I’m pleased to report Frontier Farm Credit had a very good year in 2011!
Accrual loan volume increased approximately 7%, credit quality improved to over 97%, crop acres insured increased by 28%, business services (tax, accounting, business planning) customers increased by 14% and net income by over 31%. A very good year overall!

Income is positive and we are financially strong
Net income from patronage-sourced income totaled nearly $23 million in 2011, permanent capital is at 14.97%, and our net worth increased to over $261 million. Increased net income came from increased volume and related services income and not at customer expense, as we again were able to lower our average loan rates by more than 1/4 percent on average with many customers taking advantage of historically low fixed rates for real estate, machinery and equipment.

Patronage at a new high in 2011
Positive Association results yielded increased customer patronage. Our board of directors approved $6 million which is approximately 25% of 2011 patronage-based earnings to be paid in patronage the first quarter of 2012. Since beginning the patronage program in 2005, our Association has returned $31,650,000 of net earnings to our customers.

Changes for 2012 – U.S. AgBank mergers into CoBank, which is now our funding Bank
Effective 1/1/2012 our wholesale funding source, U.S. AgBank, merged into CoBank. We are fortunate to have had a long standing relationship with CoBank for funding and loan participations and are very positive about the changes that will enable us to enhance service to customers.

Frontier Farm Credit joins AgDirect, LLP
Effective 1/1/2012 Frontier Farm Credit joined AgDirect, LLP, a national farm equipment financing option available through Farm Credit. AgDirect is an extremely convenient and competitive machinery financing option available at local dealers. Several of the dealers in our territory are already offering AgDirect. If you are in the market for machinery or equipment ask your dealer if they offer AgDirect. If not, encourage them to do so and contact your local office to have our staff introduce the AgDirect option to the dealer.

Enhancing value to customers – Vision 2015
Our industry is dynamic and that demands a lender that keeps pace. Marketplace Advisory Council feedback has accentuated the “need for speed” in loan decisions, and we have teams focused on changing processes to meet that expectation for all lines of our business. Vision 2015 has set a goal of $1.5 billion in accrual volume ($1.335 billion today), increasing crop insurance acres to 680,000 (243,000 today), and business services customers to 900 (607 today).

Leadership Focus
We began Frontier Forward as an initiative in October of 2010 to be implemented in three phases. The first to establish regional leadership focus, the second to improve processes for customer service, and the third to provide strategic focus for all lines of business. Effective January 1, 2012, we have implemented phase three to align strategic leadership for all lines of business. Clarke Jackman will be the strategic leader for all related services leaders, and Jim Aylward will be the strategic leader for all regional lending team leaders. They will be working with local teams to provide customer solutions that meet or exceed customer expectations.

We appreciate and thank you for the opportunity to earn your business! Have a great 2012!

Frontier Farm Credit is part of the $180 billion Farm Credit System. The system formed in 1916 and today is the oldest and most successful GSE (Government Sponsored Enterprise). Started with government seed money, all government funds have long since been repaid and the Farm Credit System today is a totally private cooperative funded through the national money markets and governed by a customer-elected board of directors.

This year we celebrate the 95th anniversary of the founding of the Farm Credit System that began when President Woodrow Wilson signed the Federal Farm Loan Act on July 17th, 1916. The seeds of the Farm Credit System were planted by President Theodore Roosevelt in 1908, when he appointed a Country Life Commission to address the problems facing a predominantly rural population.

The commission’s report documented a lack of adequate agricultural credit, where a farmer could readily secure loans on fair terms. After extensive analysis of other nations’ rural credit systems Congress landed on a cooperative credit delivery method based largely on Germany’s Landschafts, which had operated since 1769 and appeared to be the most successful of the various European cooperative ag-credit systems. The first real estate loan in the country actually occurred on April 10th, 1917, in Kansas. Another first for our great state of Kansas! You will find a Kansas Historical Marker just outside Larned, Kansas, denoting the loan on 280 acres of collateral owned by farmerstockman A.L. Stockwell.

Just think about the dramatic changes that have occurred since then! In 1916 farmers made up 31% of the US population of approximately 92 million. Today farmers are less than 1% of the approximately 309 million in US populations. With 922 million acres of farmland (only 5% more than cultivated or grazed in 1916), US farmers today feed over three times the US population and still export a significant amount of food to the rest of the world.

Agriculture has undergone a truly revolutionary and amazing increase in technology and farming practices over the last 95 years to be able to produce the quantity and quality of the safest food supply anywhere in the world. A number of countries are implementing modern US production methods to meet the demands of their population for more and better food. Today agriculture is positioned to meet the challenge put forth by the Federal Accounting Office report calling for an overall 70% increase (nearly 100% in developing countries) in food production needed to feed the estimated 9 billion world population by 2050.

Our customer surveys and Marketplace Advisory Councils tell us our customers need more than just money. They want to do business with someone they can trust who knows and understands their farm, ranch, or agribusiness operation. They seek a provider that is dependable, consistent, competent, that offers competitive, quality products and services. Customers appreciate professionals who care not just about how the business is doing, but also about their family and want to help them succeed in meeting their dreams and aspirations.

The Farm Credit System and Frontier Farm Credit as a part of that System has been here 95 years to meet that challenge and opportunity to serve. When we formed Frontier Farm Credit on January 1st, 2001, we made a promise to be there for our customers Side-by-Side. Season-by-Season. Thank you for your business and the trust you place in our Association and please celebrate with us the 95 years of service provided to rural America by the Farm Credit System.

With a world population projected to grow to 9 billion in the next 30 years, the industry of agriculture needs to improve productivity and efficiency to be able to feed the expanding population. There is nowhere else on earth that has the combination of resources and infrastructure to accomplish that growth than here in the United States. I can think of no more noble cause than to feed and provide for the world.

To continue to be relevant and the dominant provider of financial services to agriculture, the Farm Credit System and Frontier Farm Credit specifically need to be better, faster, and more agile. When we launched “Frontier Forward” in the fall of 2010 we asked — indeed challenged — our employees to re-design and reinvigorate our company to serve customers better.

Our ability to serve rests also in the financial strength of your cooperative. Growth to date has been good. In April, we disbursed $4.75 million in patronage to customers. In addition to the financial return via patronage to customers, the association is making additional investments. We are investing in people through critical hirings to provide expertise to customers. We are also investing in facilities to house additional experts in the Hiawatha and Manhattan regional locations.

We view 2011 and beyond as exciting, volatile, and full of opportunity for those positioned for success. We appreciate and value your business and thank you for the opportunity to earn your business each and every day.

We are Frontier Farm Credit: “Side by Side – Season by Season.”

Income is positive
Income from fees and related services totaled over $4.6 million this year and when added to loan interest income, the Association net income ended at over $19 million in 2010. Increased net income did not come at customer expense, as we lowered our average loan rates by more than ½ percent on average with many customers taking advantage of historically low fixed rates for real estate, machinery and equipment, and other term needs.

Patronage at a new high in 2010
When the Association has a positive year, it results in an increased customer patronage. Our board of directors approved $4.75 million which is approximately 25% of 2010 earnings to be paid in patronage the first quarter of 2011. Since beginning the patronage program in 2005, our Association has returned $25,650,000 of net earnings to our customers.

Customers generally doing well
When customers are doing well, the Association does well and that is certainly the case for most in agriculture today. Last year I referred to the “tale of two cities” where grain producers did well and livestock producers did not. Things do change! Livestock producers (especially pork producers) have returned to profitability in 2010, so now both grain and livestock producers are generally doing well.

Volatility – Risk and reward – Cautious optimism
The buzzword today is volatility. Volatility in production, (will we see a drought in the corn-belt in 2011?), cost of inputs (fertilizer, chemical, corn?), the value of the dollar (stronger?/weaker?), exports (Russian meat restrictions?, China, DDG’s, corn, soy?), risk management (hedging costs?) all add to the complexity of the farm business today. And yet, with volatility the rewards to management are there and that brings cautious optimism. One thing is for sure in this environment – results from business decisions – good or bad, are amplified.

Frontier Forward – Enhancing value to customers
Our industry is dynamic and that demands a lender that keeps pace. At our strategic planning meeting in August we set key goals for our Association to meet that challenge by 2015. We expect growth in all areas of our business. We projected loan volume to exceed $1.5 billion, crop insurance acres to increase from 220,000 to 680,000, and business services customers to double from 450 to 900.

To accomplish our change, in December 2010 we launched “Frontier Forward” – a plan to align staff knowledge and expertise with improved processes and new technology. We analyzed the market we serve and defined each customer group. Those operations with significant off farm income but still very interested in owning assets and being involved in agriculture we refer to as “AgLife” customers. The larger farm, ranch, and agribusiness operations, we refer to as “Commercial” customers. Operations where the primary source of income is from the farm or ranch, even though supplemented with off farm income, we refer to as “AgProduction” customers. We have much work to do! Our project teams will be working throughout 2011 to analyze, change, and implement new policies to improve timeliness and service.

We are committed to increasing the value we bring to you our customers in 2011 and beyond! Thank you for your business!

In conjunction with “Brandstand”, we found a way to encourage our team of staff and directors to turn in the old and order new branded clothing. Our heritage is the conservative values of farming and ranching. We just don’t throw away old stuff…..especially “stuff” that still fits and doesn’t have any holes in it! Well then, how about finding a worthy cause for the donation? We did just that— Tractors for Our Daily Bread. In the future we may see Frontier Farm Credit shirts in Eden Children’s Village in Zimbabwe, Africa! I invite you to consider how you might support their farming needs.

Branding has many connotations. We can physically “brand” things to identify them as ours, such as cattle. We can “brand” someone as having a particular point of view. We can buy brand products vs. generic. The Frontier tagline says a lot about our brand – Side by Side. Season by Season. It refers to who we are, to our value system, and most of all to our actions. We think 2008 and 2009 gave us an opportunity to prove our brand and proudly commit to and stand by our customers. Farm Credit is a single industry lender, more proud than ever to serve you our customers the farmers, ranchers, and agribusinesses of Kansas and rural America.

We think we have a special reason and purpose to be here. We are uniquely commissioned by the agricultural committees in Congress to serve agriculture and rural America. Who else can say that no credit worthy customer was denied credit during the financial meltdown in the fall of 2008? Who else can say they have the willingness and financial strength to weather the business cycles farmers and ranchers face? Who else can say they have staff with the industry knowledge and expertise to serve this industry? Who else can say they offer services to manage risk and provide tax and business consulting?

We can, and we are proud to serve you. Thank you for trusting us with your business.

I’ve also noted that producers are generally passionate about their specific industry and production practices. What impacts one industry or product in a positive way may impact another industry or product in a negative way. We have numerous examples including the debate on ethanol blend and government support, regulations on water, and different crop and livestock production systems. The cause and effect from numerous well intentioned product promotions potentially creates winners and losers and may pit one part of the industry against another.

For example, in the last few months we’ve seen the positioning of specific food production systems such as “local”, “organic”, “natural”, “grass fed”, “antibiotic free” versus what has been coined as “conventional food production” as if “conventional food production” was somehow bad. That coincides with a USDA initiative on “Know Your Farmer, Know Your Food”. While that’s a well intentioned initiative I’m sure consumer preference and buying habits will ultimately determine the value of any product differentiation strategy. In my opinion, it cannot be a debate of one over the other, but rather how each operation’s strategy fits the market they serve.

It’s our Association’s mission to provide sound and constructive credit and financially related services. Our strategy is to finance agriculture as we find it as long as the operation has a reasonable chance for profitability and success. For example, we have several customers with operations that provide locally grown produce, many times in combination with their conventional crop or ranching operation. Staff that serve local direct-marketing operations tell me it takes a real dedication and a love for the business to be successful. There are different kinds of risks to manage, and it takes many hours of labor to produce and directly market a crop to consumers. A quote I’ve heard from one of our officers – “A half acre farm doesn’t look too big until you’re farming it on your knees!”

In generally affluent countries like the U.S., consumers have both the resources and opportunity to be selective about where and how food is produced. That’s a privilege we enjoy. When in season I love fresh strawberries, sweet corn, asparagus, and other fresh fruit and vegetables. I also like farm raised chickens, beef, and pork and I’m willing to pay more for it. But the rest of the year I also want access to fruit, vegetables, and meat in the local grocery that I know is wholesomely and safely produced in today’s conventional and highly efficient production systems.

You’ve probably heard or read the prediction that we will need to double world food production by 2050 to meet the needs of our growing world population. We can’t do that if we reduce efficiency. The world for certain needs more protein and we just do not have the land mass to produce all our livestock in free range conditions and still meet that demand. Agriculture will continuously change, grow, and evolve and I think for any one segment to attack another is harmful to the industry as a whole.

We are very proud that our Association and the Farm Credit System has withstood the financial stress of the fall of 2008 and much of 2009 and because of our strong capital position, system earnings, and overall financial strength we didn’t even give a thought to seeking government assistance. We met the needs of all creditworthy customers and gave time to producers under stress to return to profitability. We are proud to serve our industry, love living and working in rural America, and are passionate about serving our customers that we know and respect. We hope that you might give us a chance to earn even more of your business in the future and sincerely thank you for your business and trust in our Association.

Growth is flat to down for the year – Combination of reasons
Accrual volume started the year at $1.185 billion and ended the year at approximately $1.178 billion. Contrast that to growth of over 13% in 2008. We still booked over $237 million in new loans but that was down from over $350 million in 2008. With all the publicity of the national recession, some customers chose to pay down debt versus spending more in 2009. Crop operations were generally profitable, with challenges for livestock operations – especially pork producers facing the H1N1 impact.

Overall credit quality is strong, specific industries continue to show stress
While the overall credit quality for the Association finished the year at 93.95%, we have a small number of larger loans and participations still showing stress. Higher prices for grain, especially corn, while certainly good for our grain farmers created a difficult adjustment period for any of the end users such as livestock and ethanol. Margins are beginning to return in late 2009 and hopefully profitability in 2010.

Association net income down
We have historically earned $12 to $20 million as an Association. For example, 2006 was $16.5 million, 2007 was $17 million, and 2008 was $12.7 million. We will earn about $6.4 million in 2009. Why? 1. Dramatically lower return on own funds; 2. US AgBank suspended paying patronage in 2009, and 3. Additions to allowance for loan losses. Earnings would have been over $18 million if we had the same kind of patronage from US AgBank and return on own funds that we had in 2008.

Board approves $1.5 million patronage, passes resolution to continue the patronage program
Our Board of Directors approved $1.5 million in patronage from 2009 earnings to be paid by April 2010. That is consistent with about 25% of Association net income being returned to customers as patronage. Even with the lower earnings, Association capital remains strong at nearly 15% and we feel it’s important to consistently pay patronage if at all possible. While not as large an amount as previous years, the Association has now paid $20.9 million in patronage to customers since the inception of the program in 2005. The Board also passed a resolution to continue the patronage program in the future.

Added services having an impact on the bottom line
Nearly $2.5 million in income for the Association has come from non-interest income sources and fees including crop insurance, life insurance, fee appraisals, and tax, record, and business planning services. We provide these services based upon customer feedback. In addition to our loan products and services, customers told us they need these quality and competitive services that are not consistently being provided by other firms all across our Association territory.

Why Frontier Farm Credit?
I’ve been in this industry for 35 years and have never seen more exciting, volatile, and challenging times. Change, opportunity, and risk seem to reside together. As you seek to grow your business, you want and need a business partner that can help identify solutions to manage the increasing risks associated with increasing opportunities. It requires more specialized and knowledgeable staff than ever to serve your expanding needs. We are here to help you find those solutions with an array of products and services specifically tuned to your needs. Our people were born and raised on farms and ranches. We love living and working in rural Kansas and we care about your success. We know we must earn and maintain your trust in every connection we have with you as a customer and owner of Frontier Farm Credit.

Thank you for your trust and most of all thank you for your business.

I have used the corollary with staff that our customer’s fortunes are like the “Tale of Two Cities.” Generally, grain operations have been and are continuing to do very well. The market certainly has taken a dip from last year’s highs but countering that are generally good growing conditions and what should be excellent yields. The livestock sector, especially pork, has been hit hard with only about two profitable months in the last 24. H1N1 and the hoopla around it certainly hasn’t helped.

Our cattle producers are generally faring better, but overall profitability is down. Equity lost by pork producers and cattle producers has been discouraging at a minimum and devastating to some. Even in the face of really tough times for the livestock sector, I really admire and respect our customers. They’ve worked hard with us to find solutions. Solutions not always that easy to find.

So what’s the overall impact to our Association? Credit quality remains above 90%, which historically is still a very positive number. We are fortunate that we’ve gone into this credit downturn with very strong credit quality and capital. All during the turmoil in the financial markets, the Farm Credit System and Frontier Farm Credit have met our mission and accessed ample funds at competitive rates for our customers. We never engaged in sub-prime lending or anything like it and have “stuck to our knitting” with solid underwriting standards that have proven to serve us well during this downturn.

Earnings are more challenged. Decreasing credit quality and an increase in non-performing loans require funding additions to the allowance account for loan losses. That directly reduces Association net income. Historically low interest rates lower returns to our net worth just like it does to your savings accounts. Our funding bank – US AgBank – incurred investment losses and lower returns on their capital. As a result, our costs to the bank have gone up and they have chosen not to pay patronage to Associations in 2009. These factors have all contributed to below acceptable earnings for our Association so far this year. Our board will take all of these factors into account in determining if we can pay customer patronage next year from 2009 earnings.

So what have we put in place to offset some of the negative news in earnings and credit quality? We instituted a number of cost savings including reductions in staff compensation, travel, director expenses, and overall budget by nearly $1 million. For financially stressed customers, we jointly developed a plan to return their loan to profitability if at all possible. The Farm Credit System is the only lender that includes borrower rights for distressed loan customers allowing them to apply for loan restructuring. Our mandate is to find a resolution representing all stockholder interests meeting the dual test of being of benefit to a stressed customer while finding the lowest cost alternative for the Association.

We have slowed growth to remain strongly capitalized. We’ve chosen to slow overall growth by temporarily limiting participation purchases. Purchasing participation interests in diverse industries, generally from other Farm Credit lenders across the United States, is an important diversification strategy we’ve employed since 2004. Today about 15% of our loan volume is composed of participations. This has and continues to be a good diversified source of income to the Association. While temporarily limiting participation purchases, we remain focused on meeting the needs of both our current and credit worthy new customers.

This year has been and continues to be stressful financially, as the worldwide recession ripples into the agricultural economy. The prediction is for dramatically less farm income in 2009 as compared to 2008. The general economy appears to be emerging from the recession; however, the recovery appears to be a long and slow climb and that certainly affects both domestic and foreign markets.

Sometimes it’s hard to remain optimistic in the face of what seems to be constantly negative news; however, we do remain optimistic about the opportunities in agriculture. We see customers every day that are making very good progress and building a solid and financially strong business. We’re proud to be of service in helping make that happen for you and your family. It’s a privilege to work with the very best customers and people in the world. Thanks for the opportunity and thanks for your business.

• Positive growth of 8.36% to accrual volume of $1,185,031,118
• Earnings of over $12.2 million increasing shareholders equity to over $218.9 million
• Credit quality above 96.6%
• Low delinquencies of .46%
• $3 million of patronage paid to customers for a total of $19.4 million since the 2004 inception of the program

The overall economy creates challenges for 2009
The weakening general economy is creating stress in our credit portfolio and earnings potential for 2009. The ethanol and protein sectors — pork, beef, and poultry — are under stress. The drop in consumer spending and high transportation costs in 2008 creates stress in our “green” portfolio (nursery, garden center, landscape, and greenhouse). Cash grain producers generally had positive 2008 results, but to remain profitable in 2009, strong commodity prices will be necessary to cover higher input costs. Land values remain steady with some signs of a slowdown in sales activity and
more no-sales.

What could we see in 2009?
Our Association’s ability to pay customer patronage in 2009 will depend upon the ability to generate net earnings and deal effectively with increasing credit stress. The first priority of the board is to maintain the financial strength of the Association so we remain a consistent, dependable provider of credit and financially related services for our customers.

Focusing on net income
We are projecting reduced earnings and increasing credit stress in our 2009 business plan. In response, we are cutting Association expenses and focusing on increasing net income. A special emphasis will be on increasing non-interest income from our financially related services —crop revenue insurance, tax preparation, records, and business planning services.

Will I have access to operating money?
Frontier Farm Credit’s financial strength allows continued access to the nation’s debt markets. Additionally, a backup funding source exists in the event the national money markets become illiquid.

What is happening to rates?
Rates continue to be at historic lows. Prime rate loans are moving to an internal variable rate index because the national prime rate market is essentially non-existent. Rates remain very competitive.

Where should customers focus right now?
Build balance sheet equity (net worth) and liquidity (working capital). Why do you need to build equity and liquidity? It keeps you in control when you have cash or margin on hand. If rates go up dramatically with inflation, you won’t have to borrow as much. Today cash is king. There are and will be opportunities available to those with extra cash.

How do you do it?
Be prudent with capital spending, keeping it to only what
is absolutely needed. Fund as much of your ’09 operating
expense from ’08 earnings as you can. Do not pay ahead
on fixed rate term loans unless you have substantial cash
reserves. Keep the extra cash or margin in your current
position.

Today more than ever, you need a lender that knows the
industry and can be there with you through good times and
bad times. Our staff is tenured and knows what it means to
be a consistent and dependable lender. Thank you for your
business. Thank you for allowing us to serve your needs.

“How has this financial turmoil affected the Association?”

• We are an AAA rated financial institution with no sub- prime loans.
• We have transparent financial reporting and a strong independent regulator.
• We have a Farm Credit System insurance fund of over $2.7 billion to protect bond investors.
• We have strong financial ratios and solid earnings. Key financial information as of 9/30/08:
       * Credit quality – 97.38% acceptable and special mention
       * Permanent capital – 14.52% (double the 7% regulatory         minimum)
       * Core surplus – 14.15% (4 times the regulatory minimum         of 3.5%)
       * YTD average total equity – $218.7 million up from         $201.6 million 9/30/07

“Will I have access to operating money?” “What is happening to rates?”

• Yes. Because of our financial strength, we have ample access to the nation’s debt markets.
• Rates are still at historic lows. At renewal, loan spreads (stated rate – cost of funds) will be held steady for the same
  quality loan. If our Association cost of funds is up, the customer rate will go up.

“What are plans for patronage?”

• Association directors’ #1 priority is to maintain a strong Association financial position and are therefore paying close attention to managing growth and capital ratios.
• Association directors are also committed to customer patronage when the Association has and can project strong financial results.
• The board will make a decision on patronage before year end 2008.

“What do you think customers should focus on right now?”
Build balance sheet equity (net worth) and liquidity (working capital).

• Why do I need to build equity and liquidity?
       * It keeps you in control when you have cash or margin on         hand. If rates go up dramatically with inflation, you won’t         have to borrow as much.
       * Today, cash is king. There are and will be opportunities         available to those with extra cash.
• How do I do it?
       * Be prudent with capital spending, keeping it to only what         is absolutely needed.
       * Fund as much of your own ’09 operating expense from         ’08 earnings that you can.
       * Do not pay ahead on fixed rate term loans. Keep the         extra cash or margin in your current position.

Today more than ever, you need a lender that knows the industry and can be there with you through good times and bad times. We thank you for letting us be of service to you and your business.