Dr. David M. KohlProfessor Emeritus

Agricultural and Applied EconomicsVirginia Tech

Blacksburg, VA 24060(540) 961-2094 (Alicia Morris)

e-mail: sullylab@vt.edu

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