Quarterly Report on FCS Condition

June 13, 2019

Dennis A. ShieldsHal Johnson

FCA Board Meeting June 2019

1

Topics for Open Session

▶ Economic Conditions Affecting the Farm Credit System▪Commodity price outlook▪Farm programs and other government assistance▪Weather, trade, and other 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

Weather moved the markets in May

Corn futures

Source: CME Group. Note: December 2019 corn futures and November 2019 soybean futures.

Soybean futures

4

May 31$4.44/bu.

May 31$9.05/bu.

May 10$3.72/bu.

May 13$8.27/bu.

200720082009

20102011

20122013

2014

2015 2016 2017 2018May 2019 forecast6

8

10

12

14

16

0 5 10 15 20 25

$/bu.

Ending stocks-to-use ratio in percent

Soybean stocks-to-use ratio to remain high

U.S. soybean price and stocks-to-use ratio

Source: FCA using USDA data (May). 5

Soybean margins to turn negative without Market Facilitation Program payments

Iowa soybean margins

Source: FCA using USDA (May) and Iowa State University data. 6

0.06

2.85

3.55

2.47

1.20

-0.90-0.60

0.450.77

1.80

-0.84-1.00

0.00

1.00

2.00

3.00

4.00

2009 10 11 12 13 14 15 16 17 18 2019F

$/bu.

Includes $1.65 2018 Market Facilitation

Program payment

Excludes pending 2019 MFP payment

2007 2008

2009

2010

20112012

201320142015

20162017

2018 May 2019 forecast

1

2

3

4

5

6

7

5 10 15 20

$/bu.

Ending stocks-to-use ratio in percent

Corn stocks-to-use ratio could decline sharply from initial forecast

U.S. corn price and stocks-to-use ratio

Source: FCA using USDA data. Note: 2019 production scenario A=- 0.9 mil. bu. and B=-1.4 bil. bu. from May forecast. 7

B

A

Corn margins to remain near break-even levels

Iowa corn margins

Source: FCA using USDA (May) and Iowa State University data. 8

-0.10

1.64

2.23

1.45

-0.18 -0.29 -0.23 -0.19

0.14 0.21 0.05

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

2009 10 11 12 13 14 15 16 17 18 2019F

$/bu.

Includes $0.01 2018 Market Facilitation

Program payment

Excludes pending 2019 MFP payment

2007 2008

20092010

20112012

2013

2014

20152016

20172018

May 2019 forecast

2

3

4

5

6

7

8

10 20 30 40 50 60

$/bu.

Ending stocks-to-use ratio in percent

Wheat stocks are also large relative to use

U.S. wheat price and stocks-to-use ratio

Source: FCA using USDA data (May). 9

Wheat margin loss continues to narrow

Kansas wheat margins

Source: FCA using USDA (May) and Kansas State University data. 10

-1.25

0.79 0.981.53

0.33

-4.03

-2.73

-1.09-1.39 -1.31

-0.41

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

2009 10 11 12 13 14 15 16 17 18 2019F

$/bu.Includes $0.14

2018 Market Facilitation Program payment

Excludes pending 2019 MFP payment

$6.01

$4.00

$13.49

$9.54

$0

$2

$4

$6

$8

$10

$12

$14

$16

2011 13 15 17 19

Corn Soybeans

Weather drives crop insurance and planting decisionsProjected crop insurance price ($/bu.)

Source: USDA/RMA. 11

Scenario: Low corn yield and prices below projected levels Corn Soybeans

Prevent plant indemnity (after weed control) OR $331 $252

Crop revenue $581 $475

+ crop insurance indemnity + $41 + 0

- non-land costs - $469 - $256

= expected return before land cost = $153 = $219

Expected net returns in 2019 ($/acre)

Source: Farmdoc daily, May 14, 2019.

Farm programs provide some downside price protection in 2019

Part of the gap between the Farm Bill reference price and the season-average farm price is paid under Price Loss Coverage

Source: FCA using USDA prices (May) and statutory reference prices. 12

2019 farm price May forecast = $3.30/bu.

$3.00

$3.25

$3.50

$3.75

$4.00

2014 15 16 17 18 19F

Corn

Reference price= $3.70/bu.

2019 farm price May forecast = $8.10/bu.

$7.50

$8.00

$8.50

$9.00

$9.50

$10.00

$10.50

2014 15 16 17 18 19F

Soybeans

Reference price= $8.40/bu.

2019 farm price May forecast = $4.70/bu.

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

2014 15 16 17 18 19F

Wheat

Reference price= $5.50/bu.

Cow-calf margins to remain slightly positive

▶ High hay costs limit cow-calf margins; May 1 hay stocks down nearly one -third from 2014-18 average

▶ Recent export demand strength expected to continue in 2019

▶ Domestic beef demand remains healthy

Average cow-calf returns

-100

100

300

500

2009 2011 2013 2015 2017 2019F

$/head

Source: Informa Economics. 13

Hog producers return to profitability

▶ African Swine Fever is sharply reducing China’s hog inventory

▶ Pork exporting opportunities lead to market volatility and hedging opportunities

▶ U.S. guards against adverse impacts of a potential outbreak

Hog producer margins

-50

-25

0

25

50

75

Jan.2016

Jan.2017

Jan.2018

Jan.2019

Dec.2019

$/head

Forecasts

Source: Informa Economics. 14

Dairy margins improve after running in the red in 2018 ▶ Slowdown in production

growth has lifted prices▶ Margins are running slightly

above breakeven▶ High-cost producers remain

under pressure

Dairy producer margins

-3

-2

-1

0

1

2

3

Jan.2016

Jan.2017

Jan.2018

Jan.2019

Dec.2019

$/cwt.

Forecasts

Source: Informa Economics. 15

Kansas farm management data indicate contrasting returns by income group

Average net income per farm

16

-200

-100

0

100

200

300

400

All farms Low income group (25%) High income group (25%)

$1,000 per farm

18 2014 16 1715 18 2014 16 171518 2014 16 1715

Source: Kansas Farm Management Association, May 2019.

U.S. export intensity is relatively high for key agricultural commodities

U.S. exports as a share of production in 2018

Source: USDA/FAS Production, Supply and Distribution; and Global Agricultural Trade System.

Top 3 markets

17

55%55%

33%17%

10%

22%17%

12%

80%49%

39%23%

16%

PistachiosAlmonds

GrapesApples

Oranges

PorkBroiler meat

Beef

CottonWheat

SoybeansSorghum

Corn Mexico, Japan, S. KoreaChina, Japan, SpainChina, Mexico, NetherlandsJapan, Mexico, PhilippinesVietnam, China, Turkey

Japan, S. Korea, MexicoMexico, Hong Kong, CanadaJapan, Mexico, Canada

S. Korea, Canada, JapanMexico, Canada, IndiaCanada, Mexico, S. KoreaIndia, Spain, Hong KongHong Kong, Germany, Belgium

0%

10%

20%

30%

40%

50%

60%

70%

2000 01 02 03 04 2005 06 07 08 09 2010 11 12 13 14 2015 16 17 18 19F

Soybeans Corn Wheat

Waning competitiveness: U.S. share of global exports declined in 2018

U.S. share of global exports by crop year

18Source: USDA/FAS Global Agricultural Trade System.

Concluding comments

▶ Weather in 2019 creates production risk and pricing opportunities▶ Additional trade-related payments and disaster assistance form a

bridge to next year’s loan renewal season▶ Low-cost operations survive and thrive in a low price environment▶ Marginal producers may not survive, even with support

Risks ahead▶ U.S. animal disease outbreak and market volatility ▶ Resilience of U.S. and global economic growth amid trade issues

19

Questions

THANK YOU

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Farm Credit System Condition and Performance

as of March 31, 2019

Hal JohnsonSr. Financial AnalystOffice of Examination

21

Topics

▶ System growth

▶ Portfolio credit quality

▶ Earnings

▶ Capital

▶ FIRS

22

System reports little growth in the 1st quarter, seasonal factors drive financing needs

Source: FCS Information Statements 23

Total Assets3/31/19

$348.7billion

-0.1% Qtr+4.7% YOY

Gross Loans3/31/19

$274.2billion

+0.3% Qtr+4.4% YOY

279291

305314 320 322 333 335

349

216227

238242 250 251 263

265 274

-0.4%

2.0%4.0%

2.3%

-0.7%

2.7%0.1%

3.0%

-0.2%

1.2% 0.3%

Total FCS Assets Total Gross Loans% change Qtr-over-Qtr Loans

0.6% 0.2%

-6.9%

11.8%

1.0%0.1%

-9.2%

16.8%

0.3%

-0.2%

-4.4%

8.0%

-10%

0%

10%

20%

Total LoanPortfolio

RE Mortgage(46%)

Prod. &Intermediate

(19%)

Agribusiness(18%)

Mar-17 Mar-18 Mar-19

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

Credit risk rises as agricultural producers face continued low prices and market uncertainty

Nonperforming Loans as a % of Gross Loans

% of Loans Classified less than Acceptable

Source: FCS Information Statements 24

6.8

7.1

11.4

4.3

2.9

6.6

7.1

10.6

4.3

2.2

6.3

6.7

10.4

4.4

2.6

0.0 5.0 10.0

TotalPortfolio

Real EstateMortgage

Production &Intermediate

Agribusiness

Rural Infrastructure

Mar-19 Dec-18 Mar-18

1.99%1.66%

1.41%1.01% 0.82% 0.77% 0.81% 0.84% 0.86%

$2.365 Qtr chg + $167M | up 7.6%

billion Yr. over Yr. + $156M | up 7.1%

YE '18 0.31%

Q1 '18 0.34%

(1) accruing loans 30 days or more past due

Nonperforming Loans

Delinquencies (1) 0.48%

System earning remained strong in the 1st

quarter; interest spreads continued to compress

Source: FCS Information Statements 25

% increase in Average Earning Assets (compared to the same period a year ago)

1,157 1,252 1,244

1,473

1,266 1,363

1,288

69 58 37 9 69 59 65

System Net Income

Provisions for Loan Lossesincludes $104M net deferred tax adjust.

Quarterly System Earnings ($M) Q1'19 Q1 '18

2.00% 2.15%

Q1'19 Q1 '18

2.40% 2.44%

Net Interest Spread(YTD annualized)

Net Interest Margin(YTD annualized)

9.0%

-1.3%

7.7%6.4% 6.5%

8.6%6.3%

3.6%5.2%

Strong earnings support continued capital growth

Capital and Liquidity- as of March 31, 2019 -

▶ Retained earnings as a percentage of total capital equaled 79.4% of total capital.

▶ The System’s liquidity position equaled 177 days of coverage.

▶ Days of available liquidity for the 4 funding banks ranged from 149 to 227 days.

Source: FCS Information Statements Note: Restricted capital represents capital associated with the Insurance Fund. 26

30.8 34.1

36.6 39.6

43.7 46.8

50.0 53.4

56.2 59.7

14.5%14.7%

15.8%16.0%

16.6% 16.8%16.4% 16.7% 16.9% 17.1%

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

System CapitalTotal Capital less RestrictedCapital-to Asset-Ratio

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 andAssociations have a Composite FIRS rating of 1 or 2

▶ Institutions rated 3 or loweraccount for less than 2.5% ofSystem assets

Composite FIRS RatingsFarm Credit System Banks and Associations

Source: FCA’s FIRS ratings database 27

37 43 44 46 44 39 34 33

38 31 32 29 3129 32 33

11 8 4 3 25 7 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-18 Mar-19N

umbe

r of R

ated

Inst

itutio

ns

1 Rated 2 Rated 3 Rated or lower

Summary and final points

▶ Challenges for the farm economy:▪Volatile markets, trade issues, weather, low margins,

production levels and existing supplies

▶ Declining credit quality underscores the significant operating challenges facing System borrowers in many ag sectors

▶ The System remains financially sound and strongly capitalized

▶ System institutions have the risk-bearing capacity to support agricultural producers

28

Questions

THANK YOU

29