Transcript No Slide Title

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
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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
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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
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Alternative Energy
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wide range in oil prices
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$40 swing
breakeven price moves toward
$60/barrell
buffalo jump after 2008-2009!
demand side of equation
technology & competition
Emphasis of Next Farm Bill
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conservation & the environment
rural & energy
homeland security & nutrition
less dollar support
WTO
Global Partners
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Proposed Asian Group
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NAFTA
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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
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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
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short-term rates
core inflation
 housing market
 labor issues
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long-term rates
federal debt
 value of dollar
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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
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expenses/revenue below 70%
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percent equity above 60%
low maintenance family living
expense
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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
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P = O + C + L + M2
working capital management
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85% managing & 15% doing rule
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96-4-50 Rule
three supervisor rule
business plan and technology
adoption
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20-25% of expenses/revenue
twice as profitable and cash flow
transition plan management
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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
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P = O + C + L + M2
earns and turns
working capital for extremes
enterprise analysis “202”
Capital Turnover
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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%
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Red (0-4)
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Yellow (5-8)
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Under 20%
20 to 40%
Green (9-10)
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Over 40%
Margin Management
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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%
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Red (0-4)
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Yellow (5-8)
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Under 9%
9 to 16%
Green (9-10)
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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
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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%
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Red (0-4)
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Yellow (5-8)
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Under 10%
10 to 25%
Green (9-10)
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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
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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
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Positioning for Flexibility
Long Run
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invest 10% profit outside of
business
50% rule
long term plan for next generation
the clone – 96- 4- 50 rule
insurances & risk management
programs