Analysis: Despite talk of farm bubble, Farmer Mac woos investors

Mon Sep 23, 2013 1:28am EDT
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By David Randall

NEW YORK (Reuters) - Farmer Mac - the farm loan equivalent of its cousins Freddie Mac and Fannie Mae - owes its existence to the last time a U.S. farm bubble burst. Now, the company is trying to convince investors it would survive another one.

The market isn't giving the company a vote of confidence yet. Just five years ago, Farmer Mac had to be rescued by its creditors after its large positions in Lehman Brothers and Fannie Mae went sour. Now, the revived company must prove to skeptical investors that it can withstand a sharp decline in the price of farmland that analysts expect to come in the next year. That open question - and the inability of Congress to pass an updated five-year farm bill, which provides crop insurance and other subsidies that farmers rely on - has been weighing on the company's stock price.

Shares of Federal Agricultural Mortgage Co. (AGM.N: Quote) - a government-sponsored enterprise that functions as a secondary market for farm, rural utility and rural development loans - are up approximately 6 percent for the year and 35 percent over the last 12 months. This year has seen a widespread market rally that has pushed the benchmark Standard and Poor's 500 index up more than 20 percent.

After collapsing to around $3 in late 2008, the stock price has since recovered to pre-crisis levels of around $34. Still, the stock trades at a price to earnings ratio of 5.5, close to half the valuation of small lenders like PennyMac Financial Services (PFSI.N: Quote) and of its own five-year average P/E of 10.1, according to Thomson Reuters data.

The company has been actively courting small-cap fund managers, institutions and endowments by pitching itself as a conservative way to play the booming U.S. farm sector. In February, for instance, the company presented at the Bank of America/Merrill Lynch Global Agriculture Conference in Miami, and in April it gave a presentation to the California Municipal Treasurers Association. In all, it has made seven presentations to potential investors in New York, Baltimore, San Francisco and other locations this year.

At all the events, chief executive Timothy Buzby argued that a decline in farm prices would not affect his company as much as the market expects. Farmers can always sell a few hundred acres of a larger farm or their excess equipment before defaulting, he said.

"We only make real estate loans, not operation loans. If there's a bursting of a bubble, the last lender to get hurt is the one who has the loan on the farm," he said.

He points to the company's low 0.01 percent default rate and the fact that the firm "lost zero" during last year's drought - the most extensive in at least 25 years - as evidence of the resilience of the sector.   Continued...

A view of a barn in Dallas County, Iowa, December 24, 2011. REUTERS/Joshua Lott