Producer Finances and What You Should Know Today · 2016. 12. 19. · Volatile (adj.) Derived from Latin volatilis- winged- from volare- to fly 2) readily vaporizable at a relatively

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

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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