Fitch: US Agricultural ABS to Weather the Drought
Business Wire -- NEW YORK, NY -- August 7, 2012 -- Fitch expects the current drought to have minimal impact on agricultural equipment asset-backed securities (ABS) because of the record 2011 harvest, lower leveraged farms, federal government funding, the use of crop insurance and currently strong commodity pricing. However, we do expect limited performance deterioration on agricultural equipment loans in the latter half of the year.We believe it is likely that minor upticks in delinquencies and losses will occur. However, available credit enhancement is expected to cover any performance deterioration. All of the agricultural equipment ABS pools we rate employ some combination of reserve accounts, over collateralization, subordination, and excess spread.
While most farm cash receipts from crop sales may feel the impact of the 2012 drought, many farmers benefited from a strong 2011. According to the U.S. Department of Agriculture (USDA), 2011 net farm income increased 24% over 2010 levels and exceeded $98 billion for the first time. In addition, farmers are in a good position to weather the drought due to strong farm balance sheets. Since 2002 the USDA reports that the average farm has lowered its debt to equity and debt to asset ratios by almost one-third. The average levels are now lower than the anytime since 1960.
We also expect many farmers to take the drought in stride because of direct government payments and pervasive crop insurance. While direct payments are generally small relative to total cash receipts (on average approximately 3.5%), crop insurance premiums are subsidized by the federal government which leads to broad coverage. As of Aug. 6, 2012, the USDA reports that approximately 73%-80% of net crop acreage for corn, soybean, and wheat is covered by some form of crop insurance.
While we do expect the drought to lower crop yields, the commodities markets should soften the blow. Both corn and soybean futures reached all-time highs last month while wheat is near a four-year high. Farmers will benefit from these high spot prices when they sell their 2012 harvest, or any grains they may have in storage.
We will continue to monitor the drought and its affect on agricultural equipment ABS performance and report back.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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