Agriculture & Agrilending

THE MANAGEMENTMINDSET

Macro Clinic Video Blog: www.compeer.com/educationRoad Warrior of Agriculture: www.cornandsoybeandigest.comAg Globe Trotter: www.northwestfcs.comDave’s GPS & Dashboard Indicators: www.farmermac.com

Dr. David M. KohlProfessor Emeritus, Agricultural and Applied Economics

Member of Academic Hall of Fame, College of Agriculture & Life SciencesVirginia Tech, Blacksburg, VA

(540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | [email protected]

January 12, 2021

Management Mindsets for the 2020s2

Poll #1

3

Which would best describe your business? (select one)

a) startup from scratchb) family business in transitionc) existing business in growth moded) scaling down, becoming more efficiente) stable, no change

Median Net Farm Income- All, High 20% and Low 20%

2019 Update:High 20%= $236,000Low 20%= $ -49,000

4

Aligning with Mindsets

Producer A How do I compare? What are others doing? think longer term & what is

on the horizon

5

Producer B Will a lender finance me? Will I survive for another

year? often a know it all or

victim

School vs. Real World Perspective:

In school, you get the lesson first, then the test. In the real world, you get the test first, then the lesson.

Management Assessment

Greens adaptive to a

situation- proactive 5% rule get efficient before

getting bigger sweat the small stuff plan, strategize,

execute & monitor process oriented advisory teams

6

Yellows success because of

equity & history vs. profitability & cash flow

preparing the next generation

bigger before better, examine human horse power

magic bullet- the next big thing

Reds waiting for prices &

markets to save them

excuse game, not my fault

lose money, equity keeps them going

80/20 rule is alive & well

Business IQ: Management FactorsCritical Questions for Crucial Conversations

Your Score

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

Total 0

Score35-50

20-34

<20

Developed by: Dr. David M. Kohl, Professor Emeritus, Ag & Applied Economics, Virginia Tech

Green (3 points or 4*) Yellow (2 points) Red (1 point)

Knows cost of production Written In head No idea

Knows cost of production by enterprise Written* In head No idea

Goals - business, family, & personal Written* In head No idea

Record keeping system Accrual Schedule F (one & done) No idea

Projected cash flow Written* In head No idea

Financial sensitivity analysis Written* In head No idea

Understand financial ratios, break evens Written* In head No idea

Yes* Sometimes Never

Marketing plan written and executed Yes Sometimes Never

Yes* Sometimes Non existent

Work with advisory team and lender

Attitude Proactive* Reactive Indifferent

Written plan for improvement executed & strong people management Yes* Sometimes Non existent

Transition plan/Business Owner plan Yes Working on plan Non existent/controversy

High risk & lack of long term viability

Moderate risk & viability; will most likely show previous refinancing

Strong management rating & viabilityOverall Analysis

Farmer Checklist

Educational seminars/courses Yes Sometimes Never attend

Risk management plan executed Yes Sometimes Never

Modest lifestyle habits, family living budget

*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

Business IQ Exercise

After completing the Business IQ: Management Factors Scorecard, what are three areas/points in your business that you will continue and three areas/points for improvement?

8

Three areas/points to continue:• ______________________• ______________________• ______________________

Three areas/points to improve:• ______________________• ______________________• ______________________

How Can Team Members Use Business IQ as a Tool for Producers?

screener for attitude to improve each family member, business partner, spouse

complete the Business IQ separately assists in prioritizing improvements communication tool- internal and external to

team of advisors customer develops plan for improvement to

improve or buy in objective way to measure management monitoring tool, year over year

9

10

HUSBAND

1. 3

2. 4

3. 4

4. 3

5. 4

6. 4

7. 4

8. 4

9. 2

10. 3

11. 4

12. 4

13. 3

14. 3

15. 4

Total 53

Score35-50

20-34

<20



Farmer Checklist Green (3 points or 4*) Yellow (2 points) Red (1 point)








Work with advisory team and lender Yes* Sometimes Never



Modest lifestyle habits, family living budget Yes* Sometimes Non existent


Strong management rating & viability




Overall Analysis



*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(See pg. 2 for Progressive and Attempting Turnaround definitions)

11

WIFE

1. 3

2. 2

3. 3

4. 3

5. 3

6. 3

7. 1

8. 3

9. 2

10. 3

11. 3

12. 2

13. 3

14. 2

15. 3

Total 39

Score35-50

20-34

<20



Farmer Checklist Green (3 points or 4*) Yellow (2 points) Red (1 point)













Strong management rating & viability




Overall Analysis




12

DAUGHTER

1. 2

2. 2

3. 3

4. 3

5. 2

6. 2

7. 2

8. 2

9. 2

10. 2

11. 4

12. 3

13. 3

14. 3

15. 3

Total 38

Score35-50

20-34

<20












Yes* Sometimes Non existent









Farmer Checklist



Modest lifestyle habits, family living budget


13

CFO

1. 3

2. 3

3. 3

4. 3

5. 2

6. 3

7. 2

8. 2

9. 2

10. 2

11. 3

12. 3

13. 3

14. 3

15. 3

Total 40

Score35-50

20-34

<20






Farmer Checklist





Marketing plan written and executed


Written plan for improvement executed & strong people management Yes*

Working on plan Non existent/controversy

Sometimes Non existent

Transition plan/Business Owner plan Yes

Yes Sometimes Never










14

LENDER

1. 3

2. 3

3. 2

4. 3

5. 3

6. 3

7. 3

8. 3

9. 1

10. 1

11. 1

12. 1

13. 3

14. 3

15. 2

Total 35

Score35-50

20-34

<20












Written plan for improvement executed & strong people management Yes*







Farmer Checklist

Educational seminars/courses Yes Sometimes

Sometimes Non existent


Never attend




17.45%

28.70%

58.20%

20.52%

32.30%

50.08%

TOP 1/3 MIDDLE 1/3 BOTTOM 1/3

Debt/Total Asset

Median Mean

Financial Ratios Across Business IQ Percentiles

16

Preliminary Study of Kentucky Farm Business Management Association data - Ben Isaacs, Undergraduate Research Study at University of Kentucky

2.25%

0.45%

-0.20%

3.16%

0.94%0.173%


Return on Assets

Median Mean


17


$109,947

$45,243 $14,349

$202,120

$123,766

$53,406


Net Farm Income

Median Mean


18


Other Key Ratios

coverage ratio top third - 114% bottom third - 10%

operating expense to revenue ratio¹ top third 68% bottom third 90%

19

¹ excluding interest and depreciation

Management Tests for Farms/Ranches/Businesses/Households

volatility agility resiliency opportunity

20

Passing the Test for Volatility

• working capital 20-25% of expenses• cash in household budget, 4-6 months of

expenses• marketing program

• commodity• value added

• risk management program• crop insurance• health insurance, disability• coverage, equal to or greater than debt levels

21

Passing the Test for Agility

• working capital/cash • Is it business driven?• Is it lender driven?

• optimization versus diversification• resources• talents, skills• marketplace• plan B, C, and D non-farm/ranch gig income/revenue find the balance

22

Passing the Test for Resiliency

• competitive cost of production• break evens and benchmarking• trend analysis, positive

• modest to low family living withdraws• family business needs to prepare for the next

generation – 6 year rule• startup mentorship• term debt/EBITDA < 6 to 1

• EBITDA includes farm/non-farm income23

Passing the Test for Opportunity

• manage the controllables & manage around the uncontrollables

• goal focused• 80-16-4 rule

• process focused• follow fundamentals• plan, strategize, execute & monitor

• team of advisors• strong Business IQ

• <26 = adversity, >35 = opportunity 24

Chat Question #1

25

What are your top three actions for 2021?

Toggle the drop down to ‘All panelists and attendees’ then type your response.

Click on the Chat button at the bottom of the Zoom window.

Lenders Wish List for 2021 For Producers projected cash flow accrued adjusted statements break evens - cost of production marketing risk management plan personal family living budget written goals

26

The Feisty Fifteen: Problems Your Business Should Have (1)

Your business pays lots of taxes. find sweet spot of paying taxes vs. deductions

Your lender wants to loan you money. strong profits/cash flow war chest for working capital - greater than 25% of operating expenses

You have growth frustrations, just can’t grow fast enough. overestimate capital and time by 25% term debt to EBITDA < 5 to 1 working capital to debt service > 5 to 1 human horsepower & management acumen

Everyone wants to work for you. attract & retain the right people, including family members be a work culture magnet over compensate productive people

27


Your business has excess cash sitting around. cash is queen blocking capital in adversity opportunity capital for purchases or acquisitions

In a family business, the older generation suddenly wants to exit, and they have at least 50% of retirement income generated outside the business.

You have time for family & friends when neighboring businesses don’t. 2,500/500 hour rule

You could walk away from the business for one month and it functions fine without you.

You left money on the table when marketing this year’s crop or livestock. The younger generation spends too much time in the office on the

computer and in the books. You must spend money for a facilitator and team of advisors for your

transition/estate plan. 28


Your neighbor comments that you spend too much time at seminars and conferences, and you have heard it all before.

Even though you are financially successful you still spend time refining your written business plan.

You don’t have to bring your personal checkbook to the business board meeting.

Mom & Dad, Grandma & Grandpa are upset about those tough questions that you are asking in developing the business plan.

29

Dr. Kohl Unplugged (1)

Do you see any trends in business IQ results across the different generations? i.e. older generations having higher or lower business IQ than more recent generations? If so, any ideas of why that might be?

Often we find producers make quick decisions based on cash flow for the month. Given COVID volatility, that is understandable. How would you present the “cost of not doing something”… sometimes referred to as Type 1 vs. Type 2 error? Do you have an analogy or examples of these types of discussions?

Based on groups of producers, green, yellow and red; how do you feel this influences and impacts marketing decisions?

The top 20% of class have a high business IQ. How do they decide on what investments to make? (Big or small). What gets their attention when making a purchase?

30

Dr. Kohl Unplugged (2)

What are the 2-3 key things that I need to learn from a producer’s banker/lender to help me be a more effective advisory board member?

Will COVID-19 change the university education model long-term? What do you see interest rates doing in the next decade? You had mentioned that non-meat and non-dairy alternatives gained

more market share when processing plans were hit this year. Do you think this will continue to grow at an increased rate once the COVID bug passes?

31

Chat Question #2

32

What is the most enjoyable aspect of being involved in agriculture?

Toggle the drop down to ‘All panelists and attendees’ then type your response.

Click on the Chat button at the bottom of the Zoom window.

Agriculture & Agrilending

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