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Monday, November 25, 2013

FCC: The Farm Debt Trafficker

I previously Blogged about Farm Credit Canada ("FCC") here, and here; mainly about FCC possibly aiding and abetting the farming community to overdose on debt.

I next read the 2012-2013 Annual Report of FCC.  It's very nice, quite impressive at first glance.  They say all the right things. For example:
  • "Agriculture Matters"
  • 2 million people work in agriculture or agri-foods
  • FCC has over 100,000 customers
  • "Agriculture. We know it. We love it. We’re in it for the long run."
  • Growing their loan portfolio by more than 8%/yr for the last 3 years
  • 20 consecutive years of growth
  • Impaired loans (ie. loan payment late or defaulted) are just 1.33% of total loans receivable.
  • FCC's Mission, Vision, and Corporate Values are excellent.  In my opinion, they're comparable to any textbook on Business Excellence
  • "FCC is a prudent lender"
  • 95.2% of the 40,478 loans issued in 2012/13 were to farmers (primary producers), the balance to agri-industries upstream and downstream of farmers.
  •  etc.

  Somebody did quite an excellent sales job.  However, is their meat behind the window dressing?

In 2012, FCC offered support to the hog industry who were is great financial difficulties again.  That means payment deferrals, re-financing, and other creative measures to keep the loans from going into default.  Is this a major reasons for only 1.33% impaired loans?

FCC Loan Write-offs $ increasing at 6.69%/yr., doubling every 10.5 years
Source: FCC Annual Reports
I went back through all the Annual Reports for FCC, and cobbled together the data on loan write-offs, shown at the right here.

FCC's loan write-offs have been growing at 6.69%/yr.; doubling and re-doubling every 10.5 years.  Write-offs are growing slightly slower that the loan portfolio, so FCC seems to be ever so slightly reducing their risk exposure, or they have been lucky so far.

Here is what FCC said in Sept. 1984 about loans collateralized by inflated farm land values:
During the inflationary 1970's, many producers acquired modern buildings and purchased new equipment. Unfortunately, these purchases were not always financed from farming profits. Many farmers borrowed against inflated land values. Now these modern farm enterprises have much higher fixed overhead costs. Declining land values in the1980's coupled with instability in commodity prices and lower farm incomes have left this group of farmers unable to meet large debt payments.

During the eighties, consecutive declines in cash flows coupled with lower purchasing power forced many farmer s to offer some or all of their land for sale. But there are few buyers. The resulting imbalance between supply and demand for land has either reduced land values or resulted in price stagnation. Many who could wait no longer are bankrupt already, resulting in a record number of farm bankruptcies.
 

FCC had to be bailed out by the Federal Government soon thereafter, to the tune of about $2.5 Billion dollars.  Remember, that bailout came from the Federal Government, who in turn took the money from Canadian taxpayers.

Source:  FCC Farmland Value Reports
According to FCC, In the 1981 Census of Agriculture, farm real estate was worth $104 Billion, which was 79% of the total value of farm capital in Canada.  FCC data shows a 5.32%/yr average increase, doubling every 13.2 years.  The cumulative increase is 256% as compared to 1998  (blue curve to the left vertical axis, red curve to the right vertical axis).

However, Statistics Canada reports farm land was worth $70.197 Billion (53.86% of total farm assets) as of Dec. 31, 1981, and $200.47 Billion (56.97% of total assets) as of Dec. 31, 2010 which is a 285.6% increase in 29 years, or an average increase of 3.68%/yr.

I wasn't able to explain the discrepancy between FCC and StatsCan, except that these two organizations may have significantly different measurement methods.

Using Statistics Canada data between 1981 and 2010 (definitions here), we learn that today, Canada's farmers have:
  • 254% higher current assets ("X"% as financial bubbles, ready to burst?)
  • 683% higher quota value ("X"% as financial bubbles, ready to burst?)
  • 266% higher real estate value (ie. buildings + land), ("X"% as financial bubbles, ready to burst?)
  • 286% higher land values ("X"% as financial bubbles, ready to burst?)
  • 269% higher total assets ("X"% as financial bubbles, ready to burst?)
  • 377% higher total liabilities
  • 255% better Equity (Total Assets - Total Liabilities), ("X"% of Assets are financial bubbles, ready to burst, but Total Liabilities are hard, real debts that won't go away until paid back or bankruptcy)
  • 55% worse Current Liquity (Current Assets/Current Liabilities)
  • 48.5% worse Acid Test ((Current Assets+Accounts Receivable)/Current Liabilities)
  • 48% worse financial leverage (Total Liabilities/Equity)
  • 39.5% worse debt solvency ratio (Total Liabilities/Total Assets)
  • 275% worse return on assets, (NIBT+I)/ATA
  • 212.5% worse return on equity (NIBT/AE)
  • 11.3% better Interest Coverage Ratio (NIBT+I/I), mainly due to record low interest rates, but for how much longer?
With all the land lost to urban sprawl since 1981, how do we justify that the puny fraction which still remains as farm land in 2010 is worth 286% more than all the farm land back in 1981?

If you ignored the record low interest rates of today, and the various bubbles that have temporarily inflated asset values, Canadian farmers are rich on paper (land valuations + quota), but can't cash in without getting out of farming.  What's really worrying is that farmer's financial ratios are terrible, and getting worse.

If you allow for interest rates rising faster than they can pay their debt off, and the bursting of the asset bubbles, most Canadian farmers have a ticking time bomb under their bed.

Urban, prime real estate is said to hold value, increasing by 0.3% per year over the long term (ie. cost of property taxes and mandatory maintenance); anything more than this is a bubble that will eventually burst.  Perhaps the same logic applies to farmland.  Canada's former Finance Minister, Garth Turner, has well documented on his real estate & financial Blog that Canadian residential real estate has already entered free fall, will continue to slowly decline, losing 20% to 30% of its currently inflated value.  Others feel that the Canadian real estate market will drop by up to 90% in value.  See http://theautomaticearth.blogspot.ca/2010/12/december-21-2010-stoneleigh-and-max.html, putting real estate back to 1985 values.

Dr. George Brinkman (see here, here, and here), a retired economist from the University of Guelph began warning about the Canadian farmers' debt load being unsustainable more than five years ago.  He has called Canada’s farm debt level a “ticking time bomb.”
  Debt servicing charges of more than $2.3 billion were one of the largest farm expenses off the farm bottom line last year.
  In 2009, Dr, Brinkman said,
"In the U.S., farm incomes are increasing, while ours are stagnating or going down, and it will take Canadians 23 years to pay off their average debt, while it will take most Americans about 3.5 years."
Dr. Brinkman says that farmers have to collectively say "NO!" to spiraling debt and land prices because if not, their neighbour down the road will snap it up, and the prices will keep spiraling.  Dr. Brinkman says it will take the average farmer more than 70 years to pay off their current debt.

What do you think are the odds that interest rates will go significantly higher, or a financial bump in the road occurs at some time within those 70 years of payback?  Do you think their tractor might wear out and they have to buy a new one sometime in the next 70 years, thereby pushing their debt even higher?

I say the same advise applies to the banks, FCC included.  The bankers also know that if a farmer is looking for money, they have to say "YES !", or another banker will snap up the deal, gain the commissions and market share, thereby enabling the spiral to even riskier deals in the future.

It is the government through Bank of Canada, Office of the Superintendent of Financial Institutions ("OSFI") and other agencies to set the collective standards for all commercial lenders so as to avoid this competitive spiral to debt bubbles and subsequent collapse.  If not, it is Canadians who will pay the ultimate price for this financial insanity.

This trend is encouraged by FCC and others allowing interest-only loans for the purchase of depreciating assets (eg. cars, trucks, farm equipment, etc.)  This short-sighted tactic digs the farmers deeper and deeper into his debt pit every year.  It's a folie à deux, requiring both a crazy farmer and a crazy banker, for it to occur.

History never repeats, but it sure rhymes.  There seems to be significant similarities between then and now.  Is there nobody left at FCC who remembers these crazy days of yore?
  
Might I suggest that FCC be required to report annually on the number of loans that are re-negotiated to avoid or mitigate loan impairment or default.

As for OFSI, I suggest that banks (including FCC) be limited to % Loan to Value, and assessed values can only increase at a maximum of 0.5% per year of a cumulative basis (catch-up is allowed).  If the purchase & sale agreement is for a higher price, the fool can pay it if he wishes to, but he can't get financing from any bank that is under OFSI and/or CDIC (Canadian Deposit Insurance Corporation).  This will eliminate property asset bubbles, flipping, and all similar nasty sources of risk and speculation that drives up cost of living for Canadians.  Of course, the powerful FIRE (Finance, Insurance, & Real Estate) monopoly, which includes developers, land speculators, conversion of farmland into subdivisions, builders, etc. will never allow this improvement to occur, for the current system is how they make billions of $ off the backs of Canadians.

On March 1, 2013, Bloomberg News reported that both finance (ie. Flaherty) and agriculture (ie. Ritz) ministries requested the review of Farm Credit Canada by the Office of the Superintendent of Financial Institutions, especially their appetite for risk.

This request is said to be linked to FCC's loan portfolio growth of more than 400 percent since 1997 to $24.9 billion, accounting for nearly 30 percent of Canada's farm debt.  That's an average portfolio growth of more than 9%/yr for those 16 years, doubling and re-doubling every 7.7 years.

I guess it's easy to grow your business when you're giving out money; everybody wants some.

That's why the Canadian Bankers' Association is watching FCC closely.  The Big Canadian banks want FCC to restrict itself to only be "lender of last resort".  Minister of Agriculture Gerry Ritz said, "They [FCC] are constantly under pressure from the chartered banks and credit unions to do less, not more."

On March 20, 2013 C.D. Howe published an Op-Ed piece in the Financial Post raising some red flags about the allegedly risky loans by FCC.   FCC quickly complained about C.D. Howe's use of "inflammatory and unsubstantiated words like 'sub-prime', 'dodgy', and 'hyper competitive' to describe FCC lending practices".

C.D. Howe reports that FCC's share of total farm loans has grown from 14 percent in the 1992 to 29 percent in 2011.  This growth is said to partially relate to modifications in FCC's legislation in 1993 and
2001, expanding their mandate.  That's an average annual growth of 3.91% over this 19 year span; doubling and re-doubling their loan market share every 17.9 years.

Since FCC has 30% market share of farm debt, and over 95% of their portfolio is loaned directly to farmers, FCC will be the epicenter of the debt bubble explosion; if or when it bursts.

Perhaps that is why FCC needs to be more cautious than all others when it comes to farm loans; taking only the best of the best financing opportunities.

I can't prove it beyond a reasonable doubt, but the unlimited rainbows, sunshine, and unicorns in FCC's annual report are perhaps too good to be true.

Perhaps FCC should go back and read its prior reports from Sept 1984, making sure they fully learned all the lessons that required a $2.5 Billion bailout the last time they tried this "more debt for all" approach.


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