GLOBAL ECONOMICS:
POINTS TO PONDER
Dr. David M. Kohl
Professor Emeritus, Agricultural and Applied Economics
Virginia Tech, Blacksburg, VA
(540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | sullylab@vt.edu
November 4, 2011
Weekly Columns: Ag Globe Trotter: www.farm-credit.com
Road Warrior of Agriculture: www.cornandsoybeandigest.com
Black Swans





oil
Japan
sovereign debt issues
social unrest
other
2
Mega Trends of the Second Decade
Rise of emerging nations:





BRICS
20% of world economy and 50% of world growth
8 - 5 - 3 Rule
southern hemisphere competition
China: 7th to 2nd; Brazil: 14th to 6th
“The long term viability of these nations will be
defined by the way they handle adversity.”
3
Mega Trends of the Second Decade
Economic moderation of developed nations:




public debt
aging population
entitlements
1-2% Rule
“These nations could become a cluster of
powerful economic nations.”
4
Game Changers for the
Agricultural Economy
8-year super cycle
Tailwinds
Headwinds
 crop & row crop
 livestock/other
 south/coastal/other
 Upper Midwest/Canada:
“islands of prosperity”






Asia/China export
ethanol
low value of the dollar
weather
land values “bullish”
low interest rates





input/cost
consolidation
regulation/consumers
liquidity/equity decline
volatility
5
Contrasting Economies
USA (Hertz)
China (Avis)
Ranking
#1
#2
Inflation
2.0%
5.7%
Growth Rate
1.3%
8.7%
Debt/GDP
95%
33%
Consumer Spending/GDP
72%
35%
Household Income
$47,000
$4,300
Issue
deflation
inflation
QE2
stockpiling
food & fuel
Response
6
What are the top challenges/risks to
the ag industry in the next 5 years?




volatility and global markets
asset bubble vs. credit bubble
normalization of deviation: NASA example
young lenders and producers have never
faced a downturn
 agriculture business cycle
 making decisions on tax returns
rather than on accrual-adjusted records
Lenders’ Top Questions for Dr. Kohl
7
What are early warning risk
management metrics?
 total US farm debt to net farm income
 green light
<5:1
 yellow light
5:1 to 10:1
 red light
>10:1
2011 Projected
Debt to Income:
2.35:1
 GDP growth of emerging economies/BRICS nations
 green light
>7%
 yellow light
3%-7%
 red light
<3%
 early warning signs for producers
 more than five different sources of credit
 debt to asset ratio above 50%
 working capital to revenue ratio below 20%
 “If it grows too fast, then it’s a weed.”
 sixth “C”
Lenders’ Top Questions for Dr. Kohl
8
World Growth
Germany
0.5%
Canada
-0.4%
Iceland
-10.9%
Britain
0.4%
U.S.
1.3%
India
7.7%Q2
Euro zone
0.6%
Mexico
4.5%
Russian Fed.
3.4%Q2
China
9.1%
France
1.7%Q2
Japan
-2.1%
South Korea
3.6%
Indonesia
6.5%Q2
Brazil
3.1%
South Africa
1.3%
Australia
4.8%
GDP Growth % Change from Year Ago
2011 Latest Quarter Figures
October 15, 2011
9
Source: www.Economist.com
Global Economic GDP Growth
Benchmarks
Location
Green
Yellow
Red
USA
>3%
0-3%
Negative
Europe
>3%
0-3%
Negative
Japan
>3%
0-3%
Negative
8-10%
4-7%
<3%
BRICS Nations*
*Brazil, Russia, India, China and
South Africa
© 2010 by Dr. David Kohl & Dr. Ed Seifried
10
Global Economic GDP Growth
Assessment
Fill in current status and check green, yellow or red for each region.
Location
Current
Green
Yellow
Red
USA
Europe
Japan
BRICS Nations*
*Brazil, Russia, India, China, and
South Africa
© 2010 by Dr. David Kohl & Dr. Ed Seifried
11
The World According to Oil
Source: POET vital, Spring 2010
12
The World According to Water
Territory size shows the proportion of all worldwide
freshwater resources found there.
Source: www.worldmapper.org
© Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan)
13 13
Oil -“Black Gold”






Six of eight recessions in past fifty years due to oil
74% of price of oil – global market value
70% oil produced military/politically sensitive areas
60% of fertilizer military/politically sensitive areas
consumers lock up at $3.00 to $3.50 per gallon
consumers shut down at $4.00 per gallon
14
U.S. Farm Real Estate Values
Annual Percentage Change in US Farm Real Estate Values
1910-2010
30.0%
25.0%
20.0%
15.0%
$/ac
10.0%
5.0%
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
-5.0%
1910
0.0%
-10.0%
-15.0%
-20.0%
Source: Dr. Steve Isaacs, University of Kentucky
15
Farm & Ranch Land/Real
Estate Clock
Increasing
•Older buyers
•Grains & row crops
•High quality land & row
crop
•Urban fringe/ satellite
cities
Positive
Positive
•Mineral, oil, water
influences
Slow
Increase
Rapid
Increase
•Competitive agriculture
& aggressive investors
Slow
•Lower quality land
•Ag industries are not
competitive
Rapid
Stable
Negative
Negative
Slow
Decline
Rapid
Decline
•Ag industries in down
cycle
•Recreational farm and
ranch land
•Urban fringe after
bubbles
Declining
What’s happening in your area?
16
Land Value Correction




global economic downturn
tightening of government policy
operating lines/suppliers credit
renting/growth oriented farms
 all profits for expansion leaving no liquidity
 large blocks of land in an area
17
Progression List in Land
Acquisition & Expansion
Item
Yes
No
Have you been profitable in the last three years?
Will the land/expansion result in greater than 50%
equity?
Do you have working capital to revenue of 33% or more
after expansion?
Will overall profitability after expansion exceed interest
rates?
Will overall profitability after expansion result in return
exceeding inflation?
Will overall profitability after expansion result in return
exceeding w.c.c.?
18
Doc’s Economic Clock:
Dashboard Indicators
Green
Yellow
Yield Curve
Leading Economic
Index® (LEI)
Factory
Utilization
LEI Diffusion Index
Purchasing
Manager Index
Orange
Red
Oil Prices
Housing Starts
Core Inflation
Unemployment
Headline
Inflation
19
What practices could producers use to
prepare for economic & policy changes?





build strong working capital and cash reserves
sound risk management program
watch financial leverage - 50% rule
sound financial records and systems approach
prepare for a five year down cycle
Lenders’ Top Questions for Dr. Kohl
20