WIXLIB

TAKING C AREOF B USINESSDr. 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 8, 2019Road Warrior of Agriculture: www.cornandsoybeandigest.comAg Globe Trotter: www.northwestfcs.comDave’s GPS & Dashboard Indicators: www.farmermac.com

Why Some Businesses Are MoreProfitable Than Others These businesses are a “little” better at: productionmarketingcost controlasset and capital efficiency utilize the 5% Rule2

Median Net Farm Income3

Is the New Normal the OldNormal?Time PeriodApproximateNet Farm IncomeIn Constant DollarsEra Name2013-2017 35,000Agricultural Economic Reset1996-2001 50,000Asian Tigers Boost Commodity Demand2001-2005 54,000Pre Agricultural Super Cycle2007-2012 125,000Agricultural Commodity Super CycleSource: https://finbin.umn.edu/4

Net Farm Income, 20125

Net Farm Income, 20166

Net Farm Income, 20177

Economic WarmingHow quick to cash?Collateral MountainsBusinessNet IncomeSpringWorkingCapitalHills ountsReceivableRidgePrepaidPromiseCapital Infusionor axGulchAdapted From:Harlan Hill- HillFinancial EducationEarnedWealthInletCap Ex &Growth RunPostponedPrincipal &Interest/OperatingDelta25%*EBITDA- Earnings BeforeInterest, Taxes, Depreciation& Amortization8

The Burn Rate – Working CapitalAdversity vs. OpportunityDefensive “Adversity Oriented”Current Assets: 2,000,000Offensive “Opportunity Oriented”Current Assets: 2,000,000-Current Liabilities: 1,000,000-Current Liabilities: 1,000,000 Working Capital: 1,000,000 Working Capital: 1,000,000Projected Loss: 500,000Debt Service(Existing & New)Payments: 200,000Working Capital 2 YearsProjected LossWorking Capital 5 YearsTotal Debt Service PaymentsRed 1.0 Year VulnerableRed 2.5 Years VulnerableYellow 1.0-3.0 Years ResilientYellow 2.5-5.0 Years ResilientGreen 3.0 Years AgileGreen 5.0 Years Agile9

Burn Rate on Core EquityAdversity vs. Opportunity(Assume 500,000 Earnings Loss & 20% land value decline)Assets- tionRemainingPrincipalEquity ExcessReserves1. 6,000,000 4,800,000XX70%70% 4,200,000 3,360,000- 2,000,000 1,160,0002. Intermediate 3,000,000X60% 1,800,000- 800,000 1,000,0003. Current 1,650,000X80% 1,320,000- 860,000 460,000Long Term(20% Decline onLand) 2,200,000 2,200,000Burn Rate: Land & Long Term Equity Reserves Excess Reserves 2,000,000 4.0 YearsEarnings Loss¹ 500,00020% DeclineBurn Rate: Land & Long Term Equity Reserves Excess Reserves 1,160,000 2.32 YearsEarnings Loss¹ 500,000¹ Assume Earnings Loss of 500,000Red 4.0 Years VulnerableYellow 4.0-7.0 Years ResilientGreen 7.0 Years Agile10

Business IQ: Management FactorsProgressive BusinessesCustomer 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.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 viability

Financial Philosophy &Perspectives cash is Queen – chess boardequity is Kingprofits and cash flow are the Kingdomvolatility is either friend or foebusiness IQ will be the difference maker12

Critical Financial Performance Indexfor Debt & t/Asset RatioTotal Farm LiabilitiesTotal Farm Assets 70%40-70% 40%Term Debt/EBITDATotal Term Debt (non-operating)EBITDA¹ 6:13:1-6:1 3:1WorkingCapital/ExpensesCurrent Assets - Current Liabilities 10%10-33% 33%OperatingExpenses/RevenueOperating Expenses²Total Farm Revenue 85%75-85% 75%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 Expenses¹ EBITDA Net Farm Income Interest Depreciation² Operating Expenses Excluding Interest and DepreciationCustomer3 YearAverage8

Habits of Successful Businesses 1 goal focused & balanced business family personal core values focused on five to seven key words that means success invest in productive assets land machinery & equipment livestock people modest family living withdrawals from the business develop and monitor income statements and cash flows monthly quarterly14

Habits of Successful Businesses 2 understand macro economics- how it creates opportunities and challengesand complete scenario analysis for: production price cost interest rates follow the management principle of better before bigger 5% rule 60-30-10 rule of profitability and positive economic cycles interdependent vs. independent – know the value of people best crop you will ever raise children grandchildren aspiring agriculturalists15

Staying Positive in the DownCycle network of people self worth net wortholder – mentor and wisdomeducation and developmenttake a look at yourself exercise hear the silence giving back sweat the small stuff position for small accomplishments16

Four “P’s” of Success Purpose: working toward your passion Picture: mapping where you want to go Planning: written business plan & mentalimage detailing your strategy and tactics Partnering: the people you will engage andalign with to accomplish the plan17

Questions18

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.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 executedYesSometimesNon 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 viability19

Part 220

AGRICULTURAL E CONOMICM EGA T RENDSDr. 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 8, 2019Road Warrior of Agriculture: www.cornandsoybeandigest.comAg Globe Trotter: www.northwestfcs.comDave’s GPS & Dashboard Indicators: www.farmermac.com

Radar Screen 2019-2020:“Low Beams” international trade USMCA China’s Belt & Road Initiative other slowing of the global economypost mid term electionsbaby boomer, farm land values, “the great bridge”great wall of proteinU.S. economy all time record!interest rates/dollardebt, debt, and debt- Achilles’ heel22

U.S. Farm Real Estate ValuesSource: Dr. Steve Isaacs, University of Kentucky

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’s24

Land Value Resilience local or regional vs. state or nationalmarginal land valuescrop insurancehedge fundslow interest ratescycle of refinancingBaby Boomer farmer25

Factors Contributing to DramaticDiscount in Land Values 100 to 200 basis point increase in long terminterest rates more conservative refinance cycle outside investors seeking alternativeinvestments supply and demand in a given area strong value of dollar, higher rates, less exportpotential crash of the U.S. or global economy26

State of U.S. Economy 110-plus months 106 & 120 months urban and coastal economies and the fly overstates central bank driven- U.S. and abroad wealth effect consumer investing consumer spendingIMPACT: killers of economic expansions27

Federal Reserve’sInterest Rate Barometer Three increases in 2019IndicatorCurrent Estimated“Flag” LevelsUnemploymentBelow 5.0% orAbove 6.0%GDP GrowthAbove 3.0% orBelow 2.0%InflationAbove 2.5% orBelow 1.0%Consumer SentimentAbove 90 orBelow 80 trends matter stock market/real estate wealth effect copper prices28

Mega Trends 2020-2030:“High Beams”29

Mega Trends 2020-2030:Dietary Trends Millennials, Gen Z & Baby Boomerscultured meat & non-dairyvegans- U.S. & abroadenvironmental footprint95% of success is alignment of: resources talents markets experiences & personalization vs. commoditization“We have not seen anything yet.”30

Mega Trends 2020-2030:Tech Transformation roboticsdata in the food chainretail & wholesale disruptionblockchain technology“Market disruptors.”31

Mega Trends 2020-2030:Non-Government Organizations Smithfield lawsuitsMonsanto lawsuitsothersbiosecurityopen pensantibiotic freeanimal welfare“NGOs more disruptive thangovernment regulations.”32

Mega Trends 2020-2030:Technology/Consumer bio engineering information convergence production consumers/food industry/producers great wall of protein & “impossible burger sliders” skill base analyze data critical thinking communication first replaces labor higher level of talent systems/replicate – use of information data too connected“Think beer.”33

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.”34

Mega Trends 2018-2030: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 Missouri35

Mega Trends 2020-2030:Oil & Energy Economics 911 tragedyU.S. is globe’s major energy producerdrive towards efficiencysolar, wind, and electric2040 Germany & Franceelectric vehicles2025- one fourth of cars in China will be electricCentral Africa will become the new Saudi Arabia“80% of ag expenses areenergy related.”36