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Analysis: Despite Talk Of Farm Bubble, Farmer Mac Woos Investors
By David Randall NEW YORK | Mon Sep 23, 2013 (Reuters) – Farmer Mac – the farm loan equivalent of its cousins Freddie Mac and Fannie Mae – owes its existence to the last time a U.S. farm bubble burst. Now, the company is trying to convince investors it would survive another one. The market isn’t giving the company a vote of confidence yet. Just five years ago, Farmer Mac had to be rescued by its creditors after its large positions in Lehman Brothers and Fannie Mae went sour. Now, the revived company must prove to skeptical investors that it can withstand a sharp decline in the price of farmland that analysts expect to come in the next year. That open question – and the inability of Congress to pass an updated five-year farm bill, which provides crop insurance and other subsidies that farmers rely on – has been weighing on the company’s stock price. Shares of Federal Agricultural Mortgage Co. ( AGM.N ) – a government-sponsored enterprise that functions as a secondary market for farm, rural utility and rural development loans – are up approximately 6 percent for the year and 35 percent over the last 12 months. This year has seen a widespread market rally that has pushed the benchmark Standard and Poor’s 500 index up more than 20 percent. After collapsing to around $3 in late 2008, the stock price has since recovered to pre-crisis levels of around $34. Still, the stock trades at a price to earnings ratio of 5.5, close to half the valuation of small lenders like PennyMac Financial Services ( PFSI.N ) and of its own five-year average P/E of 10.1, according to Thomson Reuters data. The company has been actively courting small-cap fund managers, institutions and endowments by pitching itself as a conservative way to play the booming U.S. farm sector. In February, for instance, the company presented at the Bank of America/Merrill Lynch Global Agriculture Conference in Miami, and in April it gave a presentation to the California Municipal Treasurers Association. In all, it has made seven presentations to potential investors in New York, Baltimore, San Francisco and other locations this year. At all the events, chief executive Timothy Buzby argued that a decline in farm prices would not affect his company as much as the market expects. Farmers can always sell a few hundred acres of a larger farm or their excess equipment before defaulting, he said. “We only make real estate loans, not operation loans. If there’s a bursting of a bubble, the last lender to get hurt is the one who has the loan on the farm,” he said. He points to the company’s low 0.01 percent default rate and the fact that the firm “lost zero” during last year’s drought – the most extensive in at least 25 years – as evidence of the resilience of the sector. RUN-UP IN PRICES The widespread concerns that farmland is a bubble ready to pop comes from an unprecedented run-up in prices. Between 2003 and 2013, the average acre of farmland in the U.S. jumped 213 percent in non-inflation adjusted dollars, according to research by Brent Gloy, an agricultural economist at Purdue University, an average annual increase of 12 percent. By comparison, prices rose 127 percent in real terms between 1971 and 1981, a rally that ended in the late 1980s farm crisis when land prices tumbled 40 percent. That steep decline brought down several community banks and led Congress to create Farmer Mac. “If prices don’t start to slow down soon, that would be a major red flag,” said Gloy. Farmer Mac has responded by tightening its lending standards and the portfolio’s loan-to-value ratio has fallen to 60 percent from 70 percent, Buzby said. That has helped the 90-day delinquencies rate in its farm and ranch portfolio fall to 0.69 percent of loans in the second quarter of 2013, compared with a 1.30 percent delinquency rate in the same quarter of 2010. Freddie Mac , by comparison, reported that 2.79 percent of its loans were seriously delinquent at the end of 2012. Over the same time, Farmer Mac’s core capital rose to $564 million from $461 million. The company has also tightened its own standards for its liquidity portfolio, said Buzby, who became chief executive of the company in 2012. The prior management team was using the portfolio to boost earnings , he said. When its large position in Lehman tanked, the company was forced to sell $65 million in preferred shares to its lenders as part of a rescue plan. Most of the portfolio is now invested in low-yielding U.S. Treasuries, Buzby said, meaning that the company is losing money on its capital after inflation. Like other government-sponsored enterprises, the company has the implicit backing of the U.S. government, but does not offer the same level of security as a Treasury bond. To be sure, the company remains highly leveraged, like other government-sponsored enterprises. The company has a leverage rate of approximately 25 to 1. While that has fallen from a peak of 45 to 1 before the 2008 crisis, it remains higher than regional banks , which typically have leverage rates of 12 to 1. “When you talk about what you could be concerned about as an investor in this company, that would certainly figure into the analysis,” said one hedge fund manager whose fund owns shares of Farmer Mac and who did not want to be quoted by name. VALUE PLAY Some value investors who own the stock say that the company has stronger fundamentals than the market is giving it credit for. “If you look at the leverage within the farm system, it’s not nearly as high (as in residential mortgages) and it isn’t going out of whack like the residential space was,” said Howard Lu, a portfolio manager with First Wilshire, a Pasadena, California-based money management firm with $650 million in assets under management which owns Farmer Mac stock. The Kansas City Fed estimates that the debt to asset ratio in the farm sector is currently around 10 percent, well below the 25 percent mark associated with the collapse of the 1980s. By comparison, debt to asset ratios topped 25 percent in the residential mortgage sector leading up to the 2008 financial crisis. Lu said that the company is still “significantly” undervalued because of its earnings growth. Farmer Mac reported core earnings of $1.48 per share in its most recent quarter, a 27.9 percent gain from the same period last year. The company is little followed by Wall Street, in part because its market cap is so small that large-asset funds can’t invest much more than $20 million in the company without becoming a significant holder in the shares and distorting prices. As a result, its shareholders tend to be small mutual funds and hedge funds. The one analyst polled by Reuters who covers the company, Evan Hutto at Compass Point, rates it a buy, with a target price of $42, a roughly 25 percent increase from its current price of approximately $34. New York-based Sidoti & Company initiated coverage Wednesday with a price target of $44. Hutto looks for positive price moves after Congress passes a farm bill and when concerns abate that Farmer Mac will be hurt by falling farm prices. Rising interest rates could also push Farmer Mac’s loan volumes higher. Unlike Freddie Mac and Fannie Mae, Farmer Mac has largely been exempt from Republican bills that would unwind government-sponsored enterprises. “This is a company that’s had tremendous growth but has been falling under the radar,” Hutto said. “Now they need to prove that they’re for real.” (Reporting by David Randall; Editing by Claudia Parsons) Continue reading
Look To The Fundamentals In Emerging Markets
http://www.ft.com/cms/s/0/70d9b14c-14af-11e3-b3db-00144feabdc0.html#ixzz2fQfIJxI8 By Gary Mead Being a generalist in emerging markets is to be a mindless herd member – and the herd has no mind, but is just pushed by snapping dogs. So ponder the particularities of a place, an industry, a sector: there will be fantastic opportunities once the herd stays put. What lies behind the recent rout? Quantitative easing (QE) is the monetary policy drug of choice right now, and the threat of its withdrawal has already induced an ugly international bout of cold turkey in world markets. Princeton University’s Jean-Pierre Landau, a former Bank of France deputy governor, put it more diplomatically at last month’s Jackson Hole annual summit for central bankers. Accommodative monetary policy has averted one global financial crisis, but inadvertently produced another – capital markets’ anxiety over how soon and how fast QE might be unwound. Mr Landau was pessimistic about the level of central bank co-ordination necessary to get off this drug without pain: “The most likely scenario is that of progressive fragmentation of the international financial system.” Since December 2008 the US Federal Reserve has poured easy money into the US economy and, by extension, the global system, obedient to one of its mandates, getting America back to work. It has done this partly by keeping a tight lid on US overnight interbank lending rates, maintaining them in a range of 0-0.25 per cent. On top of that it has bought almost $2tn of longer-term US Treasury bonds. This vast QE, aided and abetted by similar (if smaller) schemes in Japan and the UK, has had the inevitable consequence of dragging thousands of billions of dollars into emerging markets, in the desperate quest for yield. Those days are not quite over – but the smartest money is now trying to figure out when US interest rates will start to rise and dispel the Fed’s opiate-induced calm. For some, this is creating rising hysteria; others are exhorting us to calm down because this is just a return to the status quo ante bellum. The canniest, of course, are on the watch for fresh opportunities, and trying to ignore scaremongering headlines in normally reputable media. What are the hard facts? On May 22 the Fed’s chairman, Ben Bernanke, said he might start slowing bond purchases – so-called “tapering” – if the US economy continues to improve. Almost immediately the MSCI Asia-Pacific Excluding Japan Index slipped 14 per cent. Around $44bn has been withdrawn from emerging-market stock and bond funds globally since the end of May, according to the data provider EPFR Global. This retreat from emerging markets now appears to be a fixed trend. According to the authoritative latest (June 2013) Capital Flows to Emerging Market Economies report produced by Felix Huefner and his colleagues at the Institute of International Finance, private capital inflows to emerging markets will total $1.145tn in 2013, $36bn less than in 2012. Next year these flows will fall even further, to $1.112tn, the lowest level since 2009. But that is still a wall of money and it might be seen as a return to normality rather than outright collapse. As the west went into deep recession, cut rates and printed money, investors fled, looking for better returns wherever they could, paying scant attention to the fundamentals of the economies of several big emerging markets. Now that the west is in better health, those often weak fundamentals have reminded many investors why they had not previously entered them. India and Indonesia, the two Asian nations with the region’s biggest external funding requirements for their current-account deficits, have already stumbled. The Indian rupee fell to an all-time low in July after the country’s current account deficit widened to an unprecedented $87.8bn in the fiscal year that ended in March. Also in July, Indonesia’s current-account deficit climbed to a record, economic growth slowed and inflation geared up. Overall, more than $1tn has been wiped from equities in emerging markets in the last few weeks. The hope that a slower-growing developed world was smoothly converging with a faster-growing emerging world is, if not over, then certainly delayed. For anyone exposed to emerging markets as a whole, standing in the way of the crowd heading for the exit makes little sense. Too many countries in the emerging world face serious structural problems that were, perhaps justifiably, ignored when the developed world’s economies were being put through the wringer. It is difficult to ignore incipient revolution in Egypt, appalling civil war in Syria, bitter political divisions in Turkey and rampant corruption in India when the west appears to be on the mend. But the key to all this is an individual country’s balance of payments. Trading on the basis of “is this a risk-on or a risk-off day?” is unwise. Trading on the basis of the underlying strengths or weaknesses of a nation’s economy might be duller but is more rational. It is easy to get distracted by newsflow but look out for economic fundamentals. Continue reading
Europe Moves To Drastically Cut Crop-Based Biofuels
By Michael Byrne Image: Jess Johnson /Creative Commons Usually this is a pretty annoying debate tactic when it comes to science or otherwise: but look at Europe . Mainly, I’m thinking of transgenic organisms, which have been banned in many European countries as a result of public pressure (rather than science). But the European Parliment, is in the process of making policy changes on biofuels well worth taking a good look at, if not emulating: limiting crop-based biofuels. That might sound strange coming after a decade of biofuel boosting. Specifically, European laws passed since 2003 mandate a 6 percent reduction in carbon emissions and an increase to 10 percent of renewable energy use. However, these laws came before science had a chance to look at the larger picture, which revealed that the carbon footprint of crop-based biofuels was bigger than fossil fuels because they necessary involve carving out more land for crops (aka indirect land use change). This not only releases carbon from the soil but removes forests, which are better for scrubbing the air than agricultural crops. In 2012, the Parliament wisely added a caveat to its renewable energy laws: only 5 percent of transport fuel could come from fuel crops by 2020. Last week, the Parliament tweaked this slightly, upping the cap to 6 percent while incentivizing a separate 2.5 percent target. This all still has to be approved by the energy ministers of the European member states, which all have slightly different ideas about were the cap should be. “Until an agreement is reached, it is uncertain for investors and the environment what the future of biofuels will be,” Nusa Urbancic, of Transport and Environment NGO, tells Nature News . “What is certain though is that Europeans will have to keep paying for another seven years for biofuels that pollute more than the fossil fuels they are supposed to replace.” Indeed, the 2020 goal is a concession to industry, allowing companies that went all-in for biofuel crops to recoup their investment. Meanwhile, land will keep disappearing, swallowed into the maize and soy black holes. Three new studies from the Joint Research Centre in Brussels have also found that, expectedly, government-induced demand for crop-based biofuels is increasing the cost of food. This is true in America as well and, given that the country is the world’s leading producer of maize, pushing crop-based biofuels has global implications , particularly for countries highly dependent on U.S. corn. In the U.S. itself, the biofuel boom means farmers are tearing up barely farmable prairies in the northern Midwest at a rate not seen since the dawn of the Dust Bowl, which, if you’ll recall, was largely caused by the indiscriminant push into barely farmable, drought-prone grasslands. The U.S. doesn’t have crop-based biofuel limits persay . Corn and soy-based biofuels still count as renewable/”green” energy, but under rules passed in 2010, they count less toward mandated emissions reductions than, say, corn waste products. So there is some amount of disincentivizing. The boom continues regardless. Corn might only count for a quarter of the emissions reductions as waste grease in the eyes of the EPA, but farmers are still trying to grow it in North Dakota drought country. Making crop-based biofuels less valuable as renewable energy products might just mean farmers have to grow more of it. Again, this is an echo of the Dust Bowl, when grain prices tumbled due to a boom in supply. Farmers didn’t get out then either; they just planted more crops in even more inhospitable land to make up the difference. That didn’t work out so well. Continue reading
