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2000 Southern Region Agricultural Outlook Conference

2000 Southern Region Agricultural Outlook Conference. September 25-27, 2000 Atlanta, Georgia By: Bill Melton. Discussion Topic. “Southern Agriculture’s Current Financial Situation” from An Ag Lender’s Viewpoint. Business & Strategy District Structure. AgFirst Farm Credit Bank

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2000 Southern Region Agricultural Outlook Conference

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  1. 2000 Southern Region AgriculturalOutlook Conference September 25-27, 2000 Atlanta, Georgia By: Bill Melton

  2. Discussion Topic “Southern Agriculture’s Current Financial Situation” from An Ag Lender’s Viewpoint

  3. Business & Strategy District Structure AgFirstFarm Credit Bank (including wholly-ownedsubsidiary Farm CreditFinance Corp. of Puerto Rico) 27 District Associations Provide credit and related services to borrowers in 15 states and Puerto Rico Borrowers 82,000 farmers, agribusinesses and rural homeowners

  4. There was no annotation for the original map picture; this one was ungrouped, but the original page is in DISCARDS 1916 The Federal Land Bank of Columbia was one of 12 banks established by Congress to provide a dependable source of long-term credit to American agriculture  1933 By another act of Congress, the Federal Intermediate Credit Bank of Columbia was formed as a vehicle to fund short- and intermediate-term credit to agriculture. See 1 1988 The Federal Land Bank of Columbia and Federal Intermediate Credit Bank of Columbia merged to form the Farm Credit Bank of Columbia 1993 The Federal Intermediate Credit Bank of Jackson merged into the Farm Credit Bank of Columbia. See 2 1994 Four associations, formerly affiliated with the Farm Credit Bank of Louisville, re-affiliated to the Farm Credit Bank of Columbia. See 3 1995 The Farm Credit Banks of Columbia and Baltimore consolidated to form AgFirst Farm Credit Bank. See 4 Business & Strategy AgFirst Farm Credit Bank Today, AgFirst is the largest single provider of credit to agriculture in its 15 state region (and Puerto Rico) through its 27 (1)affiliated Associations, which are in turn owned by approximately 82,000 farmers, agribusinesses, and rural homeowners AgFirst’s growth has led to greater geographic, customer, and commodity diversification (1) To be consolidated to 23 Associations as of January 1, 2001

  5. Business & Strategy AgFirst FCB Business Profile Total earning assets: $11.1 billion as of 6/30/00 • Direct Lending Line of credit extended to member associations under General Financing Agreement (GFA) • Investments Liquidity reserve Diversify income source • Participations Provide overlines to member associations Provide a national reach Diversify income source • Secondary Mortgage Marketing Unit (SMMU) Facilitates loans through the FNMA and FAMC Diversify income source • Support Services Appraisal review, Portfolio Management, Credit Policy Guidance, Information Services, Accounting, Marketing, Human Resources, & Insurance Services Investments20.4% DirectLending 67.2% SecondaryMortgage2.4% Participations 10.0% Total earning assets: $8.9 billion as of 12/31/95 Investments17.0% Participations 8.0% DirectLending 75.0%

  6. Business & Strategy Association Portfolio Borrower Profile AgFirst's credit exposure is widely dispersed through 27 associations that serve 82,000 borrowing entities • Association customers, while primarily rural and rooted in farming, are also predominantly part-time farmers and rural homeowners • Full-time farmers' incomes are significantly supported by off-farm income • Customer size for both full-time and part-time farmers indicates a large number of small balance loans, which significantly mitigates agricultural commodity/industry credit risk Number of Borrowers 32,000 38,000 12,000 Median Off-Farm Income $28,000 $55,000 $45,000 Median Farm Credit Loan $66,000 $36,000 $32,000 Median Total Liabilities $202,000 $100,000 $61,000 Median Net Worth $473,000 $230,000 $74,000 Median Debt: Net Worth .43:1.00 .43:1.00 .82:1.00 Median Spread on Loan 1.90% 2.00% 1.30% Customer Segment Full-Time Farmer Part-Time Farmer Rural Home Owner Source: AgFirst Marketing Department

  7. Status of AgFirst FCB • Combined Income of AgFirst and Affiliated Associations as of December 31, 1999 $218.2 Million • Almost identical to previous year’s earnings • Combined income as of June 30, 2000…$110.5 million • An increase of $10 million from the previous year

  8. Status of AgFirst FCB • 11th Consecutive Year Where Earnings Have Been Stable or Increasing Over Previous Year • Despite $11.5 million in merger expenses year to date, we expect 2000 earnings to exceed the 1999 level • Anticipate an additional $2 million in merger/consolidation before year end

  9. Status of AgFirst FCB • Paid Patronage of $1.2 billion to Our Stockholders/Borrowers in the last ten years • Gross Loans of $10.1 Billion as of 8/31/00 • 2.8% average growth for the past 4 years • Growth in loan volume was flat during the past 12 months but is beginning to rebound • As of August 31, 2000, rate of growth is 2.23% • Total Assets of $13.0 Billion as of 8/31/00

  10. Credit Conditions – AgFirst District • Permanent capital levels at June 30, 2000, averaged 17.6%. • The allowance for loan losses total $261.3 million and represent 2.85% of total loans. • Asset quality has remained stable through August 31, 2000.

  11. Substandard Acceptable OAEM 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Feb- Feb- Feb- Feb- Feb- Feb- Feb- Feb- Feb- Feb- Feb- Oct-89 Oct-90 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Baltimore merger Association PortfolioLoan Classification Trend

  12. Credit Conditions – AgFirst District • Earnings remain strong. As of June 30, 2000, ROA averaged 1.99% and ROE averaged 10.08%. • Loan growth increased to 2.23% as of August 31, 2000. The growth trend is expected to flatten out in 2001. • Drought conditions were most severe in the deep South states.

  13. Association Portfolio -Loan Size Dist. Loan Size Distribution by Dollar Volume Loan Size Distribution by Number of Relationships • In the district, there are 77 loans that exceed 10% of the holding Association’s capital • The 77 loans are classified: • 66 Acceptable • 10 Special Mention • Only 2 Associations have more than 1 Special Mention • 1 Substandard • Loan size tracks agricultural demographics • Significant number of part-time farmers • Reliance for repayment on non-farm income

  14. Market Overview AgFirst District Market Position Market Share of Non-Real Estate Agricultural Debt • Dominant lender to agriculture, agribusiness and rural residents in the eastern US • Successfully increased market share through several agricultural credit cycles while improving credit quality • A balance between full-time and part-time farmers – consistent with demographics • Association originated loan portfolio at 6/30/00 has a weighted average maturity of 7 years • Weighted average maturity has declined over time, indicative of focus on growing the non-real estate portfolio Source: USDA Association Originated Loan Portfolio 1995 1996 1997 1998 1999 Real Estate Portfolio 54% 52% 50% 46% 47% Non-Real Estate Portfolio 46% 48% 50% 54% 53% Weighted Average Maturity (yrs) 8.7 8.1 7.7 7.3 7.0

  15. Association PortfolioCommodity Diversification Total Portfolio: $9.6 billion As of June 30, 2000.

  16. Association PortfolioGeographic Distribution by State

  17. Farmers now have a new crop . . . Its called “Mailbox Farming”! Check is in the mail!

  18. Market Overview U.S. Farmers’ Net Cash Income $59.3 $59.1 $55.2 $58.5 $57.5 $52.8 $52.6 $54.9 $56.8 $50.4 $51.1 $55.3 * Preliminary ** Forecasted Average of 1990-1998 Source: USDA 1998

  19. Market Overview Government payments as a % of Farm Net Income by Territory Source: USDA 1998

  20. Recipients of Government Payments

  21. Net Cash Income – 8 Principal Crops ($ Billions) Without Government Payment Crop Year

  22. Effect of Government Payments Average Effective Prices, 1999/2000 1/ Production value plus government payments divided by production. 2/ August-November average upland cotton price.

  23. “The Dilemma” “Southern States hardest hit by drought represent barely 2% of the U.S. corn average and less than 9% of the U.S. soybean.” Source: AgWeb.com

  24. Backdrop for the AgFirst Outlook • Rising Interest Rates • Weather Pattern with Extremes • Low Prices for Many Commodities • Uncertain Farm Policy for the Long Term • Loan Demand is Weakening in Some Areas • Energy Cost have Soared • Massive Transfer of Wealth Occurring IDEAL TIME for Making Poor Decisions!

  25. Fruits/VegetablesSignificant segments, Citrus, Fresh Vegetables CommodityorIndustry Sugar Grain Complex No significant segment Meat Complex Significant segments: Pork, Broilers, Eggs, Dairy Significant company consolidation; vertical integration; drive to compete worldwide Less U.S. Producerprotection General Trend Production units consolidating. Biotech boosts yields. Genetic modification will regain momentum. Globalization of productionand distribution. NAFTAshifting production. Direct support very limited absent dairy. Regulations as to food safety and environment becoming more stringent; cash basis accounting is key. Very important – support of prices since same istrue worldwide. Government Support/ Regulations Support is fueled by mid-west dominance in grains and political factors and will continue. Little impact directly.New crop insurance isavailable. Food safetyconcerns continue. Consolidation of productionunits. More fresh consumptionvs. processed. Near term – difficult market. Long term – huge integrated producers areglobally competitive. Near term – very large production in U.S., expansion based on cheap grain. Long term – growth in exports is key. Outlook Near term – over production and price pressure. Long term – U.S. competitiveness wins out. – Neutral Neutral + Growth in Loan Demand Green Complex Significant segments,Nursery, Greenhouse, Sod,Recreational Property, Timber Economic growthstimulates demand atdouble digit rate. No support. Limitedregulations. U.S. economic growth to slow sooner rather than later. Sector growth is geographically driven on East Coast and will outperform the economy ++ Market Overview & OutlookOverview by Commodity Type

  26. Outlook... • Impact of Stress in Ag Economy Will Not Be Borne Equally • Generally some commodities will always be in its down cycle • This year it is broilers, eggs and dairy • Regional, the Eastern U.S. is more diverse in its production agriculture and less dependent on Government support • Free Trade is Critical to a Healthy Ag Economy • NAFTA taking hold with Canada and Mexico, our best trading partners • A very positive sign for Ag was the permanent “Most Favored Nation” trading status voted for China • The brightest spots to point to in 2000 • A robust general economy that producers a Government surplus • $24.3 billion in Government assistance already approved

  27. Outlook… • Continuation of Consolidations within the Production Side & Processing/Marketing Sector • Poultry & Livestock • Continuation of Strategic Alliances and Long Term Contracts Between Producers and Food Companies • Tobacco . . . Finally! • Nursery/Greenhouse Production

  28. Outlook… • Continued Consolidation in Banking including the Farm Credit System Significant merger activity among associations • 23 associations by year end; down from 40 two years ago

  29. Outlook… • Difficult to impossible to get large confined livestock & poultry facilities permitted • Environmental, Land Use, and Food Safety Regulations Strictly Enforced • Interest rates have risen sharply since June 1999 • Energy prices will be a large factor in subsequent adjustments • The Fed appears to have achieved a “Soft Landing”

  30. Early Warning Signals • Are the Statistics Lying of Just Lagging? • Low Delinquencies • Normal Charge-Offs • Few Foreclosures • Stable Asset Quality

  31. Early Warning Signals • Net Farm Income buoyed by Government Payments • Creates a false Ag Economy • Ag Real Estate Has Held its Value or Risen in Value • Dilemma is that higher land values make price of product uncompetitive. Example: 4 to 1 difference in price of acre in Iowa and Brazil. • Level of Debt Held by Farmers Not Substantially Higher, but Becoming Increasingly Dependent on Government Assistance for Repayment Capacity

  32. Predictions • East Coast Agriculture Will Fare Better Than the Midwest • Prices for Broilers, Eggs, Dairy and Timber Are All Being Negatively Impacted by Supply • Over-Production Will Again Hurt Hog Prices and Keep Dairy Profitability Very Low • Over-Production will Continue to be a Problem for U.S. Agriculture

  33. Troubling Signs for Lenders • Pattern of “flipping land” by speculators • Owners cashing out • Non recourse lending • No “skin in the game” – 100% financing • Expansion without regard for business cycle

  34. Predictions • Another Round Of Shake-Out For Farmers and Ag Lenders • Advances in Biotechnology will Ensure Food Supply is Not Diminished by Departing Producers • Consumers may “pay up” for GMO free products • In the Long View, Agriculture will Remain Viable & Profitable for the Low Cost Producers

  35. 2000 Southern Region Agricultural Outlook Conference Thank You!

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