Fitch Ratings believes that the current drought experienced in the U.S. should have little effect on agricultural equipment ABS in 2H12. 

The rating agency said that a number of positive factors should offset this including the record high 2011 harvest, lower-leveraged farms, federal government funding, the use of crop insurance, and robust commodity prices.

Even though the majority of farm cash receipts from crop sales might feel the effect of the 2012 drought,  many farmers benefited from 2011 net farm income jumping 24% over 2010 levels and exceeding $98 billion for the first time, according to the U.S. Department of Agriculture (USDA).

Farmers are also prepared to withstand the drought resulting from the strong farm balance sheets. The USDA reported that since 2002, the average farm has dropped its debt-to-equity and debt-to-asset ratios by almost one-third. Currently, the average levels are at its lowest since 1960.

In addition, Fitch believes that many farmers will survive because of direct government payments and crop insurance. While direct payments are relatively small compared to total cash receipts, crop insurance premiums are supported by the federal government, leading to wide coverage. In fact, as of Aug. 6, the USDA statistics read that about 73%-80% of net crop acreage for corn, soybean, and wheat is covered by some form of crop insurance.

In terms of agricultural equipment, Fitch expects that there will likely be minor increases in delinquencies and losses will occur. However, the rating agency also anticipates that available credit enhancement will cover any performance deterioration. Furthermore, Fitch said that all of the agricultural equipment ABS pools that it rates use some combination of reserve accounts, over collateralization, subordination, and excess speed.

Although drought is expected to reduce crop yields, analysts said that the commodities markets should ease the setback. Fitch referred to the record high corn and soybean futures from last month aside from wheat being at a close to four-year high, as farmers will profit from these strong prices when they sell their 2012 harvest or any grains that they may possess in storage.

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