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Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-2094 (Alicia Morris) e-mail: [email protected] Weekly Website Columns: Ag Globe Trotter: www.farm-credit.com Road Warrior of Agriculture: www.cornandsoybeandigest.com Views from the Road 150 bushel/acre corn grown with 3” of rainfall research & development at one major input supplier increased from 4% revenue to 10% revenue corn yields will double in the next 20 years soybeans will increase by 17% in yield in the next two years Rabobank sponsors 40 youth involved in production ag land values of $10,000/acre by 2010 in Iowa one-half of new ag lenders in schools are from outside of agriculture Five Positive Trends in Farm Economics volatility will create opportunity consumers and technology will drive business models ROA of top producers is above 10 percent evaluation of the new manager good managers manage the manageable manage around the unmanageable Alternative Energy wide range in oil prices $40 swing breakeven price moves toward $60/barrell buffalo jump after 2008-2009! demand side of equation technology & competition Emphasis of Next Farm Bill conservation & the environment rural & energy homeland security & nutrition less dollar support WTO Global Partners Proposed Asian Group NAFTA Members: Japan, China, India, Australia, South Korea, New Zealand & the 10-member ASEAN group: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand, the Philippines & Vietnam Population: 3.1 billion Total GDP: almost $10 trillion (US) Members: Canada, United States, Mexico Population: 430.5 million Total GDP: $12.9 trillion European Union Members: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, the Netherlands, United Kingdom Population: 460.1 million Total GDP: $11.7 trillion The Economy & Interest Rates short-term rates core inflation housing market labor issues long-term rates federal debt value of dollar lead economic indicators Widening of Performance 2400 Farms & Ranches Financial Variable Low Medium High Net Farm Income -$19,000 $61,000 $300,000+ ROA -2.7% 9.1% 14.4% Operating Margin -7.6% 17.36% 28.3% Asset Turnover & Utilization 35% 44% 51% Five Critical Elements for Smaller Farms expenses/revenue below 70% percent equity above 60% low maintenance family living expense excluding depreciation & interest paid under $40,000 or off-farm income to compensate synergy & balance among business, family & personal goals focus or diversification strategy depending on skill set “Better is better before bigger is better.” “Get efficient before getting bigger.” Five Critical Elements for Growth-Oriented Farms P = O + C + L + M2 working capital management 85% managing & 15% doing rule 96-4-50 Rule three supervisor rule business plan and technology adoption 20-25% of expenses/revenue twice as profitable and cash flow transition plan management professional team of advisors “Checks can’t be written out of profits.” “25% of businesses filing bankruptcy just had their most profitable year.” Nuts & Bolts of Business Models P = O + C + L + M2 earns and turns working capital for extremes enterprise analysis “202” Capital Turnover gross revenue/total assets ideal capital turnover varies by enterprise 0 – negative 1 – 1 to 4% 2 – 5 to 9% 3 – 10-14% 4 – 15 to 19% 5 – 20 to 24% 6 – 25 to 29% 7 – 30 to 34% 8 – 35 to 40% 9 – 41 to 50% 10 – over 50% Red (0-4) Yellow (5-8) Under 20% 20 to 40% Green (9-10) Over 40% Margin Management net profit/gross revenue net profit margin times asset turnover equals ROA 0 – negative 1 – 1 to 2% 2 – 3 to 4% 3 – 5 to 6% 4 – 7 to 8% 5 – 9 to 10% 6 – 11 to 12% 7 – 13 to 14% 8 – 15 to 16% 9 – 17 to 19% 10 – over 19% Red (0-4) Yellow (5-8) Under 9% 9 to 16% Green (9-10) Over 16% $ 50,000 (net income) + 20,000 (interest paid) 70,000 - 40,000 (family withdrawal) $ 30,000 (operating profit margin) $30,000 $450,000 revenue = 6.7% Liquidity net working capital / total expenses 0 – negative 1 – 1% 2 – 2 to 3% 3 – 4 to 6% 4 – 7 to 9% 5 – 10% 6 – 11 to 14% 7 – 15 to 20% 8 – 21 to 25% 9 – 26 to 50% 10 – over 50% Red (0-4) Yellow (5-8) Under 10% 10 to 25% Green (9-10) Over 25% Current Assets minus Current Liabilities divided by Total Farm Expenses $200,000 - $100,000 = $100,000 $100,000 / $400,000 = 25% Positioning for Flexibility Short Run business planning with strategy & execution working capital- 20% of expenses debt to asset ratio < 40% variance analysis on budgets capital reserve account unforeseen event opportunity Positioning for Flexibility Long Run invest 10% profit outside of business 50% rule long term plan for next generation the clone – 96- 4- 50 rule insurances & risk management programs