Macro Clinic Video Blog: www.compeer.com/education Road Warrior of Agriculture: www.cornandsoybeandigest.com Ag Globe Trotter: https://www.northwestfcs.com/ag-industries/economic-updates/ag-economy-articles Dave’s GPS & Dashboard Indicators: www.farmermac.com
Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics
Member of Academic Hall of Fame, College of Agriculture & Life Sciences Virginia Tech, Blacksburg, VA
(540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | sullylab@vt.edu
July 15, 2021
Roller Coaster Economics
40
80
120
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20192020F
Net Cash Farm Income (NCFI)
NCFI
~2015-2019
- Trade uncertainty - Strong dollar - Global competition - Government payments to ag $2 billion/day
Government/ Central Bank Super Cycle “Steroid Era” ~2020 until?
2
- PPP- Emerging Nations- BRICS, KIMT’S - Ethanol - Weak dollar - Weather in extremes - Low interest rates
- Accommodative monetary policy - Stimulus- 14% of global economy - China effect - Protein complex - Weather issues - Supply disruptors - Inflation – M2
$ Billion
Source: USDA, ERS, Farm Income & Wealth Statistics, as of 2/5/21. Values are adjusted for inflation using the GDP chain-type price index, 2021=100
Government Payments as Percent of Net Farm Income § $2 billion government payments per day in 2020 to agriculture
globally § government payments as a percent of net income
Source: USDA, ERS, Farm Income and Wealth Statistics
3
Temporary Inflation
§ China’s demand to rebuild protein & manufacturing complex § supply chain disruptors § stimulus checks- 14% of $85 trillion global economy § central bank’s accommodative strategy § consumer saving & spending § wages & unemployment § M2 velocity of money § transportation and port issues § weather extremes
4
Permanent Inflation
§ M2 velocity of money § regional & economic segments of inflation § spot shortages created by black swans § U.S. & worldwide consumer confidence § central banks’ interest rate policy § government budgets & tax strategies § wages, automation & unemployment
5
Long Term Concerns for the Agricultural Economy
§ lack of emphasis on export markets § rise of China § global trade prospects § rise of global competitors in agriculture
6
7
8
China’s Dual Circulation Strategy
China’s Belt & Road Initiative- 68 countries, $1 trillion in loans and now a shift to a medical innovation path
Global Trade Perspectives
RCEP¹ 15 2.7 Billion $25.8 Trillion $12.5 Trillion
CPTPP² 11 508 Million $11.1 Trillion $7.6 Trillion
USMCA³ 3 493 Million $24.4 Trillion $7.8 Trillion
9
¹RCEP- Regional Comprehensive Economic Partnership (15 Asian Countries) ²CPTPP- Comprehensive & Progressive Agreement for Trans-Pacific Partnership
(Canada & 10 countries in the Asia-Pacific region). ³USMCA- United States-Mexico-Canada Agreement (North America)
B3W – Build Back Better World Partnership
§ U.S. & Europe § counter the belt & road initiative § China’s counter strategy
10
Median Net Farm Income
Net Farm Income, 2019
How Did Farms Stack Up Historically? 2009-2020 Historical information for Southwest, South Central & Southeast Minnesota
The source of the green, yellow, and red credit risk rating is from "Weighing the Variables" by David M. Kohl. He considers the six (6) color coded factors below to be key indicators of financial credit quality.
Green The farm business enjoys a competitive position Early Yellow The farm business has some early caution signs Late Yellow The farm business has some major caution signs
Red The farm business could face some major obstacles
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Current Ratio - Multiple-Enterprises
Top 10 Percent 2.38 2.42 2.68 3.21 2.37 2.12 2.28 2.30 2.24 2.22 2.30 2.69 High 20 Percent 1.81 2.32 2.66 2.90 2.40 2.24 2.21 2.21 2.11 2.20 2.20 2.39 Average Farms 1.75 2.04 2.26 2.50 2.03 1.79 1.64 1.62 1.57 1.51 1.51 1.98 Low 20 Percent 1.15 1.27 1.37 1.48 1.60 1.23 1.23 1.19 1.12 1.07 1.07 1.23
Farm Debt to Asset Ratio (Market) Top 10 Percent 39% 42% 39% 38% 39% 42% 38% 39% 40% 39% 40% 40%
High 20 Percent 42% 43% 40% 40% 38% 40% 39% 40% 41% 39% 41% 41% Average Farms 45% 45% 43% 42% 40% 43% 45% 45% 45% 46% 46% 44% Low 20 Percent 54% 55% 50% 51% 46% 52% 54% 54% 53% 55% 54% 51%
Rate of Return on Farm Assets - Rent/Lease Majority of Assets (Cost) Top 10 Percent 12.7% 16.9% 16.9% 17.9% 7.8% 12.5% 5.8% 5.8% 6.8% 5.9% 7.8% 12.3%
High 20 Percent 11.6% 15.9% 15.8% 17.3% 7.4% 10.4% 5.2% 5.6% 6.3% 5.2% 7.2% 11.4% Average Farms 5.3% 11.5% 11.5% 13.7% 2.6% 3.7% 0.8% 1.4% 1.9% 1.0% 3.4% 7.8% Low 20 Percent -7.1% 0.3% -0.6% 1.0% -6.2% -5.5% -5.2% -4.0% -3.8% -4.0% -3.4% -1.7%
Term Debt Coverage Ratio Top 10 Percent 316% 448% 462% 540% 236% 336% 197% 199% 215.0% 233.0% 273.0% 403.0%
High 20 Percent 285% 408% 429% 491% 218% 297% 178% 190% 203.0% 208.0% 246.0% 375.0% Average Farms 145% 278% 294% 363% 102% 133% 77% 90% 102.0% 91.0% 148.0% 274.0% Low 20 Percent -65% 66% 71% 94% 67% 47% -46% -20% -13.0% -21.0% 3.0% 72.0%
Operating Expense Ratio Top 10 Percent 66.3% 61.6% 65.2% 57.6% 73.2% 73.3% 73.8% 72.7% 72.8% 72.7% 73.3% 67.4%
High 20 Percent 67.2% 61.9% 65.5% 59.9% 72.5% 73.8% 74.5% 73.8% 74.2% 74.7% 74.3% 68.4% Average Farms 77.8% 66.9% 68.8% 64.7% 81.4% 79.8% 84.6% 83.0% 82.3% 84.3% 79.4% 71.2% Low 20 Percent 101.5% 86.9% 86.2% 86.3% 99.9% 99.2% 99.6% 96.2% 96.6% 97.4% 95.3% 89.2%
Interest Expense Ratio Top 10 Percent 3.4% 3.2% 2.6% 2.5% 2.9% 2.2% 3.0% 3.3% 3.2% 3.9% 3.4% 2.8%
High 20 Percent 3.8% 3.6% 2.8% 2.7% 3.1% 2.4% 3.2% 3.5% 3.4% 3.9% 3.7% 3.1% Average Farms 4.9% 4.5% 3.8% 3.4% 3.9% 3.7% 4.2% 4.6% 4.8% 5.4% 5.2% 4.3% Low 20 Percent 5.6% 6.7% 7.0% 5.4% 4.5% 6.1% 4.7% 5.4% 6.1% 6.6% 7.8% 8.2%
Aaron Brudelie, Farm Management Instructor Minnesota West Community and Technical College
Business IQ: Management Factors Critical Questions for Crucial Conversations
Your Score
2. Knows cost of production by enterprise
3. Goals - business, family, & personal
4. Record keeping system
5. Projected cash flow
6. Financial sensitivity analysis
8. Work with advisory team and lender
9. Marketing plan written and executed
10. Risk management plan executed
11. Modest lifestyle habits, family living budget
12. Written plan for improvement executed & strong people management
13. Transition plan/Business Owner plan
14. Educational seminars/courses
24-34
<24
2021 Version - Developed by: Dr. David M. Kohl, Professor Emeritus, Ag & Applied Economics, in cooperation with Dr. Alex White, Dairy Science, Virginia Tech
Written* In head No idea
Written* In head No idea
Green (3 points or 4*) Yellow (2 points) Red (1 point)
Written In head No idea
Accrual Schedule F (one & done) No idea
Written* In head No idea
Sometimes Never
Proactive Reactive Indifferent
Farmer Checklist
Moderate management rating, potential issues in resiliency & agility
Strong management rating, strong potential for resiliency & agility Overall Analysis*Extra Points:
- Progressive Business may receive 4 points for #2,6,7,8,14 - Struggling Business Attempting Turnaround may receive 4 points for #3,5,8,11,12 (See pg. 2 for Progressive and Attempting Turnaround
Business IQ Exercise
After completing the Business IQ: Management Factors Scorecard, what are three areas/points in your business that you will continue and three areas/points for improvement?
17
Three areas/points to continue: • ______________________ • ______________________ • ______________________
Three areas/points to improve: • ______________________ • ______________________ • ______________________
How Can Team Members Use Business IQ as a Tool for Producers? § screener for attitude to improve § each family member, business partner, spouse complete the
Business IQ separately § assists in prioritizing improvements § communication tool- internal and external to team of advisors § customer develops plan for improvement to improve or buy in § objective way to measure management § monitoring tool, year over year
18
19
HUSBAND – BUS IQ: 53 3 Areas to Continue 3 Areas for Improvement
1Irrigation/manure mgt 1Office management using CFO's talent
2Intense office management 2More efficient labor 3Improve crop/livestock efficiency 3Executing the marketing plan
WIFE – BUS IQ: 39 3 Areas to Continue 3 Areas for Improvement
1Record keeping - ratios, B/E 1Financing without high interest rate
2Cost of production (livestock) 2More seminars on ratios/break- even
3Productivity of crops & livestock 3Communications & employees' knowledge of how the business works
DAUGHTER – BUS IQ: 38 3 Areas to Continue 3 Areas for Improvement
1Researching cost effective crop/livestock mgt practices
1Employee handbook with written rules and guidelines
2Diversifying the farm in livestock 2Lease equipment to avoid high repair bills and subscription fees
3Searching for a new ag lender with better rates
3Crop/livestock KPIs
CFO – BUS IQ: 40 3 Areas to Continue 3 Areas for Improvement
1Crop Production 1Debt restructuring-reduce interest expense-improve cash flow
2Custom Hire 2Lease versus buy equipment 3Diversifying in livestock 3Pay invoices within terms to avoid
finance charges
LENDER – BUS IQ: 35 3 Areas to Continue 3 Areas for Improvement
1 Crop production KPIs 1 Cash flow - extending current loan terms 2 Using equipment longer before trading 2 Comparison of budget to actual 3 Getting outside advice 3 Crop/livestock inventory
17.45%
28.70%
58.20%
20.52%
32.30%
50.08%
Debt/Total Asset
Median Mean
Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study at University of Kentucky
2.25%
0.45%
-0.20%
3.16%
Return on Assets
Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study at University of Kentucky
$109,947
Net Farm Income
Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study at University of Kentucky
Other Key Ratios
§ coverage ratio § top third - 114% § bottom third - 10%
§ operating expense to revenue ratio¹ § top third 68% § bottom third 90%
23
Fueling the Phoenix- The Seven “P’s”24
1. Planning 2. Projections 3. Pivot 4. Profitability 5. Pathway 6. People 7. Prioritization
Fueling the Phoenix – The Seven “P’s”
1. Planning (5 to 10% Rule)
§ plan, strategize, execute, & monitor § HUT principle § speed kills- more zeros/commas on financial statements § SWOT analysis
§ industry § business § enterprise
§ team of advisors to energize the process § in person, on-line, & hybrid approaches 25
Fueling the Phoenix – The Seven “P’s”
2. Projections (Visualization & Outcomes)
§ cash flow, 80% of the business plan § production, marketing, finance, & operational management § possible outcomes
§ production § price § cost
26
3. Pivot (Working Capital is Queen)
§ working capital & quickness to cash § working capital, debt service (principal & interest) >5 to 1 § working capital/expenses >25%
§ >30% of your working capital - able to be converted to cash in 90 days
§ four to eight months of household expenses in cash § pivot: block adversity/capitalize on opportunity
27
4. Profitability (Oxygen of the Business)
§ 60-30-10 profit plan § term debt to EBITDA <5 to 1 § operating expenses (excluding interest & depreciation) to revenue < 75% § pay taxes § profits: balance the head & heart
28
5. Pathway (The Journey)
§ wonder, blunder, thunder, & under phases § 1% asset or equity base invested in transition planning § 50% retirement income for senior generation § personal budget & business budgets § invest 5% of income outside the business
29
6. People (Independent Vs. Interdependent)
§ productive people is the difference between good and great § Good to Great: Why Some Companies Make the Leap... and Others
Don’t by Jim Collins § six perspectives of the bus § accountability: leadership, frontline people, family members, advisors § role players win championships
30
7. Prioritization (Lessons Learned)
§ overscheduled- work & life balance § goal setting- six degrees § 2,500 - 500 hour rule § MEDS for life § DAIRY for life
31