MWBS Can Help Increase Your CUs Earnings with Farmer Mac

Midwest Business Solutions is excited to add another tool that can help make your credit union money—Farmer Mac loans.  MWBS is now a direct seller to Farmer Mac.  FM offers a variety of fixed and variable rate financing on farmland, ranch land and farm facilities.  Leased farm ground may also be eligible.  Variable rates can fluctuate monthly, or on a one, three, five, ten, 7/1, or 10/1 year basis.  Fixed rates can be locked up to 25 years.  Amortizations on these loans can run up to 30 years.  The property must be involved in production of an eligible commodity as those listed by the USDA and must have at least $5,000 of annual gross agricultural sales.

FM also offers an AgEquity Line of Credit that gives the farmer a 5 or 10 year draw period followed by a repayment period of up to another 25 years.  The payments during the revolving draw period are interest only and will fluctuate monthly. 

Mortgage amounts are typically up to $11 million, and the maximum loan request for any one borrower is up to $30 million.  Payments can be set up monthly, semi-annually or annually for your borrower’s convenience.  The interest rates will be directly competitive with those at FSA or with an insurance company who finances farm ground.

These loans also represent no risk to you, as they are all sold into the secondary market.  You can think of it as a FannieMae or FreddieMac loan for farmers.  Since this is the case, your institution does not need to have an experienced ag or business lender on staff.  Any institution could participate in this loan.  Those CUs who have ag loans on their books, may find this product valuable to manage your balance sheet exposure.  You can move the term debt on the land to a FM product while you keep the equipment and operating line debt.  This can also help manage duration risk of placing a large fixed interest rate loan on your books while giving your farmer a product he wants.

The best thing is that even though this product is sold into the secondary market, you still have an opportunity to make money.  You can make money at origination and also can make servicing income throughout the life of the loan, even though it is not on your books.  If you had a FM loan with an average balance of $1 million and were making 50 basis points on the servicing side, this would translate into another $5,000 of non-interest income for your credit union. 

You can find out more about our FM loans at www.mwb-s.com/farmer-mac.   Our site also has information on the different FM loan types, an underwriting grid for various FM loans and a series of questions to help you talk about this product to your customer. 

We will be sending out rate sheets on a weekly basis for the Farmer Mac products.  If you want to get on our rate sheet email list, email me at phil.love@mwb-s.com.

Megatrends in Agriculture

We often tend to focus on our day to day activities and do not spend much time surveying the landscape.  Every now and then, it is good to pop above the tree level and get a view of the entire forest.  What follows are a few thoughts on the megatrends in agriculture that are present in agriculture.

Massive growth in food demand will continue into the future.  Currently, there are slightly over 7 billion people on the planet.  The U.K. Food and Agriculture Association predicted the population will increase to 9 billion before the middle of this century.  This is a huge increase in the demand for food.  We also have increasing middle classes in countries like India and China.  As people move from a lower class into a middle class, they will tend to consume more food.  This fact alone means that agriculture is full of opportunity.

A continuing ramp-up in efficiency and new technology will dominate changes in agriculture.  If the population will increase by 30%, then the current food output must increase as well.  Yet, there is little new arable land available in the world.  Additional production will have to come from smarter and more efficient ways to produce food to meet the growing demand.

The graying of agriculture is a serious trend as the average age of a farm operator is now at 57.1 years old according to the USDA.  This means that eventually these farms, if they are to continue in operation, need to be transferred to younger owners.  Succession planning for your farm clients is important for them to consider now instead of being blindsided by it in the future.  The wise farmer who prepares and navigates around the pitfalls of taxes and operational challenges will have a better chance of leaving that farm to his heirs.

An upcoming generation in farming will embrace new technological advances.  Farm finances can be tracked much better now.  Yields per acre have increased with the use of GPS.  The trend toward more innovations will increase in the future.  Yet, these young producers have never faced a downturn and need to learn from the seasoned veterans how to weather an economic storm.

The growth of mega-producers’ dominance in agriculture presents new challenges.  These entities can produce a concentration risk, and understanding the various attached entities that would be impacted if problems occurred with one of them is important.  For example, a grain elevator may expand to accommodate the production of a large corporate giant, but if something occurs that severely curtails the revenue the elevator would receive from the mega-producer, the elevator may face financial challenges.

Labeling and packaging will drive agricultural decisions in the future.  Take a look at bananas.  Did you know that Chiquita has come up with a special membrane that doubles the shelf life of the product, by regulating the flow of gasses through packaging?  Naturepops are wrapped in a bio-degradable film made from plant matter.  Look at how many different changes are coming in, and how the food that we buy is labeled and packaged.  Each of these innovations impacts our industry.

The energy opportunity in rural areas is huge.  We understand this impact here in the Dakotas, with North Dakota as the second largest producer of oil last year, behind Texas.  The revenue from oil and gas can be a real game changer to the family farm.  There is a push to make our country energy-independent, and oil from the Bakken will play a big part of that.  Other types of energy like wind, solar and biofuels will play an important role also.  The US Department of Energy expects alternative fuels to provide 5% of our energy needs by 2020, which is up from under 2% today.  Europe plans to have a usage of 20% biofuels by 2020, and Feed & Grain estimates fuels from agricultural feed could replace 25-30% of US petroleum imports.  Of course, these factors will increase our prices of food at the table, but it will also mean even more agricultural demand.

Agriculture will continue to be relevant.

  I recently heard of a legislator from a city, who was complaining of folks in rural America and saying they were not relevant today.  In my view, as long as folks like to eat, put fuel in their car, and use many of the products they use today, the farmer and rancher will still play a big role in their lives.

The Farmland Price Bubble

I recently heard of Iowa farm prices soaring to new record highs, some even as high as $20,000/acre.  The Realtors Land Institute reported in September 2012, that tillable land prices in Iowa increased by an average of 7.7% compared to the preceding 6 months.  In the 3rd quarter of 2011, the seventy Federal Reserve District reported land values increased 25% on a year-to-year basis.

We have all seen farmland increase in price substantially since food prices began to climb in 2007.  Here in the Dakotas, the increase has grown exponentially in some areas with the discovery of oil or natural gas.  But an overriding question is, “Will the inflated bubble of land prices pop and if so what will be the effect?”  Will we have another disaster like we had in the 1970s in agriculture, or another crisis like the recent housing crisis?

In the farm crisis of the 70s and 80s, total farm debt to net farm income was as high as 14:1, that is $14 of debt for every $1 in income.  Currently, the debt to income ratio has been closer to 2:1.  Data from the USDA shows the debt repayment capacity of utilization (DRCU) ratio is falling.  DRCU shows the ability of the farm sector to repay its debt over time using just farm income is still under 40%.  At the height of the farm crisis in the 80s, the DRCU was near 110%.  Debt-to-equity values are at 11.7%, showing a strong reliance on equity instead of debt to fund farms.

Part of the reduction in the ratios is from farm asset values increasing, but a lot comes from a more conservative approach to farm debt with producers and investors applying more cash equity into the project and lenders applying lower LTV limits than what they did in previous times.  Entities like Farmer Mac have recently reduced their top LTVs they will look at in areas with steep land price increases.

Clearly, the leverage applied to farms is not near what was used in the housing crisis.  A 2010 survey by the Federal Reserve Bank of Kansas City showed an average LTV of 70% of the land value.  At the peak of the housing bubble, the National Association of Realtors reported in 2006 that more than 40% of borrowers bought a house with absolutely no money down, giving a LTV of 100%.

Even though the farm economy is rather healthy now, caution should be applied.  Some strong growth-oriented producers and young farmers may be leveraged highly or are using long-term, high-priced contracts for leased farmland.  Any correction in commodity prices will compress their operating margins to the point of making the credit a problem loan. 

The lending landscape in agriculture has changed.  In the 70s, farm debt was spread out over a large number of farms and ranches.  Now, it is more concentrated with 10% of the farms generating 80% of the agricultural revenue and carrying 60% of the U.S. farm debt.  The risk today is any third party risk and how US farm debt is interconnected.  Today, if a large producer has a down year, contracts, farm alliance obligations, and ownership interests can make the complex loan a risky portfolio concentration. 

Long term cycles tend to repeat themselves every 30 to 50 years and today we sit nearly 30 years since the last dip.  Some will argue that we are due for a correction, but how severe is yet to be seen and the lack of high leverage in the Ag community points to a softer landing.