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Fitch: Prudent US Farm Lenders Can Handle Weakening Farm Economy
May 6, 2014 / 4:37 PM / 4 years ago

Fitch: Prudent US Farm Lenders Can Handle Weakening Farm Economy

(The following statement was released by the rating agency) NEW YORK, May 06 (Fitch) U.S. farm lenders should be able to handle a weakening farm economy and plateauing farmland values, according to Fitch Ratings. We believe that the prudent steps taken by the Farm Credit System (FCS) during the recent run-up in land values, as well as the structural traits inherent in the system, will be sufficient to stave off any meaningful correction in land values. Overall, we view risk management practices as key credit strengths, particularly relating to credit and liquidity risks. Values of cropland, particularly in the Midwest region of the U.S., have sharply increased over the past few years due to low interest rates and volatile commodity prices. With commodity prices trending downward and long-term interest rates bottoming out in early 2013 and now appearing to rise, we expect increases in farmland values to slow and potentially even reverse, resulting in downward pressure on farmland prices over the long term. There could be some adverse impact to credit quality should land values start correcting. However, we note that the System Banks (AgFirst, AgriBank, CoBank and Farm Credit Bank of Texas) and associations have taken reasonable steps to mitigate a correction, namely lower loan to value limits (65% versus regulatory limits of 85%) and debt caps per acre based on a sustainable price level for commodities. Furthermore, we believe the second-loss position the System Banks take on loans to their respective associations is also a significant risk stabilizer for plateauing or correcting land values. With the exception of CoBank, the majority of the loan portfolios of each System Bank are in a second-loss position, with the underlying associations absorbing losses first. Each association has a different capital and earnings profile, but most are very strong, especially the larger ones. We also observe the level of debt that has been taken on by farmers is relatively small compared with the recent run-up in land prices, strengthening farmers' balance sheets. The value of total real estate owned by farmers grew 7.5% during 2013 compared to 4.2% in property-related debt, according to the USDA. This should allow farmers to maintain adequate financial flexibility in case their net worth is squeezed by falling land values. The ability of the FCS to obtain liquidity at reasonable terms and its liquidity risk management processes are key credit strengths. During the financial crisis, liquid market functions seized up and investors flocked to investments such as U.S. Treasuries and cash equivalents. Through all of the market turmoil, the Federal Farm Credit Bank Funding Corporation never lost access to cost-effective funding and was able to issue discount notes daily with terms that would not have significantly or adversely impacted the financial performance of the FCS. Cost-effective market access was likely maintained due to the FCS remaining intact given its limited exposure to the subprime mortgage market. We believe that such access could be hampered should the system be significantly and adversely impacted by a major disruption in the agricultural sector. However, strong liquidity risk management practices, such as the common minimum liquidity standard (which was codified to regulation by FCS regulators), would allow the system to withstand a market disruption with adequate funding for multiple months. For further analysis of the FCS and explanation on the system's ratings, see "U.S. Farm Credit System and Farm Credit System Banks," published May 5, 2014, at Contact: Bain K. Rumohr, CFA Director Financial Institutions Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL +1 312 368-3153 Christopher Wolfe Managing Director Financial Institutions Fitch Ratings, Inc. 33 Whitehall St. New York, NY +1 212 908-0771 Cynthia Chan Senior Director Fitch Wire London +44 20 3530 1655 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: U.S. Farm Credit System and Farm Credit System Banks here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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