Quarterly Report on FCS Condition

April 9, 2019

Dennis A. ShieldsHal Johnson

FCA Board Meeting April 2019

1

Tab 2

Topics for Open Session

▶ Economic Conditions Affecting the Farm Credit System▪Macroeconomic factors▪Commodity indicators and farm income prospects▪Diversification of farm sector and risks ahead

▶ FCS Condition and Performance▪System growth ▪Loan portfolio▪Earnings and capital▪Financial Institution Rating System (FIRS)

2

Economic Conditions Affecting the Farm Credit System

Dennis A. ShieldsChief Economist

Office of Regulatory Policy

3

Economic factors remain favorable

Economic factor 2017 2018 2019F

U.S. real gross dom. product (change) +2.2% +2.9% +2.4%

Unemployment rate 4.4% 3.9% 3.7%

10-year Treasury yield (end of year) 2.8% 2.7% 3.1%

U.S. dollar (change) 1.7% stronger 1.1% weaker 0.1% stronger

Crude oil price $51/barrel $65/barrel $56/barrel

Diesel fuel $2.65 per gal. $3.18 per gal. $3.01 per gal.

Sources: Consensus Economics, USDA/Economic Research Service, U.S. Energy Information Administration.

4

U.S. agricultural exports increased in 2018, but final quarter was weak

U.S. agricultural exports

5

144.4 150.0

133.1 134.7 138.2 139.6

45.3 43.036.3 41.3 39.3 35.6

0

50

100

150

Calendar 2013 2014 2015 2016 2017 2018

$ billion Jan.-Dec. Oct.-Dec.

Source: USDA/FAS Global Agricultural Trade System.

Trade impact: the market is telling farmers to plant fewer soybeans (but weather matters)

Prospective plantings: 2019 change from 2018

Source: Prospective Plantings, 3/29/19, USDA/NASS.

Soil is saturated in major producing areas

Source: NOAA/National Weather Service. 6

-4.6

3.7

-0.6

-0.3

-2.0

-4.4

-6 -4 -2 0 2 4 6

Soybeans

Corn

Sorghum

Cotton

Wheat

All crops

Million acresCalculated soil moisture historical ranking in percentile

Soybean stocks to remain high for 2019 crop year even if planted area declines

U.S. soybean prices and ending stocks

Source: USDA. 7

0

200

400

600

800

1,000

0

3

6

9

12

15

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Mil. bushels$ per bushel

Ending stocks

Farm price

Weak or negative crop margins put pressure on farm returns

Crop margin including government payments

Sources: FCA-ORP using data from Iowa State Univ. (soybeans and corn), Kansas State Univ. (wheat) and USDA.8

-5-4-3-2-101234

Soybeans Corn Wheat$ per bu.

2009 2019F 2009 2019F

2009 2019F

2014

2014

2014

Farm prices depend on location

Soybean prices in February ($/bu.)

Source: USDA/NASS (monthly farm price).

9

U.S. farm price $8.52

North Dakota $7.82

Iowa $8.38

Illinois $8.71

Ohio $8.86

Soybean basis (cash minus futures)

Source: https://www.dtnpf.com/agriculture/web/ag markets/local-grain-bids on April 1, 2019.

Milk production growth slows; farm prices begin to recover

U.S. milk production growth

Source: USDA.10

0.0

0.5

1.0

1.5

2.0

2.5

2010 11 12 13 14 15 16 17 18 19F

% change

14

15

16

17

18

19

20

Jan Mar May Jul Sep Nov

$ per cwt 2017 2018 2019

U.S. farm milk price

% change in production

2017 2018 2019F

+3.8 +2.6 +1.5

+2.4 +2.2 +1.1

+2.6 +2.9 +4.2

0

20

40

60

80

100

2000 04 08 12 16

Billion lbs.

Beef

Broiler

Pork

Production growth in 2019 to slow for beef and broiler meat

U.S. production

Sources: USDA and Livestock Marketing Information Center. 11

19F

Net cash farm income in 2019 looks like the four-year period before the boom

U.S. net cash farm income

Source: USDA/ERS. 12

1999-2018 average = $106 bil.

0

25

50

75

100

125

150

175

1999 01 03 05 07 09 11 13 15 17 19F

$ billion(2018 $)

Farmland values are mixed in early 2019

13

% change in $ value of “good” farmlandTop: Oct. 2018 to Jan. 2019

Bottom: Jan. 2018 to Jan. 2019

Source: Federal Reserve Bank of Chicago.

▶ Some markets show continued strength; modest declines in others

▶ Land for sale continues to be relatively modest and balanced with demand

▶ Surveys of lenders and real estate professionals indicate stable to somewhat lower cropland prices in 2019

Trade and farm policy update

▶ U.S.-Mexico-Canada Agreement contains small improvements over NAFTA for agriculture

▶ A potential agreement with China▶ Farm programs for crops, dairy program upgrade, and

assistance for disasters (e.g., Midwest flooding)

14

Commodity diversification in agricultural production varies by state

The farm sector is more diversified in California than in other states

Source: FCA-ORP using USDA/ERS cash receipts data for 2016. 15

0

20

40

60

80

100

0 10 20 30 40 50 60 70

Percent of state total cash receipts

Number of commodities

Illinois North Dakota California

CA cash receipts1. Milk (13%)2. Misc. crops (12%)3. Grapes (12%)4. Almonds (11%)

(48% of total)

IL cash receipts1. Corn (46%)2. Soybeans (35%)3. Hogs (8%)4. Cattle (4%)

(93% of total)

ND cash receipts1. Soybeans (29%)2. Wheat (19%)3. Corn (15%)4. Cattle (11%)

(74% of total)

Concluding comments

▶ U.S. farmers adjust to tariffs and weak/uncertain returns ▪Plantings to shift away from soybeans, but stocks remain high▪Expansion slowdown for meat, poultry, and milk supports prices▪Continued (and potentially severe) farm financial stress results in

voluntary exits; others adapt to economic conditions; enhancing marketing and risk management skills are key

▪Farm safety net might not help much if tariff issues are not resolvedRisks ahead▶ Permanence of lifting tariffs on U.S. farm exports▶ A decline in commodity prices from current levels could impact land values

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Questions

THANK YOU

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Farm Credit System Condition and Performance

as of December 31, 2018

Hal JohnsonSr. Financial AnalystOffice of Examination

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Topics

▶ System Growth

▶ Loan Portfolio

▶ Earnings

▶ Capital

▶ FIRS Ratings

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The System continues to grow at a measured pace; growth concentrated in the 4th quarter

Source: FCS Information StatementLoan type as a % of portfolio: RE Mortgage 46%; Prod. & Intermediate 20%; Agribusiness 17%.

20

214 215230 230 247 261

283304

320330 349

161 165 175 175 192 201217

236249

259 272

13.0%

2.1%6.4%

-0.4%

9.9%4.8%

8.0% 8.7%5.5% 4.0% 5.1%

$ bi

llions

Total System Assets

Total Gross Loans

% year-over-year change in Gross Loans

5.9 6.9

6.2

4.4 4.5 4.5 6.3

2.2 2.9 3.3

21.8

11.1

8.3

6.5

9.2 8.08.7

5.5

4.0 5.1

0

5

10

15

20

25

2014 2015 2016 2017 2018

RE Mortgage

Prod. & Intermediate

Agribusiness

Total Portfolio

Loan Growth by Loan Type(% change year-over-year)

System Growth

Portfolio credit risk edged higher in 2018

Source: FCS Information Statement

% of Loans Classified less than Acceptable

21

6.6

7.1

10.6

4.3

6.1

6.5

10.0

4.7

4.0

3.8

5.4

4.3

0.0 5.0 10.0

TotalPortfolio

Real EstateMortgage

Production &Intermediate

Agribusiness

Dec-18 Dec-17 Dec-15

1.190.60 0.62

2.42

3.543.00

2.041.63

1.97 2.20

1.28%

0.56% 0.43%

1.50%2.14%

1.72%

1.01%0.69% 0.76% 0.81%

Nonperforming Loans ($B)

Nonperforming Loans as a % of Gross Loans

Nonperforming loans

System portfolio is diversified by commodity

System Loan Portfolio by Commodity Concentration

Source: FCS Information Statement

System Loan Portfolio($ in millions) Dec-18 % chg.

yr. over yr.Cash Grains 43,673 1.2%

Tree Fruits, Nuts & Grapes 15,655 9.6%

Field Crops 14,936 2.9%

Other Crop Production 15,290 5.8%

Cattle 24,738 4.0%

Dairy Farms 18,139 5.5%

Poultry & Eggs 7,377 4.2%

Hogs 6,586 9.6%

Other Livestock 7,107 2.3%

Rural Infrastructure 29,160 4.3%

Food Products 18,857 4.9%

Rural Home 16,563 3.0%

Forestry 15,768 1.9%

Farm Supply & Marketing 13,773 12.4%

Other 24,322 12.4%

Total Loans Outstanding 271,944 5.1% 22

Cash Grains16.1%

Tree Fruits, Nuts & Grapes

5.8%Field Crops5.5%

Other Crops5.6% Cattle

9.1%

Dairy Farms6.7% Poultry &

Eggs2.7%

Hogs2.4%

Other Livestock

2.6%Rural

Infrastructure10.7%

Food Products

6.9%Rural Home6.1%

Forestry5.8%

Farm Supply & Marketing

5.1%

Other8.9%

Portfolio volume is also geographically distributed

Top 5 States % of Portfolio

California 11.0%

Texas 6.9

Iowa 5.4

Illinois 5.0

Minnesota 4.5

Source: FCS Information Statement 23

System Loan Portfolio by State as of yearend 2018(only states with percentages greater than 1% are displayed)

The System is financially sound; earnings remained strong in 2018

Source: FCS Information Statement 24

3,495 3,940 4,118

4,640 4,724 4,688 4,848 5,189 5,332

667 430 313

(31)

40 106 266 197 194

2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Income

Provision for Loan Losses

System Earnings ($M)

4.24 4.06 3.79 3.59 3.46 3.41 3.48 3.75 4.21

1.63 1.38 1.08 0.95 0.96 1.01 1.171.50

2.09

2.61 2.68 2.71 2.64 2.50

2.40 2.31 2.25 2.12

2.82 2.86 2.87 2.78 2.64 2.55 2.49 2.48 2.46

2010 2011 2012 2013 2014 2015 2016 2017 2018

Rate: Earning Assets Rate: Interest-Bearing Liabilities

Net Interest Spread

Net Interest Margin

Earnings Ratios

System is well-capitalized

Capital and Liquidityas of December 31, 2018

▶ Retained earnings as a percentage of total capital equaled 79.5% of total capital

▶ The System’s liquidity position equaled 182 days of coverage

▶ Days of available liquidity for the 4 funding banks ranged from 160 to 241 days

Source: FCS Information Statement Restricted capital represents capital associated with the Insurance Fund. 25

30.0 33.3

35.9 38.6

42.6 45.7

48.8 52.3

55.4 58.4

13.9%

14.5%

15.6% 15.7%16.3% 16.2% 16.1% 16.4%

16.8% 16.7%

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

System Capital

Total Capital less Restricted

Capital-to Asset-Ratio

Total System Capital ($B)

System FIRS ratings

FIRS Ratings• Composite FIRS ratings reflect

the System’s solid financial performance and acceptable portfolio credit quality

• Over 90% of System Banks and Associations have a Composite FIRS rating of 1 or 2

• 3 rated or lower institutions account for less than 2.5% of total System assets

Composite FIRS Ratings Farm Credit System Banks and Associations

Source: FCA's FIRS ratings database 26

37 43 44 46 44 39 34

38 31 32 29 3129 32

11 8 4 3 25 7

0

10

20

30

40

50

60

70

80

90

100

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18N

umbe

r of R

ated

Inst

itutio

ns

1 Rated 2 Rated 3 Rated or lower

Summary and final points

▶ Challenges facing agriculture:▪ U.S. economic factors are generally favorable, but tariffs, trade

uncertainties and labor costs bear watching▪ Farm sector concerns include crop prices and ending stock levels,

export demand, rising input costs, and deteriorating liquidity levels

▶ The System is financially sound and strongly capitalized▶ While portfolio loan quality is acceptable, stress remains

elevated for agriculture▶ System institutions have significant risk-bearing capacity and

are well-positioned to support agricultural producers27

Questions

THANK YOU

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