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Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-20

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.

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Dr. David M. Kohl Professor Emeritus Agricultural and Applied Economics Virginia Tech Blacksburg, VA 24060 (540) 961-20

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  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

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