Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech

1. How to Make Money in Agriculture Today Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-2094 (Alicia Morris) e-mail: sullylab@vt.edu Weekly Website Columns:Ag Globe Trotter: www.farm-credit.comRoad Warrior of Agriculture: www.cornandsoybeandigest.com

2. 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

3. 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

4. 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

5. Emphasis of Next Farm Bill • conservation & the environment • rural & energy • homeland security & nutrition • less dollar support • WTO

6. 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

7. The Economy & Interest Rates • short-term rates • core inflation • housing market • labor issues • long-term rates • federal debt • value of dollar • lead economic indicators

8. Widening of Performance2400 Farms & Ranches

9. 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.”

10. 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.”

11. Nuts & Bolts of Business Models • P = O + C + L + M2 • earns and turns • working capital for extremes • enterprise analysis “202”

12. Capital Turnover • gross revenue/total assets • ideal capital turnover varies by enterprise 0 – negative 1 – 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% • Red (0-4) • Under 20% • Yellow (5-8) • 20 to 40% • Green (9-10) • Over 40%

13. Margin Management • net profit/gross revenue • net profit margin times asset turnover equals ROA 0 – negative 1 – 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% • Red (0-4) • Under 9% • Yellow (5-8) • 9 to 16% • Green (9-10) • Over 16%

14. Liquidity • net working capital / total expenses 0 – negative 1 – 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%

15. Positioning for FlexibilityShort Run • 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

16. Positioning for FlexibilityLong 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