Financing US Agriculture and Food:

Transcription

1 MULTI-CLIENT STUDY PROSPECTUS October 2001 Financing US Agriculture and Food: Who Will Provide It? Who Will Receive It? What are the Key Economic and Business Drivers? How Will These Decisions Be Made? Given the poor to modest economic performance of agriculture and food in recent years, it continues to be difficult to get and provide financing at economic rates which are profitable for both the lending and recipient enterprises. Perceived volatility of returns and a lack of familiarity of success drivers for these enterprises have made lenders cautious and related credit risks require ample collateral and relatively steep risk premiums. This is still the case as macroeconomic/monetary policy actions have driven short term interest rates to extremely low levels. It is still a matter of profitability. There may be more credit choices/alternative sources for borrowers, but the rules dictating the decision to loan still are relatively restrictive. Further complicating these financing decisions is the esoteric nature and uncertain sustainability of government agriculture policy, which has propped up farm income for the last five years. The lending sector is consolidating and the credit landscape has changed - and not for the better. Moreover, agriculture and food companies have typically received modest valuations in the equities markets due to their slow growth rates and mature markets. And the equities markets overall have been unfavorable during the last 18 months, making stock offerings a limited option for raising capital. So how will the agriculture and food industry achieve its credit needs and how will these business decisions be made? This study will answer these questions and provide analytic systems to evaluate related decisions. Sparks Companies, Inc. (Sparks) is proposing a special multi-client study including the provision of related analytic models focused at agriculture and food financing decisions. This project will provide its participants: a strategic evaluation of the financing industry serving agriculture and food; short term, intermediate and long term fundamental outlooks and a financial assessment for the agriculture and food sector; a subsectoral business/financial evaluation of key supplier and buyer segments of the agriculture and food value chain; and a set of financial evaluation models (and select case studies) designed to evaluate financial risk by agriculture and food enterprise.

2 INTRODUCTION Tomorrow's agriculture sector will be fundamentally different than the one with which we have become familiar over the past decade. Domestic and world markets are shifting dramatically; factors affecting production, supply and trade are enormously different; the "free money" era of Congressional direct payments is past; and the sector's competitive environment is changing daily with consolidation, mergers and new global entrants. Moreover, technology has enabled a more effective flow of information and capital around the globe, removing geographic constraints and increasing the competition for good agricultural credit risks from non-traditional credit providers, including commercial (non-bank) lenders and credit businesses. The old definitions of risk no longer apply, and the institutions financing the sector face an entirely new environment. Consider: Ø There is a New Macroeconomic Environment that has gripped global business; involving recession, proactive central banks, bigger government expenditures, prospects of war-based inflation and a steep yield curve. Will the banks be willing, or is it even sensible for the banks to be proactive financiers of the agriculture and food industry? Ø There is continued Consolidation of the producers, processors and suppliers of the agricultural and food industry. Implications for the finance sector are immense, as more capital is put at risk in fewer enterprises. This is further complicated by the fact that many of these entities also are starting to extend credit down the value chain. Ø There is ongoing Globalization of agriculture, which has brought both new opportunities and new threats as markets for commodities have truly become global, bringing at once expanded opportunities and new competition. Moreover, unsettled geo-politics establishes new forms of business and investment risk. Ø There is New Technology. The advent of biotechnology has resulted in improved economics for farmers, but also created risks to grain companies and food processors that their products will be rejected by consumers (e.g., the Star Link incident). Will the next wave of output traits in biotech really lessen this threat? Ø There is a New Agriculture Policy Environment taking shape in the US as a new administration takes over in the White House and a new Farm Bill is being crafted in Congress. In just one month, flush federal coffers fueled by surpluses have all but disappeared. This study will examine these and other macroeconomic and agriculture/food forces that have already changed the way agriculture and related sectors are financed. Participants in this study will gain the insight and the tools needed to properly position, measure/evaluate and manage the risks and opportunities associated with the financing of the agricultural industry over the next decade. This study is an important business input for agriculture and food decision makers whether finance provider or user. 2

3 Key Questions To Be Answered By This Study Ø What are the sources and magnitude of the new risks for lenders financing the agricultural and food industry now and are these risks greater or substantially different than those facing other industries? Ø What are the specific risks involved when financing agriculture and food today and what is changing each? And, how do these risks differ by each agricultural value chain segment and related niches? Ø Are there new (and better) ways to mitigate the amount of risk when financing agriculture and food? Ø What are the new emerging opportunities for institutions engaged in the financing of the agriculture and food sectors? Ø What tools can be utilized by both financier and recipient to objectively evaluate financing decisions and related rates? PURPOSE OF THE STUDY The purpose of the study is to provide analytic insight and foundations as well as the business tools needed to successfully evaluate agricultural finance decisions through the coming decade for both financiers and credit recipients. The study will help participants identify financing opportunities and risks and provide decision tools for objective evaluation of specific cases as well as provide a fundamental economic and business view towards controlling these risks. METHODOLOGY Four analytic steps will be employed in this study. The first step will be to assess the agriculture and food sector as a whole in terms of its business prospects and financial and economic risk. Next, it will examine key subsectors that make-up the value chain. The third step will be to provide tools to identify and then quantify the risks in each major sector of the agricultural industry (with select exhibiting case studies). The fourth step will be to provide a strategic evaluation of the industry financing agriculture, in terms of business growth, profitability and risk. To complete these steps, a detailed background statement covering the current dynamics of the agricultural industry and the macroeconomic environment will serve as the study s foundation. This will include a discussion on the outlook for the agriculture and food industry with commodity-specific and sectoral analyses and the macroeconomic environment (global and domestic). In addition, an evaluation will be performed of the current structure and strategic prospects for the financial segment serving agriculture and food. This sector will be evaluated in terms of strategic position, business capacity and the related strengths, weaknesses, opportunities and threats. 3

4 As a unique and sustainable aspect of the study, models will be exposited that incorporate Sparks commodity information and will be utilized to evaluate both the commodity risk inherent in agricultural loans as well as the credit risk of specific types of borrowers (via select case studies). These models will be helpful to non-agricultural bankers and directors by providing a good understanding of both the perceived and actual risk involved in agricultural credit. These models also will give bankers a tool in pricing their loans fairly and wisely to both prospective and existing credit clients, based on a set of assumptions, credit risks and commodity risks. Moreover, this aspect of the study will also give borrowers insights into how the financial community assesses agriculture and food lending. MODELS TO BE EMPLOYED FOR CASE STUDIES Interest Rate Pricing Model for Lenders Risk Scoring Models for Lenders by Enterprise Financial Ratio Economic Performance Model Study Outline: Financing US Agriculture and Food A. Background and Outlook for the Global Agricultural Environment Commodity Outlooks Value Chain Evaluations B. Background and Outlook for the Macroeconomic and Monetary Environment Global Macroeconomic Fundamentals Focus on US Macroeconomic Outlook Fixed Income and Credit Markets Outlook Emphasis on Commercial Banking Impact C. Background and Outlook for the Agriculture and Food Equities Environment Sectoral Reviews Food and Agriculture vs. Other Sectors D. A Subsectoral Evaluation of Business Prospects Related to Credit Risks and Opportunities Current Issues Future Prospects Winners and Losers E. Return to Risk Analysis of Select Value Chain Segments Beta Analysis by Select Segment Models to Measure Actual Risk Models Providing Recommended Interest Rates Actual or Hypothetical Case Studies (Cases Determined by Participating Clients) 4

5 F. Business and Policy Implications Regarding the Agriculture and Food Industry s Financial Prospects Short Run (Next 12 Months) Intermediate Run (Next 3 Years) Long Run (Next Decade) G. Recommendations and Suggested Corporate/Institutional Focus Commercial Sectors Agriculture and Food Financiers Policy Makers STUDY SCHEDULE AND DELIVERABLES Pre-study Conference: A meeting of subscribers and the Sparks project team will be held in Memphis, Tennessee, to review the detailed plans for the study. At this meeting, the group will be given the opportunity to identify additional areas of interest as well as to provide emphasis for specific study topics. Comprehensive Study Report and Presentation Materials: All participants will receive the study report entitled Financing US Agriculture and Food, including: study documentation and all supporting information, analyses, forecasts, select models and the select case studies developed as part of the study. Clients also will receive copies of PowerPoint materials for presentations made in association with the study. Post-Study Seminar: A concluding, daylong seminar will be held for all study clients as a group, to review the findings and implications of the study with the Sparks team. Optional Presentation at Client Offices: Sparks staff will travel to client offices to present the final report and conduct in-house seminars, as requested. These seminars will be tailored to each client s individual needs and interests. Clients will be charged only for Sparks personnel out-of-pocket travel and related expenses. PROPOSED PROJECT SCHEDULE December 2001 March 2002 March 2002 April July 2002 Kickoff Meeting Final Report Sent to Clients Group Presentation Individual Presentations at Client Offices PROJECT TEAM Dr. Bruce A. Scherr, President and Chief Executive Officer, will coordinate the overall project. Mr. Tom Scott, Senior Vice President and Mr. Scott Richman, Vice President, will serve as project leaders. In addition, Mr. Jason Lawton, Consultant, will serve as a key member of the project team. Lawton is the model developer and comes to Sparks from the agricultural banking community. The biographies of these individuals are given below. Other Sparks professionals will contribute to the study as topics and activities dictate. 5

6 Bruce A. Scherr, President and Chief Executive Officer. Dr. Scherr has been with Sparks since 1987 and has worked extensively with companies to develop improved price risk management procedures, to organize and manage purchasing and merchandising programs, and to assist agribusinesses and public sector institutions in strategic and tactical planning. Formerly, he was president of Sparks, Jacobs, Scherr, Inc. (SJS), a sister company to Sparks, and president of Agri-Commodities, Inc., an agriculture consulting firm based in Andover, Massachusetts, which was acquired by SJS. Prior to forming Agri-Commodities, Dr. Scherr was a divisional vice president at Data Resources, Inc., where he developed and utilized for the public and private sectors the first commercially available econometric model for US agriculture. Dr. Scherr received his bachelor's degree from Rutgers University and his master's and doctorate degrees from Purdue University, all in agricultural economics. Dr. Scherr is a member of the Board of Directors for Desert STAR Inc., an electrical transmission Independent System Operator for the Desert Southwest. In addition, Dr. Scherr has served as a member of the University of Tennessee s (UT) Institute of Agriculture Agricultural Development Board and UT s Committee for the Future. He is a member of several honorary research and agricultural societies, a member of the National FFA Foundation Sponsors Board and a former advisor to the President's Council of Economic Advisers and National Aeronautics and Space Administration. Thomas P. Scott, Senior Vice President. Mr. Scott is head of Sparks's Project Consulting Group. His responsibilities include general consulting with a specialty emphasis on the grain industry and international markets. Specialized work has included analyses of the implications of the US/Canada Free Trade Agreement and long-term asset demand in the transportation industry. In addition, Mr. Scott has extensive experience in the agribusiness sectors of Central Europe and Southeast Asia. Prior to joining Sparks, he had various assignments in management, trading logistics and merchandising for the Continental Grain Company. He received his bachelor's degree in agricultural economics from Cornell University and a master's in business administration from the Amos Tuck School of Business Administration at Dartmouth College. Scott A. Richman, Vice President. Mr. Richman provides management consulting services to agribusiness, with emphasis on feasibility studies and the positioning of products within specialized markets. He has worked extensively with the agricultural biotechnology and grain processing industries on products ranging from herbicide resistant crops to ethanol. He received his bachelor's degree in economics from Vanderbilt University and his master's degree in international affairs at Columbia University where he specialized in international business. Jason A. Lawton, Consultant. Mr. Lawton s primary responsibilities include research and analyses for domestic and international consulting clients. He came to Sparks from Madison, Wis., where he worked for the banking division of Marshall & Ilsley Corporation as a senior agricultural credit analyst. His work there included credit analysis for new and existing clients, development of loan presentations, analyses of financial and cash flow statements, and establishment of guidelines and training programs on agricultural credit. Mr. Lawton received his bachelor s degree in economics from the University of Wisconsin-Stevens Point, and his master s of business administration from the University of Wisconsin-Madison. 6

7 STUDY FEES The fees for participating in the study are US$17,500 for current Sparks clients and US$22,500 for non-clients. The fees entitle subscribers to receive the comprehensive report Financing of the US Agriculture and Food Industry and to attend the study kickoff meeting and the group presentation. The costs of participants travel to the kickoff meeting and post-study seminar, as well as the expenses for Sparks staff travel to companies offices for individual presentations (optional), are not included in the study fees indicated above. 7

8 ENROLLMENT FORM Yes, I want to participate in the multi-client study Financing US Agriculture and Food. I understand that the cost of the study is US$17,500 for current Sparks clients and US$22,500 for non-clients. Onehalf will be billed upon initiation of the study and the remainder upon receipt of the final report. FAX to (901) Please have someone contact me to provide further information. Name: Title: Company: Signature: Street Address: City, State, Zip: Telephone: Fax: Address: Return this form to: Dr. Bruce A. Scherr Sparks Companies, Inc. 775 Ridge Lake Blvd., Suite 400 Memphis, TN Phone: Fax: bscherr@sparksco.com 8