Lending, pages 8,9 OCC. May 28, 2014 John.blanchfield@verizon.net

28 What did the Banking Industry do Following the 1980s Crack-Up? A generation of ag bankers dedicated themselves to making changes to farm finance to mitigate a repeat of what they went through Collective action, facilitated by banking associations, was how they did it (and how changes can still be made today) The collapse of Farm Credit in 1987 was a catalyst Banking industry losses in the $3+ billion range was another The creation of Chapter 12 was another Bankers ultimately won the development of the secondary market for farm real estate mortgages, created farm financial standards, and developed more effective USDA credit guarantees John.blanchfield@verizon.net

29 Creation of a Secondary Market For Farm Mortgages. Farmer Mac Was created because bankers demanded it, and because there was an opportunity in 1987 when FCS failed and needed Congressional bailout The Crown Jewel in the 21 st Century Ag Lender s tool box Provides credit and interest rate risk mitigation In portfolio guarantees may become the ultimate insurance against a bumpy real estate ride going forward Fundamentally changed how banks approach the real estate financing challenge, and continues to change this business 165 sellers sold over 900 loans in 2014 Much more capacity but don t wait too long John.blanchfield@verizon.net

30 Farm Financial Standards Effort started in 1989 by bankers to enable the secondary market for farm real estate mortgages to get off the ground Has evolved way beyond the original vision Led to the development of farm financial analysis tools like WebEquity, FinPack and others Coincided with Al Gore s invention of the internet Financial management accounting for producers Better financial benchmarking tools like FinBin and others John.blanchfield@verizon.net

31 More Effective USDA Credit Guaranty Programs Many positive changes brought about by bankers and USDA officials who were determined to improve the program after the 1980s FSA guarantees now more than $14 billion outstanding. 35,000+ borrowers Loan losses negligible, and have been Maximum guarantee now $1.392 million (10/14) Secondary market is robust Many servicing options are hard baked into the loans (reschedule, ream, deferral, partial loss claim) PLP program was a major achievement that continues to be underutilized by bankers John.blanchfield@verizon.net

32 The Pocket CMS. How to become a PLP with FSA A bank s CMS should address: Ag lending objectives and risk appetite Acceptable types of Ag loans and lending territory Underwriting standards Ag credit administration Pricing, structure, covenants and documentation How loans are to be serviced Risk mitigation practices How/who the department is supervised, and who is the lead FSA lender Comptroller s Handbook, Agricultural Lending, pages 8,9 OCC. May 28, 2014 With changes by presenter. John.blanchfield@verizon.net

33 Best Practices for You Be a relentless communicator to management about your farm loan portfolio Make sure you understand the bank s policies for all situations Don t let your customers go dark on you To your customers, be a provider of options to help them meet their financial challenges Facilitate farm operator discovery Practice empathy the ability to understand the feelings of others Be inspired by someone or something John.blanchfield@verizon.net

34 The Small Print PRESENTATION CONTENT DISCLAIMER The information contained in this presentation is for informational purposes only and is based on the presenter s personal opinions and interpretations of marketplace data, as well as the presenter s own professional work experience. On that basis all information included herein is presented AS IS without warranty or liability of any kind associated with any party s use of, or reliance on the presented content, and presenter accepts no responsibility for any loss or damage of any kind or nature resulting from a party s reliance on or use of such content. To the best of my knowledge, all information included in this presentation that is not my own unique work product resides in either the public domain, or has been attributed to the proper source with regard to ownership. With regard to information found and used under a public domain assumption it is never possible to ascertain with 100% certainty that proper attribution of ownership has ever taken place, but it is the presenter s intention to not knowingly infringe any copyright or other ownership right of any party. In the event that any information used by presenter in this presentation on a public domain basis (and found by presenter without attribution) is later determined to have inadvertently violated the intellectual property rights of any third party, presenter would ask that the party asserting such issue immediately contact john.blanchfield@verizon.net whereupon such notice presenter would contact the copyright holder to request full permission to use such information or cease using such information if such request be denied.

35 Thanks Very Much! John M. Blanchfield