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) | sullylab@vt.edu

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

2

Black Swan Progression -Dirty Bird

3

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

4

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”

5

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

6

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

7

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

8

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

9

Fast Facts

personal savings $3.1 trillion

15% of the U.S. economy

savings rate 25.7%

10

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%

12

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

13

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.

15

Interest in Rural Properties

Interest Percent

Increased 84%

Remains the same 14%

Decreased 2%

16

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

18

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

20

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

23

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

24

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%

27

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

28

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

29

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

30

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

32

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

33

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

34

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

36

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

38

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