David Sparks, Regional President, East
Regional Agribusiness Banking Group
NGFA Country Elevator Conference
December 12, 2016
Producer Finances and What You Should Know Today
Discussion Topics
The New Normal is really the Old Normal
Know your customers and have transferable information to
new employees
Blocking and Tackling
Setting the stage on Real Estate Values and Collateral
New Risks- Counter Party Risks and Smart Fraudsters
Positioning for Profitability
2
Current U.S. Business Cycle is Fourth Longest
But Under Performing
0 4 8 12 16 20 24 28 32 36 40 44
-10%
0%
10%
20%
30%
40%
50%
Percent change from previous business cycle peak
1960-69
1969-73
1973-80
1980-81
1981-90
1990-2001
2001-07
2007-??
Number of quarters from previous peak and real growth during each business cycle
38 qtrs(+52%)
42 qtrs(+41%)
36 qtrs(+35%)
27 qtrs(+19%)
34 qtrs(+11%)
Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)
2007-?? cycle
Fourth longest
Deepest / longest trough
Weakest recovery
Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)Data source: World bank
0
25
50
75
100
125
150
175
Indexes (2010=100)
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Energy Agriculture (all commodities)
RisingGlobal
Middle class
EconomicTurmoil2009-13
PolicyRealignment
2014-18
Commodity Market Realignments Will Continue
To Reflect The New Realities of Global Economy
Old normal zone
New normal zone?
5Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)
19931994
19951996
19971998
19992000
20012002
20032004
20052006
2007
20082009
2010
2011
2012
2013
2014
2015
2016
50
60
70
80
90
100
110
120
130
140
Index (2011=100)
Prices received: crops
*Prices paid commodities & services, interest, taxes and wage rates
Prices received: livestock
Prices paid
Commodity Prices Adjusting Sharply to New Market
Realities; Cost Side Next
Costpressures
6Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)
0
1
2
3
4
5
6
7
8
9
Percent
10-yearTreasuries
FederalFunds Rate
92 93 94 95 96 97 98 99 00 01 02 0403 05 06 07 0908 1210 11 13 14 1615 17
Federal Reserve Will Be Cautious and Continue
To Promote Growth and Employment in 2016
Global economic concerns impacting pace of actions! Modified target unemployment rate to reflect unique conditions! Inflation target still 2%!
Federal Reserve actions:
Appropriate pace of policy firming: midpoint of target range or target level estimates of FOMC participants for federal funds rate at end of respective year (June 2016)
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.02016 2017 Longer run
The FOMC consists of twelve members--seven members of the Board of Governors,; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
Federal Reserve Consensus on Start and End
But Pace of Increase is in Question
2018
Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)
10
15
20
25
30
PercentU.S. Farm Debt Ratios
Debt/assetratio
Source: USDA
9
__________________________________
Being About the Business
Circle of Influence
What you can control
Circle of Concern
What you can’t control
Circle of ConcernWhat you can’t control
Circle of InfluenceWhat you can control
10
Basic Credit 101: The Five C’s of Credit and We may be adding another one
From a 20,000 ft. view for any financial risk taker, the important factors are:
Character - integrity of organization/individual
Capital - balance sheet
Capacity - earnings
Collateral - when things go bad, what’s left
Conditions - covenants/requirements
Counter Party Risk - your partners/suppliers and stakeholders
2 tests
11
12
Financing and Capitalization Issues in a Volatile Environment -Why we are in the National and Global financial situation we are in today
Investment/Banking Perspective
Volatile (adj.) Derived from Latin volatilis- winged- from volare- to fly 2) readily vaporizable at a relatively low temperature, 4) characterized by rapid change.
Volatility (n) financial - standard deviation of the continuously compounded returns of a financial instrument with a specific time horizon. Often used to quantify the risk of the instrument over that period of time. Volatility is typically expressed in annualized terms, and it may be an absolute number ($5) or a fraction of the mean (5%). Volatility can be traded in today’s market through options and variance swaps.
Risk (n) 1) possibility of loss or injury, 2) a dangerous element or factor. Vt- to expose to hazard or danger, to incur the risk or danger of.
Example of risk, as a lender of money or financial obligations
$10,000 note/bond, 1 year maturity, you’ll make about 2% off the note/investment, you lose it all.
How much new volume or increased $ at the same potential profit will it take the next year to make up for the $10,000 loss?
Answer- 5 something
Know Your Customer
Answers needed from Producers based on commodity value-
Know Your Customer
What is your operating costs to break even?
What is your all in cost (equipment and land) to break even?
“I don’t know” won’t suffice and ask further open ended question
What kind of margin discipline (% of sales) do you need to be profitable. You build
a monster you have to feed the monster
It’s all about the bottom line as we approach an extended period of unknown prices
and pressure on Farmer Capacity.
13
14
15
16
NGFA
Measure Risks, either real or perceived
Quantify Issues and look in the mirror and understand the responsibility
Ask questions and challenge processes and decisions
This marketplace is humbling and appears that it may remain that way forever.
Shannon Ganschow
17