Today’s SpeakerDr. David M. Kohl Department of Agricultural and

Applied EconomicsppVirginia Tech,

Blacksburg, Virginia g, g

Dr. David M. KohlProfessor Emeritus

Agricultural and Applied EconomicsVirginia Tech

Blacksburg, VA 24060Blacksburg, VA 24060(540) 961-2094 (Alicia Morris)

(540) 719-0752 (Angela Meadows)e-mail: sullylab@vt.edu

Weekly Website Columns:

Ag Globe Trotter: www.farm-credit.com

Road Warrior of Agriculture: www.cornandsoybeandigest.com

Lender Economic Planning Environmentg

economic change- rapid & abruptquick historical view since WWIIeconomic moderationvolatility at extremesdead cat bounces /false recoveriesdead cat bounces /false recoveriesreprioritization and focus

2009 Views from the Road

livestock / protein industrydependent on real estatethird party / counter party riskp y p ynon-farm incomelenders rationing creditlenders rationing creditforestryhousing & export markets

Century of Super Cycles

Commodities Boom 1915-17 1950-57 1973-74 2003-08

Common Characteristics:Commodities Boom 1915-17 1950-57 1973-74 2003-08

Rapid Global Real Growth (average annual % h )

N/A 4.8% 4.0% 3.5%

% change)

Conflict & Geopolitical Uncertainty

First World war Korean war Yom Kippur & Vietnam wars

Iraq conflict

yInflation Widespread Limited Widespread Limited

Significant Infrastructure

First World war Postwar reconstruction

None ChinaInfrastructure Investment

reconstruction

Centered on Metals, agriculture

Metals, agriculture

Oil, agriculture Oil, metals, agricultureg g g

% Increase in Prices (previous trough to peak)

34% 47% 59% 131%

Y f Ri i 4 3 2 5Years of Rising Prices Prior to Peak

4 3 2 5

Source: World Bank

Projected World Growth

Germany 0 8%

Iceland 9 3%

U S China Japan 0 1%

Canada -0.5% Britain

-1.1% India

-0.8% -9.3%

Russian Fed. 2.3%

U.S. -0.9%

Brazil Mexico

0.4%

China 8.0%

-0.1%

Indonesia 5 4%

France -0.4%

Euro zone -0.6%

1.1%7.3% South Korea

2.7%

3.0% Australia 1.7%

5.4%

South Africa 3.0%

GDP Growth %GDP Growth %2009 Forecast

Source: OECD Economic Outlook No. 84, November, 2008

World Growth

Germany Iceland

U S China Japan 12 1%

Canada -3.4%

Euro zone

Britain -5.9%

India

y-8.2% -3.6%

Russian Fed. 1.2%

U.S. -6.3%

Brazil

Mexico -10.3%

6.8% -12.1%

Indonesia 5.2%

France -4.4%

Euro zone -6.2%

India 5.3% South Korea

-20.8%

Brazil -13.6% Australia

-2.1%

5 %

South Africa -1.8%

GDP Growth %GDP Growth %2009 Quarter Figures

April 9, 2009

Source: www.Economist.com

Alternative Energy

$60 to $100 swings in oil prices$ $$3.50 to $4.00 gasoline- consumer chicken pointoil prices and direction

weathergeopolitical & military riskcurrency exchange ratecurrency exchange ratedeveloping & emerging countries economic status

technology and supply side of equationtechnology and supply side of equationdemand side globally in agriculture

U.S. Farm Real Estate Values

Annual Percentage Change in US Farm Real Estate Values

20.0%

25.0%

30.0% 1910-2008

10.0%

15.0%

-5.0%

0.0%

5.0%

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

$/ac

20 0%

-15.0%

-10.0%

Source: Dr. Steve Isaacs, University of Kentucky

-20.0%Year

Business Cycles by the Numbers

Months11 economic recessions58 business expansions86 Great Moderation Theory expansions7 Great Moderation Theory recessions106 d i P l V l k106 record expansion-- Paul Volcker 120 all time record expansion -- Alan Greenspan

Kondratieff Wave TheoryRolling recessions of Post WarRolling recessions of Post War

Signs & Issues of anEconomic Turnaround

housingcopper pricesgovernment debtgdeflation / inflationinterest ratesinterest ratesother

Disconnect Between Borrower & Lender Views on Ag Economyg y

I have equity. Why can’t I get a loan?all banks received TARP fundsall banks received TARP fundsmore borrowed money will fix the problemborrowers often recognize the problem too lateborrowers often recognize the problem too latelenders delay taking action because they are “too busy”yfarmers & ranchers feel they are “different”producers use the economy as an excuseproducers are too busylenders think globally, but producers think “one t k”track”borrowers say, “Why should I have to provide detailed information?”detailed information?pricing- why can’t I get the low rates?

How Lenders Contributed to the CrisisContributed to the Crisis

couldn’t make a bad loantoo growth orientedtoo growth-orienteddeals became more leveraged and complexunderwriting was thinnerunderwriting was thinner

covenant “lite”over-reliance on non-recurring incomeo e e a ce o o ecu g co efalse sense of security built on real estatelending to new industries with no expertiseg pover-reliance on statistical modelsgot away from knowing the customersoutside entities with contingent liabilities

Famous Quotes in Business & Lending From the Roadg

“If it grows too fast, it’s a weed.”“If you got the dirt you can’t get hurt ”If you got the dirt, you can t get hurt.“Land- they aren’t making any more of it.”“Money is cheap, borrow and expand.”y p, p“Go with this lender, they have cheaper rates.”“I left a lot of money on the table because of a marketing plan ”marketing plan.“Prices and cost are too volatile to plan.”“It’s a new plateau or a new normal.” It s a new plateau or a new normal. “Millionaire on paper but never earned a dollar.”“But, I have a lot of equity in land.”“Got to minimize taxes.”“Be careful of people in silk suits.”

Counter Stress Cracks

trend analysistrend analysisearned net worth / appreciated net worthcommunicationscommunicationsselective on new businessbusiness financial plans with variancebusiness financial plans with variance analysismarketing risk management progressmarketing risk management progresspersonal family living budgetsensitivity on profits liquidity & collateralsensitivity on profits, liquidity, & collateralsell-sell-sellotherother

Educational Needs“Micro”

working capital educationcash flow budgeting & variance analysiscash flow budgeting & variance analysisprofit rule (60-30-10)marketing & risk management (three levels)marketing & risk management (three levels)management succession / estate planningexpansion planning in a volatile environmentexpansion planning in a volatile environmentbusiness plan developmentstrategy & execution of business plansgy pcash to accrual in business monitoringdeferred tax consequences in sale situationsqpersonal finance & investing

Educational Needs“Macro”

understanding government programs & environmental policyinterest rates

deflation / inflationcurrency valuationy

business cycles & the economygeneral mega trendsgeneral mega trendsimpact of global economics on agricultural ind strindustry