Lending to Agriculture Joel Lorenzen Senior Vice President Chief Credit and Operations Officer Farm Credit Services Southwest ASFMRA Annual Meeting October 2011

Our Future Economic Drivers Philosophy and Customers World Trends National Issues Emerging Lending Risks Underwriting Standards Successful Producer Strategies

Philosophy and Customers Sound, Constructive, &Profitable Types of Customers Small Operator Large Integrated Dairy Agribusinesses Processors Major Products Long Term Real Estate Loans Operating Loans Other Products (No deposits)

Emerging World Middle Class Growth World middle class growth to double from 00’- 30’ No middle class growth in advanced nations China and India account for 70% of growth Ability to pay drives commodity prices and transforms world commodity markets Potential Implications for Agriculture Cotton price impacted by growth in China/India Watch for trade protectionism practices Exports & world trade increasingly important

U.S. Government Behavior New & Existing Entitlement Programs Deficits as % of GDP Taxing Implications Increased Regulation Few in Congress have ever been on a farm Federal Reserve Strategies Potential Implications for Agriculture Increased US Ag exports Federal Agriculture Programs all vulnerable Unknown estate and income tax future Oil and fertilizer input costs Crop prices - as value of $ decreases

Capital Business Investments Trillions in cash sitting on sidelines Industrial production slowly climbing Added risk of uncertainty w/o reward General Economy Taxes Regulatory Increases Impact on Agriculture Slower national economic recovery for jobs Low interest rates for ??? long

Emerging Lending Risks Commodity Price Volatility Real Estate Price Volatility Land Values vs. Income Production Increased Regulation Impact on Agriculture High potential of boom and bust cycles Continued volatility in pricing Systemic risk in lending portfolio’s

Changing Underwriting Water Issues – Especially in the West Financial Information Requirements Lending Tied to Production Value

Emerging Ag Business Environment Continued price, cost, and cash flow volatility Potential agricultural bubble in middle America Increasing cost structure from regulatory compliance (taxes, energy, environment, health care etc.). Slow National Recovery Weak dollar (favor exports and increase input costs) Greater tie into global trade and economic policy as export dependency increases.

Emerging Ag Business Environment Successful Producer Strategies Increasing liquidity Deleveraging Diversified risk management programs Managing margins vs. costs Improved financial records Looking for new opportunities

Capital Markets Update October 2011

Index Bank Market Update Interest Rate Update Commodity Markets Investment Grade Market Update Leveraged Loan Market Update Interest Rate Update Commodity Markets Confidential and Proprietary

Market Volatility 5-year Credit Default Swaps Market volatility has increased recently (bottom right) as a result of sovereign debt concerns and a weakening economic outlook. This has resulted in widening credit spreads (top right) and broad-based selling of leveraged loans (bottom left) Average Large Institutional Bid/Ask Spread VIX Volatility Index Confidential and Proprietary Source: S&P LCD, Bloomberg

Bank Market Overview Even in light of market volatility, loan volumes continue to rebound from 2008 lows. Although less than 2Q11, 3Q11 volume exceeded every other quarter since 2Q07. Rolling four quarter volume has exceeded $1.5 trillion and is approaching “pre-crisis” levels. Both investment grade and leveraged loans experienced growing volumes. Investment Grade / High Yield Distinction Investment Grade or High Grade Bank Loan Volumes ($ in Billions) Leveraged or High Yield Confidential and Proprietary Source: Thomson Reuters LPC

Investment Grade: Volume and Tenors Multi-year liquidity continues to represent the vast majority of the market. Multi-year volumes exceeded 364-day volumes by over 5 times YTD 2011. Four and five year volumes exceeded three year volumes by 6 times. The rise of longer tenors are largely a result of: Supply: Liquidity is strong, and low investment grade losses are driving risk appetite. Demand: Historically attractive upfront / unused fees and relatively low spreads are driving demand. Risk Management Focus: Rating agencies value term liquidity. Additionally, term liquidity reduces exposure to refinancing risks during events / financial shocks. I-Grade Tenor by Quarter ($ in Billions) Market Share by Tenor 4Y 5Y 1Y 3Y 364 day 3 year 4 year 5 year Confidential and Proprietary Source: Thomson Reuters LPC

Investment Grade: Multi-Year Pricing The improvement in liquidity that is driving multi-year tenors and greatly increasing volumes is also resulting in a reduction in bank loan pricing. Multi-year drawn and undrawn pricing has tightened to two-year lows. BBB multi-year undrawn pricing has fallen 10 basis points since 4Q10, and the average multi-year drawn pricing is just below 150 basis points for the first time in three years. Single A multi-year undrawn is approximately 10 basis points and drawn costs are approximately 70 basis points on recent offerings. Multi-Year Undrawn Pricing (in bps) Multi-Year Drawn Pricing (in bps) Confidential and Proprietary Source: Thomson Reuters LPC

Leveraged Loans: Overview Corporate Default Rate While the corporate default rate remains low, leveraged loan prices have recently fallen with the economic uncertainty and flight to quality. While YTD leveraged loan volumes far exceed last year’s levels, third quarter’s volumes have slowed from 1H011’s pace. Leveraged Loan Volumes ($ in Billions) * Leveraged Loans Secondary Bids * Volumes include only “new money” financings Confidential and Proprietary Source: S&P LCD

Leveraged Loans: Credit Spreads Secondary Credit Spreads (in bps) Credit spreads widened significantly during the height of the credit crisis (top right). This led to scant origination in leveraged loans during 2009 (gaps in charts below). While liquidity remains available, continued macro volatility has impacted leverage spreads recently. Primary BB/BB- Rated Loan Spreads (in bps) Primary B+/B Rated Loan Spreads (in bps) Confidential and Proprietary Source: S&P LCD

Interest Rates Treasury rates recently hit 70 year lows. Over the past 20 years: Three Month LIBOR has exceeded its current level 90% of the time. The Five Year Treasury Yield has exceeded its current level 99% of the time. The 10 Year Treasury Yield has exceeded its current level 99% of the time. The steepness of the yield curve points to higher future rates. The 10 Year Treasury Yield is ~110 bps below levels from the start of the year (~2.24%). The One Year Forward Curve projects a 10 year yield near 2.74%. The Three Year Forward Curve projects a 10 year yield near 3.34%. Historic Interest Rates Yield Curve: Historical, Current and Forward Confidential and Proprietary Source: Bloomberg

Commodity Market Volatility Nearby Grain Futures Grain commodities have been impacted by lower reported production and stocks. Increasing livestock prices reflect increased costs for feed and processing. More closely monitored commodities price increases an indication of inflation? Gold and Oil Commodities Livestock Nearby Futures Confidential and Proprietary

Financing Agriculture Panel Jim Pisani, ARA Wells Fargo Ag Industries ASFMRA, October 2011

Agricultural Industries Internal Agribusiness Consulting Group Dual roles: quality assurance and relationship enhancement. Provides support to line groups. Agricultural portfolio includes companies involved in supplying, producing, processing, marketing, or distributing food and fiber products domestically or internationally. Ag Industries: production and processors Strategic evaluation and risk profile. Commodity updates and industry trends. Budgeting and downside analysis. Agricultural appraisals, inspections, collateral monitoring. Relationship enhancement activities. Finally,some conclusions: Wells Fargo Ag Industries - 22

Financing Agriculture Agricultural commodity price volatility: Price volatility is associated with some specialty crops: Tree Fruit. Iceberg Lettuce. Other fresh produce crops. Some seasons in almonds, citrus, and grapes. Past decade in dairy industry: milk. Wells Fargo Ag Industries - 23

Source: USDA Wells Fargo Ag Industries - 24

Source: WF Ag Industries Wells Fargo Ag Industries - 25

Source: CA Almond Board Wells Fargo Ag Industries - 26

Source: NASS, USDA Wells Fargo Ag Industries - 27

Dairy – Milk Price Volatility Source: CDFA Wells Fargo Ag Industries - 28

Feed Cost Volatility Source: USDA Wells Fargo Ag Industries - 29

Feed Cost Volatility Wells Fargo Ag Industries - 30

Financing Agriculture How does price volatility affect agricultural operating risk? Qualitative risk ratings: Commodity Price Risk. Input Availability Risk. Relative Costs of Production. Industry Risk. Operating Risk: The uncertainty surrounding the projected outcome. Wells Fargo Ag Industries - 31

Operating Risk Wells Fargo Ag Industries - 32

Operating Risk Profiles Projected Wells Fargo Ag Industries - 33

Operating Risk: Downside Analysis Wells Fargo Ag Industries - 34

Production Agriculture Downside analysis compares operating risk profile to balance sheet capitalization: Downside margin: @risk model or stress variables. Compare to liquidity, borrowing capacity, solvency. Can calculate downside coverage ratios. Can assess changes in operating risk profile: Crop insurance. Price risk management tools. Crop diversification. Can assess changes in capitalization. Optimize liquidity allocation. Wells Fargo Ag Industries - 35

Dairy Production Dairy budget: Excellent management tool for sensitivity analysis and downside projection. Can assess impact on gross margin and breakeven by changing key variables. Gross margin projection is subject to variability due to price volatility in milk and feed. Wells Fargo Ag Industries - 36

Dairy Production Dairy budget downside analysis: Stress milk price, production, and feed costs. Consider affect of price risk management tools upon key variables. Calculate downside coverage ratios. Ag Consultant: assessment of budget variables and asset value review. Wells Fargo Ag Industries - 37