11/14/2014

Commodity Super Cycle Burnout

Economic Outlook for 2015 & Beyond Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Virginia Tech, Blacksburg, VA

• • • • •

slowing of emerging nations‟ economies ethanol & biofuel mandate softening central bank stimulus inefficient infrastructure in emerging nations weather – northern & southern hemisphere

(540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | [email protected]

December 2014

Macro Clinic Video Blog: http://agstar.com/edge/ Road Warrior of Agriculture: www.cornandsoybeandigest.com Ag Globe Trotter: www.northwestfcs.com Dave‟s GPS & Dashboard Indicators: www.farmermac.com

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11/14/2014

Grain Industry “Margin Flipping” • • • • • •

U.S. Value of Production - Crops

easy money has been made top flight managers still earn profit high overhead/fixed cost structure game of chicken with land rents duration of cycle four strategic factors

Source: http://www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=35021#.VCsUJhZi2KI

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11/14/2014

Livestock Industry “Margin Flipping”

Managing Thru the Cycles Cycle Duration

Credit Issues

One Year Cycle

Repayment Ability

Two to Three Year Cycle

Repayment Ability/Liquidity

Three to Five Year Cycle

Repayment Ability/Liquidity/Equity

• • • • • • •

strategic resource changes over past decade 50 to 65 year olds will not return price, early cycle margins cost, late cycle margins young people migration mistakes made in the best of times duration of the cycle

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11/14/2014

U.S. Value of Production - Livestock

Source: http://www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=35019#.VCsUTRZi2KI

Global Economy Snapshot Emerging Nations, BRICS, & KIM-T Country

GDP Rounded to Trillions

GDP Growth YOY

Interest Rate

Inflation Rate

Unemployment Rate

Brazil

2.2

-0.9%

11.0%

6.75%

4.9%

Russia

2.1

0.8%

8.0%

8.00%

4.9%

India

1.9

5.7%

8.0%

6.46%

5.2%

China

9.2

7.3%

6.0%

1.60%

4.1%

South Africa

0.4

1.0%

5.75%

5.90%

25.5%

South Korea

1.3

3.2%

2.0%

1.10%

3.5%

Indonesia

0.9

5.1%

7.5%

4.53%

5.7%

Mexico

1.3

1.6%

3.0%

4.22%

5.1%

Turkey

0.8

2.1%

8.25%

8.86%

9.8%

Total/Avg.

20.1

2.9%

6.61%

5.27%

7.63%

Source: www.tradingeconomics.com Date: 10/28/14

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11/14/2014

Global Economy Update Country

Code

Europe

Red

China

Green /Yellow

Russia

Red

Middle East

Red

Argentina

Red

Brazil

Red

Portugal

Red

Rick Ranking: • Geopolitical • Trade tensions • Natural resource • Economic reform

U.S. Economy Update Indicator

Code

Employment • Numbers • Wages • Participation

Yellow/Red

Factory Utilization

Green

Housing

Yellow

Oil/Interest Rates

Yellow

LEI & PMI

Green

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11/14/2014

Federal Reserve’s Interest Rate Barometer Indicator

Possible Change

Definite Change

Current Status

Unemployment

7.0%

6.5%

5.9%

GDP Growth

2.0%

2.5%

4.6%

Core Inflation

2.0%

2.5%

1.7%

Headline Inflation

4.0%

5.0%

1.7%

Watch List: • Dr. Yellen • Rail traffic • Overland trucking • FOMC voting • Shoe shiners • Baltic Sea index • FOMC minutes • Copper prices

2012 Farm Real Estate Value By State Dollars per Acre and Percent Change from 2011

Source: http://www.nass.usda.gov/Charts_and_Maps/graphics/farm_value_map.pdf

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11/14/2014

2013 Farm Real Estate Value By State Dollars per Acre and Percent Change from 2012

2014 Farm Real Estate Value By State Dollars per Acre and Percent Change from 2013

Source: http://www.nass.usda.gov/Charts_and_Maps/graphics/farm_value_map.pdf Source: http://www.nass.usda.gov/Charts_and_Maps/graphics/farm_value_map.pdf

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11/14/2014

Producer Views from the Road

Taking the Economic Punch

How measurements are used in decision making: View

Everyone has a plan „till they get punched in the mouth. -- Mike Tyson Percentage

• Obsessive about measures; used in planning & decision making

28%

• Measure many things, but do not use to improve farm or in decision making

54%

• Track just enough to get by, mainly for taxes & crop yields

18%

Total

100%

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11/14/2014

Taking the Economic Punch • • • • • • • • • •

Has the producer been profitable? economic cycle vs. management demonstrated ability to build working capital modest living expenses & non farm capital expenses burn rate of working capital 2.5 years ability to shed marginal assets- land, livestock, machinery, human consolidate vs. split lines of credit shed “victims” & “know it all‟s” HUT principle communications

Producers That Will Thrive • • • • • • • • •

strong, productive asset base records that talk to the business modest living expenses- $60,000 difference rule modest non-farm capital expenses working capital- 33% of revenue burn rate of working capital above 3.5 years know cost of production via enterprise strategy/alternatives history of handling adversity

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11/14/2014

Burn Rate – Working Capital Current Assets Current Liabilities Net Working Capital Total Revenue Net Income Loss

$1,000,000 $ 500,000 $ 500,000 $2,000,000 $200,000

Net working capital $500,000 = 2.5 years burn rate Net Income Loss $200,000

Ten Questions of “True Liquidity” (1) • • • • •

concentration of assets- current hollow grain bin- verify & confirm forward pricing- marketing/risk, contract, quality attitude on risk accounts receivable • • •

•

concentration collectable timing

crops growing in field & livestock in pens • • •

insurance/level timing quality

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11/14/2014

Dashboard Monitor

Ten Questions of “True Liquidity” (2) • prepaid expenses • • •

•

accounts payable/line of credit • • •

•

less than inventory timing 25% revenue

cash • •

•

cash conversion cycle how secure? line of credit

amount debt service amount compared to major expenses

deferred tax consequences

2010 $1,000 $0 $1,000 $800 $200 $100 $300 $100 $200 $100 $100

2011 $1,200 $0 $1,200 $900 $300 $200 $500 $100 $400 $200 $200

2012 $1,400 $0 $1,400 $1,000 $400 $200 $600 $150 $450 $150 $300

2013 $1,200 $0 $1,200 $1,000 $200 $150 $350 $150 $200 $100 $100

2014 $1,100 $0 $1,100 $1,000 $100 $100 $200 $100 $100 $100 $0

2015 $900 $0 $900 $1,000 -$100 $100 $0 $100 -$100 $100 -$200

Coverage Ratio

200%

200%

300%

200%

100%

-100%

Working Capital Revenue

$200 $1,000

$300 $1,200

$400 $1,400

$450 $1,200

$450 $1,100

$250 $900

WC/Revenue Ratio

20%

25%

29%

38%

41%

28%

Working Capital Debt Service or (Debt + Loss)

$200 $100

$300 $200

$400 $150

$450 $100

$450 $100

$250 $200

2.0

1.5

2.7

4.5

4.5

1.3

Business Revenue (thousands) + Non-Business Revenue Subtotal - Business Expense = Net Income + Depreciation & Interest Paid Subtotal - Family Living & Income Taxes Repayment Capacity -Debt Service Margin

Working Capital Burn Rate (Years)

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11/14/2014

Rosen‟s Diversified, Inc.

Five Step Process to Positive Margins 1. 2. 3. 4. 5.

↑ business revenue ↑ non-business revenue ↓ expenses ↓ family living & taxes debt service restructure

2015 Business Revenue (thousands) + Non-Business Revenue Subtotal - Business Expense = Net Income + Deprec. & Int. Paid Subtotal - Family Living & Income Taxes Repayment Capacity -Debt Service

Big Data, Small Data & Useful Information Starting Five Dashboards

$900 (1) $0 (2) $900 $1,000 (3) -$100

Balance Sheet

Income Statement

Cash Flow

Assets

3M

Business Revenue 2M Cash Income

Liabilities

1M

Variable Expenses 1M

Non Farm Income

Net Worth

2M

Fixed Expenses

Business/Living Expenses

2.1M 1T

$100 $0

6T

$100 (4) -$100

Current Assets

5T

Net Income

Current Liabilities

2T

Income Margin

4T

Debt Service

1.6T

4T

$100 (5)

Margin

-$200

Coverage Ratio

-100%

20% Net Cash Flow

2T

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11/14/2014

Dashboard Key Financial Ratios

Dr. Dave’s Cornerstones of Business Sustainability Thru the Cycles Measure of: Ratio:

Examples: Before & After

Ratio

Percent

Capital Efficiency

Asset Turnover = Revenue Assets

$1,869,108/$1,974,955=94.6% Before $2,432,061/$5,042,284= 48% After

Percent Equity

66%

Working Capital/Revenue

15%

Operating Efficiency

Operating Profit Revenue

$220,747/$1,869,108= 11.8% Before $447,633/$2,432,061= 18.4% After

Profit Margin

20%

Total Debt or Term Debt EBITDA*

$604,146/$437,684= 138% Before $3,286,129/$636,417= 516% After

ROA

13%

Debt Repayment Efficiency

Coverage

150%

Liquidity Efficiency

Working Capital Revenue

$526,909/$1,869,108= 28.2% Before $802,916/$2,432,061= 33% After

Total Debt/EBITDA

1.25 to 1

Asset Turnover x Operating Profit Margin = Return on Assets (ROA)

11.8% x 94.6% = 11.2% ROA Before 18.4% x 48% = 8.8% ROA After

*Earnings before interest, taxes, depreciation and amortization

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11/14/2014

Top Five Questions • What are the similarities & differences between now and the 1980‟s? • How often should producers and lenders communicate? • What are the biggest trends in agriculture? • What are the best management practices in agriculture? • What is the future for young people in agriculture?

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