Embed Size (px)
Citation preview
ECONOMIC & FINANCIALMEGA TRENDS
2020-2030
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 7, 2020
Pulse of the Global EconomyThe View from 30,000 Miles Up
NASA Photo
Perspectives on the New Decade
more change in the next decade than the last 70 years technology, consumers & management
economic & financial volatility friend: proactive manager foe: reactive manager
business IQ is the common denominator for success decade of transitions capital, human assets & business culture shifts
more opportunity for success or failure depending on your mindset,capitalizing and controlling your destiny
balance “high tech” with “high touch” high tech- biotech, engineering, big data high touch- in the moment, interpersonal skills, interdependent
3
Eras & Cycles: Fork in the Road
Decade Era of Economics
1950’s - 1960’s Post War, Go-Go Production Era
1970’s Go-Go Economics Era
1980’s No Go Economics Era
1990’s Slow Go Economics Era
2000’s Go-Go Super Cycle Era
Teen Years Slow & No Go Economics Era
Adult Years Fork in the Road Management & Economics Era4
Corner Office Critical Thinking –Disruptions:
Indistractable
Technology-Human Interface
Consumers of the Future¹
Decoupling
Texafornia
Flexitarian
Weather & Climate Changes
¹ - Transparency- Customization- Personalization- Experiences
BusinessModel
5
Low Margin Era
technology- supply exceeds demand worldwide- new resources in production weather and climate changes base hits vs. home run profits & cash flow managing expectations focus on fiduciary fundamentals
6
Volatility of Profits/Cash Flow
trade negotiations and expectations weather/African swine flu political uncertainty consumer demand shifts structural changes in industry
7
Economic Radar Screen-Globalization vs. Decoupling international trade
USMCA China’s Belt & Road Initiative
synchronized global economic moderation China- slowest growth rate in 28
years Japan- negative growth rate Germany – negative growth rate Central Bank’s stimulus in China high debt levels in urban real
estate in China
8
political uncertainty Brazil Venezuela Mexico Argentina Germany, Britain & Euro
Sector U.S.
North America’s Economic Power Block 28% of the global economy’s GDP energy & oil U.S. #1 Canada #4 Mexico #8
450+ million people 47% of Mexico’s population is under 25 ag trading partners: Canada #1 Mexico #3
9
Rising of Asia
10
Farm Real Estate Perspectives
farm real estate appreciated or stayed level 79% of years from 1910-2017
since WWII (1941) farm real estate appreciated or stayed level 88% of the years
1910-WWII (1940) farm real estate appreciated 57% of the years
farm real estate was flat or declined for 13 years from 1920-1933
farm real estate declined for four years in the 1980’s
11
Farm Real Estate- Last Line of Defense 83% of U.S. farm balance sheet assets great bridge over economic troubled waters equity often leads to management
complacency farm real estate is local, be careful of state and
national statistics
12
Volatility on Balance Sheet
lender appetite for refinances/restructure customer appetite for refinances/restructure supply/demand- real estate, equipment and/or
livestock regulators suppliers of operating credit baby boomer farmer/rancher
13
As of Mid-June, Longest Economic Expansion in the U.S.
14
When Will the Next Recession Begin?
Estimated Start Date Percent
First Half of 2020 8%
Second Half of 2020 36%
2021 38%
2022 8%
2023 10%
15
When the Next Recession Occurs, It Will Be….
Recession Type Percent
Very mild and short like recession in early 2000 72%
Similar to Great Recession in 2009 Era 10%
Possible depression in U.S. similar to the 1930’s 0%
Great Recession in the U.S. and globally 18%
16
Cause of Next Recession (More than 1 selected)
Cause of Next Recession Percent
Trade issues 40%
2020 U.S. Presidential Election results 10%
2020 U.S. Presidential, Congress, and Senate results 25%
Debt issues: personal, corporate, government and student 45%
Asset price bubbles 19%
Stock market crash, more than 40% 8%
17
Mega Trends 2020-2030: “High Beams”
18
Mega Trends 2020-2030:Breakfast in 2030
Imagine this: You 3D print your morning croissant and your sugar-free ginger cake is soft and sweet. The roast beef on your sandwich is plant based and your entire diet is perfectly tailored to your lifestyle. Can you picture this?
19
Source: The Economist Magazine, December, 2018 & Wageningen University & Research- www.wur.eu/careerinfood
Mega Trends 2020-2030:Industry Must Adopt Fads/Trends
dairy example: children say milk tastes like chalk USA Today reports during 2012-2016: skim milk sales were down 36% organic milk sales were flat flavored milk sales were up 9% whole milk sales were up 2.4%
20
“Need to be three products and services ahead of the curve.”
Mega Trends:Technology & Production
Country Corn(Percent Change)
Soybeans(Percent Change)
U.S. 21% 55%
China 48% 1.1%
Brazil 85% 108%
Argentina 174% 73%
Canada 36% 125%
Europe -9%
Paraguay 168%
21
Metric Tons Increase Since 2008-2009 til 2018
Source: Kirksville, MO presentation - University of Missouri
three layers of change• technology• new resources• weather & climate change
Mega Trends:Export Market Share
22
United States Brazil
Corn Beans Corn Beans
Mid 70’s 75% 96% 1% 1%
2000 64% 50% 8% 28%
2019 33% 35% 20% 50%
Source: The Economist Magazine- 2019
Mega Trends 2020-2030: Non-Government Organizations
Smithfield lawsuits Monsanto lawsuits others biosecurity open pens antibiotic free animal welfare
23
“NGOs more disruptive than government regulations.”
Mega Trends 2020-2030:Technology: Productivity
interruptions occur on average every 2-7 minutes It takes a half hour to regain focus after interruptions drops IQ 10 points once interruptions occur interruptions contribute to a poor night’s sleep need 2 hours per day with no technology errors increase 19 times 4 alcoholic drinks techlash People touch their phone 2,617 times per day on average, or 2 hours and
25 minutes. Source: Wall Street Journal on May 17, 2018.
24
“Silence is golden.”
Mega Trends 2020-2030:Old School Generation Vs. New School Generation:
Old School Generation New School Generation
control structure and scaffolding
manage mentor
collaboration balance (group and private time)
career path projects with meaning
tell how to do “show me” problem solvers
8-5 productivity & flexibility
courses and “talking head” lectures bite size, digestible, “flipped” learning
formal job description (set) create job description (agile)
task focused Internship/experientially focused
training training & development “life skills”
25“Old school vs. new school.”
Are you an old school generation or a new school generation?
Agricultural Business Growth:Green Shoots value added young & beginning farmers/ranchers family business transition gig economy dialed in/high tech low investment resourceful
26
Future Business Models: Young Farmers & Ranchers family business cousins partnering with
cousins non-family members separate enterprises/use
common assets
agri-entrepreneur multi-tasker gigs diversified sources of
income
boomeranger professional “outside the box” mindset new skill sets
women, minorities, veterans demographics of FFA & 4-H
vertical & urban farming
27
Median Net Farm Income
28
Net Farm Income, 2018
29
Generational Financial Performance Comparisons Super Cycle & Post Super Cycle
2012 2018
Financial MetricSuper Cycle
Median10 to 40 Years
Under 10 yearsPost Super
Cycle Median 10 to 40 years
Under 10 years
Number of Farms 2,881 744 2,451 836
Net Farm Income $197,828 $90,865 $30,752 $26,855
Return on Assets (ROA) 10.6% 14.4% 1.4% 3.6%
Operating Profit Margin (OPM) 30.5% 30.0% 6.8% 11.6%
Asset Turnover Ratio 45.3 55.3 21.5 35.9
Working Capital/Revenue 39.9% 27.6% 19.0% 19.8%
Term Debt Coverage 3.37 3.18 0.94 1.63
Debt/Asset Ratio 35% 54% 38% 58%
Non Farm Income (NFI) $13,162 $17,891 $16,013 $28,728
Family Living $53,536 $36,959 $49,987 $32,996
Capital Expenditures $126,770 $69,333 $49,000 $28,705
Machinery/Equip. Invest Per Acre $558 $290 $670 $231
Term Debt/EBITDA 1.10:1.0 1.11:1.0 2.59:1.0 1.63:1.0 30Source: FINBIN, https://finbin.umn.edu/
Super Cycle & Post Super Cycle Game Critique – Youth Vs. Experience
Younger Farmers/Ranchers maintain operating margins have stronger asset
turnover ratios preserve working capital have much stronger term
debt coverage ratio post super cycle more off farm income less family living withdrawals
have half as much machinery investment per acre
31
Experienced Farmers/Ranchers term debt to EBITDA
increased dramatically refinance losses and term debt
decrease EBITDA
have much stronger equity position, debt to asset ratio, under 40% represents resiliency
capital expenditures strong, good times
have twice as much machinery investment per acre
VS.
Business IQ:Spectrum of Performance Possibilities
32
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
Paddling - Upper Right Quad.Code Green - Disciplined Growth
strong business IQ score of 35+ proactive manager > 60% equity term debt to EBITDA <2.5:1 operating expense/revenue ratio (excluding
interest and depreciation) <75% working capital to expenses >30%
33
Treading Water- Upper Left Quad.- Limited Growth
moderate business IQ score of 20-34 70% equity working capital to expenses >20% operating expenses/revenue ratio (excluding
interest and depreciation) >80% competitive issues in industry
34
Paddling or Bailing Water – Lower Rt. Code Orange - Excessive Growth
Paddling towards Green business IQ score >38 ROA averages 6% <50% equity modest family living
expenses dimensional revenue
streams earns and turns
35
Bailing towards Red business IQ score of <28 profit issues- ROA
averages 1% <50% equity high living costs specialized revenue
streams lack earns & turns
Bailing Water -Lower Left Quad.Code Red- Partial or Total Liquidation
poor business IQ score of <20 reactive manager <40% equity working capital is negative operating expense to revenue over 90% excessive family living expenses victims & “know-it-alls”
36
Tim’s Triple Play
cost control, right cost marketing and risk management asset, capital and human efficiencies
37
2020 Winter Renewal Season Dashboard
Criteria Calculation Vulnerable Resilient AgileCustomer
3 Year Average
Operating Expenses/Revenue
Operating Expenses¹Total Farm Revenue
>85% 75-85% <75%
Term Debt/EBITDA Total Term Debt (non-operating)EBITDA²
>6:1 3:1-6:1 <3:1
Working Capital/Expenses
Current Assets - Current Liabilities Total Farm Expenses
<10% 10-33% >33%
Coverage Ratio (Net Farm Income + Interest + Depreciation + Total Non-Farm Income – Income Tax Expenses-Family Living Withdrawals) / Total Annual Principal & Interest Payments on Term Debts & Capital Leases
<110% 110-150% >150%
¹Operating Expenses Excluding Interest and Depreciation² EBITDA = Net Farm Income + Interest + Depreciation 38
Top Performing CEO Producer
business profit success formula: P=O+C+L+M² profit plan 60-30-10 people plan 40-20-40 cash & liquidity = Queen capital & equity = King profits & cash flow = Kingdom earns & turns = profitability head/heart interdependent: focus on fundamentals follow through burn the free fuel “A.R.E.” goal setting 80-16-4 network of people = financial net worth & self worth
39
Business IQ: Management Factors40
Business IQ: Management FactorsCritical Questions for Crucial Conversations
Customer Checklist Green (3-4 points*) Yellow (2 points) Red (1 point)
1. Knows cost of production Written In head No idea
2. Knows cost of production by enterprise Written In head No idea
3. Goals- business, family & personal Written In head No idea
4. Record keeping system Accrual Schedule F (one & done) No idea
5. Projected cash flow Written In head No idea
6. Financial sensitivity analysis Written In head No idea
7. Understand financial ratios, break evens Written In head No idea
8. Work with advisory team and lender Yes Sometimes Never
9. Marketing plan written and executed Yes Sometimes Never
10. Risk management plan executed Yes Sometimes Never
11. Modest lifestyle habits, family living budget Yes Sometimes Non existent
12. Written plan for improvement executed & strong people management
Yes Sometimes Non existent
13. Transition plan/Business Owner plan Yes Working on plan Non existent/controversy
14. Educational seminars/courses Yes Sometimes Never attend
15. Attitude Proactive Reactive Indifferent
Score Overall Analysis
35-50 Strong management rating & viability
20-34 Moderate risk & viability; will most likely show previous refinancing
<20 High risk & lack of long term viability
*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 41
Business IQ: Management FactorsCritical Questions for Crucial Conversations 1
Progressive Business:We find Progressive Businesses do:
#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 financial ratios (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 farm record systems or FINBIN - University of Minnesota.
#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.
To obtain four extra points they must have evidence of accomplishments of 4 out of 5 of these (#2, #6, #7, #8 #14) to be considered a progressive business.
42
Business IQ: Management FactorsCritical Questions for Crucial Conversations 2
Struggling Business attempting turnaround:We find that if these Struggling Businesses have done the following:
#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.
To obtain four extra points they must have evidence of accomplishments of these (#3, #5, #8, #11, #12) to be considered a struggling business heading for a successful turnaround.
43
Business IQ: Management FactorsCritical Questions for Crucial Conversations
Customer Checklist Green (3-4 points*) Yellow (2 points) Red (1 point)
1. Knows cost of production Written In head No idea
2. Knows cost of production by enterprise Written In head No idea
3. Goals- business, family & personal Written In head No idea
4. Record keeping system Accrual Schedule F (one & done) No idea
5. Projected cash flow Written In head No idea
6. Financial sensitivity analysis Written In head No idea
7. Understand financial ratios, break evens Written In head No idea
8. Work with advisory team and lender Yes Sometimes Never
9. Marketing plan written and executed Yes Sometimes Never
10. Risk management plan executed Yes Sometimes Never
11. Modest lifestyle habits, family living budget Yes Sometimes Non existent
12. Written plan for improvement executed & strong people management
Yes Sometimes Non existent
13. Transition plan/Business Owner plan Yes Working on plan Non existent/controversy
14. Educational seminars/courses Yes Sometimes Never attend
15. Attitude Proactive Reactive Indifferent
Score Overall Analysis
35-50 Strong management rating & viability
20-34 Moderate risk & viability; will most likely show previous refinancing
<20 High risk & lack of long term viability
*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 44
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?
45
Three areas/points to continue:• ______________________• ______________________• ______________________
Three areas/points to improve:• ______________________• ______________________• ______________________
