1. G LOBAL E CONOMICS : P OINTS TO P ONDER Weekly Columns: Ag Globe Trotter: www.farm-credit.com Road Warrior of Agriculture: www.cornandsoybeandigest.com Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Virginia Tech, Blacksburg, VA (540) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | sullylab@vt.edu November 4, 2011

2. Black Swans  oil  Japan  sovereign debt issues  social unrest  other 2

3. Mega Trends of the Second Decade 3 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.”

4. Mega Trends of the Second Decade 4 Economic moderation of developed nations:  public debt  aging population  entitlements  1-2% Rule “These nations could become a cluster of powerful economic nations.”

5. Game Changers for the Agricultural Economy  livestock/other  south/coastal/other  input/cost  consolidation  regulation/consumers  liquidity/equity decline  volatility Tailwinds Headwinds 5  crop & row crop  Upper Midwest/Canada: “islands of prosperity”  Asia/China export  ethanol  low value of the dollar  weather  land values “bullish”  low interest rates 8-year super cycle

6. Contrasting Economies USA (Hertz)China (Avis) Ranking#1#2 Inflation2.0%5.7% Growth Rate1.3%8.7% Debt/GDP95%33% Consumer Spending/GDP72%35% Household Income$47,000$4,300 Issuedeflationinflation ResponseQE2stockpiling food & fuel 6

7. Lenders’ Top Questions for Dr. Kohl 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

8. 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 light5:1 to 10:1  red light>10:1  GDP growth of emerging economies/BRICS nations  green light>7%  yellow light3%-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” 8 2011 Projected Debt to Income: 2.35:1

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

10. Global Economic GDP Growth Benchmarks LocationGreenYellowRed USA>3%0-3%Negative Europe>3%0-3%Negative Japan>3%0-3%Negative BRICS Nations*8-10%4-7%<3% *Brazil, Russia, India, China and South Africa © 2010 by Dr. David Kohl & Dr. Ed Seifried 10

11. Global Economic GDP Growth AssessmentLocationCurrentGreenYellowRed USA Europe Japan BRICS Nations* *Brazil, Russia, India, China, and South Africa Fill in current status and check green, yellow or red for each region. © 2010 by Dr. David Kohl & Dr. Ed Seifried 11

12. The World According to Oil Source: POET vital, Spring 2010 12

13. The World According to Water Territory size shows the proportion of all worldwide freshwater resources found there. 13 Source: www.worldmapper.orgwww.worldmapper.org © Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan) 13

14. 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 14

15. U.S. Farm Real Estate Values Source: Dr. Steve Isaacs, University of Kentucky 15

16. Farm & Ranch Land/Real Estate Clock Increasing Declining RapidSlow Positive Slow Increase Positive Rapid Increase Negative Slow Decline Negative Rapid Decline What’s happening in your area? High quality land & row crop Mineral, oil, water influences Competitive agriculture & aggressive investors Ag industries in down cycle Recreational farm and ranch land Urban fringe after bubbles Lower quality land Ag industries are not competitive Older buyers Grains & row crops Urban fringe/ satellite cities Stable 16

17. 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 17

18. Progression List in Land Acquisition & Expansion ItemYesNo 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.? 18

19. Doc’s Economic Clock: Dashboard Indicators Yellow Yield Curve Factory Utilization Green Leading Economic Index ® (LEI) LEI Diffusion Index Purchasing Manager Index Orange Oil Prices Core Inflation Headline Inflation Red Housing Starts Unemployment 19

20. Lenders’ Top Questions for Dr. Kohl 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 20