Sunday, August 10, 2008

Wondering Out Loud

There are three public traded companies that are identified as through this SEC Code:



Sallie Mae (SLM) USED to be part of this consortium of agencies until it was privatized (which took several years).

My "Wondering Out Loud" is about Farmer Mac, a/k/a The Federal Agricultural Mortgage Corp. Haven't heard much about them, have you? Farmer Mac creates a secondary mortgage market for farm loans. You may be transported to their website by clicking their logo below.

The Farmer Mac secondary market for agricultural mortgage loans accomplishes that public policy mission by providing liquidity and lending capacity to agricultural mortgage lenders by: gfc
  • purchasing newly originated and pre-existing (“seasoned”) eligible mortgage loans directly from lenders through its “cash window” and seasoned eligible mortgage loans from lenders and other third parties in negotiated transactions;
  • issuing long-term standby purchase commitments (“LTSPCs”) for newly originated and seasoned eligible mortgage loans;
  • exchanging newly issued agricultural mortgage-backed securities guaranteed by Farmer Mac (“Farmer Mac Guaranteed Securities”) for newly originated and seasoned eligible mortgage loans that back those securities in “swap” transactions; and
  • purchasing and guaranteeing mortgage backed bonds secured by eligible mortgage loans, which are referred to as AgVantage bonds.

Here's a chart (CTML):

As you can see, they've not suffered much from the credit debacle. Here's FNM chart for comparison:

My specific Wondering is this: Were similar excesses experienced in this market? What happens when the agricultural boom becomes long in the tooth with crop prices coming down?

I've no opinion on it, but it did cause me to wonder.

The Farm Credit Administration is the independent Federal agency. From their webage which you can find here.

Welcome to FCA. We are the independent Federal agency responsible for examining and regulating the Farm Credit System (FCS).

The FCS is a nationwide network of borrower-owned lending institutions and specialized service organizations that provide credit and related services to farmers, ranchers, agricultural cooperatives, and other eligible borrowers.

According to their 2007 report, which you can read HERE. If you are interested in farm commodities, it's worth your time to get a lay of the landscape. I think it is a well done report. Here's a couple of things (I admit that I've only given this report a cursory view):

Loan demand grew in 2007 for the following reasons

But the biggest driver of loan demand in 2007 was the sharp run-up in commodity prices, including oil. This development led to higher land values in the heartland; increased input costs for fuel, fertilizer, and feed; and a greater need to finance grain elevator inventories and attendant hedging operations.

With respect to Farmer Mac, the FCA notes that their statutory capital requirements exceed regulatory requirements. It's worth noting that their capitalization is about 4.5% of their obligations and when you add off balance sheet items, that becomes 1.9%. Seems to me that with this level of leverage (98:1) a small problem can escalate quickly. Their loan loss ratios are low (which means the only place to go is up).

My point is not to make any prognostications, but they've a balance sheet heavily invested in GSE mortgage backed securities. They had some rather large losses due to investing/hedging/deriviative write downs, but have chosen to focus on "core earnings". I consider that a red flag. GAAP/Non-GAAP income disparities seem to be quite the rage. GAAP is GAAP in Leisa-land, and admittedly, I have a prejudice here. This year it is ths anomaly, next year it is that anomaly, and pretty soon you've anomalied yourself out of business, but "our non-GAAP income is terrific". I get so disgusted by these ruses.

Anyway, I wanted to bring them to your attention.

1 comment:

GGM said...

Not sure about Farmer Mac, but most farmers I know are a savy lot.