Dr. David M. KohlProfessor Emeritus

Agricultural and Applied EconomicsVirginia Tech

Blacksburg, VA 24060(540) 961-2094 (Alicia Morris)

(540) 719-0752 (Angela Meadows)e-mail: sullylab@vt.edu

Weekly Website Columns: Ag Globe Trotter: www.farm-credit.com

Road Warrior of Agriculture: www.cornandsoybeandigest.com

2

Domestic & Global EconomyState of State

● inflection point● government

taxes cap & trade health care other

● Asia/China● standard of living (household income)

USA $49,000 in 2000 & $47,000 in 2010 China $1,090 in 2000 & $3,500 in 2010

3

Contrasting Economies

stockpiling food & fuel

QE2Response

inflationdeflationIssue

$3,500$47,000Household Income

35%72%Consumer Spending/GDP

33%92%Debt/GDP

9.6%2.0%Growth Rate

4.4%0.6%Inflation

#2#1Ranking

China (Avis)USA (Hertz)

4

State of State -Agricultural Economy

●low interest rates

●volatility●land values “bullish”

●liquidity/equity decline●weather

●regulation/consumers●low value of the dollar

●consolidation●ethanol

●input/cost●Asia/China export

●south/coastal/other●upper midwest/Canada

●livestock/other●crop & row crop

HeadwindsTailwinds

5

World Growth

Source: www.Economist.com

U.S.

3.2%Q3

Brazil

8.8%Q2

GDP Growth % Change from Year Ago2010 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%Q3Russian Fed. 2.7%Q3

66

Global Economic GDP Growth Benchmarks

LocationLocation GreenGreen YellowYellow RedRed

USA >3% 0-3% Negative

Europe >3% 0-3% Negative

Japan >3% 0-3% Negative

BRIC Nations* 8-10% 4-7% <3%

*Brazil, Russia, India, and China

© 2010 by Dr. David Kohl & Dr. Ed Seifried

77

Global Economic GDP Growth Assessment

LocationLocation CurrentCurrent GreenGreen YellowYellow RedRed

USA

Europe

Japan

BRIC Nations*

*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

8

Oil -“Black Gold”

● Six to eight recessions in past fifty years due to oil● 74% of price of oil – global market value● 70% oil produced military/politically sensitive areas● 60% of fertilizer military/politically sensitive areas● consumers lock up at $3.00 to $3.50 per gallon● consumers shut down at $4.00 per gallon

9

Farm & Ranch Land/Real Estate Clock

Increasing

Declining

RapidSlow

Positive

Slow Increase

Positive

Rapid Increase

Negative

Slow Decline

Negative

Rapid Decline

What’s happening in your area?

•High quality land & row crop

•Mineral, oil, water influences

•Competitive agriculture & aggressive investors

•Ag industries in down cycle

•Recreational farm and ranch land

•Urban fringe after bubbles

•Lower quality land

•Ag industries are not competitive

•Older buyers

•Grains & row crops

•Urban fringe/ satellite cities

Stable

10

Producers Critical Mistakes When Buying Property

● love property● land and liquidity● money is cheap, it is time to borrow● earns and turns● financial leverage● cash is land locked● deeper pocket syndrome

11

The Three Bears & “Big Foot” Balance Sheet

● lower commodity prices sustain input costs

● higher taxation and regulatory reform

● increase short term / long term interest rates

● trade sanctions- global markets- currency disruptions

Hibernating

Awakening

Hibernating

Awakening

12

Producer Dashboard Economic Indicator Benchmarks

IndicatorIndicator GreenGreen YellowYellow RedRed

The Conference Board Leading Economic Index® - LEI

Increasing Flat to Decline Decline 0.3% for 3 consecutive months AND

>1% over the period

LEI Diffusion¹ >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 Inflation² 0%-3% 3%-5% >5% or <0%

Oil Price³ ($/barrel) <$50 $50-$100 >$100

Yield Curve4 Steep Flattening Inverted

¹Ten indicators make up the LEI - measures % that are increasing; ²Includes food & energy; ³Consumer’s perspective; 43-Month Treasury Bill rate to 10-Year Bond rate

13

Producer Dashboard Economic IndicatorAssessment

Fill in current status and check green, yellow or red for each indicator.

IndicatorIndicator CurrentCurrent GreenGreen YellowYellow RedRed

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

© 2010 by Dr. David Kohl & Dr. Ed Seifried

14

Ten Characteristics of CEO Producer

● Profitability- (60-30-10)● capital asset structure- (P = O + C + L + M2)

● debt structure- (“relationship lender”)● size, growth- (“If it grows too fast, then it’s a weed.”)● risk management (revenue, cost, interest rates)● earned net worth- (“Better is better before bigger is

better.”) ● managerial skill- capacity vs. skill set- (“40-20-40 people

rule”)● financial numbers, improved business performance-

(“earns & turns”)● monitoring and audit- (“efficient but effective”)● other

Credit: Dr. Mike Boehlje, Department of Agricultural Economics, Purdue University

15

Financial & Management Decision Priority Guide

Metric High1 Medium 2 Low3 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

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.

16

Evaluating the Sixth “C”

RatingArea

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

Please rate each area from 1 to 5. 1=Poor and 5=Excellent

Total Score Assessment40 – 50: Green Light: Above average on most attributes35 – 39: Yellow Light: Several areas need focus to be successful30 – 34: Orange Light: Focus on improving below average attributes <30: Red Light: Many areas need improvement

17

Five Star Philosophy

● HUT principle● “If it grows too fast, then it’s a weed.”● undisciplined pursuit of more● 40-20-40 Rule of people business culture● “Big enough to serve, but local enough to

care.”