G

LOBAL

E

CONOMICS

: P

OINTS TO

P

ONDER

Dr. David M. Kohl

Professor Emeritus, Agricultural and Applied Economics Virginia Tech, Blacksburg, VA (540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | [email protected]

November 4, 2011

Weekly Columns: Ag Globe Trotter: www.farm-credit.com Road Warrior of Agriculture: www.cornandsoybeandigest.com

Black Swans

     oil Japan sovereign debt issues social unrest other

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Mega Trends of the Second Decade

Rise of emerging nations:      BRICS 20% of world economy and 50% of world growth 8 - 5 - 3 Rule southern hemisphere competition China: 7 th to 2 nd ; Brazil: 14 th to 6 th

“The long term viability of these nations will be defined by the way they handle adversity.” 3

Mega Trends of the Second Decade

Economic moderation of developed nations:     public debt aging population entitlements 1-2% Rule

“These nations could become a cluster of powerful economic nations.” 4

Game Changers for the Agricultural Economy

Tailwinds 8-year super cycle Headwinds

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crop & row crop Upper Midwest/Canada: “islands of prosperity”

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Asia/China export

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ethanol low value of the dollar weather land values “bullish” low interest rates

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livestock/other south/coastal/other

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input/cost

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consolidation regulation/consumers liquidity/equity decline volatility 5

Contrasting Economies

Ranking Inflation Growth Rate Debt/GDP Consumer Spending/GDP Household Income Issue Response USA (Hertz) #1 2.0% 1.3% 95% 72% $47,000 deflation QE2 China (Avis) #2 5.7% 8.7% 33% 35% $4,300 inflation stockpiling food & fuel 6

What are the top challenges/risks to the ag industry in the next 5 years?

    volatility and global markets asset bubble vs. credit bubble normalization of deviation: NASA example young lenders and producers have never faced a downturn   agriculture business cycle making decisions on tax returns rather than on accrual-adjusted records

7 Lenders’ Top Questions for Dr. Kohl

What are early warning risk management metrics?

   total US farm debt to net farm income  green light <5:1  yellow light 5:1 to 10:1  red light >10:1

2011 Projected Debt to Income: 2.35:1

GDP growth of emerging economies/BRICS nations  green light >7%  yellow light 3%-7%  red light <3% early warning signs for producers  more than five different sources of credit     debt to asset ratio above 50% working capital to revenue ratio below 20% “If it grows too fast, then it’s a weed.” sixth “C”

Lenders’ Top Questions for Dr. Kohl 8

World Growth

Canada -0.4% Britain 0.4% Mexico 4.5% U.S. 1.3% Euro zone 0.6% France 1.7%Q2 Brazil 3.1% Germany 0.5% Iceland -10.9% India 7.7%Q2 Russian Fed. 3.4%Q2 China 9.1% Japan -2.1% South Korea 3.6% Indonesia 6.5%Q2 South Africa 1.3% Australia 4.8% GDP Growth % Change from Year Ago 2011 Latest Quarter Figures October 15, 2011 9

Source: www.Economist.com

Global Economic GDP Growth Benchmarks

USA Location Europe Japan BRICS Nations*

*Brazil, Russia, India, China and South Africa

Green >3% >3% >3% 8-10% Yellow 0-3% 0-3% 0-3% 4-7% Red Negative Negative Negative <3%

© 2010 by Dr. David Kohl & Dr. Ed Seifried

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Global Economic GDP Growth Assessment

Fill in current status and check green , yellow or red for each region.

USA Location Current Green Yellow Red Europe Japan BRICS Nations*

*Brazil, Russia, India, China, and South Africa © 2010 by Dr. David Kohl & Dr. Ed Seifried

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The World According to Oil

Source: POET vital, Spring 2010

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The World According to Water

Territory size shows the proportion of all worldwide freshwater resources found there. Source: www.worldmapper.org

© Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan)

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Oil “Black Gold”

      Six of eight recessions in past fifty years due to oil 74% of price of oil – global market value 70% oil produced military/politically sensitive areas 60% of fertilizer military/politically sensitive areas consumers lock up at $3.00 to $3.50 per gallon consumers shut down at $4.00 per gallon

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U.S. Farm Real Estate Values

Annual Percentage Change in US Farm Real Estate Values 1910-2010 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% -5,0% -10,0% -15,0% -20,0%

Source: Dr. Steve Isaacs, University of Kentucky

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Farm & Ranch Land/Real Estate Clock

Increasing •Older buyers •Grains & row crops •Urban fringe/ satellite cities

Positive Positive

Slow Increase Rapid Increase •High quality land & row crop •Mineral, oil, water influences •Competitive agriculture & aggressive investors Slow •Lower quality land •Ag industries are not competitive

Stable

Rapid

Negative Negative

Slow Decline Rapid Decline •Ag industries in down cycle •Recreational farm and ranch land •Urban fringe after bubbles Declining

What’s happening in your area?

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Land Value Correction

    global economic downturn tightening of government policy operating lines/suppliers credit renting/growth oriented farms  all profits for expansion leaving no liquidity  large blocks of land in an area

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Progression List in Land Acquisition & Expansion

Item Have you been profitable in the last three years?

Will the land/expansion result in greater than 50% equity?

Do you have working capital to revenue of 33% or more after expansion?

Will overall profitability after expansion exceed interest rates?

Will overall profitability after expansion result in return exceeding inflation?

Will overall profitability after expansion result in return exceeding w.c.c.?

Yes No 18

Doc’s Economic Clock: Dashboard Indicators

Yellow

Yield Curve Factory Utilization

Orange

Oil Prices Core Inflation Headline Inflation

Green

Leading Economic Index ® (LEI) LEI Diffusion Index Purchasing Manager Index

Red

Housing Starts Unemployment

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What practices could producers use to prepare for economic & policy changes?

     build strong working capital and cash reserves sound risk management program watch financial leverage - 50% rule sound financial records and systems approach prepare for a five year down cycle

Lenders’ Top Questions for Dr. Kohl 20