2000 Southern Region AgriculturalOutlook Conference

September 25-27, 2000Atlanta, GeorgiaBy: Bill Melton

Discussion Topic

“Southern Agriculture’s Current Financial Situation”

fromAn Ag Lender’s Viewpoint

Business & Strategy District Structure

AgFirstAgFirstFarm Credit BankFarm Credit Bank(including wholly-owned(including wholly-ownedsubsidiary Farm Creditsubsidiary Farm Credit

Finance Corp. of Puerto Rico)Finance Corp. of Puerto Rico)

27 District Associations 27 District Associations Provide credit and related services to borrowers in Provide credit and related services to borrowers in

15 states and Puerto Rico15 states and Puerto Rico

BorrowersBorrowers82,000 farmers, agribusinesses and rural homeowners82,000 farmers, agribusinesses and rural homeowners

1916 The Federal Land Bank of Columbia was one of 12 banks established by Congress to provide a dependable source of long-term credit to American agriculture 

1933 By another act of Congress, the Federal Intermediate Credit Bank of Columbia was formed as a vehicle to fund short- and intermediate-term credit to agriculture. See 1

1988 The Federal Land Bank of Columbia and Federal Intermediate Credit Bank of Columbia merged to form the Farm Credit Bank of Columbia

1993 The Federal Intermediate Credit Bank of Jackson merged into the Farm Credit Bank of Columbia. See 2

1994 Four associations, formerly affiliated with the Farm Credit Bank of Louisville, re-affiliated to the Farm Credit Bank of Columbia. See 3 

1995 The Farm Credit Banks of Columbia and Baltimore consolidated to form AgFirst Farm Credit Bank. See 4

Business & Strategy AgFirst Farm Credit Bank

Today, AgFirst is the largest single provider of credit to agriculture in its 15 state region (and Puerto Rico) through its 27 (1)affiliated Associations, which are in turn owned by approximately 82,000 farmers, agribusinesses, and rural homeowners

AgFirst’s growth has led to greater geographic, customer, and commodity diversification

(1) To be consolidated to 23 Associations as of January 1, 2001

CHATTANOOGA

Business & Strategy AgFirst FCB Business Profile

Direct LendingLine of credit extended to member associations under General Financing Agreement (GFA)

InvestmentsLiquidity reserveDiversify income source

ParticipationsProvide overlines to member associationsProvide a national reach Diversify income source

Secondary Mortgage Marketing Unit (SMMU)

Facilitates loans through the FNMA and FAMC Diversify income source

Support ServicesAppraisal review, Portfolio Management, Credit Policy Guidance, Information Services, Accounting, Marketing, Human Resources, & Insurance Services

Total earning assets: $11.1 billion as of 6/30/00

Total earning assets: $8.9 billion as of 12/31/95

Participations8.0%

DirectLending67.2%

Investments20.4%

SecondaryMortgage

2.4%

Participations10.0%

DirectLending75.0%

Investments17.0%

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Business & Strategy Association Portfolio Borrower Profile

AgFirst's credit exposure is widely dispersed through 27 associations that serve 82,000 borrowing entities

Association customers, while primarily rural and rooted in farming, are also predominantly part-time farmers and rural homeowners

Full-time farmers' incomes are significantly supported by off-farm income Customer size for both full-time and part-time farmers indicates a large number of small balance loans,

which significantly mitigates agricultural commodity/industry credit risk

Number of Borrowers 32,000 38,000 12,000

Median Off-Farm Income $28,000 $55,000 $45,000

Median Farm Credit Loan $66,000 $36,000 $32,000

Median Total Liabilities $202,000 $100,000 $61,000

Median Net Worth $473,000 $230,000 $74,000

Median Debt: Net Worth .43:1.00 .43:1.00 .82:1.00

Median Spread on Loan 1.90% 2.00% 1.30%

Source: AgFirst Marketing Department

Customer Segment Full-Time Farmer Part-Time Farmer Rural Home Owner

Status of AgFirst FCB

Combined Income of AgFirst and Affiliated Associations as of December 31, 1999 $218.2 Million

Almost identical to previous year’s earnings

Combined income as of June 30, 2000…$110.5 million

An increase of $10 million from the previous year

Status of AgFirst FCB

11th Consecutive Year Where Earnings Have Been Stable or Increasing Over Previous Year

Despite $11.5 million in merger expenses year to date, we expect 2000 earnings to exceed the 1999 level

Anticipate an additional $2 million in merger/consolidation before year end

Status of AgFirst FCB

Paid Patronage of $1.2 billion to Our Stockholders/Borrowers in the last ten years

Gross Loans of $10.1 Billion as of 8/31/00 2.8% average growth for the past 4 years Growth in loan volume was flat during the past

12 months but is beginning to rebound As of August 31, 2000, rate of growth is 2.23%

Total Assets of $13.0 Billion as of 8/31/00

Permanent capital levels at June 30, 2000, averaged 17.6%.

The allowance for loan losses total $261.3 million and represent 2.85% of total loans.

Asset quality has remained stable through August 31, 2000.

Credit Conditions – AgFirst District

Association Portfolio Loan Classification Trend

SubstandardAcceptable OAEM

Baltimore merger

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Oct

-89

Fe

b-

Jun

-90

Oct

-90

Fe

b-

Jun

-91

Oct

-91

Fe

b-

Jun

-92

Oct

-92

Fe

b-

Jun

-93

Oct

-93

Fe

b-

Jun

-94

Oct

-94

Fe

b-

Jun

-95

Oct

-95

Fe

b-

Jun

-96

Oct

-96

Fe

b-

Jun

-97

Oct

-97

Fe

b-

Jun

-98

Oct

-98

Fe

b-

Jun

-99

Oct

-99

Fe

b-

Jun

-00

Credit Conditions – AgFirst District

Earnings remain strong. As of June 30, 2000, ROA averaged 1.99% and ROE averaged 10.08%.

Loan growth increased to 2.23% as of August 31, 2000. The growth trend is expected to flatten out in 2001.

Drought conditions were most severe in the deep South states.

Association Portfolio - Loan Size Dist.

In the district, there are 77 loans that exceed 10% of the holding Association’s capital

The 77 loans are classified: 66 Acceptable 10 Special Mention

Only 2 Associations have more than 1 Special Mention

1 Substandard

Loan size tracks agricultural demographics Significant number of part-time farmers Reliance for repayment on non-farm income

Loan Size Distribution by Dollar Volume Loan Size Distribution by Number of Relationships

2,350

2,994

3,732 3,823

1,138900

1,182 1,079

214

828

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

($ m

illio

ns

)

$0 - $100,000 $100,000 -$500,000

$500,000 -$1 million

$1 million -$5 million

>$5 million

6/30/1996 Total Volume= $8,616mm

6/30/2000 Total Volume= $9,624mm

60,602

18,930

2,082852 66

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

(# o

f R

ela

tio

ns

hip

s)

$0 - $100,000 $100,000 -$500,000

$500,000 -$1 million

$1 million -$5 million

>$5 million

6/30/2000 Total Relationships = 82,532

Market Overview AgFirst District Market Position

Dominant lender to agriculture, agribusiness and rural residents in the eastern US

Successfully increased market share through several agricultural credit cycles while improving credit quality

A balance between full-time and part-time farmers – consistent with demographics

Association originated loan portfolio at 6/30/00 has a weighted average maturity of 7 years

Weighted average maturity has declined over time, indicative of focus on growing the non-real estate portfolio

32.8%35.9%34.0%

30.7%27.8%27.8%

0

5

10

15

20

25

30

35

40%

1993 1994 1995 1996 1997 1998

AgFirst District Commercial Banks FSA Others

Market Share ofNon-Real Estate Agricultural Debt

Source: USDA

Association Originated Loan Portfolio

1995 1996 1997 1998 1999

Real Estate Portfolio 54% 52% 50% 46% 47%

Non-Real Estate Portfolio 46% 48% 50% 54% 53%

Weighted Average Maturity (yrs) 8.7 8.1 7.7 7.3 7.0

Association Portfolio Commodity Diversification

Other Animals4.4%

Other4.2%

Beef9.1%

Timber9.1%

Fruits/Citrus/Vegs6.5%

Country Home Loans6.3%

Swine4.3%

Dairy7.3%

Grain8.9%

Nursery4.5%

Landlords5.2%

Tobacco5.7%

Cotton3.3%

Poultry14.7%

Field Crops6.6%

Total Portfolio: $9.6 billion

As of June 30, 2000.

Association Portfolio Geographic Distribution by State

0%

5%

10%

15%

20%

25%

(% o

f Por

tfol

io O

utst

andi

ng)

NC

Geo

rgia

Pen

nsy

lvania

Mary

land

Ala

bam

a

Ken

tuck

y

Puer

to R

ico

Ten

nes

see

12/31/95

12/31/96

12/31/97

12/31/98

12/31/99

U.S. farm prices Now that'swhat I calla graphicindicator !

Farmers now have a new crop . . . Its called “Mailbox Farming”!

Check is in the mail!

Market Overview U.S. Farmers’ Net Cash Income

43.5 42.2 46.0 45.9 43.2 45.3 50.2 51.042.7

36.4 32.5

9.3 8.29.2 13.4

7.9 7.37.3 7.5

12.2 22.724.3

Direct Government Payments ($ billions)Net Cash Income, excluding Direct Government Payments

* Preliminary ** Forecasted Average of 1990-1998

$52.8$50.4

$55.2 $59.3

$51.1$52.6 $57.5 $58.5 $54.9

$59.1$56.8

Source: USDA 1998

$55.3

Market Overview Government payments as a % of Farm Net Income by Territory

8% 8%

13%

30%

40% 41%43%

22%

0

5

10

15

20

25

30

35

40

45%

CoBank Western AgFirst Texas Wichita AgAmerica AgriBank USComposite

Source: USDA 1998

Recipients of Government Payments

74%

7%8.2%

8% 6%

18.9%

10%

15%

34.7%

5%

15%22.9%

2%

15%10.6%

1%

42%

4.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Less than$50,000

50,000 -$99,999

$100,000 -$249,999

$250,000 -$499,999

$500,000 -$999,999

$1 Millionand Over

% of Farm % of Gross Sales % of Government Payment

Net Cash Income – 8 Principal Crops

0

5

10

15

20

25

30

1988 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002

Without Government Payment

Crop Year

($ Billions)

Effect of Government Payments

Crop Forecast Farm Price

Avg. Effective Price 1/

Corn ($/bu) 1.90 2.70

Wheat ($/bu) 2.55 4.27

Soybeans ($/bu) 4.75 5.83

Cotton ($/lb) 0.46 2/ 0.79

Rice ($/ewt) 6.00 11.95

Average Effective Prices, 1999/2000

1/ Production value plus government payments divided by production.

2/ August-November average upland cotton price.

“The Dilemma”

“Southern States hardest hit by drought represent barely 2% of the U.S. corn average and less than 9% of the U.S. soybean.”

Source: AgWeb.com

Backdrop for the AgFirst Outlook

Rising Interest Rates Weather Pattern with Extremes Low Prices for Many Commodities Uncertain Farm Policy for the Long Term Loan Demand is Weakening in Some Areas Energy Cost have Soared Massive Transfer of Wealth Occurring

IDEAL TIME for Making Poor Decisions!

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Market Overview & OutlookOverview by Commodity Type

CommodityCommodityoror

IndustryIndustryGeneral TrendGeneral Trend

GovernmentGovernmentSupport/Support/

RegulationsRegulationsOutlookOutlook Growth in Growth in

Loan DemandLoan Demand

Meat ComplexSignificant segments: Pork, Broilers, Eggs, Dairy

Significant company consolidation; vertical integration; drive to compete worldwide

Direct support very limited absent dairy. Regulations as to food safety and environment becoming more stringent; cash basis accounting is key.

Near term – very large production in U.S., expansion based on cheap grain. Long term – growth in exports is key.

+

Grain ComplexNo significant segment

Production units consolidating. Biotech boosts yields. Genetic modification will regain momentum.

Support is fueled by mid-west dominance in grains and political factors and will continue.

Near term – over production and price pressure. Long term – U.S. competitiveness wins out.

Neutral

Green ComplexSignificant segments,Nursery, Greenhouse, Sod,Recreational Property, Timber

Economic growthstimulates demand atdouble digit rate.

No support. Limitedregulations.

U.S. economic growth to slow sooner rather than later. Sector growth is geographically driven on East Coast and will outperform the economy

++

Fruits/VegetablesSignificant segments,Citrus, Fresh Vegetables

Globalization of productionand distribution. NAFTAshifting production.

Little impact directly.New crop insurance isavailable. Food safetyconcerns continue.

Consolidation of productionunits. More fresh consumptionvs. processed.

–

Sugar Less U.S. Producerprotection

Very important – support of prices since same istrue worldwide.

Near term – difficult market. Long term – huge integrated producers areglobally competitive.

Neutral

Outlook...

Impact of Stress in Ag Economy Will Not Be Borne Equally Generally some commodities will always be in its down cycle

This year it is broilers, eggs and dairy Regional, the Eastern U.S. is more diverse in its production

agriculture and less dependent on Government support Free Trade is Critical to a Healthy Ag Economy

NAFTA taking hold with Canada and Mexico, our best trading partners

A very positive sign for Ag was the permanent “Most Favored Nation” trading status voted for China

The brightest spots to point to in 2000 A robust general economy that producers a Government surplus $24.3 billion in Government assistance already approved

Outlook…

Continuation of Consolidations within the Production Side & Processing/Marketing Sector Poultry & Livestock

Continuation of Strategic Alliances and Long Term Contracts Between Producers and Food Companies Tobacco . . . Finally! Nursery/Greenhouse Production

Outlook…

Continued Consolidation in Banking including the Farm Credit System

Significant merger activity among associations

23 associations by year end; down from 40 two years ago

Outlook…

Difficult to impossible to get large confined livestock & poultry facilities permitted

Environmental, Land Use, and Food Safety Regulations Strictly Enforced

Interest rates have risen sharply since June 1999 Energy prices will be a large factor in subsequent

adjustments The Fed appears to have achieved a “Soft

Landing”

Early Warning Signals

Are the Statistics Lying of Just Lagging?

Low Delinquencies Normal Charge-Offs Few Foreclosures Stable Asset Quality

Early Warning Signals

Net Farm Income buoyed by Government Payments Creates a false Ag Economy

Ag Real Estate Has Held its Value or Risen in ValueDilemma is that higher land values make price of

product uncompetitive. Example: 4 to 1 difference in price of acre in Iowa and Brazil.

Level of Debt Held by Farmers Not Substantially Higher, but Becoming Increasingly Dependent on Government Assistance for Repayment Capacity

Predictions

East Coast Agriculture Will Fare Better Than the Midwest

Prices for Broilers, Eggs, Dairy and Timber Are All Being Negatively Impacted by Supply Over-Production Will Again Hurt Hog Prices

and Keep Dairy Profitability Very Low Over-Production will Continue to be a

Problem for U.S. Agriculture

Troubling Signs for Lenders

Pattern of “flipping land” by speculators

Owners cashing out Non recourse lending No “skin in the game” – 100%

financing Expansion without regard for

business cycle

Predictions

Another Round Of Shake-Out For Farmers and Ag Lenders

Advances in Biotechnology will Ensure Food Supply is Not Diminished by Departing Producers Consumers may “pay up” for GMO free products

In the Long View, Agriculture will Remain Viable & Profitable for the Low Cost Producers

2000 Southern Region Agricultural Outlook Conference

Thank You!