GLOBAL E CONOMICS &
T RENDS: P OSITIONING
FOR S UCCESS
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
Macro Clinic Video Blog: http://agstar.com/edge/
January 12, 2015
Road Warrior of Agriculture: www.cornandsoybeandigest.com
Ag Globe Trotter: www.northwestfcs.com
Dave’s GPS & Dashboard Indicators: www.farmermac.com
Super Cycle I (4 Years)

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
WWI
global need for production
mechanical industrial revolution
farm & city movement
2
Super Cycle II (4 Years)
 post WWII- restructure infrastructure
 war technology applied to farming and
manufacturing- Cold War
 peak of industrial, mechanical resolution
 acceleration of farm & city movement
 increasing standard of living
3
Super Cycle III (3 Years)

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inflation commodity cycle
unrest in commodity producing regions
Russian wheat deal
growing world population
increasing standard of living
4
Super Cycle IV (10 Years)
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ethanol & biofuels
low interest rates
emerging nations need for commodities
growing world population
increasing standard of living
5
2016 – 2020 Economic Reset
1
 BRICS & KIMT’s – 53% world economic
growth
 growth moderating 8-5-3 Rule
 China does matter to fly over states
 2007 to 2012 aberration in commodity prices
 one half of emerging nations in recession
6
World Economic Outlook:
Real GDP Growth 2000-2015
 emerging
market and
developing
economies
 world
 advanced
economies
Source: IMF World Economic Outlook (October 2015)
http://www.imf.org/external/datamapper/index.php
7
2016 – 2020 Economic Reset
2
 ethanol & biofuels
 oil black gold “recession effect”
 deflation in commodities




regulatory issues in developed countries
political dysfunction
technology, automation
demographics
8
2016 – 2020 Economic Reset
3
 40% of commodity prices & asset values
 U.S. Central Bank reducing stimulus
 European Central Bank increasing stimulus
 60 billion plus 21 months




Japan’s stimulus
China’s Central Bank stimulus
stock market appreciation
beneficial to fly over states/Canada/Australia,
etc.
9
2016 – 2020 Economic Reset





4
weather wild card
political military sanctions
quality & standards risk
consumers & public
“Black Swans”
10
Grain Industry- Reset




easy money 2007-2012 has been made
top notch managers adjust
high overhead/fixed cost structure
classic tail effect
 prices go down
 costs lag
 cycle duration
11
Grain Producers:
“Houston, We Have a Problem”
Super Cycle Observation
Constant 2014 Dollars
Median Net Income
2007-2012
$169,968
2002-2006
$66,574
Super Cycle
2.42 x’s greater
2013-2014
$32,944
2000-2001
$40,123
• Lost 40% working capital in two years
• Greater 60% Debt to Asset Ratios under 10% working capital
• Operators under age of 30 - 24 to 15% working capital
• Most leveraged farms- negative working capital
• Debt coverage ratio is 45%
12
Livestock Industry


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
strategic resource shift
grain industry economic Vortex
50 to 65 year olds will not return
1953/73/78
cycle duration
curve ball effect
13
Horticulture, Vegetable, &
Retail/Entrepreneurial

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


growth of the economy
housing starts
lower unemployment
growth of local, natural, and organic
population dynamics
14
Global Economics: Europe
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France economy sluggish
Germany- export driven
Europe China connection
Greece
central bank stimulus extended
Ukraine
15
Global Economics: China
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China PMI <50
exports down >10%
lowered rates five times
stock market up 105%, down 30 to 40%
devalued currency
natural resource issues
shadow banking
16
Global Economics: Other
 Russia
 oil
 Mr. Putin
 Brazil
 recession
 Infrastructure
 Argentina
 tax
 political dysfunction
 Brazil & China connection
17
Global Economics: Japan/Asia




debt issues
demographic wedge
South Korea sluggish
India quite strong
18
U.S. Economy Watch

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
LEI declining
PMI slowing
manufacturing, building inventory
housing 1.2 million
business cycle expansion later innings
19
Federal Reserve’s
Interest Rate Barometer
Indicator
Possible Change
Definite Change
Current Status
Unemployment
7.0%
6.5%
5.0%
GDP Growth
2.0%
2.5%
1.5%
Core Inflation
2.0%
2.5%
1.9%
Headline Inflation
4.0%
5.0%
0.0%
Watch List:
• Dr. Yellen
• Rail traffic
• Overland trucking
• FOMC voting
• Shoe shiners • Baltic Sea index
• FOMC minutes • Copper prices
20
Nine Innings of an Evolution
of a Cycle Reset
1. profits start to decline but asset appreciation continues
2. new lenders enter the market place
3. strong equity growth mentality creates complacency
4. machinery & equipment values first to decline
5. aggressive growth businesses & fraudulent activities occur
6. margin negative cash flow & operating lines of credit
become an issue
7. marginal assets discounted
8. non-traditional & new lenders retreat
9. quality assets adjust in value depending upon length of
adjustment
21
Ten Mega Trends
Impacting Agriculture
22
Global Economy






geopolitical trade risk
volatility in revenues and cost
agriculture’s movement to emerging nations
opportunity
failure
premium on planning, execution, and
monitoring
“Think globally but act locally.”
23
Technology
 convergence of technology
 bio tech
 engineering
 information/big data
 high levels of talent
 innovation vs. technology
 systems
“High tech, high touch.”
24
Consumers



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local, natural, & organic
GMO/non-GMO
ethnic groups
global consumers
consumer trends 2025
“Consumers will drive the business model.”
25
Potpourri Trends
 2050 - 70% of the world’s population will be
urban
 85% of Americans are 2 generations away
from farm/ranch
 animal welfare
 environmental
 black swans
“Expect the unexpected.”
26
Rural Communities
The characteristics of thriving communities are:
 healthcare & preventive health
 internet access
 Infrastructure
 education
 lifestyle amenities such as
shopping & recreation
“Rural communities will define your
business/people strategy.”
27
Education/Lifelong Learning
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
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internships
experienced education
knowledge centers, blended education
vocational schools
emotional intelligence – 4-H, FFA, rural
leadership groups
 First job
 Baby Boomers = age 12; Millennials = age 22
“750 universities and colleges will
file bankruptcy by 2025??”
28
New Wave of Players
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
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under 42 years of age
age wave is world wide
women
minorities
lifelong learners
new entrants
“Hire for attitude, train for aptitude.”
29
Natural Resource/Environment
 water quality & quantity
 quality land is premium
 extreme in weather around the globe
 moisture
 temperature
 other
 energy
 infrastructure
30
Transition & Evolution
 60% of U.S. farm ground will change hands by
2030
 independent vs. interdependent
 lending: banks, Farm Credit, FSA
 agribusiness
 family and business dynamics
“Heart vs. head concept.”
31
Global Economic /
Government Policy



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China 2030
debt issues worldwide
tax laws
new leadership
other
“You can only imagine!”
32
Strategic 2025
1
CEO/ leaders will be “visionary/champions” vs.
“gate keepers”
“big enough to serve but small enough to care”
 alignment & collaboration- agribusiness,
education & lenders
 technology strategy- value added, big data
 refinement of processes- collaboration, training,
& execution
 human resources- talent alignment, culture,
recruit, & retain
33
Strategic 2025
2
 knowledge, intellectual research, information
 Global, domestic, industry, region, & local
 capital, liquidity, profitability, & efficiency
 public policy, public regulatory voice
 education- internal & external- “life long
learners”
 natural resources- demographic, drive your
model
 transition- evolution of customers, association,
footprint- corporate vs. family
34
20/20 Foresight


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building perceptual acuity
cultivate perspectives
listening for risk & opportunity change
what’s new inside & outside the industry
watch, read, & repeat
examples of success
35
P OSITIONING YOUR B USINESS
FOR S UCCESS IN THE R ESET
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
Macro Clinic Video Blog: http://agstar.com/edge/
January 12, 2015
Road Warrior of Agriculture: www.cornandsoybeandigest.com
Ag Globe Trotter: www.northwestfcs.com
Dave’s GPS & Dashboard Indicators: www.farmermac.com
Business Equation for Success
P=O+C+L+M²
 P=people, profits, & plans
 O=overhead cost control
 C=costs- know thy cost
 L=liquidity-cash is king
 M²=marketing & management = margin
2
Positioning for the Reset
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family living cost- business & personal
machinery & equipment investment
crop cost $100 to $150 per acre “15% to 30%”
reduction of human assets “uncle example”
earns & turns – “margin/capital turnover”
3
The Five “P” Evaluation of Successful Business Planners(1)
Rate the following statements regarding business planners.
1-Strongly Disagree, 2- Disagree, 3-Neither Agree or Disagree, 4-Agree, 5- Strongly Agree
Evaluation Points:
Rating
Paradigm:
Conversations center around profitability instead of production, operations
Receptive to new technology & ideas
High priority on education & training for new ideas
View people inside & outside of business as important resources
_____
_____
_____
_____
People:
Employees & suppliers trust & respect them
Employees & management are given opportunity to grow
Employees & suppliers enjoy working with this business
Low employee & management turnover
Planner:
Utilize a business mission statement & core values
Use tactical plans to achieve written business goals
Use record systems (financial, production) to monitor & evaluate
performance
Could leave their business for a week/month & things would run smoothly
_____
_____
_____
_____
_____
_____
_____
_____
4
The Five “P” Evaluation of Successful Business Planners(2)
Rate the following statements regarding business planners.
1-Strongly Disagree, 2- Disagree, 3-Neither Agree or Disagree, 4-Agree, 5- Strongly Agree
Evaluation Points:
Rating
Problem Solver:
Identify problems in the business before they are obvious
Seldom have the same problem reoccur in their business
Solicit input from ag & non-ag sources when looking for solutions
Take responsibility for their decisions
_____
_____
_____
_____
Proactive:
Can make a decision & accept consequences
Productive & gets things done
Complete tasks - multitaskers
Complete tasks on schedule
_____
_____
_____
_____
Scoring:
90-100 High Potential for Success
80-90 Above Average Potential for Success
70-80 Needs Management Assistance for Success
<70 Probably will be around until the money runs out
Total Score
Source: Adapted & Revised from Southeastern Agricultural Lenders School
_____
5
Financial Dashboard
Key Ratio
Green
Yellow
Red
Coverage Ratio
>200%
125% to 200%
<125%
Working Capital/Revenue
>33%
10% to 33%
<10%
Equity Percent
>70%
40% to 70%
<40%
Term Debt/EBITDA
<350%
350% to 600%
>600%
ROA- Return on Assets
>6%
2% to 6%
<1%
6
Screening Guide for Negative
Margins
1
Historically has the producer/entity:
Yes
No
Been profitable above interest rates and rate of inflation?
Shown growth of balance sheet which is earned vs.
appreciated net worth?
Has built and protected working capital in positive cycle?
Been able to cut living expenses if needed?
Been able to sell unproductive assets?
Followed and executed a marketing risk management
program?
Have the ability to cut 10 to 30% of costs?
Producer Version
7
Screening Guide for Negative
Margins
2
Historically has the producer/entity:
Yes
No
Been able to shed unprofitable land, machinery, livestock, &
human assets if necessary?
Had a burn rate for working capital 2.5 years or more?
Had a term debt/EBITDA ratio <5 to 1?
Scoring Key:
>8
Yes boxes checked= strong case for sustainability
5-8
Yes boxes checked= modest case for sustainability
<5
Yes boxes checked= very questionable for sustainability
Producer Version
8
Financial Characteristics that
Thrive During Tough Times
Characteristic:
Yes
No
Working capital revenue above 33%
Burn rate working capital to net income loss over
2.5 years
Burn rate of working capital to annual debt
service payments 3.0 years or greater
Moderation in family living costs
Debt coverage ratio above 125%
9
Liquidity, Liquidity, & Liquidity






current ratio limitations
lender speak/producer speak
25% of revenue to expenses
top level producers- 40%
bottom level producers- 10%
Burn Rate:
Working Capital
Green
3.0 Years
Yellow
1.0-3.0 Years
Red
1.0 Year
Payments
5.0 Years
2.5-5.0 Years
<2.5 Years
10
The Burn Rate – Working Capital
Revenue $2,000,000
Expenses 2,200,000
Loss
$200,000
Current Assets
$1,000,000
Current Liabilities
500,000
Net Working Capital $500,000
Net Working Capital $500,000= 2.5 Years
Projected Loss
$200,000
Green >3.0 Years
Yellow 1.0-3.0 Years
Red <1.0 Year
11
The Burn Rate – Debt Service Payments
Revenue $2,000,000
Current Assets
$1,000,000
Expenses 1,800,000
Current Liabilities
500,000
Profit
$200,000
Net Working Capital $500,000
Debt Service Payments = $100,000
Net Working Capital
$500,000= 5.0 Years
Debt Service Payments $100,000
Green >5.0 Years
Yellow 2.5-5.0 Years
Red <2.5 Years
12
True Working Capital Analysis
Assets
Liabilities
Scenario A (Base Hits- Sweat the Small Stuff)
Months
0-4 mo.
Current Asset
Amount
Cash
$100,000
A/R
$75,000
Inventory
$350,000
Subtotal $525,000
5-8 mo. A/R
$75,000
Inventory
$350,000
Crops Growing
$200,000
Subtotal $625,000
9-12 mo. Prepaid Expenses $500,000
Subtotal $500,000
Total Current Assets $1,650,000
Months
0-4 mo.
5-8 mo.
Current Liability
A/P
Operating Line
Payment
Subtotal
Payment
Amount
$100,000
$560,000
$50,000
$710,000
$50,000
Subtotal $50,000
9-12 mo. Payment
$100,000
Subtotal $100,000
Total Current Liabilities $860,000
13
True Working Capital Analysis
Calculations- Scenario A
1. Current Ratio=
Current Assets
Current Liabilities
2. Working Capital to Revenue WC=$1,650,000-$860,000
(Revenue= $2,000,000)
$1,650,000 =
$860,000
1.92
$790,000 =
$2,000,000
39.5%
3. Burn Rate on Working Capital=
(assuming $200,000 projected losses)
$790,000 = 3.95 Years
$200,000
4. Burn Rate on Debt Service Payments=
(assuming $200,000 annual debt payment)
$790,000 = 3.95 Years
$200,000
5. Debt to Asset Ratio=
=
60%
6. Return on Assets (ROA)- 3 Year Trend=
=
8%
14
Key Financial Metrics
Degree of Financial Leverage: Risk Mitigation
Compensating Factors:
Debt to
Asset
Ratio
Term
Debt/EBITDA
Working Capital
to Revenue or
Expenses
Coverage
Ratio
ROA / Cost
<20%
6 to 1
>25%
125%
4%
21-50%
4 to 1
>25%
140%
6%
51-75%
2.5 to 1
>33%
150%
8%
>75%
<2.5 to 1
>40%
175%
>10%
15
Problems You Want Your
Business to Have
(1)
 You pay income taxes.
 You can leave your business for a month & the
business runs smoothly.
 Your lender seeks you for business.
 People want to work for your business.
 Your business has idle cash and liquid financial
assets.
 You can fire your customers/suppliers.
 You leave money on the table in some deals.
16
Problems You Want Your
Business to Have
(2)
 You surround yourself with people smarter than
you.
 You spend time networking and seeking
education.
 You could send your son/daughter/assistant
away for two years.
 You appear to be dissatisfied, not happy with
status quo.
 You occasionally fail.
17
Ten Best Management Practices
of Young Producers
 modesty in family living
 invest in productive assets
 personal/business








independent vs. interdependent
lifelong learners
strong group of peers
good set of mentors
profit plan 60-30-10
get better before getting bigger
balance between head/heart (numbers vs. passion)
strong relationship with lender
18
Ten Compelling Reasons to Be
Optimistic in Agriculture 1
 50/70/70 Rule
 1995-2013- Top 20% livestock/crop producers
had 10% returns
 one size does not fit all
 young people, women, and minorities are the
“new energy”
 innovation and technology
 bio, engineering & information
19
Ten Compelling Reasons to Be
Optimistic in Agriculture 2
 talent wars in agriculture and rural America
 1 in 6 jobs in U.S. are directly or indirectly
connected to agriculture
 retail, entrepreneurial segments
 emerging nations, BRICS & KIMT, think
globally but act locally
 raising a family- value systems/living expenses
20