TAKING CAREOF BUSINESS

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) | sullylab@vt.edu

January 8, 2019

Why Some Businesses Are More Profitable Than Others

These businesses are a “little” better at: production marketing cost control asset and capital efficiency

utilize the 5% Rule

2

Median Net Farm Income

3

Is the New Normal the Old Normal?

Time Period Approximate Net Farm Income

In Constant Dollars

Era Name

2013-2017 $35,000 Agricultural Economic Reset

1996-2001 $50,000 Asian Tigers Boost Commodity Demand

2001-2005 $54,000 Pre Agricultural Super Cycle

2007-2012 $125,000 Agricultural Commodity Super Cycle

4

Source: https://finbin.umn.edu/

Net Farm Income, 2012

5

Net Farm Income, 2016

6

Net Farm Income, 2017

7

8

Collateral Mountains WorkingCapital Hills

Cash Peak Inventory

Pinnacle

Accounts Receivable Ridge

Prepaid Promise

Lake Earnings

Earned Wealth Inlet

Non-Farm Earnings Spring

Business Net Income

Spring

Capital Infusion or Refinancing

Canteen

*EBITDA- Earnings Before Interest, Taxes, Depreciation & Amortization

Adapted From: Harlan Hill- Hill Financial Education

Prosperity ValleyFamily Living/

Dividends Creek

Principal & Interest/

Operating Delta

Killer Toy

Swamp

Cap Ex & Growth Run

Income Tax

Gulch

How quick to cash?

25%

50%

25%

Postponed

Economic Warming

The Burn Rate – Working CapitalAdversity vs. Opportunity

Defensive “Adversity Oriented”Current Assets: $2,000,000

-Current Liabilities: $1,000,000= Working Capital: $1,000,000

Projected Loss: $500,000

Working Capital = 2 YearsProjected Loss

Red < 1.0 Year = VulnerableYellow 1.0-3.0 Years = ResilientGreen >3.0 Years = Agile

9

Offensive “Opportunity Oriented”Current Assets: $2,000,000-Current Liabilities: $1,000,000= Working Capital: $1,000,000

Debt Service(Existing & New) Payments: $200,000Working Capital = 5 YearsTotal Debt Service Payments

Red < 2.5 Years = VulnerableYellow 2.5-5.0 Years = ResilientGreen >5.0 Years = Agile

Burn Rate on Core EquityAdversity vs. Opportunity

10

Assets- Market Value

Estimated Value

Loan Maximum

Collateral Position

RemainingPrincipal

Equity Excess Reserves

1. Long Term (20% Decline on Land)

$6,000,000$4,800,000

X 70%X 70%

= $4,200,000= $3,360,000

- $2,200,000- $2,200,000

= $2,000,000= $1,160,000

2. Intermediate $3,000,000 X 60% =$1,800,000 - $800,000 = $1,000,000

3. Current $1,650,000 X 80% =$1,320,000 - $860,000 = $460,000

Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $2,000,000 = 4.0 YearsEarnings Loss¹ $ 500,000

20% Decline Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $1,160,000 = 2.32 Years

Earnings Loss¹ $ 500,000¹ Assume Earnings Loss of $500,000

(Assume $500,000 Earnings Loss & 20% land value decline)

Red < 4.0 Years = VulnerableYellow 4.0-7.0 Years = ResilientGreen >7.0 Years = Agile

Business IQ: Management FactorsProgressive BusinessesCustomer 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. 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

Financial Philosophy & Perspectives cash is Queen – chess board equity is King profits and cash flow are the Kingdom volatility is either friend or foe business IQ will be the difference maker

12

Critical Financial Performance Index for Debt & Risk

Criteria Calculation Vulnerable Resilient AgileCustomer

3 Year Average

Debt/Asset Ratio Total Farm LiabilitiesTotal Farm Assets

>70% 40-70% <40%

Term Debt/EBITDA Total Term Debt (non-operating)EBITDA¹

>6:1 3:1-6:1 <3:1

Working Capital/Expenses

Current Assets - Current Liabilities Total Farm Expenses

<10% 10-33% >33%

Operating Expenses/Revenue

Operating Expenses²Total Farm Revenue

>85% 75-85% <75%

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%

8

¹ EBITDA = Net Farm Income + Interest + Depreciation² Operating Expenses Excluding Interest and Depreciation

Habits of Successful Businesses 1

goal focused & balanced business family personal

core values focused on five to seven key words that means success invest in productive assets

land machinery & equipment livestock people

modest family living withdrawals from the business develop and monitor income statements and cash flows

monthly quarterly

14

Habits of Successful Businesses 2

understand macro economics- how it creates opportunities and challenges and complete scenario analysis for: production price cost interest rates

follow the management principle of better before bigger 5% rule

60-30-10 rule of profitability and positive economic cycles interdependent vs. independent – know the value of people best crop you will ever raise

children grandchildren aspiring agriculturalists

15

Staying Positive in the Down Cycle network of people = self worth + net worth older – mentor and wisdom education and development take a look at yourself exercise hear the silence

giving back sweat the small stuff position for small accomplishments

16

Four “P’s” of Success

Purpose: working toward your passion Picture: mapping where you want to go Planning: written business plan & mental

image detailing your strategy and tactics Partnering: the people you will engage and

align with to accomplish the plan

17

Questions

18

Business IQ: Management FactorsCritical Questions for Crucial Conversations

19

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. 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 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

20

Part 2

AGRICULTURAL ECONOMICMEGA TRENDS

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) | sullylab@vt.edu

January 8, 2019

Radar Screen 2019-2020: “Low Beams” international trade USMCA China’s Belt & Road Initiative other

slowing of the global economy post mid term elections baby boomer, farm land values, “the great bridge” great wall of protein U.S. economy all time record! interest rates/dollar debt, debt, and debt- Achilles’ heel

22

U.S. Farm Real Estate Values

Source: Dr. Steve Isaacs, University of Kentucky

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

24

Land Value Resilience

local or regional vs. state or national marginal land values crop insurance hedge funds low interest rates cycle of refinancing Baby Boomer farmer

25

Factors Contributing to Dramatic Discount in Land Values

100 to 200 basis point increase in long term interest rates more conservative refinance cycle outside investors seeking alternative

investments supply and demand in a given area strong value of dollar, higher rates, less export

potential crash of the U.S. or global economy

26

State of U.S. Economy

110-plus months 106 & 120 months urban and coastal economies and the fly over

states central bank driven- U.S. and abroad wealth effect consumer investing consumer spending

27IMPACT: killers of economic expansions

Federal Reserve’sInterest Rate Barometer

Indicator Current Estimated “Flag” Levels

Unemployment Below 5.0% or Above 6.0%

GDP Growth Above 3.0% or Below 2.0%

Inflation Above 2.5% or Below 1.0%

Consumer Sentiment Above 90 orBelow 80

28

• Three increases in 2019

• trends matter • stock market/real estate wealth effect• copper prices

Mega Trends 2020-2030: “High Beams”

29

Mega Trends 2020-2030:Dietary Trends

Millennials, Gen Z & Baby Boomers cultured meat & non-dairy vegans- U.S. & abroad environmental footprint 95% of success is alignment of: resources talents markets

experiences & personalization vs. commoditization

30

“We have not seen anything yet.”

Mega Trends 2020-2030:Tech Transformation

robotics data in the food chain retail & wholesale disruption blockchain technology

31

“Market disruptors.”

Mega Trends 2020-2030: Non-Government Organizations

Smithfield lawsuits Monsanto lawsuits others biosecurity open pens antibiotic free animal welfare

32

“NGOs more disruptive than government regulations.”

Mega Trends 2020-2030:Technology/Consumer

bio engineering information convergence production consumers/food industry/producers great wall of protein & “impossible burger sliders” skill base

analyze data critical thinking communication

first replaces labor higher level of talent

systems/replicate – use of information data too connected

33“Think beer.”

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.

34

“Silence is golden.”

Mega Trends 2018-2030: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%

35

Metric Tons Increase Since 2008-2009 til 2018

Source: Kirksville, MO presentation - University of Missouri

Mega Trends 2020-2030:Oil & Energy Economics

911 tragedy U.S. is globe’s major energy producer drive towards efficiency solar, wind, and electric 2040 Germany & France electric vehicles 2025- one fourth of cars in China will be electric Central Africa will become the new Saudi Arabia

36

“80% of ag expenses are energy related.”

Mega Trends 2018-2030:Natural Resource/Environmental

great water wars soil health air quality extremes in global weather moisture, temperature, other

energy weather applications to farming

37

“Accidental superpower: America/your business”

Mega Trends 2020-2030:Millennials, Gen Z/Gen A 18-28 years old- 7.2 jobs $15,000- $20,000 cost of leaving 91% turnover in 3 years Gen Z values college degree less 4 generation work force

38

“Five year itch.”

Mega Trends 2020-2030:Old School Generation Vs. New School Generation

Old School Generation New School Generation

Control Structure

Manage Mentor

Collaboration Private Time

Career Path Projects

Tell How to Do Problem Solvers

8-5 Productivity & Flexibility

Course Bit Size

Job Description Create Job Description

Task Internships

Training Training & Development “Life Skills”

39“Old school vs. new school.”

Mega Trends 2020-2030:People & Lifelong Learning people skills life long learning 3 to 5 educational venues annually aptitude vs. emotional intelligence internships 3,000/500/2,500 hour Rule

40

“If you are going to lead, then you must read.”

Mega Trends 2020-2030:2020 Decade of Transition

agri-entrepreneurs multi task larger complex businesses cousins non-family members

women in farming, ranching, ag lending, and agribusinesses ag lending / non-traditional

41

“The mythical becomes typical.”

Mega Trends 2020-2030:Black Swans of the Economy

immigration disease cyberattacks in technology air banking agriculture

weather world wide economic debt depression

42“Paradigm shift in the economy.”