Arkansas Bankers Association 2018 Agri-Conference Little Rock, AR

Transcription

1 Arkansas Bankers Association 2018 Agri-Conference Little Rock, AR SESSION I: Triple Challenge facing Arkansas Ag Bankers: Farm Bill Battles & Likely Outcomes Ag Trade Disputes & Likely Outcomes Compliance with new CECL standards Presented by Dan Manternach, President Perfect Fit Presentations LLC St. Louis MO

2 TOP 10 AG PRODUCTS FOR ARKANSAS ($ value/yr) # 1 BROILERS $3.3 billion/year # 2 SOYBEANS $1.47 billion/year # 3 RICE $1.1 billion/year # 4 CATTLE & CALVES $653 million/year # 5 EGGS $573 million/year # 6 TURKEYS $455 million/year # 7 CORN $330 million/year # 8 HAY & FORAGE $258 million/year # 9 SORGHUM $187 million/year # 10 COTTON/SEED $180 million/year

3 Broilers, Beans & Rice are 69% of top 10 sales

4 Beans & rice dominate crop production (74%) while Broilers dominate livestock sector (66%)

5 I. Farm Bill Battles & Likely Outcomes Five sticky issues to resolve between House & Senate versions: 1) Tightened work requirements for SNAP (food stamp) eligibility. 2) Payment limits and other reforms to farm program benefits. 3) Reductions in funding for conservation programs. 4) Conflicting changes to crop insurance, cotton and dairy policy. 5) Conflicts rooted partisanship and legislative calendar issues.

6 STICKY ISSUE # 1: Big differences in changes to SNAP (food stamp) eligibility (tighter SNAP work requirements) 84% of proposed cuts in SNAP benefits for 1.5 million persons offset by increased admin. costs to enforce! Total reduction in beneficiaries: 1,465,000 persons 1,530,000 households Net cost savings: $3.9 billion $2,662 per person dropped $2,549 per household dropped Overall, House Bill still cuts Title IV nutrition spending by 5.6%

7 Senate bill changes to Title IV Nutrition program (current cost: Approx. $70 billion/year) $1.008 billion in reduced total Title IV outlays over 10 years, but includes $1.002 billion increase in SNAP benefits and new admin costs There were just 2.9% in proposed cuts to a $70 billion budget for Title IV to start with; 99.4% of those offset by increased funding for SNAP alone!

8 Most likely outcome for resolution? Senate version will prevail. Why? Costs too much to enforce tighter work requirements for SNAP Gov t food purchases part of $12 billion rescue for farmers GOP worries over mid-term elections.

9 STICKY ISSUE # 2: Big differences in proposed payment limits & eligibility House bill expands eligibility for farm program payments to new entities while Senate bill tightens eligibility requirements. House bill exempts newly-defined entities from limits on AGI and exempts marketing assistance loan gains and loan deficiency payments from payment limitations. Senate version does neither.

10 Most likely outcome for resolution? House version will prevail for fear of longterm impact on ag exports beyond and little stomach in Senate for tightening the government safety net ahead of midterms.

11 STICKY ISSUE # 3: Reductions in funding for Conservation programs House bill would eliminate Conservation Stewardship Program (CSP) while Senate bill lowers enrollment limit to million acres per fiscal year from 10 million currently. House bill increases funding for Environmental Quality Incentives Program (EQIP) and adds authority for stewardship contracting under EQIP while Senate bill cuts EQIP funding by $1.5 billion. Senate bill creates new Agricultural Conservation Reserve Easement Program (ACEP) paying farmers with expiring CRP contracts to keep the land out of farming permanently. (The House bill also has ACEP but adds $3.5 billion in funding over 10 years.)

12 STICKY ISSUE # 3 (continued) Reductions in funding for Conservation programs House bill would raise limit on acreage in Conservation Reserve Program (CRP) by 1 million acres per year, reaching 29 million acres by Costs of additional CRP acres covered by reducing limit on payment rate per acre to 80% of average county rental rates and further reductions for acres re-enrolled into CRP upon contract expiration. Senate bill increases CRP cap by just 1 million acres (to 25 million) and covers cost by reducing rental rates to 88.5% of county average rental rate.

13 STICKY ISSUE # 3 continued House bill boosts EQIP funding; Senate bill cuts it $400 million in reduced spending by 2028 $100 million in reduced spending by 2028

14 Most likely outcome for resolution? Senate version will prevail because there s less net loss in spending and land conservation efforts have broader public appeal than assistance to livestock producers under EQIP.

15 STICKY ISSUE # 4: Differences on crop insurance, cotton and dairy policy House bill trims funding for Ag Risk Coverage (ARC) by $253 million while boosting funding for Price Loss Coverage (PLC) by $408 million. House bill also eliminates ARC-individual coverage option but adds provision to PLC allowing reference prices to increase with mkt prices House bill makes minor reductions in dairy price support program but increases funding for economic assistance to cotton textile mills, while Senate bill leaves dairy and cotton programs unchanged.

16 STICKY ISSUE # 4: (continued) Differences on crop insurance, cotton and dairy policy Senate bill favors ARC by making it the default choice unless the producer selects PLC and also raises benchmark yields via trendadjusted yield factors. Senate bill also allows producers to revise their program election in the 2020 crop year; while in House bill, 2019 choice is fixed.

17 STICKY ISSUE # 4: (continued) Senate bill finds savings in lower limit on AGI & cotton EAA; spending more on ARC; House spends more on PLC; less on ARC SENATE: $35 million in net reduced spending by 2028 HOUSE: $50 million in net increased spending by 2028

18 Most likely outcome for resolution? House version will prevail for these reasons: Increased spending by Favors PLC with only minor reductions to ARC. Boosts funding for assistance to textile mills under cotton EAA, attracting more urban support in Congress.

19 STICKY ISSUE # 5: Political partisanship & legislative calendar reality Bitter division on SNAP reform could gridlock House-Senate conferees. Divisiveness over new Supreme Court nominee will dominate September. Government will need a new appropriations bill or continuing resolution. President willing to shut down government without border funding. Farm bill could still be held hostage to demands for immigration reform. Congress will recess again in October for campaigning ahead of mid-terms. Leaves little time for House-Senate conference to iron out differences ahead of fall elections.

20 II. Tariff & Trade Disputes on Four Fronts 1) China Theft of intellectual property; blatant protectionism & currency manipulation feeding huge trade imbalance. 2) Mexico Abuse of NAFTA provisions regarding manufactured trade, flagrant support of illegal migration to U.S. 3) Canada Abuse of NAFTA provisions regarding dairy product and forestry trade. 4) Europe Subsidized domestic ag production; Longstanding tariff and non-tariff trade barriers to U.S. products.

21 II. Tariff & Trade Dispute STATUS: 1) China Talks resumed, but Beijing awaiting outcome of midterm elections before making any concessions. 2) Mexico NAFTA replaced by new U.S.-Mexico agreement ending threat of tariffs on ag trade. 3) Canada Successful outcome of U.S.-Mexico talks effectively pulls plug on NAFTA; heightens pressure on Canada to talk. 4) Europe Significant progress winning reduced barriers to U.S. ag exports and shift to U.S. sourcing for liquified natural gas.

22 II. Tariff & Trade Dispute REMEDY:

23 II. Tariff & Trade remedy details: Once harvest complete and 2018 production known, producers can apply at for initial 50% payment. Must have ownership interest, actively engaged in farming and average AGI for tax years 14, 15, 16 under $900,000. Must be in compliance with Highly Erodible Land and Wetland Conservation regulations. Payments capped at $125,000 per person/entity or a combined $125K for dairy and hog producers. Dairies have to have been in operation June 1, 2018; pmt based on highest annual output of calendar years 2011,2012 or 2013 Hog payments based on total number of live hogs owned on August 1, 2018.

24 III. Best practices & resources for insuring compliance with CECL standards Key Source: American Bankers Association

25 Basic elements of Current Expected Credit Loss (CECL) accounting standard: Issued by FASB in June 2016; initially to be CECL compliant effective Jan 1, 2020 for public business entities (SEC registrants); Jan 1, 2021 for all others. Requires banks to expand calculation of potential losses to the life of loans (rather than annual loss estimates) Requires documentation of credible methodology for new life-of-loan estimates. On July 25, at ABA request, FASB advanced effective date 1 year for non-pbes, to fiscal years beginning after Dec 15, 2021 and initial CECL-compliant retained earnings balances as of Jan. 1, 2022.

26 Position of ABA since inception towards CECL: CECL should be amended. Banks should record an estimate of all losses that can be estimated with reasonable confidence. Instead, CECL requires forecasts of the future that decrease confidence in ALLL. The standard must be workable for banks of all sizes. ABA is working with banking agencies, FASB, bankers and auditors to insure such expectations are understood.

27 Most worrisome elements of new CECL standard: Retained earnings requirements for expected life-of-loan losses at origination are near certain to be higher than current practice of an incurred loss model recognizing an annual Allowance for Loss on Loans & Leases (ALLL). Estimating these losses will require institutions to use a broader range of data than under existing generally-accepted accounting principles (GAAP).

28 Compliance Measurement Methods: No single method for measuring expected credit losses specified; institutions are instructed to use judgment for methods: Well documented. (Requiring systematic & granular data gathering and recording well beyond what many banks currently practice.) Applied consistently over time. (Requiring that setting up needed data gathering, granularity and recording needs to commence now.) Faithfully estimate the collectability of financial assets by applying principles of the new accounting standard. (CECL life-time losses)

29 Most troublesome requirement: Institutions will be required adjust for their historical loss experience, but now have reasonable and supportable forecasts that affect expected collectability over the full life of loans at issuance! YOUR CHALLENGE: Where can you go for reasonable and supportable forecasts over the full life of intermediate and long-term ag loans?

30 ONE GOOD PLACE TO START IS AT THIS URL:

31 Example 1: USDA Baseline Outlook to for BROILERS

32 Example 2: USDA Baseline Outlook to for SOYBEANS

33 Example 3: USDA Baseline Outlook to for RICE

34 Example 4: USDA Baseline Outlook to for BEEF

35 Example 5: USDA Baseline Outlook to for EGGS

36 Example 6: USDA Baseline Outlook to for TURKEYS

37 Additional FASB guidance sketchy at best: Use of vendors to help calculate future credit losses: Ok, but FASB will issue guidance on which ones to use. Portfolio segmentation: Loans are expected to be pooled into groups where similar risk characteristics exist. Any loan that does fit in any pool : Must be assessed individually and not included in pooled loans.

38 Other Guidance on Qualitative Adjustments and Systematic Allowance Processes: Institutions should develop and document allowance methodology and apply in a thorough, disciplined and consistent manner. Estimating losses over lifetime of loans involves a high degree of management judgment, is inevitably imprecise, and results in a range of estimated credit losses. Gives invaluable wiggle room on your estimates.

39 Steps recommended by ABA for compliance: Become very familiar with the new accounting standard under CECL. Discuss with your Board of Directors, industry peers and external auditors/supervisors. Review existing allowance and credit risk management to identify existing bank processes which can be leveraged or tweaked to meet the new rules. Identify additional data needs and necessary system changes to implement the new standard and document estimating methodology, consistency and accuracy that meet bank supervisor expectations. Determine exactly how and when to begin collecting data needed for implementation.

40 Other highly recommended sources for CECL background, guidance & compliance data:

41 THANK YOU! Questions? Dan Manternach Perfect Fit Presentations LLC