Safety in this sea of risk.
For those of you new to Farmer Mac (NYSE:AGM), I describe it in detail below. For you chosen few who already know the company or just want a summary, here is an update for the coronavirus.
Credit quality should be largely unaffected. As a reminder, Farmer Mac’s loan charge-offs averaged 2 bp a year for 30 years. That may very well be the lowest charge-off rate of any lender over that period. I really don’t see that changing much this year or in the next few years, for these reasons:
- Farmer Mac’s borrowers are, oddly enough, farmers. Our lives are in turmoil right now, but we’re still eating. And farmers are already experts at social distancing. So hard to see any material change in farm revenues from domestic demand.
- The plunge in energy prices will create some nice cost reductions for farmers – lower fuel and fertilizer costs.
- China is apparently starting to live up to its promise to buy more U.S. farm products. Wheat prices are near the top of their 5-year range, while soybeans and corn are maybe only a bit below average.
- The only new risk is that farm families typically have one or more members working off the farm who could lose their job.
- Farmer Mac has some lending to rural utility cooperatives. Hard to see the utilities’ earnings plunging.
- Farmer Mac has a small portfolio of loans to other farm-related businesses like food processors. We not only want our food, we want it processed.
Funding is in great shape. Farmer Mac has a federal charter that gives it the implicit backing of the U.S. government. As such, even amid this turmoil, Farmer Mac’s borrowing rates up to 3-year maturities are only a few basis points higher than Treasuries. And while its spreads widened
