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How to Make Money in Agriculture Today. Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-2094 (Alicia Morris) e-mail: [email protected]. - PowerPoint PPT Presentation
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Dr. David M. KohlProfessor Emeritus
Agricultural and Applied EconomicsVirginia Tech
Blacksburg, VA 24060(540) 961-2094 (Alicia Morris)
e-mail: [email protected]
Weekly Website Columns: Ag
Globe Trotter: www.farm-credit.com Road Warrior of Agriculture: www.cornandsoybeandigest.com
Views from the Road
150 bushel/acre corn grown with 3” of rainfall
research & development at one major input supplier increased from 4% revenue to 10% revenue
corn yields will double in the next 20 years
soybeans will increase by 17% in yield in the next two years
Rabobank sponsors 40 youth involved in production ag
land values of $10,000/acre by 2010 in Iowa
one-half of new ag lenders in schools are from outside of agriculture
Five Positive Trends in Farm Economics
volatility will create opportunity consumers and technology will
drive business models ROA of top producers is above 10
percent evaluation of the new manager good managers
manage the manageable manage around the unmanageable
Alternative Energy
wide range in oil prices $40 swing
breakeven price moves toward $60/barrell
buffalo jump after 2008-2009! demand side of equation technology & competition
Emphasis of Next Farm Bill
conservation & the environment rural & energy homeland security & nutrition less dollar support WTO
Global Partners
Proposed Asian Group Members: Japan, China, India,
Australia, South Korea, New Zealand & the 10-member ASEAN group: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand, the Philippines & Vietnam
Population: 3.1 billion Total GDP: almost $10 trillion (US)
NAFTA Members: Canada, United States,
Mexico Population: 430.5 million Total GDP: $12.9 trillion
European Union Members: Austria, Belgium,
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, the Netherlands, United Kingdom
Population: 460.1 million Total GDP: $11.7 trillion
The Economy & Interest Rates
short-term rates core inflation housing market labor issues
long-term rates federal debt value of dollar
lead economic indicators
Widening of Performance2400 Farms & Ranches
Financial Variable
Low Medium High
Net Farm Income
-$19,000 $61,000 $300,000+
ROA -2.7% 9.1% 14.4%
Operating Margin
-7.6% 17.36% 28.3%
Asset Turnover & Utilization
35% 44% 51%
Five Critical Elements for Smaller Farms
expenses/revenue below 70% excluding depreciation & interest paid
percent equity above 60% low maintenance family living
expense under $40,000 or off-farm income to
compensate synergy & balance among
business, family & personal goals focus or diversification strategy
depending on skill set
“Better is better before bigger is better.”
“Get efficient before getting bigger.”
Five Critical Elements for Growth-Oriented Farms
P = O + C + L + M2
working capital management 20-25% of expenses/revenue
85% managing & 15% doing rule 96-4-50 Rule
three supervisor rule business plan and technology
adoption twice as profitable and cash flow
transition plan management professional team of advisors
“Checks can’t be written out of profits.”“25% of businesses filing bankruptcy
just had their most profitable year.”
Nuts & Bolts of Business Models
P = O + C + L + M2
earns and turns working capital for extremes enterprise analysis “202”
Capital Turnover
gross revenue/total assets ideal capital turnover varies by
enterprise
Red (0-4) Under 20%
Yellow (5-8) 20 to 40%
Green (9-10) Over 40%
0 – negative1 – 1 to 4%2 – 5 to 9%3 – 10-14%4 – 15 to 19%5 – 20 to 24%6 – 25 to 29%7 – 30 to 34%8 – 35 to 40%9 – 41 to 50%10 – over 50%
Margin Management
0 – negative1 – 1 to 2%2 – 3 to 4%3 – 5 to 6%4 – 7 to 8%5 – 9 to 10%6 – 11 to 12%7 – 13 to 14%8 – 15 to 16%9 – 17 to 19%10 – over 19%
net profit/gross revenue net profit margin times asset
turnover equals ROA
Red (0-4) Under 9%
Yellow (5-8) 9 to 16%
Green (9-10) Over 16%
$ 50,000 (net income) + 20,000 (interest paid) 70,000 - 40,000 (family withdrawal) $ 30,000 (operating profit margin) $30,000$450,000 revenue = 6.7%
net working capital / total expenses
Liquidity
0 – negative1 – 1%2 – 2 to 3%3 – 4 to 6%4 – 7 to 9%5 – 10%6 – 11 to 14%7 – 15 to 20%8 – 21 to 25%9 – 26 to 50%10 – over 50%
Red (0-4) Under 10%
Yellow (5-8) 10 to 25%
Green (9-10) Over 25%
Current Assets minus Current Liabilities divided by Total Farm Expenses $200,000 - $100,000 = $100,000 $100,000 / $400,000 = 25%
business planning with strategy & execution
working capital- 20% of expenses debt to asset ratio < 40% variance analysis on budgets capital reserve account
unforeseen event opportunity
Positioning for FlexibilityShort Run
invest 10% profit outside of business
50% rule long term plan for next generation the clone – 96- 4- 50 rule insurances & risk management
programs
Positioning for FlexibilityLong Run