News
President's Corner
by Doug Hofbauer
I love the fall! Maybe it’s the harvest season or maybe its football, but in either case we’re finding out how the preparation and work will be rewarded. To use the football analogy, our Association is into our 4th quarter of a year with tremendous volatility and challenge. Because we have some customers that have really been challenged this past year, our Association results through 3rd quarter 2009 have been stressed.
I have used the corollary with staff that our customer’s fortunes are like the “Tale of Two Cities.” Generally, grain operations have been and are continuing to do very well. The market certainly has taken a dip from last year’s highs but countering that are generally good growing conditions and what should be excellent yields. The livestock sector, especially pork, has been hit hard with only about two profitable months in the last 24. H1N1 and the hoopla around it certainly hasn’t helped.
Our cattle producers are generally faring better, but overall profitability is down. Equity lost by pork producers and cattle producers has been discouraging at a minimum and devastating to some. Even in the face of really tough times for the livestock sector, I really admire and respect our customers. They’ve worked hard with us to find solutions. Solutions not always that easy to find.
So what’s the overall impact to our Association? Credit quality remains above 90%, which historically is still a very positive number. We are fortunate that we’ve gone into this credit downturn with very strong credit quality and capital. All during the turmoil in the financial markets, the Farm Credit System and Frontier Farm Credit have met our mission and accessed ample funds at competitive rates for our customers. We never engaged in sub-prime lending or anything like it and have “stuck to our knitting” with solid underwriting standards that have proven to serve us well during this downturn.
Earnings are more challenged. Decreasing credit quality and an increase in non-performing loans require funding additions to the allowance account for loan losses. That directly reduces Association net income. Historically low interest rates lower returns to our net worth just like it does to your savings accounts. Our funding bank – US AgBank – incurred investment losses and lower returns on their capital. As a result, our costs to the bank have gone up and they have chosen not to pay patronage to Associations in 2009. These factors have all contributed to below acceptable earnings for our Association so far this year. Our board will take all of these factors into account in determining if we can pay customer patronage next year from 2009 earnings.
So what have we put in place to offset some of the negative news in earnings and credit quality? We instituted a number of cost savings including reductions in staff compensation, travel, director expenses, and overall budget by nearly $1 million. For financially stressed customers, we jointly developed a plan to return their loan to profitability if at all possible. The Farm Credit System is the only lender that includes borrower rights for distressed loan customers allowing them to apply for loan restructuring. Our mandate is to find a resolution representing all stockholder interests meeting the dual test of being of benefit to a stressed customer while finding the lowest cost alternative for the Association.
We have slowed growth to remain strongly capitalized. We’ve chosen to slow overall growth by temporarily limiting participation purchases. Purchasing participation interests in diverse industries, generally from other Farm Credit lenders across the United States, is an important diversification strategy we’ve employed since 2004. Today about 15% of our loan volume is composed of participations. This has and continues to be a good diversified source of income to the Association. While temporarily limiting participation purchases, we remain focused on meeting the needs of both our current and credit worthy new customers.
This year has been and continues to be stressful financially, as the worldwide recession ripples into the agricultural economy. The prediction is for dramatically less farm income in 2009 as compared to 2008. The general economy appears to be emerging from the recession; however, the recovery appears to be a long and slow climb and that certainly affects both domestic and foreign markets.
Sometimes it’s hard to remain optimistic in the face of what seems to be constantly negative news; however, we do remain optimistic about the opportunities in agriculture. We see customers every day that are making very good progress and building a solid and financially strong business. We’re proud to be of service in helping make that happen for you and your family. It’s a privilege to work with the very best customers and people in the world. Thanks for the opportunity and thanks for your business.
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