Financial Intermediation in Agriculture Chapter 15, 16 & 17
Who has worked for a financial institution? What did you do? For whom?
Functions of a financial intermediaries 1. Origination Create the financial asset Loan created by the note 2. Flow of funds Sourcing loanable funds Brokering differences in time, risk and geography 3. Risk-bearing Screening borrowers and savers Price and non-price risk management 4. Liquidity Balancing liquidity needs of borrowers and savers 5. Servicing Backroom functions of financial intermediation Loan application, underwriting, legal documentation etc.
TTYN HOW WOULD YOU GET A LOAN IF THERE WERE NO FINANCIAL INTERMEDIARIES?
Flow of funds and securities Text: p. 442
A quick look at the structure and performance ag finance industry
2,500 US Farm Assets and Liabilities: 1960 to 2009 2,000 $ Billion 1,500 1,000 500 0 19601963196619691972197519781981198419871990199319961999200220052008 Year Total Assets Non-Real Estate Debt Real Estate Debt Total Debt
300 US Farm Debt Levels: 1960-2009 250 200 $ Billion 150 100 50 0 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 Real Estate Year Debt
50 45 US Total Farm Debt Market Share by Lender 1961 to 2008 40 Market Share Percent 35 30 25 20 15 10 5 0 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 Year Comm. Banks FCS FSA Life Ins. Cos. Ind & Others CCC Loans
Market Share Percent 55 50 45 40 35 30 25 20 15 10 5 0 US Non-Real Estate Farm Debt Market Share by Lender 1981 to 2008 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 Year Comm. Banks FCS FSA Ind & Others CCC Loans
50 45 US Real Estate Farm Debt Market Share by Lender 1981 to 2008 40 Market Share Percent 35 30 25 20 15 10 5 0 81 83 85 87 89 91 93 95 97 99 01 03 05 07 Year Comm. Banks FCS FSA Life Ins. Cos. Ind & Others
Primary Sources of Loan Funds for Production Agriculture 1. Commercial Banks 2. Farm Credit System 3. Farm Service Agency 4. Commodity Credit Corporation 5. Insurance Companies 6. Input Suppliers, Machinery Dealers 7. Individuals
Commercial Banks 1. Type of organization: Investor-owned firm 2. Sources of funds: - deposits - purchased funds 3. Types of loans - consumer - commercial - agricultural operating and real estate 4. Management objective: maximize returns to shareholders
16,000 14,000 12,000 Number of Agricultural Banks, United States 1985 to 2008 Number of Banks 10,000 8,000 6,000 4,000 2,000 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Year Commercial Banks Agricultural Banks (FRB)
Agricultural Credit Provided by Type of Bank, US December 31, 2008 Non Ag Banks 45.7% Agricultural Banks 54.3%
Market Share for Agricultural Banks by Size of Bank, US: December 31, 2008 Total Assets <25, 2.2% 25-50, 9.1% 50-100, 18.4% 100-300, 37.1% 300-500, 11.9% >500, 21.4%
Market Share for Nonag Banks by Size of Bank, US December 31, 2008 Total Assets ($ Million) <25, 0.1% 25-50, 0.6% 50-100, 2.8%
Percent 50 45 40 35 30 25 20 15 10 5 0 Percent Share of Ag Loans in Portfolio by Size and Type of Bank, US: December 31, 2008 <25 25-50 50-100 100-300 300-500 >500 Total Assets ($ Million) Agricultural Banks Nonagricultural Banks
14 Selected Performance Measures for Ag Banks, US 1985 to 2008 12 10 Percent 8 6 4 2 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Year Rate of Return on Equity Capital Rate of Return on Total Assets Provisions for Loan Losses as a % of Total Loans Capital as a % of Assets
Percent 100 90 80 70 60 50 40 30 20 10 0 Commercial Bank Solvency and Liquidity Ratios by Bank Size, US: December 31, 2008 <25 25-50 50-100 100-300 300-500 >500 Total Assets ($ Million) Capital to Asset Ratio Loan to Deposit Ratio
Farm Credit System 1. Type of organization: Farmer-owned cooperative 2. Sources of funds: - sales of securities, notes and bonds 3. Types of loans - farm operating - farm real estate - rural housing - cooperatives 4. Management objective: maximize value of services to members
Farm Credit System Flow of Funds
140 Farm Credit System Loan Volume by Loan Type 1991 to 2008 120 100 Billion Dollars 80 60 40 20 0 1991 1993 1995 1997 1999 Year 2001 2003 2005 2007 Long-Term Real Estate Short and Intermediate Term Loans to Cooperatives Total Loans
Billion Dollars 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Farm Credit System Income: 1991 to 2008 1991 1993 1995 1997 1999 2001 2003 2005 2007 Year Net Interest Income Net Income
Percent 18 16 14 12 10 8 6 4 2 0 Farm Credit System Financial Indicators 1991 to 2008 1992 1994 1996 1998 2000 2002 2004 2006 2008 Year Return on Assets Return on Capital Capital as Percent of Assets Allowance for Losses as Percent of Loans
Farm Service Agency 1. Type of organization: Agency of the Federal Government 2. Sources of funds: - appropriations 3. Types of loans - Direct and guaranteed + farm operating + farm ownership + rural housing - Rural development 4. Management objective: meet Congressional mandates
Million Dollars 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Farm Service Agency Farmer Program Obligations: 1986 to 2009 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Year Direct (Insured) Guaranteed Total
40 Farm Service Agency Loan Program Delinquencies: 1986 to 2009 35 Percent of Total 30 25 20 15 10 5 0 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Year Direct Farmer Loan Program Guaranteed Farmer Loan Program
Next topic Understanding the management of a financial intermediary