Telling the Story
Last week, I was invited to be a panelist for the Farm Foundation Forum.
As you may remember, I was asked to be a panelist for a similar event in the fall of 2008, as the financial/debt crisis was unfolding. This year, I was asked to talk about the impact that the crisis had on agriculture and food industries, and the challenges ahead for 2010.
It was a little nerve-wracking, since the audience was a pretty distinguished group of people.
Since you’re a pretty distinguished group of people as well, I thought you might like to read my remarks. (You can actually hear them at the Farm Foundation Forum’s website…but it’s a huge file.)
As you read my thoughts on the greatest challenges to agriculture for 2010, think about what you’re seeing in your area and let me know what you think. Am I on track? What do you see as the greatest challenges to agriculture for 2010?
Thank you for inviting me to be a part of today’s panel. It has been an honor to participate in previous Farm Foundation Forum events and it’s a pleasure to be here with you today.
I represent the Farm Credit System, a nationwide network of borrower-owned institutions. Today, Farm Credit provides nearly $165 billion in loans to member owners in all 50 states and the Commonwealth of Puerto Rico. Our loans and leases support farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agribusinesses, and agricultural and rural utility cooperatives.
Farm Credit was created by Congress to serve as the permanent source of sound and dependable credit and related services to agriculture and rural America. We reverse the usual flow of capital and deliver the financial power of national and international money markets to the rural communities we serve nationwide. Farm Credit’s near-century of experience demonstrates the focus and commitment of its directors and employees and leaders to serving as the stable and reliable lender. Since we focus solely on supporting agriculture and rural America, we are uniquely positioned to understand the needs of our customers.
Farm Credit institutions are owned and operated by the very same farmers, ranchers and rural customers we serve. This unique structure keeps the Farm Credit System involved in the industries we finance and the local communities we represent. The approximately 90 local Farm Credit associations in the System have their own boards of directors and are owned cooperatively by those who borrow from them. Five wholesale System banks are in turn owned by the associations they serve and also have their own board of directors. Each bank and association manages and controls its own business activities, operations and financial performance.
To generate the capital the System lends to support rural America, the Federal Farm Credit Banks Funding Corporation issues a variety of Farm Credit Systemwide debt securities on behalf of the Farm Credit System banks. The System also has its own independent regulator, the Farm Credit Administration.
I’m the CEO of one of the retail associations and I can tell you that our Board of owner users embraces the public policy charge of the Congress and challenges me to deliver on that promise while doing it safely, soundly and efficiently.
In many ways, 2009 was a year of uncertainty – and in some cases, fear – for the U.S. and global financial markets. The perfect storm of declining asset valuations, ongoing weakness in the housing market, rising unemployment and a massive buildup of U.S. government debt were all harbingers of an overleveraged, poorly supervised financial sector. In stark contrast to that, Farm Credit’s financial results speak volumes about the accountability, strength and stability of our unique model.
Today, I’ll talk about where Farm Credit stands financially. I’ll discuss what the System has done to help ensure it’s success, and I’ll talk about our plans to maintain that strong record of success going forward.
Where We Stand
Within the generally gloomy financial sector, Farm Credit’s performance in 2009 was exceptional. The System remains fundamentally sound and has been able to meet its funding needs, build capital, and sustain its earnings performance. For year-end 2009, we reported combined net income of $2.850 billion for 2009, and capital as a percentage of assets grew from 12.7% at year-end 2008 to 13.9% in 2009. We did experience some deterioration in credit quality as non-accrual loans increased from $2.33 billion to $3.4 billion over the prior year and non-performing loans increased from 1.5% to 2.1% of total loans. We saw an increase in loan charge-offs from $99 million to $518 million. This weakening reflected performance issues with loans in the livestock, poultry, dairy and ethanol segments of our portfolio.
Throughout the market turmoil, Farm Credit was provided uninterrupted funding market access. The System’s cooperative model, conservative management and solid financials were much appreciated by domestic investors and our selling group, making them more inclined to participate in our debt offerings. Transparency and increased communication of our financing needs were welcomed. The willingness and ability of our Banks to respond to specific investor and dealer interest and increased flexibility in their funding requests contributed to the successful sale and distribution of $116 billion of term debt throughout 2009, surpassing the 2008 total of $111 billion.
What We Did
Much of Farm Credit’s success results from our position as a financially strong, mission-focused and strongly regulated government sponsored enterprise. Our financial reporting is transparent. We report results not only to our members but also to investors and other stakeholders. Farm Credit securities are also protected by our own independent insurance fund. Self-funded by our individual institutions, we are the only GSE that offers such protection to investors. The fund is administered by the U. S. government-controlled Farm Credit System Insurance Corporation holds some $3.3 billion to provide a means to pay investors in the event that a System bank is unable to retire a debt issuance on schedule.
The current economic crisis had a major impact on Farm Credit’s funding programs and practices. In response, the Federal Farm Credit Banks Funding Corporation initiated a comprehensive analysis of Farm Credit funding sources, capital levels, and liquidity positions. As a result of this study, several focus areas were identified by the Banks and the Funding Corporation for further consideration and action. Those areas include issues such as Systemwide liquidity and balance sheet management issues. This ongoing effort will allow us to better prepare Farm Credit to respond to the challenges and lessons learned through this crisis.
What Our Members Faced
Behind the story of our strong performance for 2009, is the story that many of our borrowers suffered financially. Producers in the dairy, swine, forest products and ethanol sectors weathered extended periods of losses and negative cash flows. Volatility on both the revenue and expense sides of the income statement was an added risk element for our borrowers to manage. While agriculture in aggregate has fared better than the general economy, it too has experienced the aftershocks of global economic distress.
In good economic times and bad, the Farm Credit System assists its borrower-owners in coping with their financial challenges. Since the 1980s, Farm Credit has operated with clearly stated “borrower rights,” that apply to borrowers in distress. The Farm Credit System’s borrower rights are thorough and fair, and stand as a model among lending institutions, including private banks. In fact, Farm Credit has been positively cited by the Congressional Oversight Panel – which was created to oversee the expenditure of TARP funds – and others for their effectiveness in helping troubled agriculture borrowers avoid foreclosures.
What We’ll DoFarm Credit is well positioned to withstand the headwinds of economic and political uncertainty. The System continues to face many challenges caused by a weak U.S. and global economy, huge amounts of government debt, and significant uncertainty in Federal government policy. Such an environment raises risks in many aspects of our business, including market access. Through our Funding Corporation, Farm Credit will continue to focus on being prepared for market changes and will continue our efforts to improve and increase communication between the System, our selling group members and investors.
Farm Credit has been fulfilling our mission for almost 100 years and we have been with our customers in all economic climates. We will continue to demonstrate carefully managed growth and a commitment to financial discipline and responsible business practices; this responsiveness ultimately benefits all our borrower-owners. The System will also continue to adhere to good underwriting standards and make prudent decisions in the months and years to come, all while fulfilling our mission to serve agriculture and rural America.
In conclusion, I’d like to say on behalf of Farm Credit that we are proud to help improve the income and well-being of American farmers and ranchers by furnishing sound, adequate and constructive credit to them, their cooperatives and others necessary for efficient farming operations.
We are honored to serve the producers and agribusinesses that are at the core of the American economy and provide food and fiber that affordably, nutritiously supports the health and welfare of the United States and the world. As that economy continues through this time of flux, we believe that Farm Credit has built the strong foundation necessary to help us weather the storm and continue to build on our legacy.