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

views from the road
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
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
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
Emphasis of Next Farm Bill
  • conservation & the environment
  • rural & energy
  • homeland security & nutrition
  • less dollar support
  • WTO
global partners
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
The Economy & Interest Rates
  • short-term rates
    • core inflation
    • housing market
    • labor issues
  • long-term rates
    • federal debt
    • value of dollar
  • lead economic indicators
five critical elements for smaller farms
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
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
Nuts & Bolts of Business Models
  • P = O + C + L + M2
  • earns and turns
  • working capital for extremes
  • enterprise analysis “202”
capital turnover
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%
margin management
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%
liquidity
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%
positioning for flexibility short run
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
positioning for flexibility long run
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