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GLOBAL ECONOMICS: POINTS TO PONDER
Weekly Columns: Ag Globe Trotter: www.farm-credit.com
Road Warrior of Agriculture: www.cornandsoybeandigest.com
Dr. David M. KohlProfessor Emeritus, Agricultural and Applied Economics
Virginia Tech, Blacksburg, VA
(540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | [email protected]
November 4, 2011
Mega Trends of the Second Decade
3
Rise of emerging nations: BRICS 20% of world economy and 50% of world growth 8 - 5 - 3 Rule southern hemisphere competition China: 7th to 2nd; Brazil: 14th to 6th
“The long term viability of these nations will be defined by the way they handle adversity.”
Mega Trends of the Second Decade
4
Economic moderation of developed nations: public debt aging population entitlements 1-2% Rule
“These nations could become a cluster of powerful economic nations.”
Game Changers for the Agricultural Economy
livestock/other south/coastal/other
input/cost consolidation regulation/consumers liquidity/equity decline volatility
Tailwinds Headwinds
5
crop & row crop Upper Midwest/Canada:
“islands of prosperity” Asia/China export ethanol low value of the dollar weather land values “bullish” low interest rates
8-year super cycle
Contrasting Economies
USA (Hertz) China (Avis)
Ranking #1 #2
Inflation 2.0% 5.7%
Growth Rate 1.3% 8.7%
Debt/GDP 95% 33%
Consumer Spending/GDP 72% 35%
Household Income $47,000 $4,300
Issue deflation inflation
Response QE2 stockpiling food & fuel
6
Lenders’ Top Questions for Dr. Kohl
What are the top challenges/risks to the ag industry in the next 5 years?
volatility and global markets asset bubble vs. credit bubble normalization of deviation: NASA example young lenders and producers have never
faced a downturn agriculture business cycle making decisions on tax returns
rather than on accrual-adjusted records
7
Lenders’ Top Questions for Dr. Kohl
What are early warning risk management metrics?
total US farm debt to net farm income green light <5:1 yellow light 5:1 to 10:1 red light >10:1
GDP growth of emerging economies/BRICS nations green light >7% yellow light 3%-7% red light <3%
early warning signs for producers more than five different sources of credit debt to asset ratio above 50% working capital to revenue ratio below 20% “If it grows too fast, then it’s a weed.” sixth “C”
8
2011 Projected Debt to Income:
2.35:1
World Growth
9Source: www.Economist.com
U.S. 1.3%
Brazil
3.1%
GDP Growth % Change from Year Ago2011 Latest Quarter Figures
October 15, 2011
Australia 4.8%
Mexico 4.5%
China 9.1%
Japan -2.1%
Indonesia 6.5%Q2
Canada -0.4%
France 1.7%Q2
Euro zone 0.6%
Britain 0.4%
South Africa 1.3%
India
7.7%Q2 South Korea 3.6%
Germany 0.5%
Iceland -
10.9% Russian Fed. 3.4%Q2
Global Economic GDP Growth Benchmarks
Location Green Yellow Red
USA >3% 0-3% Negative
Europe >3% 0-3% Negative
Japan >3% 0-3% Negative
BRICS Nations* 8-10% 4-7% <3%
*Brazil, Russia, India, China and South Africa
© 2010 by Dr. David Kohl & Dr. Ed Seifried10
Global Economic GDP Growth Assessment
Location Current Green Yellow Red
USA
Europe
Japan
BRICS Nations*
*Brazil, Russia, India, China, and South Africa
Fill in current status and check green, yellow or red for each region.
© 2010 by Dr. David Kohl & Dr. Ed Seifried11
The World According to Water
Territory size shows the proportion of all worldwide freshwater resources found there.
13Source: www.worldmapper.org © Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan)
13
Oil -“Black Gold”
Six of 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
14
U.S. Farm Real Estate Values19
10
1913
1916
1919
1922
1925
1928
1931
1934
1937
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Annual Percentage Change in US Farm Real Estate Values1910-2010
$/ac
Source: Dr. Steve Isaacs, University of Kentucky15
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
16
Land Value Correction
global economic downturn tightening of government policy operating lines/suppliers credit renting/growth oriented farms
all profits for expansion leaving no liquidity
large blocks of land in an area
17
Progression List in Land Acquisition & Expansion
Item Yes No
Have you been profitable in the last three years?
Will the land/expansion result in greater than 50% equity?
Do you have working capital to revenue of 33% or more after expansion?
Will overall profitability after expansion exceed interest rates?
Will overall profitability after expansion result in return exceeding inflation?
Will overall profitability after expansion result in return exceeding w.c.c.?
18
Doc’s Economic Clock: Dashboard Indicators
Yellow
Yield Curve
Factory Utilization
Green
Leading Economic Index® (LEI)
LEI Diffusion Index
Purchasing Manager Index
Orange
Oil Prices
Core Inflation
Headline Inflation
Red
Housing Starts
Unemployment
19
Lenders’ Top Questions for Dr. Kohl
What practices could producers use to prepare for economic & policy changes?
build strong working capital and cash reserves sound risk management program watch financial leverage - 50% rule sound financial records and systems approach prepare for a five year down cycle
20