FEDERAL AGRICULTURAL MORTGAGE CORP

Business Outlook

Products and Portfolio

Farmer Mac serves a vital role in serving rural America by offering liquidity, capital, and risk management tools as a secondary market that help increase the accessibility of financing for American agriculture and rural infrastructure. The growth trajectory of Farmer Mac is closely tied to the capital and liquidity needs of the lending institutions serving agriculture and rural infrastructure businesses and the overall financial health of borrowers in these sectors. Given significant increases in market interest rates over the past two years and global and economic volatility, Farmer Mac's outstanding business volume was flat in third quarter 2024 versus third quarter 2023, but net effective spread increased by 4.0% year-to-date 2024 versus the same year-to-date period 2023. This year-over-year increase in net effective spread primarily reflects the diversification of Farmer Mac’s business model and the resiliency of the agriculture and rural infrastructure sectors.

Several factors continue to influence business volume growth dynamics. The rise in market interest rates that have persisted over the past few years has had a direct impact on Farmer Mac’s Farm & Ranch product interest rates, and there generally exists an inverse correlation between Farm & Ranch new loan purchase volumes and changes in Farm & Ranch product interest rates, with higher product interest rates slowing portfolio loan prepayments. In addition, a tightening agricultural economy is creating the need for additional liquidity and working capital needs for borrowers managing through this agricultural cycle. The net effect of these forces contributed to positive Farm & Ranch loan purchase portfolio growth in third quarter 2024. Future changes in monetary policy, sustained elevated product interest rates, and the financial health of borrowers are anticipated to influence the demand for Agricultural Finance mortgage loans and the pace of repayments. Farmer Mac experienced a decrease in wholesale finance volume during third quarter 2024, driven by slower market loan growth and a tightening of market credit spreads resulting in less liquidity and diversification needs from our counterparties. Future growth will be influenced by market interest rates and credit spreads, overall economic conditions and loan growth opportunities, and the relative value of Farmer Mac’s products versus the broader market. Corporate AgFinance loan purchases and unfunded commitments increased 9.6% in third quarter 2024 versus third quarter 2023. The Rural Infrastructure Finance segments showed significant business volume growth in third quarter 2024, increasing 14.6% to $8.5 billion in third quarter 2024 versus third quarter 2023. Business volume in Rural Infrastructure Finance was strong across most products and segments year-over-year, primarily driven by increased investment activity and additional financing for renewable energy projects in response to continued strong demand for renewable power generation and storage.

Opportunities for profitable future growth include Farmer Mac's potential role in alleviating liquidity, capital, and return-on-equity capital challenges faced by agricultural and rural infrastructure lenders. The suite of Farmer Mac's offerings encompasses loan and loan portfolio purchases, participations, guarantees, LTSPCs, wholesale funding, and securitizations. In October 2024, Farmer Mac purchased from a single agricultural lender a pool of Farm & Ranch loans with an aggregate outstanding principal balance of $122.1 million. Ongoing business and product development efforts continue to attract institutional investors and nontraditional lenders, resulting in the diversification of Farmer Mac's customer base and product set, potentially generating increased product demand from new sources. Farmer Mac’s improved loan servicing capabilities enhance our loan portfolio purchase value proposition, adding new product offerings to an increasingly diverse customer base.

Growing relationships with larger agriculture lenders, financial industry consolidation, interest rates and market volatility, as well as financial institutions' focus on capital efficiency and liquidity continue to provide increased opportunities for Farmer Mac, influencing the demand for loan purchases, risk management solutions, and wholesale funding. This growth may lead to an increase in the average transaction size within Farmer Mac’s lines of business. The financing needs arising from mergers, acquisitions, consolidation, and vertical integration in the agricultural and rural infrastructure industries present further opportunities for Farmer Mac’s loan purchase products and other financing solutions. And investments supporting consumer and food supply demand may increase financing needs in the food and agriculture supply chain, potentially requiring incremental capital support through the secondary market. Deepening relationships with eligible rural infrastructure counterparties are expected to continue to create opportunities to support fiber and broadband-related transactions, including significant market activity and investments in wholesale data centers as well as renewable energy projects.

Funding

Unlike depository institutions, Farmer Mac's funding strategies do not rely on deposits, allowing us to navigate beyond short-term liquidity disruptions and to take advantage of increased opportunities in a competitive lending environment. Our funding advantage over regional and national banks is also aided by the fact that our debt has a contractual term to maturity and that we have the ability to call our callable debt before its original maturity date when market conditions are beneficial to Farmer Mac. In contrast, depository institutions largely rely on demand deposit accounts in which the depositors hold the right to withdraw at any time. Because of these differences in funding strategies, certain economic disruptions may have a positive impact on Farmer Mac’s funding costs relative to the overall market. During third quarter 2024, we began to see some benefit from calling fixed-rate debt and may continue to see this benefit throughout the rest of 2024.

Farmer Mac's business may benefit from natural business hedges that help mitigate vulnerability to effects from interest rate volatility. When interest rates rise, prepayments tend to decline, but interest earned on excess cash and capital increases, maintaining Farmer Mac's strong market access without relying on deposits. Conversely, when interest rates decline, loan purchase volume often increases, but prepayments tend to rise as well. Although these natural business dynamics may not be perfect offsets, they tend to provide some counterbalance to mitigate volatility from changes in short-term interest rates.

Operations

Farmer Mac expects continued increases in its operating expenses over the next several years as we continue to expand our investments in human capital, technology, and business infrastructure to increase capacity and efficiency as we seek to accommodate growth opportunities and achieve our long-term strategic objectives. Investments in infrastructure and funding platforms to support strategic objectives are expected to allow Farmer Mac to scale more efficiently with future portfolio and earnings growth. These investments will likely help improve product delivery and funding efficiency, potentially creating additional benefits for future growth. In September 2024, the Farm Credit Administration notified us that the amount of Farmer Mac's annual assessment for regulatory fees for the period October 1, 2024 through September 30, 2025 was $4.0 million.

Another focus of our infrastructure investments will be a continued effort to expand our servicing capabilities and to enhance the efficiency and effectiveness of processes associated with loan onboarding and servicing. Farmer Mac will continue to leverage technology enhancements and servicing standardization efforts to drive scalability and consistency. Technology enhancements are planned for the remainder of 2024 and into 2025 to continue to incorporate all Farmer Mac loan portfolios onto our servicing platform and to provide flexibility in accessing loan portfolio information, as well as streamlining operational workflows. During fourth quarter 2024, Farmer Mac substantially completed its multi-year effort to replace its platform for securities trades and to implement a treasury management system.

Agricultural Finance Industry Outlook

Farm Incomes

Overall farm incomes fell in 2023 and are forecast to have fallen again in 2024. According to the USDA, net cash farm income peaked at $210.1 billion in 2022, a new all-time high. The primary driver of profitability in 2022 was higher cash revenues, in contrast to 2019 and 2020, when elevated government support payments supported farm incomes. The USDA currently estimates that net cash farm income dropped 21% in 2023 and will decrease another 7% in 2024. Declines in crop producer revenues are being partially offset by lower expenses for protein producers in 2024 as sectors rotate through agricultural cycles. Still, the overall average farm income in 2024 would be 1% higher than the 10-year inflation-adjusted average if the USDA's projections are realized.

Commodity prices may see increased volatility in 2024 and 2025 due to a rebound in global supply levels. Annual grain crop prices remained under pressure in third quarter 2024. U.S. annual crops have benefited from favorable growing conditions across much of the U.S. Midwest this summer, raising the likelihood of above trend-line yields this year. Tree nut prices have faced similar pressure in recent years from rising production, including almonds and walnuts. Tree nut producers have reduced new plantings as a result, which, combined with robust exports this marketing year, has provided moderate support for prices. Within the livestock and animal protein sector, producers could see offsetting benefits from lower feed costs, particularly the cattle sector. Broadly speaking, farm expenses could also abate somewhat in 2024 and into 2025, with lower expected feed, fertilizer, and fuel costs partially offset by higher expected interest, labor, and rental rates. Demand for corn and soybean by-products could see a boost in late 2024 and into 2025 as renewable diesel and sustainable aviation fuel markets continue to mature.

Declining farm incomes can have multiple competing effects on loan performance and agricultural credit demand. Constraints on cash flow can cause loan delinquency rates to rise back to and surpass historical averages. This reversion is most likely in commodities experiencing negative market conditions like some grain and nut crops. Simultaneously, cash flow constraints can increase demand for debt capital to reorganize balance sheets and replace lost incomes. Farmer Mac believes its portfolio and market strategy to be sufficiently diversified by borrower, industry, and region to maintain robust portfolio performance through the current cycle and be positioned to support any expansion of the farm mortgage market that may arise in the coming quarters.

Land Values

Record-setting farm incomes in 2021 and 2022, combined with historically low interest rates in 2020 and 2021, drove a rapid rise in land values and a decrease in farm delinquencies and bankruptcies. Momentum for farmland values persisted throughout 2023 due to high levels of farm liquidity and a constrained supply of farmland for sale. Land values have slowed in some markets in 2024 due to higher interest rates and lower profitability in many agricultural sectors. Land value survey data from the USDA show a 5% increase in average farm real estate values from June 2023 to June 2024. Annual farm real estate value gains were highest in the Southeast (9.4%) and the Southern Plains (7.5%) and still strong but slowing in the Lake states (4.3%), the Corn Belt (3.7%), and the Southeast (2.4%).

Farmland value growth rates moderated in the first half of 2024 in the face of continued higher market interest rates. The Federal Reserve Bank of Chicago AgLetter reported a 2% gain in farmland values in the Seventh District (primarily Iowa, Indiana, Illinois, and Wisconsin) between July 2023 and July 2024. This was down from a 9% increase over the previous 12-month period and was the smallest increase in over three years. Data from the Federal Reserve Bank of Kansas City showed similar growth in land values in the Tenth District (primarily Kansas, Missouri, Nebraska, and Oklahoma) during that same period. Growth rates in land values could continue to moderate into 2025 due to compressing farm profitability and an elevated interest rate environment, particularly in states like California where there are multiple headwinds. Nationally, however, a general low supply of available farmland and persistent demand for the asset class across a wide variety of investors could help maintain balance in the farmland transaction markets.

While regional averages for farmland values generally provide a good barometer for the overall changes in U.S. farmland values, economic forces affecting land markets are highly localized, and some markets may experience greater volatility in farmland values than state or national averages indicate. Based on our robust collateral underwriting standards, we believe that our loan collateral is well-positioned to endure reasonably foreseeable volatility in farmland values that could result from external factors.

Markets and Weather

Exogenous factors facing farm and food producers can create uncertainty and market instability within the sector. Some of the external market conditions that could adversely affect the farm and food sectors into 2025 include foreign trade and trade policy, supply chain disruptions, and weather and environmental conditions. The U.S. agricultural sector has become increasingly dependent on foreign markets as a source of demand, making trade policy an important consideration for farms and food. The USDA projects that U.S. agriculture exports will drop to $169.5 billion in 2025, 2% lower than 2024 and down 14% relative to peak levels in 2022. Through August 2024, agricultural export values were roughly even in 2024 compared to 2023. One challenge for U.S. exports has been the value of the U.S. dollar relative to competing exporters of agricultural goods. Slower global growth could also be a headwind for consumer-oriented products like animal proteins, dairy, fruits, and nuts. Ukrainian corn and wheat export shipments continue to rebound and have approached pre-2022 levels in recent months. Looking ahead, economic and geopolitical uncertainties such as conflicts in Eastern Europe and the Middle East could lead to higher volatility for the U.S. dollar during the year.

Severe weather conditions and long-term environmental change continue to shape agricultural sectors. Through September 10, 2024, the U.S. had experienced 20 separate billion-dollar weather disasters in 2024, as tracked by the National Oceanic and Atmospheric Administration. Many of those events affected agriculture, including midwestern storms, flooding, western wildfires, excessive heat, and drought. Hurricanes Helene and Milton disrupted agricultural production in the Southeast, but Farmer Mac's portfolio had not experienced any material performance degradation as a result of those storms as of September 30, 2024. Federal crop insurance provides a strong mitigator against this risk, but farmers and ranchers face increasingly severe weather incidents.

Drought conditions, which were relatively sparse to start the year, increased modestly in intensity and prevalence in third quarter 2024. Persistent heat and drought conditions previously affected agricultural production regions in the western and midwestern parts of the United States in 2021 and 2022. However, there was a sizable improvement in conditions in 2023 for large portions of the West Coast. Notably, drought conditions in California remain largely absent in 2024 and reservoirs have returned to historical averages. As of October 15, 2024, 18% of the continental U.S. was classified as being in moderate to exceptional drought according to data from the National Center for Environmental Information, which is virtually unchanged from 17% at the end of 2023.

For loans in other areas that commonly experience exceptional drought (primarily in California), Farmer Mac's underwriting standards include an assessment of anticipated long-term water availability for the related property and how water availability impacts the collateral value and the borrower's liquidity position to mitigate that risk.

Agricultural Processing and Food Supply Chain

The production of food, feed, fiber, and biofuels has been economically viable in the past few years, but some factors have been changing in 2024 and could continue to change into 2025. Rising consumer inflation boosted the profitability of the food processing and supply chains in 2021 and 2022. Moderating consumer prices in 2023 and 2024 increased the volume of consumer spending but also limited the profit expansion of food and fiber businesses. Biofuels have gained demand due to low-carbon regulations in several states and incremental tax benefits for the production of renewable diesel and sustainable aviation fuel. A large number of planned biofuel projects and new facilities for 2024 and 2025 could provide support for raw materials such as corn and soybeans, but markets for these fuels are nascent and are expected to evolve rapidly in the coming quarters. A strong U.S. dollar, trade issues, and a high risk of global economic turmoil could pose challenges for these sectors in the last quarter of 2024 and into 2025. Nonetheless, consumer spending held steady in third quarter 2024, providing stable conditions for value-added food, feed, fiber, and biofuel consumption. Credit demand in these sectors could grow in the next few quarters if interest rate policy continues to moderate, inflation rises again, or economic uncertainty clears up.

Rural Infrastructure Finance Industry Outlook

Power and Energy

Economic conditions affecting rural power and electricity markets typically follow those in the general economy. According to data from the U.S. Energy Information Administration, sales and the revenue from the sale of electricity to customers have picked up again in 2024, with an annual increase in sales of 1.9% and an increase in revenue of 3.4%, respectively, in the last 12 months through July 2024 compared to July 2023. This increase was the result of higher residential and commercial electricity sales combined with slightly higher average prices paid for electricity relative to 2023. Higher energy input prices, such as natural gas and coal, became a headwind in 2022. After two years of increased prices and heightened volatility, oil and natural gas prices moderated throughout much of 2023 and 2024. Geopolitical uncertainty in the Middle East and Eastern Europe could increase energy price volatility, but power producers are generally able to pass higher input costs through to retail electricity prices as evidenced by higher retail electricity prices in 2022 and parts of 2023. Through September 30, 2024, Farmer Mac had not observed material degradation in the financial performance of its rural electric utilities portfolio, and that portfolio has never had a serious delinquency or default since its inception. Credit demand for electric cooperatives will likely be tied to ongoing normal-course capital expenditures related to maintaining and upgrading utility infrastructure. These growth opportunities may be affected by the demand for electric power in rural areas, increased power demand from regional data centers, capital expenditures by electric cooperatives driven by regulatory or technological changes, the changing interest rate environment, increased policy initiatives to support rural connectivity, and competitive dynamics within the rural utilities cooperative finance industry. Generally, these investments are expected to continue at, or above, historical levels based on the replacement and modernization of existing and new infrastructure.

Renewable Energy

Growth in renewable energy generation and deployment of energy storage technologies has the potential to continue to deepen Farmer Mac's relationships with existing customers through new business opportunities. According to data from the U.S. Energy Information Administration, renewable electricity capacity is expected to grow by 167% in the next ten years, compared to total electric capacity growth of 43%. The rising cost of fossil fuel-based inputs combined with the falling costs of renewable power generation may hasten this increase in capacity along with recently enacted legislation, such as the Inflation Reduction Act of 2022 that incentivizes domestic production in clean energy technologies such as solar and wind. Because of these policy tailwinds, analysis from Bloomberg New Energy Finance (BNEF) estimates that investors will put $2.5 trillion into renewable projects between 2021 and 2050. If realized, growth in renewable energy capacity has the potential to broaden Farmer Mac's customer base focused on financing renewable energy projects and companies. In response to this expected growth, Farmer Mac has hired industry-specialized staff and deployed new financing products tailored to the renewable energy sector, which represents a new and growing market opportunity for Farmer Mac.

Telecommunications

Rural telecommunication and data connectivity has proven to be of vital economic importance in the last decade, as more households and agricultural enterprises require more data and connectivity to thrive. The rapid growth in digital technologies, including the ongoing interest and investment in artificial intelligence, advancements in cloud computing, and wireless network densification, will require significantly more computing and storage capabilities as well as investment in additional fiber network capacity. These industry tailwinds are creating additional investments in rural telecommunications infrastructure by cooperative and non-cooperative providers, which is aided by access to many federally funded programs, such as USDA's Broadband Equity Access and Deployment Program (BEAD), the Federal Communications Commission's Rural Digital Opportunity Fund (RDOF), the USDA’s ReConnect program, and the USDA’s Telecommunications Infrastructure Loan and Loan Guarantee program. In addition to capital projects spurred by these programs, Farmer Mac could see an increase in financing opportunities for other telecommunications providers in rural areas, with fiber line expansion, wireless broadband, and data processing centers increasingly important to rural economic opportunity and precision agriculture.

Legislative and Regulatory Outlook

Farmer Mac continues to monitor potential legislative and regulatory changes that could affect Farmer Mac or its stakeholders, including:

•On November 16, 2023, President Biden signed a one-year extension of the 2018 farm bill, which lapsed on September 30, 2024. Avoidinga reversion to 1930s-era policy, which provides no price support for many key commodities that have enjoyed support for many years, would require Congress to enact another extension or a new farm bill by the end of the year. The farm bill is crucial for Farmer Mac's customers, supporting farmers' profitability, rural community vitality, and infrastructure modernization. Farmer Mac is seeking changes to its charter in the farm bill reauthorization to better support lenders serving rural areas. Any changes would require Congressional approval and the President's signature.

•The FCA's proposed 2024 regulatory agenda includes a proposed rulemaking to review Farmer Mac's regulatory capital framework, with rulemaking expected in May 2025. Farmer Mac's management team will continue to monitor and engage with this regulatory process as it develops.

•Two of the three members of the FCA board remain in holdover status, meaning their terms have expired. These board members will continue to serve in their roles until the President nominates and the Senate confirms their replacements. On May 2, 2024, President Biden nominated Marcus D. Graham to the FCA board to replace Glen Smith. Mr. Graham's nomination will require Senate confirmation by year-end, or the nomination will be returned to the President.

•Farmer Mac will monitor the effects of the fall elections on policies affecting Farmer Mac's business, including the expiration of key provisions of the Tax Cuts and Jobs Act at the end of 2025 and the suspension of the debt ceiling, which expires on January 1, 2025.