Dr. David M. Kohl

Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-2094 (Alicia Morris) (540) 719-0752 (Angela Meadows) e-mail: [email protected]

Weekly Website Columns: Ag Globe Trotter: www.farm-credit.com Road Warrior of Agriculture: www.cornandsoybeandigest.com

2009 Views from the Road z z z z z z z z

livestock / protein industry grain industry dependent on real estate third party / counter party risk regulators / government oversight lenders rationing credit imbalance of input costs / commodity prices export markets, technology, economy

Projected World Growth Germany -0.8% Canada -0.5% U.S. -0.9% Mexico 0.4%

Iceland -9.3%

Britain -1.1% Euro zone -0.6% France -0.4%

India 7.3%

Russian Fed. 2.3% China 8.0%

Japan -0.1% South Korea 2.7% Indonesia 5.4%

Brazil 3.0% South Africa 3.0%

GDP Growth % 2009 Forecast

Source: OECD Economic Outlook No. 84, November, 2008

Australia 1.7%

World Growth Germany -14.4% Canada -5.4% U.S. -5.5% Mexico -21.5%

Iceland -13.6%

Britain -7.4% Euro zone -9.7% France -4.7%

India 5.8%

Brazil -3.3%

Russian Fed. -9.5% China 7.9%

Japan -14.2% South Korea +0.5%

Australia +1.5% South Africa -6.4%

GDP Growth % 2009 Quarter Figures July, 2009

Source: www.Economist.com

Indonesia 4.4%

Alternative Energy z z z

$60 to $100 swings in oil prices $3.50 to $4.00 gasoline- consumer chicken point oil prices and direction 9 9 9 9

z z

weather geopolitical & military risk currency exchange rate developing & emerging countries economic status

technology and supply side of equation demand side globally in agriculture

U.S. Farm Real Estate Values

Source: Dr. Steve Isaacs, University of Kentucky

2009 Land Values & Current Status of Ag Economy

2009 Land Values

Current Status of Ag Economy

March

40%Ï

50% N

10%Ð

August

15% Ï

35% N

50% Ð

March

40% Ï

40% N

20% Ð

August

21% Ï

16% N

63% Ð

Business Cycles by the Numbers Months

11 58 86 7 106 120 z z

economic recessions business expansions Great Moderation Theory expansions Great Moderation Theory recessions record expansion-- Paul Volcker all time record expansion -- Alan Greenspan

Kondratieff Wave Theory Rolling recessions of Post War

Short Run Economic Issues z z z z z z z z

lowering of oil prices stock market earnings report CLI PMI copper prices unemployment consumer and business confidence

Long Run Economic Issues government debt 9 foreign financed z risk position of USA government z 3 ½ year rule for inflation z age- productivity z long term interest rates z devaluation of USA dollar z other z

“Big Credit” Conditions z

Impacts for lenders and producers are a result of bigger economic picture outside agriculture

z

Today’s agricultural credit reality is much more conservative

z

Credit is more expensive 9

z

Foundation for increased spreads in future are being built into credit lines

Leverage is a killer to any operation currently facing drastically reduced prices (e.g. dairy, all proteins, nursery, and timber)

Last Year z

every deal included two to three competing lenders

z

interest rate pricing was very competitive 9

z

spreads were tight, providing agricultural producers great rates

most agricultural commodities were coming off good to very good years, showing excellent repayment capacity

Last Year z

z

all commodities, except timber and nursery, were doing very well almost all lenders were considered very well capitalized 9

9 9

credit quality, delinquencies, and repayment capacity were at all time record levels debt markets were very easy to access risk management tools (e.g. credit default sways) were available to manage loan growth and risk

Today z

z

stressed agricultural markets 9

downturns in timber, nursery, poultry, hogs, dairy, and cattle, industries

9

higher costs and significantly reduced prices

ethanol 9

facing economic downturn and lower oil prices –

gas dropped from more than $4 to less than $2.50 per gallon

–

feed (e.g. corn) prices fall

–

ethanol industry in crisis (e.g. bankruptcies)

z

housing bubble burst; prices drop off table

z

credit markets are much tighter

z

commercial banking industry in financial turmoil

Impact: Changing Lender Focus z

changed perceptions and attitudes surrounding the finance industry 9

“anything goes to nothing goes” significantly reduces credit availability

9

credit quality, delinquencies, and repayment capacity are moving in the wrong direction quickly

9

capital availability is the bigger question –

z

followed by which borrowers get approval and the dollars they need

interest rates are stable or a little lower 9

but, lenders are requiring spreads that are 100 or more basis points higher than a year ago on the same quality deals

Knowledge and Successful Management z

in dynamic and uncertain markets, knowledge is key 9

more than information

9

information with context, interpretation, impact, and execution –

execution (i.e. knowing what to do) is a function of knowledge, experience, positioning, and insight (i.e. “gut” instinct)

Knowledge and Successful Management (Continued) z

key sources for understanding industries include peer and professional networks

z

lender can be a key a ‘trusted advisor’ in producers’ networks

z

agricultural producers should demand their lenders be relationship managers (more than loan officers)

Lenders as a Strategic Advantage z

Relationship managers provide more than capital 9

Understand industries, business models, and businesses’ unique positions within industries

9

Grasp interconnectedness of agricultural value chains

9

Understand people and ask questions –

Where have producers been?

–

Where are producers today?

–

Where are producers headed?

9

Provide context to information, adding meaning and relevance to ‘numbers and noise’

9

Focus on what makes long-term sense