Tuesday, September 30, 2008

Financial Markets, Part 2

This post is part 2 of 2. Click here for part 1.

How does the current turmoil in the financial markets affect Farm Credit? Is Farm Credit still lending money? Can Farm Credit still borrow money itself? Will interest rates go up?

Yes, we are still lending money and Farm Credit is still able to borrow money itself.

A good source of information is the Federal Farm Credit Banks Funding Corporation, which issues debt for the System. The Funding Corporation recently posted a "Questions and Answers" document that addresses some of these questions. In brief, the System is financially strong. I encourage you to read the Q&A document yourself. You can find it under Press Releases on the Funding Corporation's web site. Look for the press release dated 9/24/08.

The Funding Corporation's web site also includes regular press releases every time the System issues term debt. At the above link you can find press releases for the two most recent issuances of term debt, called Designated Bonds. On 7/10/08—before the crisis, the System issued $2 billion of 3-year Designated Bonds at a yield of 3.6%. Last Friday (9/26/08) the System issued $1.55 billion of 5-year Designated Bonds at a yield of 4.0%.

Finally, the Funding Corporation's web site includes annual and quarterly information statements for the System which describe the financial condition of the Farm Credit System in considerable detail.

I am not aware that any part of the Farm Credit System is in financial distress at present. Farmer Mac has had negative press recently, but they are not part of the System. Farmer Mac does not obtain its funds through the Funding Corporation and the System is not liable for Farmer Mac's debt. Farmer Mac and the Farm Credit System do share a common federal regulator, the Farm Credit Administration. If you want to follow Farmer Mac, their SEC filings are here. Farmer Mac has exposure to the Fannie Mae takeover (1 million shares of preferred stock) and the Lehman Brothers bankruptcy ($60 million of Lehman debt).

Employees of Yankee Farm Credit are naturally concerned about what is happening with Merrill Lynch, because Merrill Lynch manages our retirement accounts. The purchase of Merrill Lynch by Bank of America is reassuring. Indications are that it will be business as usual with our retirement accounts, except of course that anyone invested in the stock market is suffering declines along with everyone else.

Customers of Yankee Farm Credit may be concerned about what is happening with Wachovia, because we use Wachovia to disburse funds. The purchase of Wachovia by Citigroup is reassuring, and indications are that it is business as usual with our cash disbursement operations. See, for example, this FDIC press release.

Are interest rates going up? Many market interest rates are indeed increasing, as lenders and creditors perceive more risk in the world. LIBOR rates, for example, are increasing. (If you aren't familiar with LIBOR, there is a primer here.) LIBOR rates are important to many financial institutions, including Farm Credit.

Our cost of funds at Yankee has increased as a result of increases in LIBOR. It is likely that we will need to increase interest rates to borrowers at some point, but we are not increasing rates at present. I am aware that First Pioneer Farm Credit is increasing rates by 0.25% effective Oct. 1 and Farm Credit of Maine is increasing rates by 0.25% effective Oct. 8. If we increase rates it will be Nov. 1 at the earliest.

One should certainly not expect Yankee's interest rates to decrease. Historically we have followed changes in the prime interest rate, which in turn has historically followed interest rate changes by the Federal Reserve. We don't expect any immediate change in interest rates by the Fed. But it is possible that the Fed would decrease interest rates in response to current financial conditions. If the Fed does decrease interest rates, we will break with our historical practice and not follow.

What will happen next? I can only note that today is quarter-end for most institutions, and it is likely that there will be more surprises. Stay tuned.

UPDATE 10/01/08: Developments at Farmer Mac: the five banks in the Farm Credit System plus Zions Bancorporation invested $65 million in preferred stock; and Farmer Mac's board of directors appointed Michael Gerber, president and CEO of Farm Credit of Western New York, as acting president and CEO, replacing Henry Edelman, effective immediately. Farmer Mac news releases here. Funding Corporation news releases (including a "Questions and Answers" document about these events) here.

Financial Markets, Part 1

The Dow Jones Industrial Average fell 777 points yesterday, the largest one-day point drop in history. Is it time to worry yet?

Let's review some recent events:

Weekend of Sept. 6-7: The government took over Fannie Mae and Freddie Mac.

Weekend of Sept. 13-14: The government allowed Lehman Brothers to fail. Bank of America bought Merrill Lynch in a fire sale. At the beginning of the year there were five investment banks on Wall Street: Bear Stearns (acquired by J.P. Morgan Chase in March in a forced sale), Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs. Only two were left after this weekend.

Week of Sept. 15-19: The government took over AIG. One institutional money money fund "broke the buck." Another institutional money market fund closed and started to liquidate itself. The government announced that it was working on a plan, of a size not yet determined, and subject to Congressional negotiation and approval, to shore up financial markets.

Weekend of Sept. 20-21: The size of the government bailout plan was announced at $700 billion. Negotiations began with Congress. The last two investment banks on Wall Street (Goldman Sachs and Morgan Stanley) agreed to become commercial banks, subject to regulation by the Federal Reserve. The investment banking model died.

Week of Sept. 22-26: Washington Mutual (WaMu) failed in the largest bank failure in U.S. history (assets of about $300 billion). Its assets were sold to J.P. Morgan Chase. Negotiations continued on the $700 billion plan.

Weekend of Sept. 27-28: Citigroup bought Wachovia in a forced transaction. Negotiations were finalized on the $700 billion plan.

Monday, Sept. 29: The U.S. House of Representatives voted down the $700 billion plan by a vote of 205-228. The DJIA dropped 777 points (7%).

While yesterday's decline was the largest one-day point decline in history, it was not the largest one-day percentage decline. I think that record goes back to 1914 [see correction below], but to keep to more recent times, on Oct. 19, 1987, Black Monday, the DJIA dropped 23%. I remember that day and week. I had been controller of Champlain Valley Farm Credit for a little over a year. Both the economy and Farm Credit survived that crisis just fine.

What about time periods longer than one day? On Friday, Sept. 5, just before the timeline above, the DJIA closed at 11,221. It closed yesterday at 10,365. So although the DJIA dropped 7% yesterday, it is down only slightly more (856 points or 8%) for the tumultuous period described above.

The DJIA is now 27% below its all-time high of 14,165 reached just under a year ago on 10/09/07. It may fall further. We are certainly in a bear market (generally defined as a decline of 20% or more). We have survived bear markets before. In the stock market downturn of 2002, the DJIA fell 31%. In the stock market crash of 1973-4 the DJIA fell 45%. We are a long ways from the Great Depression, when the DJIA fell 89% from 1929 to 1932.

This post is part 1 of 2. Click here for part 2.

CORRECTION 10/01/08: The worst one-day percentage decline for the DJIA was not in 1914 as stated above. It was 10/19/87. Clarification here.

UPDATE 10/03/08: Wachovia is now being acquired by Wells Fargo instead of Citigroup. WSJ article. Wells Fargo news release. Federal Reserve news release. Citigroup news release.

Monday, September 29, 2008

Introducing Audrey Tetu

I am pleased to announce that Audrey Tetu from West Lebanon, NH has joined our White River Jct. staff as a Credit Analyst. Audrey grew up on the Vermont side of the river (Windsor) and attended college at Indiana University of Pennsylvania (IUP) located in Indiana, PA (near Pittsburgh). She studied economics at IUP and is presently pursuing an Executive Graduate Certificate in accounting at Strayer University (online).

Audrey starts tomorrow, September 30th. I hope you'll join me in welcoming Audrey to the Yankee team!

Friday, September 19, 2008

FDIC Insurance Limits

A couple of borrowers have recently inquired about the $100,000 FDIC insurance limit at depository institutions (i.e., not Yankee). Yesterday's Wall Street Journal had a good article on this subject: "Your Cash: How Safe is Safe?" Another good source of information is the FDIC itself: EDIE the Estimator.

Thursday, September 18, 2008

New York Farm Day

On September 23rd Senator Clinton will host "New York Farm Day" in Washington. This annual event to showcase New York agricultural products has become one of the most popular events on Capitol Hill. The array of foods and beverages is dizzying. For photos from last year, see Senator Clinton's web site.

This sentence from the press release is interesting: "Cornell University, a participant in past years, will offer a newly-formulated fruit beverage fortified with protein from skim milk, and will invite participants to suggest names for the new drink." Much of the increased demand for dairy products over the last few years has come from demand for the components of milk.

Yankee Farm Credit is one of the sponsors of "New York Farm Day."

China Matters to Dairy

There was an interesting article in Dairy Herd Management yesterday titled "China Matters!" (to the dairy industry). Dairy industry leaders in China as well as political leaders are promoting increased dairy consumption for health reasons. Even small increases in individual dairy consumption can have a large effect on world consumption, because China's population is so large. There are several interesting statistics and details in the article.

The article also mentions a point made on this blog earlier (here and here) — that the Olympics will likely have a positive effect on cheese consumption in China.

Thanks to Mike Farmer for pointing out this article.

Monday, September 15, 2008

Welcome FP Readers

If you found this blog by way of Financial Partner magazine, welcome!

The president's column in the Fall 2008 issue of Financial Partner magazine was titled "A Farm Debt Crisis?" In it I compared the financial health of the Farm Credit System today with that of the 1980s, when a Federal bailout was required. The column included System financial results through the first quarter of 2008. I promised to write about the System's second quarter results here on the blog.

The System continued to grow in the second quarter. Loan volume increased by 6% in the second quarter, after an increase of 7% in the first quarter. Loan volume in the first half of 2008 increased by 13%, as compared to 16% for the year in 2007 (and also 16% in 2006).

Commodity prices have fallen slightly since mid-July when I wrote my column for the magazine. This should result in less loan growth for the Farm Credit System, and perhaps even a decrease in loan volume.

Loan quality remains excellent with only 0.55% of loans considered high risk at 6/30/08, up slightly from 0.53% at 3/31/08 and 0.43% at 12/31/07. This ratio was 14% in 1985 and peaked at a whopping 26% in 1986. For reference, we consider 2% or less as the standard for this ratio.

The magazine column was an update to a series of blog posts last spring, also titled "A farm debt crisis?" You can find those blog posts in the archives for April, or here: part 1, part 2, part 3.

The Farm Credit System is in good shape. The same cannot be said of other Government Sponsored Enterprises (GSEs). I wrote about this last week: part 1, part 2.

If you are new to blogs, click here for some helpful tips. You may also be interested in this post.

Thursday, September 11, 2008

Promotion - Suzanne

I am pleased to announce that Suzanne Petig in our St. Albans office has been promoted to Credit Analyst.

Suzanne started work for the Champlain Valley association in 1988 as an office assistant. In addition to normal office assistant duties, she has at times provided recordkeeping services to clients, and she is a key employee in the process for closing and booking loans in the St. Albans office. Suzanne is always interested in learning new things and proposing new procedures for doing things better. In 1994 she completed a degree at Trinity College, while continuing to work full time.

As a credit analyst, Suzanne's duties will move beyond loan documention into credit analysis. She is also learning about income tax preparation. We will be hiring an additional office assistant in St. Albans to take over some of Suzanne's current duties.

Congratulations, Suzanne!

Wednesday, September 10, 2008

Entrepreneurship or Innovation?

Ruchel has proposed using "innovation" instead of entrepreneurship for our 4th value:
George, I'm not too fond of the word entrepreneurship - it's hard to say & spell. Plus some people have preconceived notions about what the word means, which may or may not be the meaning that you have attached to it. I'd like to propose we use the word innovative or innovation instead. I think this quote from Wikipedia covers what you wanted to represent with the word entrepreneurship: "The goal of innovation is positive change, to make someone or something better." (http://en.wikipedia.org/wiki/Innovation)

(See Ruchel's comment posted 9/09/08 here.)

Ruchel, thanks for your innovative suggestion! Let's discuss it a bit.

I like the Wikipedia quote. It certainly does capture a good deal of what I am trying to say. For that aspect of what I'm trying to say, I admit that it is a better word than entrepreneurship. (advantage: innovation) I also like that "innovation" is easier to say and spell than "entrepreneurship."

On the other hand, to me entrepreneurship connotes more of a concern with risk, revenue and costs than does innovation. I am trying to represent all of those concepts, too. (advantage: entrepreneurship)

I assume that your comment about "preconceived notions" refers to the fact that some people associate entrepreneurship primarily with startup enterprises while I have been applying the concept to both startup and established enterprises. (advantage: innovation) Were you referring to anything else?

To all readers: What do you think? Which word do you prefer, and why? Is there yet another word that we should consider? Perhaps we should go with both words, as in innovation/entrepreneurship. Please join the discussion by sharing your thoughts in the comments.

Tuesday, September 9, 2008

Addison Young Farmer Meeting

There will be a young farmers meeting at DeBoer Farm on Route 7 south of Vergennes on Thursday September 11. The meeting will take place in the BMR plot on the west side of Rt. 7. and is sponsored by Kurt Vala of UAP and Claude Fortin of Mycogen Seed.

Agronomist Art Graves and nutrionist John Broullette from Mycogen will lead the meeting.

Some of the topics that will be covered: BMR placement on your soils, BMR savings on grain costs and mixing BMR corn with conventional corn.

The meeting will begin at 6PM and dinner will be provided.

For more information, please contact Kurt Vala 603 520-6422.

Monday, September 8, 2008

Fannie and Freddie, Part 2

This post is part 2 of 2. Click here for part 1.

Q. Why is the Federal takeover of Fannie Mae and Freddie Mac relevant to Farm Credit?

A. Fannie Mae, Freddie Mac and Farm Credit are all Government Sponsored Enterprises or GSEs. There is one other major GSE, the Federal Home Loan Banks. GSEs are created by Congress to facilitate the flow of credit into specific sectors of the economy. Farm Credit serves agriculture. The other three major GSEs serve the housing sector.

Most corporations are issued state charters, but GSEs are issued Federal charters. Because of the Federal charter, investors assume that GSE debt is safer than corporate debt. GSEs can therefore borrow money more easily and more cheaply than corporations. Congress intends that this will translate into more and cheaper credit for borrowers—homeowners and farmers.

Farm Credit is the oldest GSE, but it is far smaller than the three housing GSEs. At 12/31/07, total assets were $1.2 trillion for the Federal Home Loan Banks, $900 billion for Fannie Mae, $800 billion for Freddie Mac, and $200 billion for Farm Credit. (Yankee Farm Credit had total assets of $300 million.)

Q. Why do investors assume that the Federal charter makes GSE debt safer than corporate debt? After all, when Congress creates a GSE, it explicitly states that the U.S. government is not guaranteeing the debt of the GSE.

A. No one believes Congress. Indeed, Congress bailed out Farm Credit in the 1980s (see this earlier post), and now there has been a bailout of Fannie and Freddie.

Q. What are the possible implications for Farm Credit?

A. The primary source of funds for all GSEs is debt. All of the GSEs borrow money from the same types of investors. Those investors know that the GSEs share certain characteristics. Our cost of money has been higher than normal since around the end of April, due to the bad news surrounding Fannie and Freddie. It remains to be seen if yesterday's action will help our funding costs, or further hurt them.

Yesterday's actions may also have political implications. In his press release yesterday, Treasury Secretary Henry Paulson said: "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure..."

All GSEs are subject to Congressional oversight and Federal regulation. Farm Credit is regulated by the Farm Credit Administration while the housing GSEs are regulated by the Federal Housing Finance Agency. In Congress, oversight of Farm Credit is delegated to the agriculture committees while oversight of the housing GSEs is delegated to the banking committees. So there is a degree of political separation between Farm Credit and the housing GSEs, but it is something to watch.

Q. Was this a surprise?

A. Some observers have been concerned about Fannie and Freddie for years. I have a thick file of newspaper articles about Fannie and Freddie that I started in 2000. For a time it looked like Congress might do something to reduce the risk of the housing GSEs. But in recent years it became clear that Congress would do nothing until there was a crisis. The crisis has now come.

UPDATE 10/05/08: Interesting New York Times article about what went wrong with Fannie: "Pressured to Take More Risk, Fannie Reached Tipping Point." The pressure came from all sides: banks, investors and Congress.

Fannie and Freddie, Part 1

Yesterday the Federal government took the unprecedented step of placing Fannie Mae and Freddie Mac into conservatorship. The fate of Fannie and Freddie is no small matter: "[Treasury Secretary Henry] Paulson noted that more than $5 trillion of debt and mortgage-backed securities issued by Fannie and Freddie is owned by central banks and other investors world-wide. 'Failure of either of them would cause great turmoil in our financial markets here at home and around the globe,' Mr. Paulson said." (source: WSJ article)

What is a conservatorship? It means the Federal government has taken over management of the companies. Dividends and rights of ownership for stockholders have been suspended. Common stock and preferred stock remain outstanding, but it is unclear if they have any value. Directors and the two CEOs have been removed. With financial assistance from the U.S. Treasury, interest and principal payments on debt continue, including both senior debt and subordinated debt. The companies are not being liquidated, but will likely shrink in size. (more info)

Financial institutions in the U.S. have historically been regulated by the government, but not actually operated by the government. This action is "one of the most sweeping government interventions in private financial markets in decades." (source: WaPo article) The U.S. taxpayer is now liable for the payment of the $5 trillion in debt mentioned in the first paragraph. For reference, the annual gross domestic product of the U.S. was $14 trillion in 2007 (source) and the U.S. national debt is $10 trillion (source). The ultimate cost to the U.S. taxpayer will not be anywhere near $5 trillion. The debt is backed by U.S. home mortgages, and so the ultimate cost will depend on the value of those mortgages, which is presently unknown. The cost could easily be in the hundreds of billions of dollars.

This post is part 1 of 2. Click here for part 2.

Tuesday, September 2, 2008

Doc Rock

The September 2008 issue of Business People-Vermont magazine has a nice article titled "Doc Rock" about Dr. Rocki-Lee DeWitt, one of two outside directors on the Yankee Farm Credit Board of Directors. Dr. DeWitt is the dean of the UVM School of Business Administration. The article mentions that most people call her Rocki. At Yankee we call her Rocki-Lee to distinguish her from Rocky Giroux, also a director. I once got accused of sounding like her mother, who apparently also calls her Rocki-Lee. (I didn't think I was using that tone of voice!)

Rocki-Lee has been a Yankee director since 2004. She chairs our Audit Committee and Strategic Planning Committee (no one else on the Board has a PhD in strategic planning!), and also serves on the Compensation Committee. Rocki-Lee has an agricultural background: she grew up on a farm, studied agricultural economics, worked for International Harvester. As dean of the business school, she also brings a unique and valuable business perspective to Yankee, as well as many contacts outside our normal circles.

Rocki, we are pleased to have you as part of the Yankee team.

George Birkett-Laramie

I am pleased to announce that George Birkett-Laramie from Rouses Point, NY has joined our St. Albans staff as a Financial Services Representative. George is a recent graduate from Plattsburgh State University with a major in Finance and minors in Accounting and Business Analysis.

George will start on September 15th, and will train with Farm Credit to work towards a Tax Specialist designation. The training is extensive and spans two years.

I hope you'll join me in welcoming George to the Yankee team!

Young Farmers Meeting

Addison County Young Farmer Meeting

Date/Time: Wednesday, September 3, 2008 at 6:30 pm, dinner will be provided.

Location: Allan Brisson’s Farm, 1535 Monkton Road, Vergennes. Roger Ellis, New York State Veterinarian, will speak about dairy quality assurance and on-farm drug handling safety.

Sponsors for the meeting are: Elanco and Yankee Farm Credit

Please RSVP: to Vergennes Large Animal Association (802) 877-9901 or vlaassoc@yahoo.com