Ross Anderson, AgriBank CCO, Gives Credit Update
In 2006-2008, the primary business issue within the AgriBank District was loan volume growth and accumulating the capital needed to support the increased volume. High credit quality resulted from growing domestic and export demand for key commodities produced in the District. However, the AgriBank District was not immune from the global financial crisis; rapid deterioration in the general economy began to impact our loan portfolio following the financial crisis in the fall of 2008. Commodity prices declined substantially as domestic and export demand declined, unemployment began to increase, and the dollar strengthened in response to a flight to safety. U.S. consumers had been a major contributor to robust economic growth, but consumer confidence declined rapidly as unemployment increased, the value of residential properties declined, and as many experienced declining wealth in stocks and/or 401Ks.
The economic environment was bad, resulting in the government taking aggressive action to add fiscal stimulus. This stimulus appears to have stabilized the economy, but high unemployment is expected to remain throughout 2010 and consumers are not expected to revert to prior spending habits in the near term. World demand for agricultural products is expected to remain weak due to weak economic activity in Europe, and the value of the dollar relative to major trading partners is expected to remain high relative to levels prior to the crisis.
What does all this mean for agriculture? First, net farm income had been very strong from 2004 through 2008, averaging $77 billion per year. The USDA’s most recent forecast for FY ‘09 is $54.8 billion, or a decline of 29% from the previous five year average and 37% below FY ‘08 net farm income. The global financial crisis is substantially impacting farm income.
Reduced farm income translates into lower income for key sectors. The livestock sector has been hard hit due to the high cost of feed and declining domestic demand. Gross revenues for livestock producers will decline by approximately $20 billion. Broiler producers experienced early margin pressure, followed by pork, with dairy producers experiencing intense pressure in 2009. As these operations experienced losses, working capital and equity eroded, leading to the lower quality of some of our loan assets. Ethanol producers were hard hit by the rising cost of corn followed by rapidly declining prices for ethanol as oil prices collapsed as demand fell.
In contrast, crop producers have generally been profitable due to strong prices through 2008 and generally have strong working capital and equity positions. Grain producers in 2009 are expected to see gross revenue also decline by $20 billion. The high cost of production and lower prices will result in substantially lower income for 2009, but we do not see large losses as experienced in the livestock sector.
What does this mean for AgriBank District credit quality? The high levels of net farm income in the past five years led to very high credit quality entering this business cycle. Adversely classified loans to total loans were approximately 1.3% at FYE ‘06 and ‘07. Credit quality deteriorated in FY ‘08 and ended FY ‘08 at 2.9% adverse. We now expect FYE ‘09 quality at 5% adverse. While this level of adverse assets remains at acceptable levels, the speed of deterioration has been rapid. We expect quality to continue to deteriorate in FY 2010, but at much slower rates as the U.S. economy’s GDP is expected to rebound with growth at about 2%. Significant improvement in loan quality is not expected until unemployment declines in the United States and global economic activity strengthens increasing demand for exports.
What does this mean to our Association customers? AgriBank understands credit risk and continues to manage credit risk aggressively. Because of our financial strength we can be flexible and manage credit during a difficult time. We are built for sustainability and will steadfastly continue serving those who serve rural America.