Ames, IA 3/18/19. (540) (Alicia Morris) (540) (Angela Meadows)

Transcription

1 AGRICULTURE TODAY: IT IS WHAT IT IS WHAT SHOULD WE DO ABOUT IT? Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Member of Academic Hall of Fame, College of Agriculture & Life Sciences Virginia Tech, Blacksburg, VA (540) (Alicia Morris) (540) (Angela Meadows) Macro Clinic Video Blog: Road Warrior of Agriculture: March 18, 2019 Ag Globe Trotter: Dave s GPS & Dashboard Indicators: Views from the Road agriculture is in the 7 th year of economic reset low margins, high volatility manage & manage around strategy Business IQ will be a requirement 2 1

2 Three Buckets of Ag Lending 40% 40% Business Development Strategic Selective Growth YBS High business IQ Strong working capital/equity Proactive manager 20% Refinance/burn of equity Workout Demarket Partial or Total Liquidation Refinance Restructure Pre SAM Passive/reactive manager High production Low business IQ 3 Banker Perspectives many institutions, more resources for stressed credit regulators get more conservative when measuring ag profits direction of land values lease holders lenders concerned about third counter party risk emotional stress for producers and for lenders as well 4 2

3 Producer Cost Concerns interest rate increase impacting cost of production family living expenses leveling off- too many generations of people living out of the business off farm employment and health benefits working capital- now into equity bottom third of accounts need accrual adjustments- how quick are they to cash? 5 Economic Radar Screen international trade USMCA China s Belt & Road Initiative synchronized global economic slowdown China- slowest growth rate in 28 years Japan- negative growth rate Germany negative growth rate Central Bank s stimulus in China high debt levels in urban real estate in China political uncertainty Brazil Venezuela Mexico Argentina Germany, Britain & Euro Sector U.S. 6 3

4 North America s Economic Power Block 28% of the global economy s GDP energy & oil U.S. #1 Canada #4 Mexico # million people 47% of Mexico s population is under 25 ag trading partners: Canada #1 Mexico #3 7 Rising of Asia ROW* 28% U.S. 23% ROW* 29% U.S. 21% Japan 7% Africa 3% Western Europe 31% China 2% India 1% Japan 12% Africa 3% Western Europe 22% India 4% China 14% * ROW- Rest of World Source: Global Insights, August

5 Oil & Energy Economics 911 tragedy U.S. is globe s major energy producer drive towards efficiency solar, wind, and electric 2040 Germany & France electric vehicles one fourth of cars in China will be electric Central Africa will become the new Saudi Arabia IMPACT: 80% of ag expenses are energy related 9 Farm Real Estate Perspectives farm real estate appreciated or stayed level 79% of years from since WWII (1941) farm real estate appreciated or stayed level 88% of the years 1910-WWII (1940) farm real estate appreciated 57% of the years farm real estate was flat or declined for 13 years from farm real estate declined for four years in the 1980 s 10 5

6 Drivers of Change on Land Values interest rates investor funds refinancing cycle baby boomer farmer relatives who inherit land supply and demand of commodities crop insurance 11 State of U.S. Economy 110-plus months 106 & 120 months urban and coastal economies and the fly over states central bank driven- U.S. and abroad wealth effect consumer investing consumer spending IMPACT: killers of economic expansions 12 6

7 By Mid-June, Longest Economic Expansion in the U.S. Longest economic expansions in modern U.S. history (As of February 2019) 1991 to months 2009 to present 116* 1961 to to to to Source: NBER, Economic Cycle Research Institute (Note: current expansion still in progress) 13 Top Five Economic Indicators Indicator Growth Neutral Recession LEI/Diffusion Index Positive Flat/Decline Decline 0.3% for 3 consecutive months AND >1% overall Consumer Sentiment > <80 Housing Starts 1.5 Million Million <1.0 Million PMI > <41.7 Stock Market 10% increase Flat >30% decrease 14 7

8 Yield Curves and Recessions Source: Federal Reserve 15 Federal Reserve s Interest Rate Barometer two rate increases in 2019 one possible rate decline in 2019 Indicator Current Estimated Flag Levels Unemployment Below 5.0% or Above 6.0% GDP Growth Above 3.0% or Below 2.0% Inflation Above 2.5% or Below 1.0% Consumer Sentiment Above 90 or Below 80 trends matter stock market/real estate wealth effect copper prices 16 8

9 Mega Trends of Agriculture High Beams consumers of the future dietary trends NGO s technology & production big data blockchain production increases- corn & soybeans 17 Mega Trends : Dietary Trends Millennials, Gen Z & Baby Boomers cultured meat & non-dairy vegans- U.S. & abroad environmental footprint 95% of success is alignment of: resources talents markets experiences & personalization vs. commoditization We have not seen anything yet. 18 9

10 Mega Trends : Tech Transformation robotics data in the food chain retail & wholesale disruption blockchain technology Market disruptors. 19 Mega Trends : Non-Government Organizations Smithfield lawsuits Monsanto lawsuits others biosecurity open pens antibiotic free animal welfare NGOs more disruptive than government regulations

11 Mega Trends: Technology & Production Metric Tons Increase Since til 2018 Country Corn (Percent Change) U.S. 21% 55% China 48% 1.1% Brazil 85% 108% Argentina 174% 73% Canada 36% 125% Europe -9% Paraguay 168% Source: Kirksville, MO presentation - University of Missouri Soybeans (Percent Change) 21 Mega Trends : 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 and 25 minutes. Source: Wall Street Journal on May 17, Silence is golden

12 Mega Trends : Old School Generation Vs. New School Generation Old School Generation New School Generation Control Structure Manage Mentor Collaboration Private Time Career Path Projects Tell How to Do Problem Solvers 8-5 Productivity & Flexibility Course Bit Size Job Description Create Job Description Task Internships Training Training & Development Life Skills Old school vs. new school. 23 Is the New Normal the Old Normal? Time Period Approximate Era Name Net Farm Income In Constant Dollars $35,000 Agricultural Economic Reset $50,000 Asian Tigers Boost Commodity Demand $54,000 Pre Agricultural Super Cycle $125,000 Agricultural Commodity Super Cycle Source:

13 Median Net Farm Income 25 Net Farm Income,

14 Net Farm Income, Net Farm Income,

15 Why Some Businesses Are More Profitable Than Others These businesses are a little better at: production marketing cost control asset and capital efficiency utilize the 5% Rule 29 Business IQ: Management Factors Critical Questions for Crucial Conversations Customer Checklist Green (3-4 points*) Yellow (2 points) Red (1 point) 1. Knows cost of production Written In head No idea 2. Knows cost of production by enterprise Written In head No idea 3. Goals- business, family & personal Written In head No idea 4. Record keeping system Accrual Schedule F (one & done) No idea 5. Projected cash flow Written In head No idea 6. Sensitivity analysis Written In head No idea 7. Understand financial ratios, break evens Written In head No idea 8. Work with advisory team and lender Yes Sometimes Never 9. Marketing plan written and executed Yes Sometimes Never 10. Risk management plan executed Yes Sometimes Never 11. Modest lifestyle habits, family living budget Yes Sometimes Non existent 12. Written plan for improvement executed & strong people management Yes Sometimes Non existent 13. Transition plan/business Owner plan Yes Working on plan Non existent/controversy 14. Educational seminars/courses Yes Sometimes Never attend 15. Attitude Proactive Reactive Indifferent *Extra Points: Progressive Business may receive 4 points for #2,6,7,8,14 Struggling Business attempting turnaround may receive 4 points for #3,5,8,11,12 Score Overall Analysis Strong management rating & viability Moderate risk & viability; will most likely show previous refinancing <20 High risk & lack of long term viability 30 15

16 Character Counts Critical Questions & Observations for Customers Customer Checklist Yes No 1. Are they honest, ethical & trustworthy? 2. Do they report all assets & liabilities accurately? 3. Do they use borrowed funds as agreed upon? 4. Have they managed through adversity? 5. Have they followed through on educational opportunities? 6. Have they saved for lifestyle pursuits & balance with business growth? 7. Have they had minimal surprise purchases & not obtaining credit after the fact? 8. Have they used profits and windfalls properly for cashflow? 9. Have they been willing to work with advisory team? 10. Have they considered coaching and constructive advice? Totals Total Yes Character Assessment 8-10 Yes Answers Strong 4-7 Yes Answers Fair <4 Yes Answers Weak 31 Critical Financial Performance Index for Debt & Risk Criteria Calculation Vulnerable Resilient Agile Debt/Asset Ratio Term Debt/EBITDA Working Capital/Expenses Operating Expenses/Revenue Total Farm Liabilities Total Farm Assets Total Term Debt (non-operating) EBITDA¹ Current Assets - Current Liabilities Total Farm Expenses Operating Expenses² Total Farm Revenue Coverage Ratio (Net Farm Income + Interest + Depreciation + Total Non-Farm Income Income Tax Expenses- Family Living Withdrawals) / Total Annual Principal & Interest Payments on Term Debts & Capital Leases ¹ EBITDA = Net Farm Income + Interest + Depreciation ² Operating Expenses Excluding Interest and Depreciation >70% 40-70% <40% >6:1 3:1-6:1 <3:1 <10% 10-33% >33% >85% 75-85% <75% <110% % >150% Customer 3 Year Average 32 16

17 Trouble Shooting Matrix Insufficient Repayment Capacity Cut Business Cost Reduce Four Largest Expenses: Crop, Feed, Labor,?? Non-Farm Revenue Job Stability/Availability, Job Cost Job Earnings, Skills, Time Management Increase Income Cut Living Withdrawals Restructure Debt Capital Infusion Sell Capital Assets, Deferred Taxes, Increase Production, Increase Price Purchase Financial Software, Small Cost Containment Longer Term, Interest Only, Principal/Interest Deferred Equity Capital, Family Capital, Supplemental Cash Flow Bankruptcy Voluntary, Involuntary, Chapter 7, 11, 12, Burn Rate on Core Equity Adversity vs. Opportunity (Assume $500,000 Earnings Loss & 20% land value decline) Assets- Market Value 1. Long Term (20% Decline on Land) Estimated Value $6,000,000 $4,800,000 Loan Maximum X 70% X 70% Collateral Position = $4,200,000 = $3,360,000 Remaining Principal - $2,200,000 - $2,200,000 Equity Excess Reserves = $2,000,000 = $1,160, Intermediate $3,000,000 X 60% =$1,800,000 - $800,000 = $1,000, Current $1,650,000 X 80% =$1,320,000 - $860,000 = $460,000 Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $2,000,000 = 4.0 Years Earnings Loss¹ $ 500,000 20% Decline Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $1,160,000 = 2.32 Years Earnings Loss¹ $ 500,000 ¹ Assume Earnings Loss of $500,000 Red < 4.0 Years = Vulnerable Yellow Years = Resilient Green >7.0 Years = Agile 34 17

18 Bridge or Pier Concept Before: Term Debt = $1,000,000 = 4 to 1 EBITDA $250,000 After: Term Debt = $1,250,000 = 5 to 1 EBITDA $250,000 no improvement in EBITDA refinancing using land equity debt levels higher owner equity loss, more debt service water is deeper near the end of pier the longer the pier, then the narrower the pier 35 What Great Bankers Do: maintain contact with the customer for variance analysis & projected/actual analysis go out to the farm for face to face visits provide expertise in planning & monitoring of business performance provide sound counsel to preserve wealth in adverse situations provide facilitation to retain economic & emotional stability provide tools & education to assist them in preserving equity have the courage to initiate tough conversations implement the Six C s of lending burn the free fuel A.R.E

19 Staying Positive in the Down Cycle network of people = self worth + net worth older mentor and wisdom education and development take a look at yourself exercise hear the silence giving back sweat the small stuff position for small accomplishments 37 19