Mega Forces of Agriculture & the CEO Producer


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The Mega Forces of Agriculture and the CEO Producer, presented by Dr. David Kohl.

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Mega Forces of Agriculture & the CEO Producer

  1. 1. Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-2094 (Alicia Morris) (540) 719-0752 (Angela Meadows) e-mail: Weekly Website Columns : Ag Globe Trotter: Road Warrior of Agriculture: Mega Forces of Agriculture & the CEO Producer
  2. 2. Domestic & Global Economy State of State <ul><li>inflection point </li></ul><ul><li>government </li></ul><ul><ul><li>taxes </li></ul></ul><ul><ul><li>cap & trade </li></ul></ul><ul><ul><li>health care </li></ul></ul><ul><ul><li>other </li></ul></ul><ul><li>Asia/China </li></ul><ul><li>standard of living (household income) </li></ul><ul><ul><li>USA $49,000 in 2000 & $47,000 in 2010 </li></ul></ul><ul><ul><li>China $1,090 in 2000 & $3,500 in 2010 </li></ul></ul>
  3. 3. Contrasting Economies stockpiling food & fuel QE2 Response inflation deflation Issue $3,500 $47,000 Household Income 35% 72% Consumer Spending/GDP 33% 92% Debt/GDP 9.6% 2.0% Growth Rate 4.4% 0.6% Inflation #2 #1 Ranking China (Avis) USA (Hertz)
  4. 4. State of State - Agricultural Economy <ul><li>low interest rates </li></ul><ul><li>volatility </li></ul><ul><li>land values “bullish” </li></ul><ul><li>liquidity/equity decline </li></ul><ul><li>weather </li></ul><ul><li>regulation/consumers </li></ul><ul><li>low value of the dollar </li></ul><ul><li>consolidation </li></ul><ul><li>ethanol </li></ul><ul><li>input/cost </li></ul><ul><li>Asia/China export </li></ul><ul><li>south/coastal/other </li></ul><ul><li>upper midwest/Canada </li></ul><ul><li>livestock/other </li></ul><ul><li>crop & row crop </li></ul>Headwinds Tailwinds
  5. 5. World Growth Source: U.S. 3.2%Q3 Brazil 8.8%Q2 GDP Growth % Change from Year Ago 2010 Latest Quarter Figures December 9, 2010 Australia 2.7%Q3 Mexico 5.3%Q3 China 9.6%Q3 Japan 5.3%Q3 Indonesia 5.8%Q3 Canada 3.4%Q2 France 1.8 %Q3 Euro zone 1.9%Q3 Britain 2.8%Q3 South Africa 2.6%Q3 India 8.9%Q3 South Korea 4.4%Q3 Germany 3.9%Q3 Iceland -2.1%Q3 Russian Fed. 2.7%Q3
  6. 6. Global Economic GDP Growth Benchmarks *Brazil, Russia, India, and China © 2010 by Dr. David Kohl & Dr. Ed Seifried Location Green Yellow Red USA >3% 0-3% Negative Europe >3% 0-3% Negative Japan >3% 0-3% Negative BRIC Nations* 8-10% 4-7% <3%
  7. 7. Global Economic GDP Growth Assessment *Brazil, Russia, India, and China Fill in current status and check green , yellow or red for each region. © 2010 by Dr. David Kohl & Dr. Ed Seifried Location Current Green Yellow Red USA Europe Japan BRIC Nations*
  8. 8. Oil -“Black Gold” <ul><li>Six to eight recessions in past fifty years due to oil </li></ul><ul><li>74% of price of oil – global market value </li></ul><ul><li>70% oil produced military/politically sensitive areas </li></ul><ul><li>60% of fertilizer military/politically sensitive areas </li></ul><ul><li>consumers lock up at $3.00 to $3.50 per gallon </li></ul><ul><li>consumers shut down at $4.00 per gallon </li></ul>
  9. 9. Farm & Ranch Land/Real Estate Clock Increasing Declining Rapid Slow Positive Slow Increase Positive Rapid Increase Negative Slow Decline Negative Rapid Decline What’s happening in your area? <ul><li>High quality land & row crop </li></ul><ul><li>Mineral, oil, water influences </li></ul><ul><li>Competitive agriculture & aggressive investors </li></ul><ul><li>Ag industries in down cycle </li></ul><ul><li>Recreational farm and ranch land </li></ul><ul><li>Urban fringe after bubbles </li></ul><ul><li>Lower quality land </li></ul><ul><li>Ag industries are not competitive </li></ul><ul><li>Older buyers </li></ul><ul><li>Grains & row crops </li></ul><ul><li>Urban fringe/ satellite cities </li></ul>Stable
  10. 10. Producers Critical Mistakes When Buying Property <ul><li>love property </li></ul><ul><li>land and liquidity </li></ul><ul><li>money is cheap, it is time to borrow </li></ul><ul><li>earns and turns </li></ul><ul><li>financial leverage </li></ul><ul><li>cash is land locked </li></ul><ul><li>deeper pocket syndrome </li></ul>
  11. 11. The Three Bears & “Big Foot” Balance Sheet <ul><li>lower commodity prices </li></ul><ul><ul><li>sustain input costs </li></ul></ul><ul><li>higher taxation and regulatory reform </li></ul><ul><li>increase short term / long term interest rates </li></ul><ul><li>trade sanctions- global markets- currency disruptions </li></ul>Hibernating Awakening Hibernating Awakening
  12. 12. Producer Dashboard Economic Indicator Benchmarks ¹Ten indicators make up the LEI - measures % that are increasing; ²Includes food & energy; ³Consumer’s perspective; 4 3-Month Treasury Bill rate to 10-Year Bond rate Indicator Green Yellow Red The Conference Board Leading Economic Index ® - LEI Increasing Flat to Decline Decline 0.3% for 3 consecutive months AND >1% over the period LEI Diffusion ¹ >60% 40%-60% <40% Purchasing Manager Index - PMI >50 41.7-50 <41.7 Housing Starts (millions) >1.5 1.0-1.5 <1.0 Factory Capacity Utilization >80% 70%-80% <70% Unemployment Rate 5%-6% 6%-8% >8% or <5% Core Inflation 0%-2% 3%-4% >4% or <0% Headline Inflation ² 0%-3% 3%-5% >5% or <0% Oil Price ³ ($/barrel) <$50 $50-$100 >$100 Yield Curve 4 Steep Flattening Inverted
  13. 13. Producer Dashboard Economic Indicator Assessment Fill in current status and check green , yellow or red for each indicator. © 2010 by Dr. David Kohl & Dr. Ed Seifried Indicator Current Green Yellow Red Leading Economic Index - LEI LEI Diffusion Index Purchasing Manager Index - PMI Housing Starts (millions) Factory Capacity Utilization Unemployment Rate Core Inflation Headline Inflation Oil Price ($/barrel) Yield Curve
  14. 14. Ten Characteristics of CEO Producer <ul><li>Profitability- (60-30-10) </li></ul><ul><li>capital asset structure- ( P = O + C + L + M 2) </li></ul><ul><li>debt structure- (“relationship lender”) </li></ul><ul><li>size, growth- (“If it grows too fast, then it’s a weed.”) </li></ul><ul><li>risk management (revenue, cost, interest rates) </li></ul><ul><li>earned net worth- (“Better is better before bigger is better.”) </li></ul><ul><li>managerial skill- capacity vs. skill set- (“40-20-40 people rule”) </li></ul><ul><li>financial numbers, improved business performance- (“earns & turns”) </li></ul><ul><li>monitoring and audit- (“efficient but effective”) </li></ul><ul><li>other </li></ul>Credit: Dr. Mike Boehlje, Department of Agricultural Economics, Purdue University
  15. 15. Financial & Management Decision Priority Guide For Land Acquisition, Expansion, or Major Capital Expenditures 1 If High in most metrics, and 40 to 50 in the sixth “C,” major changes may be considered. 2 If most metrics fall in the Medium column, and 35 to 39 in the sixth “C,” major changes should be delayed until improvement occurs. 3 If most metrics fall into the Low column, and sixth “C” is below 34, implement a strategy to improve both finance and management systems before making major changes. Metric High 1 Medium 2 Low 3 Your Farm/Ranch Percent Equity >60% 40 to 60% <40% Working Capital/Revenue >33% 10 to 33% <10% Return on Assets >10% 4 to 10% <4% Balance Sheet Earned Net Worth/Net Income >25% 10 to 25% <10% Operating Expense/Revenue Ratio excluding interest & depreciation <65% 65 to 80% >80% Risk Management Plan All components Some None Discipline and Execution (% decision making-% interacting-% doing) 60-30-10 33-33-33 10-30-60
  16. 16. Evaluating the Sixth “C” Please rate each area from 1 to 5. 1=Poor and 5=Excellent Total Score Assessment 40 – 50: Green Light : Above average on most attributes 35 – 39: Yellow Light : Several areas need focus to be successful 30 – 34: Orange Light : Focus on improving below average attributes <30: Red Light : Many areas need improvement Rating Area 10. Balance business, family, and personal issues effectively 9. Communicates the vision and goals clearly and prioritizes focus on day-to-day decisions with global awareness 8. Conveys an organized team culture with synergy that evolves given business and economic conditions 7. Accepts challenges and problems willingly; seeks solutions and execution of strategy 6. Uses a systems approach to total management, I.e. production, marketing, finance, transition, and exit plans 5. Utilizes a strong network of alliances and advisors 4. Has handled adversity successfully in the past 3. Utilizes a written business plan with actions, execution, and metrics 2. Attracts and retains quality people inside and outside the business 1. Is experienced in disciplined management of large amounts of debt, equity, liquidity, and /or profits
  17. 17. Five Star Philosophy <ul><li>HUT principle </li></ul><ul><li>“ If it grows too fast, then it’s a weed.” </li></ul><ul><li>undisciplined pursuit of more </li></ul><ul><li>40-20-40 Rule of people business culture </li></ul><ul><li>“ Big enough to serve, but local enough to care.” </li></ul>