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Ethanol Industry Squeezes an Otherwise Profitable Farmer Mac

By Kirsten Korosec

Updated on: May 13, 2009 / 9:07 PM EDT / MoneyWatch

Folks -- or should I say shareholders -- were falling all over themselves yesterday on news that the Federal Agricultural Mortgage Corp., commonly called Farmer Mac, posted a first-quarter profit.

Hooray -- good for them. Let's not forget the other piece of the rural lender's earnings report. The part that describes it's continued problems with delinquent loans within the ethanol industry.

I'm not here to discount the positive movements of Farmer Mac because compared to their big-city cousins -- Fannie Mae and Freddie Mac -- the government rural lender deserves a parade. But to make a few cautionary points.

Farmer Mac's business is to buy mortgages and other loans that banks make to farmers and ranchers, then repackage them into asset-backed securities. The federal lender''s first-quarter profits did not stem from this business model. Instead, profits primarily came from positive shifts in trading assets and financial derivatives.
According to its earnings report, Farmer Mac set aside $6.1 million in the first quarter to cover loan defaults, primarily from the ethanol industry.
Farmer Mac's 90-day delinquencies, including ethanol loans were 1.9 percent. Not a lot. But when asked during the investor conference call about the loans, president and CEO Michael Gerber broke it out further.

"As of March 31 we had almost $305 million of ethanol exposure and the non-performing rate on that was 19 percent or about $58 million of that portfolio. Obviously, that's a significant portion of our non-performing assets and our delinquencies." This is clearly not great for Farmer Mac. With $58 million already in default, where do the remaining $247 million in ethanol-related loans stand?

It also signals problems for the ethanol industry, which has a number of producers including Pacific Ethanol facing bankruptcies and reeling from the inability to access credit. This is the big concern: accessing credit.

Why would Farmer Mac, already burned by failing ethanol producers, provide any more loans to the industry, which will likely need more credit in the coming months?

Image by Flickr user, Andrew Stawarz, CC 2.0 See BNET's previous coverage of the biofuels industry: