he state of agriculture ag lending · dr. david m. kohl. professor emeritus, agricultural and...
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THE STATE OF AGRICULTURE & AG LENDING
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]
March 19, 2018
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March 19, 2018
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Top Economic Indicators for Agriculture economic growth of export partners value of the dollar growth of the U.S. economy interest rates/Federal Reserve actions farm records databases
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Radar Screen
international trade agreements NAFTA CPTPP
immigration Central Bank Policy in U.S. and abroad wealth effect/correction oil & energy sector weather- Southern Hemisphere & Northern Hemisphere accelerated transition
farming and ranching ag lenders agricultural and rural areas urban satellite cities
geopolitical economy- global and U.S. 4
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Top U.S. Ag Exports
Percentage exports of total production 2011-2013
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Crop Percentage (rounded)
Cotton 77%
Tree Nuts 72%
Rice 52%
Wheat 51%
Soybeans 46%
Fresh Fruit 28%
Processed Vegetables 25%
Pork 22%
Poultry 19%
Milk 14%
Source: USDA Economic Research Service
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Top Destinations of U.S. Ag Exports
Country Billion Dollars Rounded
Canada $21
China $20
Mexico $18
EU-28 $12
Japan $11
South Korea $6.0
Hong Kong $3.6
Taiwan $3.0
Colombia $2.4
Philippines $2.3
Vietnam $2.2
6Source: USDA Economic Research Service
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Black Swans of Agriculture
immigration international trade disease cyberattacks in technology, satellite, air travel,
etc. weather market disruption government policy other
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Evolution of the Agricultural Economic Cycle- SummerOffensive Domain: 2006-2012 Super Cycle strong demand from emerging nations low value of the dollar low interest rates ethanol boom technology
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Summer Stage
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Evolution of the Agricultural Economic Cycle- FallTransition Domain: 2013-2017 Early Stages of Economic Reset commodity surplus suppressed margins, profits, and cash flow working capital burn refinance for liquidity land values maintain
resiliency
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Fall Stage
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Evolution of the Agricultural Economic Cycle- WinterDefensive Domain: 2018-2021 widening gap of economic performance vendors/non-traditionals provide operating credit working capital bridge unstable core equity burn rate marginal land steep decline top 40% selectively grow
business
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Winter Stage
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Evolution of the Agricultural Economic Cycle- SpringCreative Domain: 2021-2025 Regeneration greenliners vs. redliners equity & tenure vs. management & growth consumer driven data driven people driven one size enterprise does not
fit all
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Spring Stage
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Wisdom on Economic Cycles 1
When the bottom third of any industry makes money, then economic difficulties are ahead.
Technology growth and use accelerate by strongest managers in offensive domain creating surplus within two to five years.
“Fence row to fence row” mentality including overpaying for marginal resources- “growth blinders”
Lowest interest rate is the #1 attribute in offensive domain. Relationship is the #1 attribute in the transition, defensive and creative domains.
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Wisdom on Economic Cycles 2
Operating lines of credit, working capital and liquidity are the “choke points” of any business.
Family living cost follows the Corvette Rule through six decades of economic cycles.
“If you’ve got the dirt, you can’t get hurt” mentality creates complacency in producer and lender.
Credit scoring and risk rating systems work if you don’t check your brain at the door.
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State of the U.S. Economy
over 100 months of expansion 106/120 months coastal vs. fly over states Republicans/recession velocity of money stock market
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Killers of Economic Expansion
expansions don’t die/killed off Central Bank tightening strategies oil prices stock market decline bubbles
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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
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• Three increases in 2018!
• trends matter • stock market/real estate wealth effect• copper prices
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Agricultural Economic Cycle Spectrum:Stages of the Financial Statements
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StressOpportunity
Profit/Cash Flow Liquidity/Working Capital Core Equity
Top 40% of producers Tweeners Bottom 30% of
producers
Launch & Agility Bridge Pier
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Net Farm Income, 2012
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Net Farm Income, 2015
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Net Farm Income, 2016
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Top 40% Proactive Producers “Greenliners” 5 percent rule 10-25 percent marketing advantage lower rent cost $20- $50 per acre lower crop input costs $20- $50 per acre modest living expenses sound financial system systems approach
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Bottom 30% of Producers “Redliners” marginal resources demographics cycling out rent & lease - equity in devaluing machinery lack of financial/marketing systems skills operate using Schedule F with “minimize taxes”
mentality rusted out, worn out or faded out assets high maintenance living undisciplined pursuit of more lack HUT principle know it all/victim mentality
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Take Home Tools Regardless of the Cycle:Refinancing Request Filter Questions
Refinancing Request Filter Questions Yes NoPoor lifestyle habits (family living, killer toys)?
Poor management habits?
Poor marketing and financial habits?
Failure to build working capital in good times?
Uncontrollable events (macro or micro)?
Repeating refinance cycle multiple times?
Poor quality collateral assets (land, machinery, livestock)?
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Questions to ask before refinancing a customer:
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Take Home Tools Regardless of the Cycle:Accrual Analysis
Question Positive Negative1. What is the direction of inventory value?
2. What is the direction of aging accounts payable?
3. What is the direction of accrued expenses?
4. What is the direction and aging of accounts receivable?
5. What is the direction of amount of prepaid expenses?
6. Operating lines of credit vs. inventory/receivables
7. Are current assets quick to cash?
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Seven Major Questions/Answers for Accrual Analysis
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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
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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
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Assets- Market Value
Estimated Value
Loan Maximum
Collateral Position
RemainingPrincipal
Equity Excess Reserves
1. Long Term (20% Decline on Land)
$2,000,000$1,600,000
X 70%X 70%
= $1,400,000= $1,120,000
- $700,000- $700,000
= $700,000= $420,000
2. Intermediate $1,000,000 X 60% =$600,000 - $300,000 = $300,000
3. Current $1,650,000 X 80% =$1,320,000 - $860,000 = $460,000
Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $420,000 = 2.8 YearsEarnings Loss¹ $150,000
¹ Assume Earnings Loss of $150,000
(Assume $150,000 Earnings Loss & 20% land value decline)
Burn Rate on Core EquityAdversity vs. Opportunity
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Ten Commandments of Character 1
1. follow thru on commitments educational programs financial statement requests
2. use of borrowed funds as agreed upon3. accuracy in financial statements such as
balance sheet, income statement, etc.4. willingness to sacrifice lifestyle pursuits and
balance with business growth5. good communication of goals and in times
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Ten Commandments of Character 2
6. minimal surprise business purchases7. willingness to work with advisory team8. consider constructive coaching9. proper use of profits, cash flows and windfalls10.have and utilize a network of people, peers,
and pursuits
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Top Management Views from Farmers & Ranchers calculates profitability by field constructed and followed family living budget dropped 3,000 acres of rented cropland maintained 40% working capital to expenses monitor financials every two weeks with CFO fired the son, hired the daughter boomeranger engineer applies systems peer group discussions: readings, seminars, webcasts 5% rule toured Canada
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Management Checklist
Question Yes No
Do you know cost of production?
Do you know cost of production by enterprise?
Do you have modest family living expenses?
Have you shed non-productive or non-economical assets?
Do you have a written improvement plan?
Do you practice four corners of business success? Plan, Strategize, Execute, Monitor
Do you execute a marketing plan?
Do you have a handle on record keeping?
Do you sweat the small stuff?
Are you preparing for the next generation?
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One Page Recovery Plan
Goals one year and five year business, family, & personal
Cash Flow: production: plan, strategize, and metrics marketing: plan, strategize, and metrics systems: plan, strategize, and metrics
Break evens: production, price, and cost Sensitivity analysis: production, price, and cost Plan for monitoring: monthly, quarterly Advisory team Other income equity/recurring/non-recurring People’s roles, rules of engagement, checkpoints and communications Plan for B/C/D
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Critical Financial Performance Index
Criteria Vulnerable Resilient Agile Customer Ranking Code
Coverage Ratio <110% 110-150% >150%
Working Capital/Expense <10% 10-33% >33%
Debt/Asset Ratio >70% 40-70% <40%
¹Operating Expenses/Revenue
>85% 75-85% <75%
EBITDA/Revenue <10% 10-25% >25%
Term Debt/EBITDA > 6:1 3:1- 6:1 <3:1
Burn Rate/WC <1 Year 1-3 Years >3 Years
Burn Rate/CE <2 Years 2-5 Years >5 Years
Family Living High Maintenance
Moderate to High Low to Moderate
Cap Ex Postponed >3 Years
Postponed 1-3 Years
Continuous Upgrading
Cost of Production No idea Mental & by whole operation
Via Enterprise
32¹ Operating Expenses (excluding interest & depreciation)
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Ten Habits of Successful Banks That Prosper Regardless of Cycle 1
1. perceptual acuity of big picture 20/20 foresight2. board of directors and management teams that think
and act progressively3. culture of education for internal customers, the
employees, external customers, producers and community in general
4. strong people culture: common words family and caring, firm but fair, strong communications, servant leadership
5. invest in the future: young farmers/ranchers, FFA, 4-H, other leadership groups and community programs
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Ten Habits of Successful Banks That Prosper Regardless of Cycle 2
6. provide value added: benchmarking data, customized financing, and alignment by generations
7. internships: Millennials and Gen Z8. six C’s of lending- organization/lender9. champion ag banker or ag banker team10. a balance between the head and the heart-
understanding the “why’s” of business
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