A Strong 2004 Brings Good News

by Dean W. Moreau, president and CEO, Yankee Farm Credit

Last year was a very good year for Yankee. I won’t tire you with the details, because you can find them in our annual report. But, in summary, we had excellent earnings, moderate growth and our loan quality was great, thanks to you. This combination enabled our balance sheet and risk-bearing ratios to get stronger, improving our flexibility and staying power.

I think you’ll like what we’ve got planned for 2005:

First: Patronage checks.

Around April 1, you’ll receive your cash patronage checks based on 2004 results. Total patronage paid will be $2.6 million, our best yet.

Second: Interest rates.

Everybody knows interest rates are going up. We’re budgeting that the Fed will raise rates 1 percent during 2005, which is less than many people predict. Our logic is that the United States has a lot of debt — personal, corporate, government — and the Fed will raise rates modestly because of this. The Fed’s stated goal is to get rates to “neutral,” which means a federal funds rate slightly above the inflation rate.

"... you'll like what we've got planned for 2005: Patronage checks. Interest rates.
Allocated earnings."

With inflation running about 2.5 percent, we’re guessing Fed funds will increase from 2.25 percent on January 1 to about 3.25 percent at December 31, 2005. Depending on the outlook for inflation as the year progresses, the Fed might also raise rates slightly in 2006.

While we can’t stop rates from going up, we can help a little. Sometime around mid-year 2005, when the Fed raises rates 0.25 percent, we will not increase your rates.We will “give back” the 0.25 percent we took from you in December 2002, when the Fed lowered rates 0.50 percent and we dropped your rates only 0.25 percent.We needed the extra 0.25 percent at that time because rates were so low. Now that rates have increased, we can earn enough from the equity we invest in your loans that we can operate with 0.25 percent less margin.We won’t make quite as much net income in 2005 as 2004, but it will be enough given our very strong position starting the year.

Third: Allocated earnings.

We were scheduled to cash out the allocated earnings we issued from 1997 operations in September. Instead, we will “double up” this year and cash out 1997 and 1998 allocated earnings. Our yearend 2005 balance sheet ratios will suffer slightly, but we are currently so strong financially that we are in a great position to speed up our revolvement.

Why are we revolving allocated earnings ahead of schedule? Two reasons: When we say we will do something, we mean it.We want you to be confident that our actions always follow our promises. More importantly, membership in a cooperative means joining a “closed system.” We never think of how decisions impact just Yankee. Instead, we consider how they impact Yankee as well as how they impact you.

2005 just feels like the right time (rates are rising, your cost of inputs is picking up, prices for your products may slide) to shift as much money as practical from Yankee corporate to you as individual members.

This letter appeared in the Spring 2005 issue of Financial Partner (F.P.) magazine, Yankee Farm Credit's customer publication. Click here if you would like to start receiving F.P. magazine in the mail.

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