Federal Agricultural Mortgage Corporation (AGM) Earnings Call Transcript & Summary

Well, here we are. It is 12:00 Eastern Time or 11:00 Central time, which you're coming to us from Mountain or West Coast time, you can do the Math on that. I won't go hit all the time zones. But I'd say we get fired up. So we're going to go ahead and kick off. And today, we're excited to bring to you a summary of our most recent publication of the feed. So after a little bit of a hiatus, we're back, and we're excited to talk about the winter feed and [ raise ] on economic updates. Let's take our perspectives, Farmer Mac, we were coast to coast, active secondary market and lending. So we take a wide view of everything that's going on in the agricultural sector. And the feed is our perspective on all things, Ag, world economics, energy economics, infrastructure, you name it, the feed is the place that we look to push all that content into. And today, we're going to walk through what we saw in our most recent release back in January, what we saw and what we're continuing to see in the agricultural economy. A couple of just basic level-setting comments for the meeting today. We're going to mute everybody. So if you do come in, you're going to -- your line will be muted. We just do that, not the silence people, but just to maintain the best possible audio quality because, as you noticed, we are recording. So we're going to publish the recording of our session today on our website, www.farmermac.com, and any one of your colleagues is live stream please point them in that direction to have a really important content. And they're going to want to see it. So it's on our to encourage questions. So you got a chat box, chat feature and Zoom. We're going to monitor that. I got that up on my other screen, -- so going through our content free to ask questions, and then we'll hold a little bit of time at the end. We're going to try to do this our content in about 30 minutes, it tends to be what we try to target for this session. At the end, we could do a little bit of Q&A, but you might as well just do it as we go. Do you want to hang in for the entirety of our session today, too, because we will ask you to give us some feedback on the content we provided and maybe some ideas for what content you want to get in the future. So Betsy is going to hang with us and do a survey at the end and take that inventory and account and we'll look to you to figure out, hey, is this the context you want? Or what else can we do to continue to bring even better content. Before I jump right into the agenda, which we're going to follow a time-tested flow here where we talk about our analysis. What else is going on in the news and how do you -- the access to publication, the feed and ask us questions. But before we dive into the content, I do want to introduce the latest member of the Strategy research and analytics team here at Farmer Mac, Blaine Nelson. Just a wonderful resource and background in agricultural finance and agricultural economics, has a wealth of knowledge and experience in all things related to agricultural and rural economics and comes to us by way of Minnesota and a [ farm-Kid to boot ]. So Blaine, I just wanted to give you a quick introduction for all of our viewers out there and say welcome to Farmer Mac, and we're excited to have you on the session today.

No, thank you, Jackson. Coming from outside of Farmer Mac, but joining the team here. I can just say from an outside perspective, a lot of respect for what Farmer Mac does and so super excited to be here and to be a part of this team.

Well, no webinar Farmer Mac refresh webinars is complete without throwing somebody right into the deep end. So that's what I'm going to do for you with our very first highlight some winter feed. We talk about the Farmer economy. And we're using USDA or whatever gets updated, and we try to keep everything fresh. And as we were preparing for today's session yesterday, guess what, USDA draw 2023 update. So rather than just cover what we wrote in December and January with older data, we thought, hey, let's go ahead and do a hot take on the most recent information. So for that, Blaine, I'm going to put you right in the hot seat and tell us what will the USDA released yesterday? And what does '23 look like maybe compared to '22?

You're asking for a hot take. So let's see, how do I unpack USDA data into a hot take? Let's just think about that for a second. No. Thank you, Jackson. The update yesterday, if I were to summarize it in one sentence, I'd say, it's largely in line with what we expected. The USDA puts out 3 of these forecasts a year, generally February, August, September and in December, their February forecast tends to be a little bit more pessimistic, if you will. There are studies out there that show that, probably some reasoning why that is. So coming off an extremely strong last year, the highest net cash farm income year, I believe, on record and very high even after adjusting for inflation. The USDA expects that we're going to see traction this year. We can talk about some of the reasons why, but at a very high level, they're forecasting about a 21% decline in net cash farm income. There wasn't one specific commodity they were saying that outpaced the others in terms of driving the decline in farmer seats largely -- it was really across the board. -- livestock crops, you name it. They just see kind of a pullback in revenues there. They also see an increase this year in prices of expenses. I believe a 3% increase coming off of last year's 19% increase in broad overall expenses. So, you put those 2 factors together, and what you see is a pullback in net cash farm income. It still is going to be a very strong year from a historical perspective. And I really want to drive that point home, if nothing else, it's going to be a good year. They put on a really good webinar, so I don't want to just kind of read through and hit all of their data points if you wanted to hear that. I don't mind putting a plug-in for the folks at the USDA. But hitting on a couple that I think stood up to me, they do expect working capital to decline a little bit this year. As one might expect, higher expenses, lower revenues that tends to occur. They also expect the debt-to-asset ratio to tick up a little bit. At a very high level, both things that we're monitoring, but both working capital on the debt-to-asset ratio still in a, what I would say, is a very strong, if not fantastic position, just coming off 2, if not 3 or 4 really strong years in terms of farm income. So, you [ got lots to unpack ] Jackson. I'd turn it to you . What's it to you?

Everything you just mentioned, particularly, you can see in the gray bars you got up on the screen in front of you for expansions in the Ag economy. We are coming off the longest running expansion in the agricultural economy since World War 2. So, pretty hard to see that going up, continuing to go up. Like what are the forces that we're going to drive that? So, to your point, almost guaranteed to see a drop, not just because that tends to be what happens in the February at least. But hard to see all the forces coming together to push farm incomes any higher. So yes, expect to drop, still not that bad when you compare it to history. I love your point on, hey, look, let's look at the last 10 years, we're still 20% above our 10-year average in terms of the Ag economy. But that drop looks pretty precipitous. And I appreciate your plug of that ERS farm income team, [ Trey ] does a fantastic job. Their webinar, I believe, is available on the website. So, worth a quick watch to hear sort of their explanation of all these things. Maybe [Technical Difficulty] just 2 things. I'll comment on the increase in interest expense on interest rates a little bit kind of when interest rates go up, but it was probably the largest increase in like on a percentage basis on the farm expense increase side. And the other thing, the biggest drop was on the revenue side, not the biggest drop, but a fairly large drop was in government receipts. So, we've got a lot of revenue coming in. Maybe the government doesn't have to pay out a lot in ad hoc payments. And I think you see that shrinking of the income from government sources to farmers probably makes sense given the context of the strength and success of the Ag economy. But the [ lowest ] number as a percentage base, I think, since 1982 or the early 1980s. So it's been a while since we -- government payments be that slim in terms of the total support for the Ag revenues, but there's a reason for it. And it's that incredible run-up in revenues that we've experienced in the last couple of years. Awesome. All right. Well, so we've got the chat box open. If you do have questions, don't forget about us, go over there and hop in the chat box. And if I don't have any more questions to pop, I'm going to jump to our second highlight, which was who's lending? And how are the dynamics of competition out there for the farm balance sheet and farm real estate, non-real estate debt? How are those things unfolding? And we did announce this. We had our 2 business officers at Carpenter kind of weigh in on this, too, because he sees a lot of these strategies and changes out in the marketplace. So he sees them at that very high level. So he did a great job in that article. And maybe one of the things I'll highlight here is just, when you see the orange bars, that's the commercial bank sort of adding to such as the change in farm mortgages. If it's an orange box, that means banks are growing. If the blue bar is positive, that means the farm credit system is growing, and you see periods of time where they're both growing, and you see periods of time where one is growing faster than the other. The last couple of years has really tilted towards the farm credit system growth. And if you look back at what are the trends and drivers in there in a declining interest rate environment, you tend to see the farm credit system outcompete in some of those long-term products compared to what a bank is most competitive at offering, which is sort of intermediate and short-term products. So, when interest rates are falling, typically, what you see is the farm credit system that bars may be a little taller than the commercial bank. And in periods of time when interest rates are rising, the opposite is true. So, what we saw maybe in 2021 and parts of '22 are starting to flip as that interest rate market changes. So, as long rates have started to go up and short-term rates start to go up, banks have actually had maybe a little bit more competitive offering as they've been able to tap into deposits and those have a cheaper maybe interest rate compared to things like long-term bonds, which is what the farm credit system uses to fund their loan products. So it's an interesting way to see, who's competing out there in the marketplace? I'm sure many of you, if I ask you directly, who's your competitor and you're in a farm credit institution, you're going to say my local bank, the community bank in my territory. And if you're one of our banking partners, you're going to say, "Hey, it's probably that farm credit system, institution maybe who's bumping up against my territory or it's an insurance company. Blaine knows a thing or 2 about the insurance companies and where they compete in this marketplace. But it does change and it ebbs and flows over time and right now, we're in a rising interest rate environment, and the banks are starting to take back some of that market share on the farm mortgages. But it's a tall order because the farm credit system really edged out a lot of market share in '20 and '21. Blaine, what [indiscernible] ?

No. I think, listen, you hit on all the end points, especially just referencing back to article. I think some additional context, and I'm just going to reference back to a bunch today because a graph like this, it can look disconcerting in terms of loan volume going out, especially here, we're focusing just on farm mortgages. Again, going back to what the USDA is saying yes, farm lending volumes or farm mortgage lending volumes are increasing. And I think they said,, like 7.5% increase this year is what they're expecting or thereabouts. Again, the sector from a debt-to-asset ratio still remains very low leverage and comparing back against the 1980s when you saw the looking here on the graph and you see the run up to the 1980s in lending volumes. The debt-to-asset ratio there was almost double what it was today. So yes, there has been a fair amount of lending activity, especially in the farm mortgage space, but I think the sector remains in strong financial footing. The other thing I'd just note is that rising farmland values obviously help in terms of new loan volume going out the door. So just simply maintaining a stable debt-to-asset ratio, but given what rise we've seen in farmland values, you'd see a fair amount of loan volume going out the door. So that's part of what's going into this graph. But yes, all good points, Jackson.

I can't stress enough what you just said about the sector leverage remains low -- it's a great feature just added to acre value if there's any acre value subscribers or future subscribers. So check this out. But right now, if you're a subscriber [ first ] subscriber, you can actually click on recent sales transactions. And if there was a mortgage attached to that maybe it takes a couple of months to get those in, so you got to look backwards a little bit. But you can see how -- just how many sales in the last 1, 2, 3 years are cash based. So there is no mortgage attached to enough cash either from savings, government support programs, a great run-up in commodity prices to just buy that land out right. And we do hear those too on maybe the investor side of cash transactions-- look in the residential world. We see it happen all the time in the Ag space where it kind of ebbs and flows with the health and strength of the Ag economy. And there's still a tremendous amount of equity out there on the farm and more equity is in the land itself. So I couldn't stress that enough, and thank you for that highlight. All right. Number 3, inflation, we touched on this a little bit. But Blaine, why don't you talk about sort of that relationship and maybe where we're headed, hopefully, in a better direction.

Yes. I think when you say you hope that inflation is headed in a better direction, it's almost like you're channeling your inner [ Drum ] Powell. A lot of comments from the Federal Reserve and the Board closely monitoring what's going on with inflation. It does remain elevated. I think the article harkening back to the feed does a really nice job kind of walking through, what were the drivers behind inflation? And why did we see kind of the delay. A lot of people like to go back to their ECON101, they think about the money supply. Well, the money supply went up in the most recent spike back in early 2020. Why did it take so long for that to filter through? And I think the article does a nice job kind of connecting some of those dots. There has been a long-term relationship with long-term interest rates and inflation. One of the graphs we don't show here is though, is the real interest rate, so when talking about comparing those 2 and what that means for I think what I care most about and what you care most about in terms of farmland values, real interest rates remain historically low when you consider where the tenure is today. Now the tenure has come up. I think this morning, it was somewhere in the high 3% range. But just overall, when you compare that to what inflation is that we're sitting at negative real interest rates. And that tends to be supportive for long-term asset prices like Farmland. And so, I know we're going to talk a little bit more about farmland in the next slide, but that's something that's near and dear in my heart just those 2 things. I want to make sure that I touch on some of the notes that we've written down here. So let's talk then just real quick about what we think might happen in terms of this year going forward. A lot of activity, a lot of commentary right now in terms of the most recent increase in short-term rates. The Fed kind of pointing out that, yes, things have changed somewhat. Inflation has come off of its peak, but it's still elevated. And so they haven't -- they elected to go with maybe a smaller interest rate increase at the last meeting than maybe some folks were expecting. That being said, there is a fair portion of the board that is still relatively hawkish that does think that we're going to need to see sustained interest rate increases throughout this year on the short end of the curve. And even on the long end of the curve, thinking about, what does that mean in terms of the Fed's balance sheet and some actions that can be taken there. I personally don't think that we've seen the peak in short-term rates. On the long end, I think that we may be in for a bit more of an elevated, at least a comparison to where we were in 2020 and 2021. I don't see us going back there, at least in the short term. But yes, Jackson, a really good article, but I'm curious, as you were constructing this, this was the one that you wrote. So what was kind of driving your other ship here?

I mean you hit on the key things. There's obviously a relationship if you look at the shape of these 2 curves, I mean, the correlation is off the charts. And the key drivers for inflation in '20 through '22, it's a combo deal, right? It's not one thing or the other, that tends to be people kind of shouting from multiple sides of this issue, there's too much money in the marketplace. No, no, know that the supply chain was just -- was crimped and we didn't have enough stuff. And honestly, it was both. It was both things happening at the same time. And I agree with your assessment here like it's going to be hard to get that back down to something like 2%. Globalization, did it for us for a while, we exported all that inflation today. It's harder to see that. We're seeing more of that work come onshore and there's a lot more effect saying, "Hey, maybe 2% is going to be a tough nut to get inflation back down to? That has real implications for the future path of interest rates and where we settle into the future. So what the Fed will do, I mean, you ask a Fed, member of that open market committee what they're going to do or what they expect to do, and you'll get a bunch of different answers. But you tend to see kind of 2 [ paths ], we're going to hold it for a while or no, no, we still have some work to do. Either way, it's not already to time. No matter who you're listening to, if it's a super hawk or just a regular hawk, everyone's pretty hawkish on the current level of short-term rates, which means we're not done, if inflation is not done and the Fed says, hey, we still need to being a little bit here. We're not quite done with that interest rate environment yet. That's a lot I've got a question here. I don't want to go too far into the future of addressing this question because Matt raised this here as we're flipping the slides on interest rates mean we had in the chat, which was, "Hey, yes, the asset ratio is low, but wasn't it low before the 1980s too. And when land values dropped, which is sort of the [indiscernible] debt-to-asset ratio, that's what drove up the ratio of debt levels to assets." So I totally agree with you. It's almost like a construction of the ratio until you see things in the nominator, but not things in the denominator. But if things in the denominator change, you would, for sure, see that ratio go up. And that's what we saw in the mid-1980s when you got like a 20% debt [ aeration ] wasn't because people took on a bunch more debt that's because the assets fell in value. So I'm totally very with you, Matt, great question, great clarification point on that, but I will maybe push back a little bit and say the affordability of mortgages today. And so when I think about the debt levels, I don't necessarily think about the absolute level of debt to be more about what is the capacity of those assets to cash flow the debt, and it's a very different picture today than it was in the ---§ Blaine, maybe I'll let you answer Matt's question as well.

Yes. You hit exactly what I was going to kind of point to is a lot of the current underwriting standards today that focus so heavily on cash flow and will -- debt service coverage ratio go right down the list. A lot of those came out of the 1980s. It was previously, again, my understanding, this predates my time by just a year or 2, but at least in the Ag finance space. But a lot of great literature out there just focusing on the underwriting standards and how they change coming out of the 80s. So could we see a sharp decline in the value of assets in the Ag sector? Anything is possible. Is it likely? I would argue that it's very unlikely and especially given, again, where farm incomes are and given how the U.S. Ag sector as a whole has evolved. I just don't view it as the highly likely outcome.

Well said, well spoken. [indiscernible] just a little bit about farmland back. We kind of touched on this a little bit, but there's a great article in the issue that kind of goes into more detail here. In '22, so this is a series that comes out every year from the USDA, the great folks at the NAS team does a massive survey of all land holds out there and say, how much has your value changed and they compile all the data in last year in June of '22, we saw this number come out for the first time double digits in several years. So I think 2013 and '14, maybe it was double digits, and it's been low single digits ever since. And we got last year in the numbers. I like to look at 2 years because I think '21 and '22, a lot of the same drivers were moving land dies a lot of cash coming in, low interest rates come on those 2 things, you get a big push in the farmland values, [indiscernible] state by state. The great thing about the USDA series, you can look at any state, you can look at the type of land. We picked the U.S. total, that's right there in the middle and the 2-year total is at 20%, but places like Kansas you're coming to us from Kansas who I bet [ mind ] your head when you said it's gone the land has gone up a lot in the last 2 years. In South Dakota, Minnesota, so the core Midwestern Corn Belt saw a great deal of appreciation in the last 2 years because of high commodity prices, extra cash that flowed through the income and balance sheets. And that low interest rate environment that made it attractive to go after some of that land that you've been eyeing for maybe a couple of years and just all of a sudden having cash to be able to do it, low-cost debt to finance it. And while we saw that push in land values. It looks like a lot, say 12.4% is like sort of a big number when we think about U.S. total. But let's put that into perspective. Number one, inflation was about 9.5% during this time frame. So in real terms, asset or farm estate assets only went up about 3 percentage points. Historically, that's not even in the top 20 in terms of years in which land values change. So it's not a huge number when you think about the cost of everything else also went up almost double digits. And the other thing other asset class is, boy, it was a big year for a lot of asset classes, and I'll point to residential real estate, maybe as one that was a little bit -- I hate to say irrationally exuberant but we economists like to use other people's words all the time. And that's one that I'll pull out here to say increases in the residential world were much higher, like double what they were in farmland real estate. So,§ when I start to look at 12.4%, and I put that in context of how much other stuff went up. And then what was the other real estate assets doing at the time, it looks a lot more modest with those 2 things in comparison. Now when you see a sale at $30,000 an acre or $35,000 an acre in the Midwest, it really makes you think about, these things might be running away with us, but those are sort of tail events. And not every piece of land is selling at that sort of eye-popping price. When you go over the averages, -- maybe it's a little bit more moderate than some of these headline numbers might indicate. I'll pause there. Blaine, you've been working in sort of farm real estate for a while now, family owns farmland. What are you seeing? What are you thinking about in terms of farmland values?

I think I like this graph because it does do a good job of just explaining that, there is variation across the country. There's variation across different counties. I mean there's variation everywhere. And there's a lot of reasons behind that, so we can talk about that for a while. But I think overall, the USD does a fairly decent job of coming together with -- or putting together a good kind of composite average for the country. Some things on my mind as we went into the COVID era in terms of, what are farmland values doing? We saw an immediate uptick, especially in kind of farmland that was maybe a little bit closer to the larger cities. I think that in terms of where would I think about the most risk to farmland values. I think about some of those that maybe did see some of that irrational exuberance. The farmland value close the cities folks are buying. They want to get out of the city. Now they're coming back to the office and that piece of property, 60 miles outside of the urban area isn't as attractive or even in terms of, okay, residential development potential, what we've seen in terms of building permits, that farmland that's right on the border of cities, we're seeing some pullback there. I don't see it in terms of just your Class A farmlands in kind of your core agricultural states. And I would put some money on betting that the survey results that come on August of this year, which we'll, of course, report on would kind of confirm that farmland values are holding up very well. Do I expect that we're going to see a huge increase, record level increases just continue over the course of this year.? I'd expect those announcements to slow. But overall, net cash farm income. I'm going to harken back to -- we started the presentation with that. Ag exports had a record value last year, net cash farm income they go hand in hand. And you'd expect that farmers would buy the most valuable asset on the composite balance sheet, which is farmland.

You buy what you know. That's what I always say. Buy what you love and farmers, I think, take that to the 10th degree when it comes to reinvesting those profits. But I'll also say like you don't have to go up 12% if inflation has come back down to 5%. So you could see farmland values go up 8% in '23, and that would still be the same amount of real appreciation in the asset class than '22 was. So when you think about -- if we talk about inflation, it kind of permeates our entire issue, when we think about transitions and what might happen in farm income and land values and interest rates, it's all really coming back to what are other prices doing? And how does that change my perspective on is [ farming ] going up or down? Protein sector, so we picked sort of the protein sector to dive into a little bit because there's always a lot of action and we were -- Blaine and I we were just talking earlier today about all the activity around the different proteins. I'm going to let Blaine maybe describe some of our conversations and what we wrote up in the feed for our trends in the protein sector.

Yes. [indiscernible] Jackson, so I'll just go real quick. A couple of highlights, right? So last year, record export volumes and value for almost every one of the major protein types. We did see a little bit of traction on the pork side. A lot of that is due to the China dynamic and then rebuilding their [ pork herd ]. I don't want that to distract from the fact that we saw a very, very strong export activity that really supported the sector and prices. So that's a huge win. We have seen margins compress and a lot of that is attributable to high annual crop prices. A lot of that's attributable to the drought that has really hampered hay and alfalfa production across the Western plain, Southern plains. And that obviously has an impact, especially when you look at the dairy or beef sector. We have seen a pullback in terms of USB production. The cattle herd is shrinking. It's not that easy to undo a shrinking cattle herd even if we see a pullback in call rates, it's going to take some time. So, we think that beef prices especially are going to stay elevated, even if export demand waned a little bit. And then finally, just on the dairy side, dairy prices are down about 20% from their peak. Oh, no, it sounds terrible, except when you look at where they hit in 2022. So, Class III, the futures market still today, you can book out basically through the end of next year in the high teens, if not low 20s for a lot of the months. So, prices are strong there. It's still going to create some pressure just given what feed costs are doing. But I would say just overall protein, lots to be positive about.