Current Trends in Ag Lending

1. Current Trends in Ag Lending CBI Summit – Council Bluffs, IA October 17, 2013

2. Themes • Ag is, and has always been, a cyclical industry • It has been a good run over the past several years • Particularly for crop producers • However, the “easy” money has likely been made • Farmer Mac has been seeing steady improvement in the financial characteristics of producers • We do see headwinds for the Ag sector in 2014 • But these do not necessarily presage a “crash”

3. Financial Ratios • Farmer Mac underwriting focuses on several critical financial ratios • Liquidity: current ratio • Leverage: debt-to-asset ratio • Repayment capacity: total debt service coverage ratio • Collateral: loan-to-value ratio • These ratios are calculated on a market value basis

4. 2013 Financial Ratio Comparison All Loan Average IA Loan Average Total-Debt Coverage Current Ratio Debt-to-Asset

5. Farmland Values • Farmer Mac has observed land value increases similar to those reported by others • For IA, our average land value is similar to the average of high and medium quality ground as reported by ISU

6. Farmland Values • The good news is that in general investor influence has been limited • Farmer-buyers more likely to be “buy and hold” • Some of these farmer-buyers act out of non-optimal economic motivations

7. Farmland Values • Are current farmland value trends sustainable? • Increasing interest rates • Decreasing profitability • Example using ISU land value and cash rent data:

8. Credit Scoring • Farmer Mac has obtained updated FICO and DNB scores for many loans in portfolio • This has allowed us to track the performance over time; portfolio has been surprisingly resilient

9. Credit Scoring • We have found a good correlation between the DNB scores and future performance • Use the scores are part of the risk rating process; perform portfolio segment analysis of score trends

10. 2014 Thoughts (Bad news first) • We see a variety of headwinds for the ag sector heading into 2014 • Better than expected 2013 US crop • Large harvests in competing countries • “Sticky” production costs • Interest rates / monetary policy • Pressure to change government policies • Farm Bill, crop insurance, etc • Renewable Fuels Standard

11. 2014 Thoughts (Good news) • Do not see these issues necessarily leading to a “crash” • Can be a manageable adjustment • These issues are not universally negative for the ag sector • Livestock producers likely to benefit • These changes come after a period of prosperity for many producers • Entering from a position of financial strength

12. Broad Observations • Observations from Farmer Mac’s vantage point • We generally are seeing borrowers with strong balance sheets • High working capital, low leverage • Top quartile producers are “killing it” financially • Long term fixed rates very popular • Great to see producers locking in low (and known) interest costs • Primary use of funds: refinance existing debt • Significant because R/E purchase is not the primary use • Increase in land values has resulted in less acreage encumbered as collateral

13. Broad Observations • As a primary lenders, you have significant influence • Continue to work with producers to emphasize responsible financial management and proactive risk management strategies • Watch for excessive debt build ups • Working capital stresses as canary in coal mine • Be prepared for correction in land values • Could easily see reductions of 15-20% • Is captive financing Ag’s “shadow banking”? • Much of the debt is not reported; is Ag sector leverage substantially under-counted?

14. Questions or Discussion? Brian Brinch, Director – Financial Research brian_brinch@farmermac.com