Straight Talk, Straight Actions: Agriculture in a Changing Economy

Transcription

1 Straight Talk, Straight Actions: Agriculture in a Changing Economy January 27, 2017 Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Virginia Tech, Blacksburg, VA

2 Game of Economic Reset Innings 1-3 profit margins decline, cash flow issues Innings 4-6 relief pitcher, use working capital, refinance Innings 7-9 core equity, sale of property, multiple refinancing 2

3 State of the State of Agricultural Economics Reset: The Mid Innings emerging nations, BRICS & KIMT, slow growth, one half in recession ethanol & oil s impact on commodity prices Central Banks - U.S. & abroad duration of the strong dollar weather: supply & demand 3

4 Global Economics: Europe Brexit immigration issues next year s elections break up of euro other 4

5 Global Economics: China TPP: China s role water, soil, & air issues asset bubbles: stock real estate other military buildup South China Sea 5

6 Global Economics: Japan leader in support of TPP aging population Central Bank s stimulus military shrinking economy 6

7 Global Economics: Russia, Brazil & Others Oceania political disconnect economic challenges currency valuation weather other 7

8 Underwhelming Growth 7.6% 4.0% 5.6% 4.9% 5.1% 4.3% 4.4% 4.3% 3.6% 2.8% 2.1% 1.2% 2Q

9 Slow Orbit Future Growth- Debt 1 Debt U.S. $19 Trillion dollars 40% financed by foreign markets Japan 250% of GDP China 200% of GDP public debt in U.S. greater 100% of GDP low interest rates gang of six 9

10 Slow Orbit Future Growth- Political & Government Dysfunction 2 50 to 70 year cycles 1870 s Europe 1920 s to 30 s US & Europe 1960 s & 70 s Today social media fragmentation information society 10

11 Dodd Frank & Basel III Obamacare environmental WOTUS compliance administration cobra effect Slow Orbit Future Growth Regulation Downside- Technology & Information 3 11

12 Slow Orbit Future Growth Demographics 4 baby boomers millennials conservative investment patterns with boomers health care/run out of money youth in emerging nations 12

13 New Administration international trade banking regulations health care immigration taxation trillion dollar infrastructure spending 13

14 Federal Reserve s Interest Rate Barometer three increases in 2017! Indicator Current Status Unemployment 5.0% GDP Growth 3.0% Inflation 2.5% Consumer Sentiment >90% stock market/real estate wealth effect Updated 12/28/16 14

15 Net Farm Income,

16 Collateral Mountains Business Net Income Spring Working Capital Hills Non-Farm Earnings Spring Cash Peak Inventory Pinnacle Capital Infusion Canteen Accounts Receivable Ridge Prepaid Promise Killer Toy Swamp Lake Earnings Prosperity Valley Family Living/ Dividends Creek Income Tax Gulch Earned Wealth Inlet Cap Ex & Growth Run Principal & Interest/ Operating Delta *EBITDA- Earnings Before Interest, Taxes, Depreciation & Amortization Adapted From: Harlan Hill- Hill Financial Education 16

17 1 Working Capital Sufficiency 2 Cash to Current Assets 3 WC Burn Rate: Debt Service 4 Equity to Asset Ratio: Res ilie nce & G row th Rec ove ry Practice: Financial Dashboard Vul ner abl e Side by Side Analysis < 10 % % > 33 % Formula: (Current Assets Current Liabilities) / Operating Expenses Summary 2016 Goal 21% (1,407,861 1,003,383) / 1,963,000) < 5 % Formula: Cash / Total Current Assets > 15 % 22% > 5: % > 70 % 55% 2:1 5: 1 > 5:1 EBITDA > Demand 5 15 % 305,956 / 1,407,861 < 1:1 1:1 5: 1 Formula: Working Capital / Term Debt Payments 404,478 / 612,000 < 40 % Formula: Total Equity / Total Assets 4,712,998 / 8,510,867 5 Core Equity Burn Rate < 2:1 Formula: Excess Reserves / (EBITDA FL Interest Debt payments) Assets Breeding Livestock * Market Value 1,500,000 Loan Max 60% Borrowing Capacity 900,000 Existing Debt 245,000 Excess Reserve 655,000 Machinery & equipment 2,141,385 60% 1,284, , ,709 Real Estate & Buildings 3,414,500 70% 2,390,150 1,727, ,786 * Real estate is primary core asset in todays economy. 17

18 p 6 y Debt Efficiency y y Res ilie nce & G row th Practice: Rec ove ry Financial Dashboard Vul ner abl e Side by Side Analysis Summary 2016 > 7:1 3:1 7:1 < 3: < 10 % % > 25 % 32.3% < 30 % % > 70 % 34.0% < 2 % 2 8 % > 8 % 9.9% % < 15 % 9.8% Goal Formula: Term Debt / EBITDA 2,794,486 / 934,801 7 EBITDA Efficiency Formula: EBITDA / Revenue 934,801 / 2,897,801 8 Asset Turnover Formula: Revenue / Total Assets 2,897,801 / 8,510,867 9 Rate of Return on Assets Formula: (EBITDA FL) / Total Assets (934,801 92,000) / 8,510, Family Living Withdrawals > 25 % Formula: FL / EBITDA 92,000 / 934,801 18

19 Transformative Mega Trends global economic volatility consumer trends convergence technology NGOS disconnect millennials transition acceleration 19

20 10 Good Reasons to Start Farming/Ranching Today 1. machinery & equipment values are down 20%-40% 2. low interest rates 3. 20% of family farms have no next generation 4. one size does not fit all 5. capitalize on local niche markets 6. control vs. ownership of assets 7. collaboration of assets and talent sharing 8. 60% of land turnover by rule 10. raising a family/children 20

21 Dr. Kohl s Contact Information: Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Virginia Tech, Blacksburg, VA (540) (Alicia Morris) (540) (Angela Meadows) sullylab@vt.edu Macro Clinic Video Blog: Road Warrior of Agriculture: Ag Globe Trotter: Dave s GPS & Dashboard Indicators: