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E CONOMIC & F INANCIALM EGA T RENDS2020-2030Dr. David M. KohlProfessor Emeritus, Agricultural and Applied EconomicsMember of Academic Hall of Fame, College of Agriculture & Life SciencesVirginia Tech, Blacksburg, VA(540) 961-2094 (Alicia Morris) (540) 719-0752 (Angela Meadows) sullylab@vt.eduMacro Clinic Video Blog: www.compeer.com/educationJanuary 7, 2020Road Warrior of Agriculture: www.cornandsoybeandigest.comAg Globe Trotter: www.northwestfcs.comDave’s GPS & Dashboard Indicators: www.farmermac.com
Pulse of the Global EconomyThe View from 30,000 Miles UpNASA Photo
Perspectives on the New Decade more change in the next decade than the last 70 years technology, consumers & management economic & financial volatility friend: proactive manager foe: reactive manager business IQ is the common denominator for success decade of transitions capital, human assets & business culture shifts more opportunity for success or failure depending on your mindset,capitalizing and controlling your destiny balance “high tech” with “high touch” high tech- biotech, engineering, big data high touch- in the moment, interpersonal skills, interdependent3
Eras & Cycles: Fork in the RoadDecadeEra of Economics1950’s - 1960’sPost War, Go-Go Production Era1970’sGo-Go Economics Era1980’sNo Go Economics Era1990’sSlow Go Economics Era2000’sGo-Go Super Cycle EraTeen YearsSlow & No Go Economics EraAdult YearsFork in the Road Management & Economics Era4
Corner Office Critical Thinking usinessModelFlexitarianWeather &ClimateChangesTechnologyHumanInterfaceConsumersof theFuture¹¹ - Transparency- Customization- Personalization- Experiences5
Low Margin Era technology- supply exceeds demandworldwide- new resources in productionweather and climate changesbase hits vs. home run profits & cash flowmanaging expectationsfocus on fiduciary fundamentals6
Volatility of Profits/Cash Flow trade negotiations and expectationsweather/African swine flupolitical uncertaintyconsumer demand shiftsstructural changes in industry7
Economic Radar ScreenGlobalization vs. Decoupling international trade political uncertainty USMCA Brazil China’s Belt & Road Initiative Venezuela synchronized global economicmoderation China- slowest growth rate in 28years Japan- negative growth rate Mexico Argentina Germany, Britain & EuroSector U.S. Germany – negative growth rate Central Bank’s stimulus in China high debt levels in urban realestate in China8
North America’s EconomicPower Block 28% of the global economy’s GDP energy & oil U.S. #1 Canada #4 Mexico #8 450 million people 47% of Mexico’s population is under 25 ag trading partners: Canada #1 Mexico #39
Rising of Asia10
Farm Real Estate Perspectives farm real estate appreciated or stayed level 79%of years from 1910-2017 since WWII (1941) farm real estate appreciatedor stayed level 88% of the years 1910-WWII (1940) farm real estate appreciated57% of the years farm real estate was flat or declined for 13 yearsfrom 1920-1933 farm real estate declined for four years in the1980’s11
Farm Real Estate- Last Line ofDefense 83% of U.S. farm balance sheet assets great bridge over economic troubled waters equity often leads to managementcomplacency farm real estate is local, be careful of state andnational statistics12
Volatility on Balance Sheet lender appetite for refinances/restructure customer appetite for refinances/restructure supply/demand- real estate, equipment and/orlivestock regulators suppliers of operating credit baby boomer farmer/rancher13
As of Mid-June, LongestEconomic Expansion in the U.S.14
When Will the Next RecessionBegin?Estimated Start DatePercentFirst Half of 20208%Second Half of 202036%202138%20228%202310%15
When the Next Recession Occurs, ItWill Be .Recession TypePercentVery mild and short like recession in early 200072%Similar to Great Recession in 2009 Era10%Possible depression in U.S. similar to the 1930’s0%Great Recession in the U.S. and globally18%16
Cause of Next Recession(More than 1 selected)Cause of Next RecessionPercentTrade issues40%2020 U.S. Presidential Election results10%2020 U.S. Presidential, Congress, and Senate results25%Debt issues: personal, corporate, government and student45%Asset price bubbles19%Stock market crash, more than 40%8%17
Mega Trends 2020-2030:“High Beams”18
Mega Trends 2020-2030:Breakfast in 2030Imagine this: You 3D print your morningcroissant and your sugar-free ginger cake is softand sweet. The roast beef on your sandwich isplant based and your entire diet is perfectlytailored to your lifestyle. Can you picture this?Source: The Economist Magazine, December, 2018 &Wageningen University & Research- www.wur.eu/careerinfood19
Mega Trends 2020-2030:Industry Must Adopt Fads/Trendsdairy example: children say milk tastes like chalk USA Today reports during 2012-2016: skim milk sales were down 36%organic milk sales were flatflavored milk sales were up 9%whole milk sales were up 2.4%“Need to be three products andservices ahead of the curve.”20
Mega Trends:Technology & ProductionMetric Tons Increase Since 2008-2009 til 2018CountryCorn(Percent Change)Soybeans(Percent a174%73%Canada36%125%Europe-9%Paraguay168%Source: Kirksville, MO presentation - University of Missourithree layers of change technology new resources weather & climate change21
Mega Trends:Export Market ShareUnited StatesBrazilCornBeansCornBeansMid rce: The Economist Magazine- 201922
Mega Trends 2020-2030:Non-Government Organizations Smithfield lawsuitsMonsanto lawsuitsothersbiosecurityopen pensantibiotic freeanimal welfare“NGOs more disruptive thangovernment regulations.”23
Mega Trends 2020-2030:Technology: Productivity interruptions occur on average every 2-7 minutes It takes a half hour to regain focus after interruptions drops IQ 10 points once interruptions occur interruptions contribute to a poor night’s sleep need 2 hours per day with no technology errors increase 19 times 4 alcoholic drinks techlash People touch their phone 2,617 times per day on average, or 2 hours and25 minutes. Source: Wall Street Journal on May 17, 2018.“Silence is golden.”24
Mega Trends 2020-2030:Old School Generation Vs. New School Generation:Are you an old school generation or a new school generation?Old School GenerationNew School Generationcontrolstructure and scaffoldingmanagementorcollaborationbalance (group and private time)career pathprojects with meaningtell how to do“show me” problem solvers8-5productivity & flexibilitycourses and “talking head” lecturesbite size, digestible, “flipped” learningformal job description (set)create job description (agile)task focusedInternship/experientially focusedtrainingtraining & development “life skills”“Old school vs. new school.”25
Agricultural Business Growth:Green Shoots value addedyoung & beginning farmers/ranchersfamily business transitiongig economydialed in/high techlow investmentresourceful26
Future Business Models:Young Farmers & Ranchers family business cousins partnering withcousins non-family members separate enterprises/usecommon assets agri-entrepreneur boomeranger professional “outside the box” mindset new skill sets women, minorities, veterans demographics of FFA & 4-H vertical & urban farming multi-tasker gigs diversified sources ofincome27
Median Net Farm Income28
Net Farm Income, 201829
Generational Financial Performance ComparisonsSuper Cycle & Post Super Cycle2012Financial MetricSuper CycleMedian10 to 40 YearsUnder 10 years2018Post SuperCycle Median10 to 40 yearsUnder 10 yearsNumber of Farms2,8817442,451836Net Farm Income 197,828 90,865 30,752 26,855Return on Assets (ROA)10.6%14.4%1.4%3.6%Operating Profit Margin (OPM)30.5%30.0%6.8%11.6%Asset Turnover Ratio45.355.321.535.9Working Capital/Revenue39.9%27.6%19.0%19.8%Term Debt Coverage3.373.180.941.63Debt/Asset Ratio35%54%38%58%Non Farm Income (NFI) 13,162 17,891 16,013 28,728Family Living 53,536 36,959 49,987 32,996Capital Expenditures 126,770 69,333 49,000 28,705Machinery/Equip. Invest Per Acre 558 290 670 231Term Debt/EBITDA1.10:1.01.11:1.02.59:1.01.63:1.0Source: FINBIN, https://finbin.umn.edu/30
Super Cycle & Post Super CycleGame Critique – Youth Vs. ExperienceExperienced Farmers/RanchersYounger Farmers/Ranchers term debt to EBITDAincreased dramatically maintain operating margins have stronger assetturnover ratios refinance losses and term debtdecrease EBITDA preserve working capital have much stronger termdebt coverage ratio postsuper cycle more off farm income less family living withdrawals have half as muchmachinery investment peracreVS. have much stronger equityposition, debt to asset ratio,under 40% representsresiliency capital expenditures strong,good times have twice as muchmachinery investment peracre31
Business IQ:Spectrum of Performance PossibilitiesHigh CollateralHigh WorkingCapitalCode YellowCode Green20-34 B. IQLow Profits &Cash Flow35 B. IQReactiveProactiveCode Red 20 B. IQHigh Profits &Cash FlowCode OrangeLow Equity &Low Efficiency20-40 B. IQLow WorkingCapitalLow CollateralB. IQ Business IQHigh Equity &High Efficiency32
Paddling - Upper Right Quad.Code Green - Disciplined Growth strong business IQ score of 35 proactive manager 60% equityterm debt to EBITDA 2.5:1operating expense/revenue ratio (excludinginterest and depreciation) 75% working capital to expenses 30%33
Treading Water- Upper Left Quad.- Limited Growth moderate business IQ score of 20-3470% equityworking capital to expenses 20%operating expenses/revenue ratio (excludinginterest and depreciation) 80% competitive issues in industry34
Paddling or Bailing Water – Lower Rt.Code Orange - Excessive GrowthPaddling towards Green business IQ score 38 ROA averages 6% 50% equity modest family livingexpenses dimensional revenuestreams earns and turnsBailing towards Red business IQ score of 28 profit issues- ROAaverages 1% 50% equity high living costs specialized revenuestreams lack earns & turns35
Bailing Water -Lower Left Quad.Code Red- Partial or Total Liquidation poor business IQ score of 20reactive manager 40% equityworking capital is negativeoperating expense to revenue over 90%excessive family living expensesvictims & “know-it-alls”36
Tim’s Triple Play cost control, right cost marketing and risk management asset, capital and human efficiencies37
2020 Winter Renewal entAgileOperatingExpenses/RevenueOperating Expenses¹Total Farm Revenue 85%75-85% 75%Term Debt/EBITDATotal Term Debt (non-operating)EBITDA² 6:13:1-6:1 3:1WorkingCapital/ExpensesCurrent Assets - Current Liabilities 10%10-33% 33%Coverage Ratio(Net Farm Income Interest Depreciation Total Non-FarmIncome – Income Tax ExpensesFamily Living Withdrawals) /Total Annual Principal & InterestPayments on Term Debts &Capital Leases 110%110-150% 150%Total Farm Expenses¹Operating Expenses Excluding Interest and Depreciation² EBITDA Net Farm Income Interest DepreciationCustomer3 YearAverage38
Top Performing CEO Producer business profit success formula: P O C L M² profit plan 60-30-10 people plan 40-20-40 cash & liquidity Queen capital & equity King profits & cash flow Kingdom earns & turns profitability head/heart interdependent: focus on fundamentals follow through burn the free fuel “A.R.E.” goal setting 80-16-4 network of people financial net worth & self worth39
40Business IQ: Management Factors
Business IQ: Management FactorsCritical Questions for Crucial ConversationsCustomer ChecklistGreen (3-4 points*)Yellow (2 points)Red (1 point)1.Knows cost of productionWrittenIn headNo idea2.Knows cost of production by enterpriseWrittenIn headNo idea3.Goals- business, family & personalWrittenIn headNo idea4.Record keeping systemAccrualSchedule F (one & done)No idea5.Projected cash flowWrittenIn headNo idea6.Financial sensitivity analysisWrittenIn headNo idea7.Understand financial ratios, break evensWrittenIn headNo idea8.Work with advisory team and lenderYesSometimesNever9.Marketing plan written and executedYesSometimesNever10.Risk management plan executedYesSometimesNever11.Modest lifestyle habits, family living budgetYesSometimesNon existent12.Written plan for improvement executed &strong people managementYesSometimesNon existent13.Transition plan/Business Owner planYesWorking on planNon existent/controversy14.Educational seminars/coursesYesSometimesNever a Points: Progressive Business may receive 4points for #2,6,7,8,14 Struggling Business attemptingturnaround may receive 4 points for#3,5,8,11,12ScoreOverall Analysis35-50Strong management rating & viability20-34Moderate risk & viability; will most likely show previous refinancing 20High risk & lack of long term viability41
Business IQ: Management FactorsCritical Questions for Crucial Conversations 1Progressive Business:We find Progressive Businesses do:#2 Know cost of production by enterprise: Know the cost of production by enterprise and are ableto readily explain which enterprise is the most profitable.#6 Financial sensitivity analysis: Know how changes in price, production, cost and/or interest ratesaffect the bottom line. Complete different scenarios in their cash flows to test this for theirbusiness/operation.#7 Understand financial ratios: A dashboard of financial ratios (5 to 7 ratios) that they do a 3 to 5year trend analysis on their business? Second, benchmark these ratios to other businesses like theIllinois farm record systems or FINBIN - University of Minnesota.#8 Work with an advisory team and lender: Establish an advisory team consisting of a lender, cropor livestock consultant, and possibly a financial planner, etc. If so, do they meet 2 to 4 times a year?#14 Educational seminars/courses: Attend or take five educational seminars or courses a year.One should be outside of the industry of agriculture.To obtain four extra points they must have evidence of accomplishments of 4 out of 5 of these (#2,#6, #7, #8 #14) to be considered a progressive business.42
Business IQ: Management FactorsCritical Questions for Crucial Conversations 2Struggling Business attempting turnaround:We find that if these Struggling Businesses have done the following:#3 Goals-business, family & personal: Written business, family and personal goals.#5 Projected cash flow: Completed a cash flow.#8 Work with an advisory team and lender: Exhibit willingness to be coached by an advisory teamand lender.#11 Modest lifestyle habits, family living budget: Take modest family withdrawals and have afamily living budget.#12 Written plan/business owner plan: Developed and executed a one-page written plan on howthey will improve cash flows, profits and what is the likelihood of the turnaround of business. If not,problems can continue.To obtain four extra points they must have evidence of accomplishments of these (#3, #5, #8, #11,#12) to be considered a struggling business heading for a successful turnaround.43
Business IQ: Management FactorsCritical Questions for Crucial ConversationsCustomer ChecklistGreen (3-4 points*)Yellow (2 points)Red (1 point)1.Knows cost of productionWrittenIn headNo idea2.Knows cost of production by enterpriseWrittenIn headNo idea3.Goals- business, family & personalWrittenIn headNo idea4.Record keeping systemAccrualSchedule F (one & done)No idea5.Projected cash flowWrittenIn headNo idea6.Financial sensitivity analysisWrittenIn headNo idea7.Understand financial ratios, break evensWrittenIn headNo idea8.Work with advisory team and lenderYesSometimesNever9.Marketing plan written and executedYesSometimesNever10.Risk management plan executedYesSometimesNever11.Modest lifestyle habits, family living budgetYesSometimesNon existent12.Written plan for improvement executed &strong people managementYesSometimesNon existent13.Transition plan/Business Owner planYesWorking on planNon existent/controversy14.Educational seminars/coursesYesSometimesNever a Points: Progressive Business may receive 4points for #2,6,7,8,14 Struggling Business attemptingturnaround may receive 4 points for#3,5,8,11,12ScoreOverall Analysis35-50Strong management rating & viability20-34Moderate risk & viability; will most likely show previous refinancing 20High risk & lack of long term viability44
Business IQ ExerciseAfter completing the Business IQ: Management FactorsScorecard, what are three areas/points in your businessthat you will continue and three areas/points forimprovement?Three areas/points to continue:Three areas/points to improve: 45
Road Warrior of Agriculture: www.cornandsoybeandigest.com. Ag Globe Trotter: www.northwestfcs.com. Dave's GPS & Dashboard Indicators: www.farmermac.com. . plant based and your entire diet is perfectly tailored to your lifestyle. Can you picture this? 19 Source: The Economist Magazine, December, 2018 &
