GLOBAL ECONOMICS: POINTS TO PONDER

Weekly Columns: Ag Globe Trotter: www.farm-credit.com

Road Warrior of Agriculture: www.cornandsoybeandigest.com

Dr. David M. KohlProfessor 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

Black Swans

oil Japan sovereign debt issues social unrest other

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Mega Trends of the Second Decade

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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.”

Mega Trends of the Second Decade

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Economic moderation of developed nations: public debt aging population entitlements 1-2% Rule

“These nations could become a cluster of powerful economic nations.”

Game Changers for the Agricultural Economy

livestock/other south/coastal/other

input/cost consolidation regulation/consumers liquidity/equity decline volatility

Tailwinds Headwinds

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crop & row crop Upper Midwest/Canada:

“islands of prosperity” Asia/China export ethanol low value of the dollar weather land values “bullish” low interest rates

8-year super cycle

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

Response QE2 stockpiling food & fuel

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Lenders’ Top Questions for Dr. Kohl

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

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Lenders’ Top Questions for Dr. Kohl

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

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”

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2011 Projected Debt to Income:

2.35:1

World Growth

9Source: www.Economist.com

U.S. 1.3%

Brazil

3.1%

GDP Growth % Change from Year Ago2011 Latest Quarter Figures

October 15, 2011

Australia 4.8%

Mexico 4.5%

China 9.1%

Japan -2.1%

Indonesia 6.5%Q2

Canada -0.4%

France 1.7%Q2

Euro zone 0.6%

Britain 0.4%

South Africa 1.3%

India

7.7%Q2 South Korea 3.6%

Germany 0.5%

Iceland -

10.9% Russian Fed. 3.4%Q2

Global Economic GDP Growth Benchmarks

Location Green Yellow Red

USA >3% 0-3% Negative

Europe >3% 0-3% Negative

Japan >3% 0-3% Negative

BRICS Nations* 8-10% 4-7% <3%

*Brazil, Russia, India, China and South Africa

© 2010 by Dr. David Kohl & Dr. Ed Seifried10

Global Economic GDP Growth Assessment

Location Current Green Yellow Red

USA

Europe

Japan

BRICS Nations*

*Brazil, Russia, India, China, and South Africa

Fill in current status and check green, yellow or red for each region.

© 2010 by Dr. David Kohl & Dr. Ed Seifried11

The World According to Oil

Source: POET vital, Spring 201012

The World According to Water

Territory size shows the proportion of all worldwide freshwater resources found there.

13Source: www.worldmapper.org © Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan)

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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

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U.S. Farm Real Estate Values19

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1913

1916

1919

1922

1925

1928

1931

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Annual Percentage Change in US Farm Real Estate Values1910-2010

$/ac

Source: Dr. Steve Isaacs, University of Kentucky15

Farm & Ranch Land/Real Estate Clock

Increasing

Declining

RapidSlow

Positive

Slow Increase

Positive

Rapid Increase

Negative

Slow Decline

Negative

Rapid Decline

What’s happening in your area?

• High quality land & row crop

• Mineral, oil, water influences

• Competitive agriculture & aggressive investors

• Ag industries in down cycle

• Recreational farm and ranch land

• Urban fringe after bubbles

• Lower quality land

• Ag industries are not competitive

• Older buyers

• Grains & row crops

• Urban fringe/ satellite cities

Stable

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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

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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.?

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Doc’s Economic Clock: Dashboard Indicators

Yellow

Yield Curve

Factory Utilization

Green

Leading Economic Index® (LEI)

LEI Diffusion Index

Purchasing Manager Index

Orange

Oil Prices

Core Inflation

Headline Inflation

Red

Housing Starts

Unemployment

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Lenders’ Top Questions for Dr. Kohl

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

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