Interest Rate Changes 5/1

Today the Federal Reserve lowered interest rates by 0.25%.

All Yankee Farm Credit variable interest rates will be decreased by 0.25% effective May 1.

American Cancer Society - Relay for Life

The American Cancer Society – Relay for Life 2008 – Plattsburgh, NY Region – Will be held at the Clinton County Fair Grounds on Friday, June 13th beginning at 7:00 pm until 7:00 am on Saturday, June 14th. Individuals will walk throughout the night in support of, and in honor of, family and friends who have had or who have succumbed to cancer.

The team Collateral Cohorts will once again walk at the relay in honor of Gordon Hurlburt, a long time employee of Yankee, who passed away in November 2006 from brain cancer. The Collateral Cohorts which once primarily consisted of Yankee Farm Credit employees and family members, is now supported greatly by Yankee Farm Credit, ACA and its employees.

Marie Guay, a senior loan officer in Yankee’s Chazy, NY office, originally founded the Collateral Cohorts team and is now involved in the Relay for Life as the team captain chairperson, responsible for coordinating all 78 teams.

The Collateral Cohorts team welcomes your participation. If you wish to participate in the walk or wish to support their efforts, visit the Plattsburgh Relay Site and look for the Collateral Cohorts under Team Names.

Board Chairperson and Vice Chairperson elected

At the April 29, 2008 Board meeting, the Board of Directors elected Paul Doton to serve as Chairperson and Paul Gingue to serve as Vice Chairperson. Also appointed were committee assignments:

Executive Committee
Alan J. Bourbeau
Rupert C. Chamberlin
Paul E. Doton
Alfred A. Dunklee
Paul E. Gingue

Audit Committee
Rocki-Lee DeWitt
Rocklyn A. Giroux
Walter M. Gladstone
Paul F. Saenger
Charles J. Sniffen

Membership/Governance Committee
Alan J. Bourbeau
Alfred A. Dunklee
Rocklyn A. Giroux
Celeste Kane-Stebbins
Charles J. Sniffen

Strategic Planning Committee
Rocki-Lee DeWitt
Paul E. Gingue
Walter M. Gladstone
Paul F. Saenger

Compensation Committee
Rupert C. Chamberlin
Rocki-Lee DeWitt
Paul E. Gingue
Rocklyn A. Giroux
Celeste Kane-Stebbins

A farm debt crisis? Part 3

This post continues the topic of the previous two posts. In this post, I discuss the Farm Credit System in the 1980s, and what is different today.

The 1980s were a time of crisis for the Farm Credit System. In response, Congress passed the Agricultural Credit Act of 1987. This Act provided for up to $4 billion of 15-year U.S. Treasury-guaranteed debt to bail out the System, of which $1.3 billion was eventually used. The last of this $1.3 billion was fully paid back in 2005.

The 1987 Act also required certain redistributions of capital within the System. Healthy institutions, such as those in the northeast, were required to make payments to support failing institutions. Two predecessor organizations of Yankee were required to make payments. (If you are curious about the details, see the first comment to this post.)

Could Yankee again be required to make capital contributions to support failing institutions elsewhere in the Farm Credit System? It is possible, but there are several reasons not to be overly concerned. In addition to a financial bailout, the Agricultural Credit Act of 1987 also made several other changes intended to prevent a similar crisis from recurring in the future.

First, the 1987 Act (along with other legislation in 1985 and 1986) greatly strengthened the Farm Credit Administration (FCA) as the regulator of the System. Previously FCA had been an advocate for the System. FCA became an arm's length regulator comparable to other banking regulators. FCA now has more powers, and more inclination, to prevent institutions from getting into trouble, and also more authority to act earlier and more decisively if they do.

Second, the 1987 Act established the Farm Credit System Insurance Fund to insure holders of Farm Credit System bonds against loss. System institutions pay into this Fund much as commercial banks pay into the Federal Deposit Insurance Corporation (FDIC) to insure small savers against loss. Currently the FCS Insurance Fund is $2.6 billion. This is 1.7% of outstanding bonds. While not huge, it is not small, either, and it did not exist at all in the 1980s.

Third, the System has a stronger balance sheet than in the 1980s, in terms of both capital and credit quality. (In this post "capital" means the same as members' equity or net worth.) The 1987 Act required FCA to establish capital standards for the first time, which FCA did in 1989—the 7% permanent capital standard. And System institutions have also adopted higher credit quality standards.

System accounting changed materially in 1985. Prior to 1985, the System's annual report to investors (aka the Annual Information Statement) was a consolidation of only the System banks and did not include the associations. Also, this report was not audited prior to 1985. The first independent audit in 1985 by Price Waterhouse (now PricewaterhouseCoopers) was a watershed event for the System. Many new accounting conventions were adopted in 1985. Accordingly, I will go back only to 1985 in my historical comparisons.

The risk funds ratio is one measure of capital. (The risk funds ratio is: capital plus the allowance for loan losses divided by assets plus the allowance for loan losses.) For the System as a whole, this ratio was 13.9% in 1985. It fell to a low of 10.7% in 1989, and nearly 1/3 of capital at that time was what was called "protected capital" which was more like a liability than capital. In 2007 the risk funds ratio was 14.5%, with no "protected capital." In addition, the portion of capital consisting of unallocated surplus, the most permanent form of capital, fell to a low of 26% in 1986 vs. 76% in 2007.

A good measure of credit quality is the ratio of high risk loans to total loans, referenced in the preceding post. This ratio, for the System as a whole, was 14% in 1985 and peaked at 23% (!!) in 1986. As noted in the previous post, we view 2% or less to be the standard for this ratio, and in 2007 this ratio was a very low 0.4% for the consolidated System.

In short, the System has more (and higher quality) capital now than in the 1980s and a much lower risk profile. Nevertheless, vigilance is warranted. Credit quality can deteriorate quickly, with little warning. And the trend in the risk funds ratio bears watching. It was as high as 17.7% as recently as 2004. But we are a long ways from the stress levels that the System experienced in the 1980s.

A farm debt crisis? Part 2

This post continues the topic of the previous post. In this post, I discuss the recent experience of Farm Credit's loan portfolio.

The concern of the AP article cited in Part 1 was that farm debt is increasing rapidly, and that this could lead to a financial crisis like the 1980s. First, let me say that we are not seeing this locally in Yankee. Dairy farmers (nearly 60% of our loan volume) had perhaps the best year ever in 2007, similar to the record times for crop farmers. But they paid down debt, instead of taking on more debt to expand. Perhaps that's because the memories of bad times are more recent for northeastern dairy farmers (2006) than for midwestern crop farmers (1980s).

The two largest associations in the Farm Credit System are both in the midwest, and they are both mentioned in the AP article previously referenced. Farm Credit Services of America, ACA is headquartered in Omaha, Nebraska. Farm Credit Services of Mid-America, ACA is headquartered in Louisville, Kentucky. Each association has about $12 billion in loans. Each association is about 40 times the size of Yankee. What has been their experience with loan volume growth?

FCS of America's loans grew by 16% in 2007 and had a compound annual growth rate (CAGR) of 13% over the past 5 years. FCS of Mid-America's loans grew by similar amounts: 17% in 2007 and a 5-year CAGR of 12%. (Source: calculated from information on FCA's web site.)

The Farm Credit System as a whole had $143 billion in loans at the end of 2007. The overall System loan growth rate was 16% in 2007, with a 5-year CAGR of 10%. (Source: calculated from the System's Annual Information Statement.)

These loan growth rates are slightly on the high side, and are cause for reflection. But one reason that I am not overly concerned is that loan quality has improved considerably in the past 5 years and is currently at a high level. High risk loans as a percent of loans were as follows (12/31/02 -> 12/31/07):

FCS of America: 0.9% -> 0.3%
FCS of Mid-America: 1.1% -> 0.5%
Farm Credit System: 1.3% -> 0.4%

For reference, we consider 2% or less to be the standard for this ratio. Yankee's numbers were 0.8% -> 0.2%.

A farm debt crisis? Part 1

Are we headed for another farm debt crisis like the 1980s? This AP article discusses the similarities between the current ag economy and the late 1970s/early 1980s. In brief, crop prices are at record highs, leading to increased land prices and higher input costs. This has led to increased debt as farmers finance more costly inputs and more valuable inventories, or try to expand. If crop prices fall, many farmers will be bankrupt.

The farm economy is presently booming (in contrast to the overall economy). What could cause the farm economy to weaken? Last time it was changes in government policies, including the Soviet grain embargo following the Soviet invasion of Afghanistan in late 1979 (President Carter) and the restraint of rampant inflation in the early 1980s (President Reagan).

This time, many people are worried about ethanol. U.S. government policy has strongly favored ethanol production, and this has been a factor in the present high crop prices. Could ethanol fall out of favor?

There are two reasons to be concerned that it could. First, the high crop prices have driven up food prices around the world, causing food riots in at least 14 countries. Last October a UN official (granted, a controversial UN official) called the production of biofuels from food crops a "crime against humanity" because of the effect on food prices and world hunger. The second reason to be concerned is that the supposed carbon benefit of ethanol has been questioned. Recent studies have suggested that ethanol increases greenhouse gas emissions, rather than reducing them as generally believed.

Another factor I wonder about is China. The increasing wealth of many developing countries, especially China, has driven up world wide demand for food, causing higher prices. I have no doubt that long term this trend will continue. But that doesn't mean there can't be short term interruptions. China is presently preoccupied with the 2008 Summer Olympics. It reminds me of when the U.S. was preoccupied with Y2K. Could there be a pause in China's growth after the Olympics, like there was a recession in the U.S. after Y2K? If so, that could have a significant effect on world wide food demand and prices for a time.

Finally, it is well to remember that markets and prices change over time, sometimes dramatically, not only because of external factors, but also sometimes because of their own internal dynamics. High prices breed strong emotions. Fear and greed can lead to hoarding and speculation, which can lead to price bubbles and collapses without any external cause. There may be some of that going on now, too.

UPDATE 7/01/08: Unfortunately the link to the original AP article above no longer works. I cannot find that article anywhere on the Internet. It was a good article, too. Google News maintains a tremendous archive of news articles, back to the 1920s, so the loss of this link seems odd. But it may be because AP has recently been making waves about people linking to and quoting their articles. That's another issue, for someone else. More info here if you are interested.

UPDATE 7/02/08: Jeff Thredgold, an economist, posted interesting comments today in his weekly newsletter the "Tea Leaf" about price bubbles. He doesn't specifically mention food prices, but he writes about commodity prices (especially oil) and commodities would include food, too. Some readers of this blog may recall hearing Jeff Thredgold speak at various Farm Credit conferences.

"Blog Update" E-mails

Occasionally I send out an e-mail titled "Blog Update." This e-mail lists the recent posts on the blog, in case you are interested in checking them out. Of course, you can find out that information yourself by visiting the blog on your own, but the e-mail serves as a handy reminder. Also, the e-mail will list any older posts that have new comments or updates, which is something not easily discovered on your own.

If you aren't getting our "Blog Update" e-mails and you would like to, please send me an e-mail message.

Farm Credit Fellows Program

The 2008-2009 Farm Credit Fellows program is underway. This program is for college juniors at Cornell, UVM and the University of Maine. There are 25 students in this year's program. Three are children of Yankee members. Following are the students from UVM this year (and the office hosting their one-week internship): Andrew Birch from Derby (Middlebury); Gerrit Gosliga from Addison (Batavia); Coral Kent-Dennis from Marlboro (Newport); Asa Manning from Sharon (WRJ); Amy Maxham from South Hero (Potsdam); Tate Morris from East Lyme, CT (Dayville); David Rice from Windsor (Cobleskill); Brian Trudell from East Fairfield (Riverhead); and Andrew Wood from Concord (St. Albans).

Click here for more info on the Fellows Program.

42nd Annual Maple Festival

This weekend, April 25-27, will mark the 42nd Annual Maple Festival in St. Albans, VT. Yankee Farm Credit co-sponsors (with Clarence Brown, Inc.), two sugarhouse tours. The Beebe Family Sugarbush and French Hill Farms. Climb aboard a bus and enjoy a complimentary tour!

FFA Granite State Convention

April Smith, office assistant and credit analyst in the White River Junction office, attended the sponsor recognition portion of the 78th Granite State FFA Convention held at the Mount Washington Hotel on April 3 - 5.

Yankee Farm Credit believes in supporting Young, Beginning and Small farmers. They represent the future of farming. The entry of Young, Beginning and Small farmers into the industry is critical to the long-term success of agriculture. Contributions are made regularly to agricultural organizations, such as Extension Service, 4-H and FFA, which provide education and experience to our future farmers.

UPDATE: Here is the certificate that was presented to April:

Director Election Results

The last of four annual meetings was held last night at the Middlebury Inn. Members completed voting for directors, ballots were counted, and the results were announced before the meeting was adjourned. Elected to three year terms on the board of directors were:

Region 1 - Celeste Kane-Stebbins
Region 2 - Walt Gladstone
Region 3 - Paul Doton

Congratulations to Celeste, Walt and Paul. And thanks to Jack Parent, Louise Calderwood and Ted Foster for participating in the elections as candidates.

There were 151 ballots cast this year, which was 15% of eligible voters. This was up slightly from 144 and 14% last year.

Thank you to everyone for participating, and a special thanks to employees for organizing and running successful meetings.

Townline Sales and Service Open House

Townline Sales and Service, located in Plainfield, NH, held their open house on April 16th. Yankee's Jeff Temple, Vice President, and Bill Heath, Chief Credit Officer, attended the annual event. There was a large crowd of customers enjoying the beautiful weather and complimentary lunch of hamburgers, hot dogs, baked beans etc (made by Carol Marrazzo) to thank them for their patronage.

Thanks to Claude and Ted

We are in the midst of customer annual meetings and director elections. Winners will be announced tomorrow evening at the Middlebury Inn. Due to term limits, two veteran directors are departing from our board this year: region #1 - Claude Bourbeau; and region #2 - Ted Young. Both of these gentlemen have served with the best interests of Yankee at heart for many years—Claude for 26 years and Ted for 12. Many thanks to you both for your leadership, guidance and wisdom over the years!

What is science?

In the previous post, I mentioned that Agri-Mark is working with the Manomet Center for Conservation Sciences to develop a science-based sustainability scorecard for farmers. I wonder if Agri-Mark's customers who are interested in sustainability are equally science-based. More generally, this got me thinking about the question: What is science?

Our society often equates "science" with "expert." When we want to know what the "science" is on a particular matter, we hire an expert to tell us, preferably a PhD. I'm not sure this is the right way to think about science. But, just to be safe, I will cite a PhD in support of my position.

In an earlier post I wrote about the physicist Richard Feynman. In that post I mentioned Feynman's 1974 speech Cargo Cult Science. "Cargo cult science" was Feynman's phrase for pseudoscience or junk science. That speech is a good discussion of what science is and is not. If you have not read it, you may find it worthwhile to do so.

In this post, I want to mention another Feynman speech. In 1966, the year after he won the Nobel prize, Feynman gave a speech at a meeting of high school science teachers titled What is Science? He talked about how the human race has learned to accumulate knowledge and pass it on to subsequent generations:

This phenomenon of having a memory for the race, of having an accumulated knowledge passable from one generation to another, was new in the world. But it had a disease in it. It was possible to pass on mistaken ideas.

Feynman went on to say that science was developed (or discovered) as a cure for this disease. Science avoids the disease by continually rechecking knowledge claims against experience. It is not sufficient to simply accept the word of "experts":

Learn from science that you must doubt the experts. As a matter of fact, I can also define science another way: Science is the belief in the ignorance of experts.

The experts who are leading you may be wrong.

Feynman was of the opinion that "we live in an unscientific age" in which much that is passed off as science is in fact pseudoscience:

As a result, there is a considerable intellectual tyranny in the name of science.

That was in 1966. I wonder if we are more or less scientific today.

Agri-Mark Annual Meeting

Congratulations to Agri-Mark, which held its 28th annual meeting in Burlington on April 10-11. At the left is Gov. Jim Douglas addressing the members and guests.

The winner of Agri-Mark's top milk quality award was Dimock Farms LLC of Peru, NY. Congratulations to Don, Martha and Bruce!

One of the interesting presentations was about sustainability. Some of Agri-Mark's customers have asked it: What are you doing about sustainability? As a result, Agri-Mark is working with the Manomet Center for Conservation Sciences to develop a science-based sustainability "scorecard" that can be used to evaluate the things that Agri-Mark members do to promote sustainability. Agri-Mark members can expect to hear more about this over the next few months.

NEK Dairy Farmers Meeting

On April 8th the North East Kingdom Dairy Farmers group met at the Simpson Farm in Sutton, VT. Owners Ryan and Marci Simpson opened their farm up for a tour and discussion about dairy cattle reproduction. The meeting was also hosted by Schering-Plough, a pharmaceutical company. Rick Jackson of Schering-Plough helped lead the discussion on the progress made in the reproductive health of the Simpson Farm since Ryan’s takeover about 2 years ago.

Rick also had each member of the group discuss their homework assignment for the meeting. All members attending were assigned via the newsletter to address this question: "What is the biggest challenge on your dairy?" Challenges discussed included feed consistency, days to first breeding after calving for 1st calf heifers, breeding synchronization, employee management, and various other things.

All attendees enjoyed the sunshine, free pizza lunch provided by Schering-Plough, and great conversation with their neighboring young farmers.

For more information about the NEK Dairy Farmers group contact Yankee loan officer Kelly Langmaid at the Newport office 800-370-2738.

Annual Meetings

Annual Meetings are underway! Members come together to enjoy dinner, mingle and cast votes for the open seats on our Board of Directors. On April 7th, there was a meeting held at Fireside Inn and Suites in West Lebanon, NH; April 9th there was a meeting held at the Eastside Restaurant in Newport. There will be two meetings next week: St Albans Lodge of Elks on April 15th and the Middlebury Inn on April 17th.

Large Dairy Farm Benchmark Meeting

First Pioneer Farm Credit held their annual Large Dairy Farm Benchmark Program meeting in Burlington on Friday, April 4. About 80 people attended, mostly farmers from northern New England and New York, including many Yankee Farm Credit customers. First Pioneer consultants Bill Zweigbaum, Rick Hermonot and John Lehr ran the meeting.

Also speaking at the meeting was David Galligan, VMD of the University of Pennsylvania. Dr. Galligan talked about "Growing Your Dairy Economically." He demonstrated many interesting "visual analytics." If you are interested in more information, contact Dr. Galligan (contact info on his web site) as the visual analytics are available on his web site but are password-protected.

A few of the many concepts discussed at the meeting were: paying more attention to liquidity (something we have been encouraging also); improving internal herd growth; and looking at income and expenses on a gross margin basis. The last concept is something that First Pioneer consultants have been talking about for several years now. The idea is to divide expenses into variable expenses (cost of goods sold) and fixed expenses (overhead). If your cost of goods sold is higher than it should be, you might consider getting better before you get bigger. If your fixed costs are higher than they should be, then expansion might be a viable strategy.

Marie Guay and I attended the meeting from Yankee staff.

More Feynman

Following is additional information about Richard Feynman, to supplement my column about him in Financial Partner magazine (see this post below for the Financial Partner magazine column):

Feynman had a great sense of humor. Here is a condensed version of one of the stories in Surely You’re Joking, Mr. Feynman: Adventures of a Curious Character: When Feynman first arrived at Caltech, he was invited to a party hosted by another professor, Professor Bacher. Feynman had recently been on sabbatical in Brazil, where he had learned enough Portuguese to give his lectures there in the native language. Bacher decided to play a joke on Feynman, and he told his guests: “This guy Feynman thinks he’s smart because he learned a little Portuguese, so let’s fix him good: Mrs. Smith here [who is completely Caucasian] grew up in China. Let’s have her greet Feynman in Chinese.” So when Bacher introduces Mrs. Smith to Feynman, she says: “Ai, choong, ngong jia!” Now Feynman doesn’t know any Chinese, and he hasn’t the foggiest idea what Mrs. Smith just said. But without missing a beat, and with complete confidence, he politely bows and replies: “Ah ching, jong jien!” At which Mrs. Smith loses her composure and exclaims: “Oh, my God! I knew this would happen—I speak Mandarin and he speaks Cantonese!”

[Feynman's "Cantonese" was, of course, completely made-up nonsense which he pulled out of the air on the spur of the moment. Because Feynman doesn't know any Chinese, I'm 99.9% sure that in his version of the story Mrs. Smith's "Mandarin" is made-up nonsense, too.]

Feynman was a brilliant physicist, but he also had many other interests. He was known for safecracking, deciphering Mayan hieroglyphics, demystifying magic tricks, painting nudes, storytelling and playing the bongo drums (he once provided the music for a ballet). Many of his published stories were originally told to friends during drumming sessions.

Here are some of my favorite Feynman quotes:

The first principle is that you must not fool yourself — and you are the easiest person to fool.

Physics is like sex: sure, it may give some practical results, but that's not why we do it.

The principle of science, the definition, almost, is the following: The test of all knowledge is experiment. Experiment is the sole judge of scientific 'truth.'

Science is the belief in the ignorance of experts.

I was born not knowing, and have only had a little time to change that here and there.

If you wish to learn more about Richard Feynman, you should certainly read Surely You’re Joking, Mr. Feynman: Adventures of a Curious Character. I also recommend:

The Pleasure of Finding Things Out: The Best Short Works of Richard P. Feynman

Two good biographies about Richard Feynman are:

Genius: The Life and Science of Richard Feynman, by James Gleick

No Ordinary Genius: The Illustrated Richard Feynman, edited by Christopher Sykes

If you wish to experience Feynman's gift for explaining complex scientific ideas in simple terms, I recommend Six Easy Pieces (also available on audio CD). Feynman gave a layman's explanation of his Nobel prize winning achievements in quantum electrodynamics in QED: The Strange Theory of Light and Matter. A collection of Feynman's letters was published in 2005 by his daughter: Perfectly Reasonable Deviations From The Beaten Track.

Addison County Young Farmer Meeting

Date: Tuesday, April 8, 2008

Time: 6:30 pm, dinner will be provided. Please bring your spouse or
significant other.

Location: American Legion, Middlebury. Anson Tebbetts will be presenting key messages to help when addressing difficult questions from consumers.

Please RSVP: to Kirstin Quesnel (802) 349-5776 or klq4@yahoo.com

UVM Career Fair

Loan Officers, Morgan Greenwood and Kelly Langmaid attended the Career Fair at UVM on April 1, 2008. The fair was held at the new Davis Student Center. Many area businesses were present to speak to students about possible internships and career opportunities.

Surely You're Joking!

The president's column in the current issue of Financial Partner magazine is about Richard Feynman. Here is the column, edited slightly for the blog:

Surely You're Joking, Mr. Feynman!

Everyone needs heroes. One of mine is the physicist Richard Feynman. I mention this because the feature article by Karen Murphy in this issue of Financial Partner magazine is on nanotechnology, and some consider Richard Feynman to be the father of nanotechnology.

A curious character

Richard Feynman lived from 1918 to 1988. He taught at Cornell University for five years following World War II, but spent most of his career at the California Institute of Technology (Caltech). One of the youngest scientists to work on the Manhattan Project, Feynman later won the Nobel Prize for physics in 1965 for his work in quantum electrodynamics. He was also a member of the presidential commission that investigated the 1986 Space Shuttle Challenger disaster.

One reason why I like Feynman is that he told the funniest stories, some of which he captured in his book, Surely You’re Joking, Mr. Feynman: Adventures of a Curious Character. The title says a lot about the man: he loved a good joke; he treated life as an adventure; he was curious about everything; and he was certainly a character!

Room at the bottom

I also admire Feynman because he was a great teacher. He had a gift for explaining complex ideas in simple terms. One example is his famous 1959 speech, There’s Plenty of Room at the Bottom, which is considered to be the first talk on nanotechnology.

In his speech, Feynman proposed that manipulating individual atoms should be possible. He explored the implications of being able to do so, such as explaining how it would be possible to write all information from all the world’s books (at that time) in an amount of matter the size of a speck of dust.

His speech was so comprehensible by general audiences that Feynman later repeated it to high school physics students. This speech is easily found on the Internet: click here for the original speech and click here for the Wikipedia entry about the speech.

How not to fool yourself

Lately I’ve thought about Richard Feynman for another reason. At Yankee Farm Credit, I recently began discussing values with employees. “Integrity” is at the top of my list of important values, and my favorite discussion on integrity is from a commencement speech that Feynman gave at Caltech in 1974 titled Cargo Cult Science. This speech is also easily found on the Internet: click here for the original speech and click here for the Wikipedia entry about the speech.

Feynman advised future scientists about scientific integrity, and his advice still applies to us today. He suggested questioning our own assumptions, theories and conclusions. “The first principle is that you must not fool yourself — and you are the easiest person to fool.”

It seems like good advice to me.

UPDATE: More posts about Richard Feynman:
More Feynman
What is science?