Ag Finance Outlook Jim Knuth Senior Vice President Farm Credit Services of America

Transcription

1 Ag Finance Outlook Jim Knuth Senior Vice President Farm Credit Services of America The following material is provided for informational purposes only. Farm Credit Services of America is not providing advice, nor does Farm Credit Services of America warrant the accuracy or completeness of this information or undertake to update it. Copyright 2016 Farm Credit Services of America

2 Agenda Interest Rates Grain Production Agriculture 1

3 INTEREST RATES

4 Short Term Rates Federal Reserve controlled First rise in interest rates in 9 years Anticipate modest increases in 2016 Fed action will impact variable rate debt Primarily Operating Line of Credit 3

5 Long Term Rates Free market controlled year UST = 1.86% year UST = 2.99% year UST = 1.93% year UST = 1.62% Global flight to quality dynamic remains the primary driver of long term interest rates 4

6 10 Year U.S. Treasury % % Long term rates have fallen over 30% in the past year. 5

7 Interest Rates Keep perspective in the current environment Short-term rates are going from historic lows to very low Current interest rate environment still provides excellent opportunities for interest rate risk management Current interest rate environment still provides excellent opportunities for loan restructure / reamortization to improve cash flow 6

8 Interest Rates Interest rates remain a positive for agriculture Important Concept: If your cash flow is not working it is the amount of your debt or the amortization of your debt (or both), not the cost 7

9 GRAIN PRODUCTION AGRICULTURE

10 Comparison to Prior Cycles The 1980s represented a leverage crisis driven by: High real estate prices High levels of debt relative to asset values High interest rates and variable rate loans The current challenge is a cash flow shortage, driven primarily by: Declining grain prices High cash rent Machinery and equipment investments Living expense 9

11 Average Real Estate Data Financial Position Current Ratio Debt to Asset 34% 35% 34% 35% 34% 34% Debt Coverage Ratio Loan Conditions Loan Term 19 years 18 years 17 years 17 years 16 years 17 years Loan to Collateral Value 49% 46% 43% 46% 48% 53% Average Size $423,098 $396,974 $411,292 $419,976 $321,393 $272,613 Annual Loan Volume $2.0B $1.9B $2.5 B $3.1 B $1.9 B $1.7 B

12 Ave $ / CSR 2011 $ $ $ $ $ $108.10

13 A Good Reminder... Last year was a reminder that long-term success depends as much on managing through the tough cycles as it does on maximizing profits during the good ones. Jeremy Heitmann 2015 Board Chairperson 12

14 U.S. Net Farm Income Source: USDA Economic Research Service, August 2015

15 Supply/demand have returned to an equilibrium similar to that prior to the commodity boom of , though at somewhat higher prices. Corn price move was unprecedented 14

16 U.S. corn use for ethanol, co-products Sources: FAPRI-MU baseline update, August 2015 and USDA WASDE, October 2015

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18 Macro Economic Drivers Demand driven by ethanol expansion has leveled off Growth in China and other emerging economies has slowed, tempering demand increases The value of the dollar has strengthened, creating headwinds to exports Supplies have recovered to abundant levels, both U.S. and worldwide 17

19 Current Micro Economic Drivers Weather issues in South America Weather concerns in the U.S. Value of the dollar softening China / Asia increased soybean demand 18

20 Macro vs. Micro Market The basic macro-economic trends have not changed Weather is the dominant micro-economic change Weather driven markets are fickle and difficult to predict Macro-economic trends are long term drivers Micro-economic trends are short term opportunities / challenges 19

21 Net Effect Grain production agriculture is adjusting to the reality of its revenue stream Macro-economic trends indicate recent prices are likely to be the norm for the foreseeable future, barring the unexpected It is not likely that price will fix the problem cost reductions remain key 20

22 Adjusting to the Current Environment Working Capital Fixed cost adjustments Pace of adjustments Understand / embrace the new realities 21

23 Working Capital Working capital is your first risk shock absorber Working capital = flexibility Lender Plan B replace liquidity with equity (additional collateral) 22

24 Lower Fixed Costs Fixed costs Owned Land Machinery/Equipment Rented Land Family Living Where producers can make the most difference Analyzing and adjusting your fixed costs could reduce the gap by $50-$100/acre 23

25 Grain Production Agriculture Universal Truth Fixed costs not variable costs is the main factor that separates high cost, medium cost and low cost operations 24

26 Pace of Adjustments The lack of proactive fixed cost adjustments with medium-high cost producers is one of the biggest risks in grain production agriculture Lack of action will significantly increase the risk of liquidity / working capital loss and jeopardize future viability 25

27 2016 Grain Producer Realities Grain production agriculture needs to reconcile the reality of our revenue stream. The ethanol boom is fading in the rear-view mirror. It is not likely price will fix the problem. Cost reductions are the likely solution. 26

28 2016 Grain Producer Realities Working on your variable costs is ok, but generally will not fix your overall cost structure issues. Lowering your fixed costs is the key. Do not fear a moderately rising short term interest rate environment. It is not the cost of debt (interest rate) that is the issue, it is the amount or amortization (or both.) 27

29 2016 Grain Producer Realities Look at your financial position holistically versus farm by farm or piece of equipment by piece of equipment. The holistic picture is what matters and should drive decision making. Your pace of adjustments will be critical to thriving / surviving 28

30 2016 Grain Producer Realities The majority of cost adjustments will fall to producers, land owners and lenders Expansion of acres is for those with the financial ability to do so A refinance / re-amortization strategy is for EVERYONE 29

31 FCSAmerica Financial Guidelines 30

32 Long-term Optimism World populations are growing, as are middle classes in China and other emerging economies U.S. producers are well-positioned to meet demand Transportation infrastructure Legal / regulatory / political stability Technology, energy, processing access Over time, the market will find new equilibriums and adjust 31

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34 2016 Closing Comments Grain producer focus is on cash flow adjustments Interest rates remain favorable The market will continue to re-establish the value of a rented acre Further correlation between land values and revenue generation is expected 33

35 2016 Closing Comments We remain bullish on the future of agriculture We will be growing food, fuel, fiber in Iowa for the next 100 years Ultimately, grain production agriculture will adjust to the reality of our revenue stream 34

36 Ag Finance Outlook FARM Jim Knuth Senior Vice President Farm Credit Services of America The following material is provided for informational purposes only. Farm Credit Services of America is not providing advice, nor does Farm Credit Services of America warrant the accuracy or completeness of this information or undertake to update it. Copyright 2016 Farm Credit Services of America