ECONOMICTRANSITION IN A BLACKSWANENVIRONMENT€¦ · Microsoft PowerPoint - Day2_1_Kohl_web.pptx...
Transcript of ECONOMICTRANSITION IN A BLACKSWANENVIRONMENT€¦ · Microsoft PowerPoint - Day2_1_Kohl_web.pptx...
ECONOMIC TRANSITION IN A
BLACK SWAN ENVIRONMENT
Macro Clinic Video Blog: www.compeer.com/education
Road Warrior of Agriculture: www.cornandsoybeandigest.com
Ag Globe Trotter: www.northwestfcs.com
Dave’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]
September 17, 2020
Views From Cyberville
new agricultural lenders
two out of three new lenders do not have an ag or rural background
acceleration of transition of staff & employees involved in ag lending
watch the non-traditional debt build up
less non-farm income & fringe benefits
concentration of debt
access to markets
demand destructors
indifferent attitudes post-government programs
producer & ag lenders
life insurance competition- T.I.N.A.
2021-2022- accelerated economic divide
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Black Swan Progression -Dirty Bird
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Dirty Bird or Phase I – Splash
(March 1 to May 1, 2020)
job losses
preventative health
consumer shutdown, back to the basics
40% consumer based economy
0-25% of sales
global economy on life support
Business & Personal:
shock
numbness
anxiety
Needs: time to absorb information reality check
Black Swan Progression -Angry Bird
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Angry Bird or Phase II – Ripple
(May 1 to December 31, 2020)
recovery plan nationally/globally
realization of job loss
business failures
systems of health surveillance
deglobalization discussions
trade issues
volatility based on headlines
Personal/Society/Government:
revenge
blame
confusion
frustration
Needs: support okay to feel a loss collaboration critical thinking unintended consequences
More baby black swans?
Black Swan Progression -Phoenix “Mythical Bird”
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Phoenix or Phase III – Ripple
(January 1, 2021 - 2022 & Beyond)
commitment to move forward driven by young leadership
new business models
question of consolidation: big business vs. small business
accelerated deglobalization
AI & privacy balance
accelerated innovation in health systems
TSA all the time
Personal:
more energy
commitment to move forward
adjustment & focus
Needs: creative leadership innovation adaptation new models for success
More baby black swans?
Global Macro Economic Risks
globalization vs. deglobalization
government & political agendas
business
consumers
supply & marketing chain disruptors
concentration is fragile & fatal
diversification is agile & resilient
disjointed recovery
90% economy
50-75% economy
125% economy
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trade agreement uncertainty
Australia vs. China
rich Nations vs. China
silk & belt road initiative takes medical innovation path
central banks’ government support
U.S. vs. global support
length & depth of support
price to pay
Grain Industry Radar Screen for U.S. & Abroad
economic health of protein sector
economic health of trading partners
weather
value of the dollar
consumer trends
trade issues
ethanol
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Livestock & Other
access to markets & marketing changes
concentration, cannibalization
competitive products non-meat alternatives
non-dairy alternatives
regulation
labor, immigration
health of the U.S. economy
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U.S. Economy - Compare & Contrast 2008-09 to 2020
2020 Pandemic sudden impact/shock disruption
economic behavioral changes/basics
no pattern of corrective action- health
three D’s: Depth, Diffusion & Duration
Nike swoosh shaped recession with a jagged tail “w” size 6 or size 14-18?
deeper global recession?
re-emerging bio shocks / cyber attacks
southern hemisphere bio shocks
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Fast Facts
personal savings $3.1 trillion
15% of the U.S. economy
savings rate 25.7%
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Spending Percent
Health care -21.0%
Food service -34.0%
Clothing -21.0%
Gasoline -39.0%
Disconnect Between Stock Market and the Economy
sugar high with stimulus and unemployment historical top 10% price to earnings ratio
low 10% earnings
investor high risk takers backed by central banks/government central bank stimulus
government stimulus
large swings in the marketplace institutional investors
day traders
low interest rate environment
Warren Buffett moves to cash11
Future of Agriculture for Young People
Degree of Optimism Percent
Very optimistic 6%
Optimistic 51%
Neutral 18%
Pessimistic 22%
Very pessimistic 3%
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Poll results from 294 ag lenders- August 2020
COVID-19 The Black Swan Disruptor-Positives for Agriculture
importance of a diversified safe food, fiber & fuel source- basics of life
reassurance of transparency in where food is produced, processed & distributed
healthy soil & water plants, humans, animals & environment
niche markets, U.S. & globally
repositioning of the image of agriculture
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Future Mega Trends14
Rural America Renaissance & Resurgence
lower cost of doing business
broadband internet & technology
youth & human capital magnet
less vulnerability & health issues
plus to the environment
energizes rural America
technology: AI, bio integration, etc.
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Interest in Rural Properties
Interest Percent
Increased 84%
Remains the same 14%
Decreased 2%
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Mega Trends on the Radar ScreenNew Farms/Ranches
women
minorities
boomerangers
urbanites in transition
remote managers/owners
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Strategies & Actionable Items to Mitigate Risk
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Median Net Farm Income- All, High 20% and Low 20%
2019 Update:High 20%= $236,000Low 20%= $ -49,000
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Characteristics That Are Important to Agricultural Producers for Resiliency & Agility
Poll results from 976 ag lenders- Summer 2020
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Characteristic Percent
Know cost of production 62%
Execute a marketing risk management plan 58%
Strong working capital 41%
Modest living 29%
Positive, proactive attitude 29%
High equity to debt ratio 28%
Use an advisory team 21%
Good communications 16%
Black Swan to Phoenix-Business Model of the Future
Resilient
know cost of production
marketing & risk management program
capital/equity borrowing capacity
Agile
working capital
market for product
optimization/efficiency vs. diversification/resiliency
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Entrepreneurial / Innovative
“people first” business invest in people
align with rapidly changing marketplace
quarterly sprints/journey of sustainability
Strong Business IQ
high scores in all 15 areas
plan, strategize, execute & monitor
written plan for improvement
dashboards
Four Pillars:
Which pillar is more important?
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
Score
35‐50
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 managementYes* 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 & viability
Overall 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 Businessmay receive 4 points for #2,6,7,8,14‐ Struggling Business Attempting Turnaroundmay receive 4 points for #3,5,8,11,12
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Business IQ: Management FactorsCritical Questions for Crucial Conversations 1
Progressive Business Characteristics:
To be considered a “Progressive” Business, farms must score in the green in four of these five checklist items (#2, #6, #7, #8, #14).
#2 Know cost of production by enterprise: Know the cost of production by enterprise and are able to readily explain which enterprise is the most profitable.
#6 Financial sensitivity analysis: Know how changes in price, production, cost and/or interest rates affect the bottom line. Complete different scenarios in their cash flows to test this for their business/operation.
#7 Understand financial ratios: A dashboard of financials (5 to 7 ratios) that they do a 3 to 5-year trend analysis on their business? Second, benchmark these ratios to other businesses like the Illinois FBFM or University of Minnesota’s FINBIN.
#8 Work with an advisory team and lender: Establish an advisory team consisting of a lender, crop or livestock consultant, and possibly a financial planner, etc. If so, do they meet 2 to 4 times a year?
#14 Educational seminars/courses: Attend or take five educational seminars or courses a year. One should be outside of the industry of agriculture.
Developed by: Dr. David M. Kohl, Professor Emeritus, Ag & Applied Economics, Virginia Tech
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Business IQ: Management FactorsCritical Questions for Crucial Conversations 2
Struggling Business Attempting Turnaround Characteristics:
To be considered attempting a successful turnaround, farms must score in the green in four of these five checklist items (#3, #5, #8, #11, #12).
#3 Goals - business, family & personal: Written business, family and personal goals.
#5 Projected cash flow: Completed a cash flow.
#8 Work with an advisory team and lender: Exhibit willingness to be coached by an advisory team and lender.
#11 Modest lifestyle habits, family living budget: Take modest family withdrawals and have a family living budget.
#12 Written plan/business owner plan: Developed and executed a one-page written plan on how they will improve cash flows, profits and what is the likelihood of the turnaround of business. If not, problems can continue.
Developed by: Dr. David M. Kohl, Professor Emeritus, Ag & Applied Economics, Virginia Tech
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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?
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Three areas/points to continue:• ______________________• ______________________• ______________________
Three areas/points to improve:• ______________________• ______________________• ______________________
Business IQ:Spectrum of Performance Possibilities
High Collateral
Low Collateral
High Working Capital
Low Working Capital
High Equity & High Efficiency
Low Equity & Low Efficiency
High Profits & Cash Flow
Low Profits & Cash Flow
Code Green35+ B. IQ
Code Orange20-40 B. IQ
Code Yellow20-34 B. IQ
Code Red< 20 B. IQ
B. IQ= Business IQ
Reactive Proactive
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Northeast QuadrantCode Green - Disciplined Growth
strong business IQ score of 35+
proactive manager
> 60% equity
<40% debt to asset ratio
term debt to EBITDA <2.5:1
operating expense/revenue ratio (excluding interest and depreciation) <75%
working capital to expenses >30%
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Northwest Quadrant- Limited Growth
moderate business IQ score of 20-34
Often 70% equity
<30% debt to asset ratio
working capital to expenses >20%
operating expenses/revenue ratio (excluding interest and depreciation) >80%
competitive issues in industry
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Southeast QuadrantCode Orange - Excessive Growth
Green – Higher Quad
business IQ score >38
ROA averages 6%
<50% equity
modest family living expenses
dimensional revenue streams
earns and turns
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Red- Lower Quad
business IQ score of <28
profit issues- ROA averages 1%
<50% equity
high living costs
specialized revenue streams
lack earns & turns
Southwest QuadrantCode Red- Partial or Total Liquidation
poor business IQ score of <20
reactive manager
<40% equity
>60% debt to asset ratio
working capital is negative
operating expense to revenue over 90%
excessive family living expenses
victims & “know-it-alls”, aggressive, alpha customers
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Chat Question 1
Please type one attribute you see in producers who are in the top third of profitable producers versus the lower third.
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Agricultural Producers’ Action Plan
develop written farm budget & compare actual to budget
evaluating budgets as economic conditions change in the U.S. & globally
personal family living budget & compare actual to budget
reestablish your goals & objectives
communicate with your advisory team- lender, crop/livestock consultant & accountant
develop risk management plan
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Wisdom to Ponder (1)
be in the moment- working together indistractable – “either you control your own time, or others will”
invest in productive assets this includes yourself- mental, physical and spiritual
cash is queen, equity is king and profits are the kingdom “Cash is the queen of the financial chess board providing or blocking
opportunities.”
know your numbers but be careful of managing a business only by the spreadsheet
“balance head (numbers) with your heart (passion)”
the personal family living budget is as important as the farm/business budget opportunity requires sacrifices and separation of expenses
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Wisdom to Ponder (2)
execution requires the “HUT” principle Hear, Understand and Take action
if it grows too fast, then it is a weed business outgrows working capital and business acumen
There is no new next big thing!!
a business plan is not concrete - it is always evolving through four cornerstones: plan, strategize, execute and monitor
the best crop that you will ever raise will be young people: children, grandchildren and youth
“you are what you were when” philosophy
financial net worth is not equal to self worth in life positive support: people, peers and places
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Causes of Stress for Producers
76% of Canadian producers have mid to high stress scores based on recent survey (May 2020)
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Cause PercentUnpredictability of markets & weather 77%
Financial pressure 73%
Workload pressure 72%
Expansion & growth 66%
Transition management 58%
Public trust/social media 48%
Isolation 38%
Conflict in family 34%
Source: Farm Management Canada, https://www.fmc-gac.com
Following a Written Business Plan Contributes to Peace of Mind
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Extent? PercentTo a large extent 35%
To a moderate extent 53%
To a small extent 9%
Not at all 1%
Not sure 2%
88% of farmers that use business plans say that a written business plan contributed to peace of mind.
“Good business management doesn’t avoid crisis like trade wars or crop failures, but it helps get you through those times” -Farmer, Western Canada
“Good business management doesn’t avoid crisis but it helps you navigate through these times.” – Young Fisherman, Alaska
Source: Farm Management Canada, https://www.fmc-gac.com
Chat Question 2
How can you build interpersonal relationships through technology? For example, what’s the value added provided by crop insurance professionals?
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Wisdom for Well-being
M.E.D.S. for life
Meditate
shut down the drama
hear the silence
platform of peace
Exercise
endorphins
routine
work & life balance
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Diet
physical health
feel guilty once in awhile
Sleep
replenish the body
AND
a positive support network
financial net worth is not equal to self worth in life