Transcript Document

Examining Land Values, Cash
Rents, Crop Input Costs &
Potential Crop Profitability in
2015
Barry Ward
Department of Agricultural, Environmental
and Development Economics,
The Ohio State University
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What is Driving Land Value?
>> Crop Net Income has been excellent but will be lower in
’14 &’15
>> Higher or Lower interest rates? – 10 Year T-Bill – 2.2%
>> Farmer’s (crop) equity still solid but will likely not
increase in 2015
U.S. Farm Sector Debt to Asset Ratio ~ 11%
(D/A Ratio in 2002 was 14.8%)
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Ohio Cropland Values
Source: NASS
8.9%
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Land Survey Data - % Increases
OSU AEDE (collected Jan. 2014)
Projected Decrease for 2014 – 4.0 to - 5.4%
Purdue (Indiana) (collected June 2014)
Yearly Increase June 13-June 14 + 6.4 to + 7.1%
Half Year Decrease – Dec 13 – June14 – 0.9 to - 2.3%
Chicago Fed (Collected July 1, 2014)
Indiana - Northern 3/4 – “Good” Farmland
Yearly Change July13 – July14, +3% (District 7, -2%)
3rd Quarter Change, +3% (District 7, 0%)
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U.S. Treasuries – 10 Year T- Bills
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Interest Rates
>>Geopolitical Risk
>>Foreign Demand for Treasuries
>>Demographics – Shifting Investment
to Treasuries and Corp Bonds
>>Stalling World Economy
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Farmland Values: Outlook
Competing Fundamentals:
-Crop Net Income will be lower or negative
-Steady Interest Rates?
versus
-Farmer equity positions are healthy
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What has Driven Rental Rates?
>Crop
Net Income has been good
>Farmers balance sheets have strengthened
+ Larger pool of tenants
+ Rental bids highly competitive - tenants
understand that once land is leased there is a
greater likelihood of retaining the land –
transaction costs to the landowner to change
tenants
>Property tax increases
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+3.6%
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Ashtabula
Williams
Lucas
Fulton
Lake Geauga
Wood
Henry
Ottawa
Lorain
Erie
Sandusky
Trumbull
Cuyahoga
Defiance
Portage
Medina Summit
Huron
Seneca
Paulding
Mahoning
Hancock
Putnam
Wyandot
VanWert
Crawford
Richland Ashland Wayne
Stark
Columbiana
Allen
Hardin
Carroll
Mercer
Marion
Auglaize
Holmes
Morrow
Tuscarawas
Jefferson
Knox
Logan
Union
Shelby
Harrison
Coshocton
Delaware
Darke
Licking
Champaign
Miami
Clark
Preble
Guernsey
Muskingum
Franklin
Belmont
Madison
Fairfield
Greene
Noble
Perry
Montgomery
Pickaway
Monroe
Morgan
Fayette
Washington
Hocking
Butler
Warren
Clinton
Ross
Athens
Vinton
Hamilton
Highland
Clermont
Pike
Brown
Adams
Meigs
Jackson
Gallia
Scioto
Lawrence
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Land Values/Cash Rents 2014 – Northwest
Land Class
Average
Average
Avg Corn Yield (bu/a)
Avg Soybean Yield (bu/a)
Market Value per Acre
Rent per Acre
Top
Avg Corn Yield (bu/a)
Avg Soybean Yield (bu/a)
Market Value per Acre
Rent per Acre
Poor
Avg Corn Yield (bu/a)
Avg Soybean Yield (bu/a)
Market Value per Acre
Rent per Acre
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Range*
162.9
174.7
151.2
49.0
53.1
44.8
$7,009
$8,306
$5,711
$187
$227
$147
192.4
205.5
179.3
60.3
66.7
54.0
$8,389
$9,774
$7,004
$240
$292
$189
135.3
150.7
119.9
37.8
42.3
33.2
$5,455
$6,802
$4,108
$140
$174
$106
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Rental Rates: Outlook
Competing Fundamentals:
Crop Net Income will be lower
versus
Farm balance sheets are healthy
Higher property taxes
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Managing Rents in a Period of
“Normalizing” Profit Margins
o Strengthen Balance Sheet to survive a
reversal
o Communicating with Landowners of the
reality for lower to negative “returns” and
the need for rents to decrease…
o Communicate the value of non-cash
benefits to the landowner
o Consider flexible cash leases
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Energy Information Administration
November 2014 Estimates
2014
2015
13-14
14-15
95.00 77.75
-2.97% -18.16%
Brent Crude ($/brl) 101.04 83.42
-7.00% -17.44%
WTI Crude ($/brl)
Gasoline ($/gal)
3.39
2.94
-3.42% -13.27%
Diesel ($/gal)
3.82
3.38
-2.55% -11.52%
Nat. Gas ($/mcf)
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11.05 11.06
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7.28%
0.09%
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Energy Information Administration
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Energy Information Administration
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Current Ohio Fertilizer Prices
NH3
$755 ($715-800)
UAN(28%)
$328 ($290-380)
MAP
$600 ($565-626)
Potash
$470 ($460-510)
Source: DTN Fertilizer Index
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General Fertilizer Fundamentals
 Lower Crop Prices
 Fertilizer Manufacturing and Mining Profit Margins have
led to generally more global fertilizer production
 Consolidation in the sector
 Farmers have had a wait and see attitude
 This may impact short term fundamentals and prices
as a relatively empty supply chain may create
shortages and price increases in late winter/ early
spring
 Global fertilizer fundamentals suggest flat to lower prices
 Logistical issues may create ongoing bottlenecks…
 Short term retail fertilizer fundamentals may differ…
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Nitrogen
Factors that may lead to N price decreases:
- Lower crop prices leading to tighter margins and potentially
lighter demand
- More domestic N production online
- More domestic N production being built or in planning stages
Factors that may lead to N price increases:
+ Strong crop farm balance sheets
+Production issues have led to limited supply. The issues are short
gas supplies (Trinidad, Egypt), plant turnarounds (Russia,
Australia), and political unrest (Russia, Libya, Ukraine)
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Nitrogen - Greenfield Developments
Plant
Ohio Valley Resources - Spencer County, IN
Midwest Fertilizer Co. - Mt. Vernon, IN
Cronus Chemical - Tuscola, IL
OCI Iowa Fertilizer - Wever, IA
CHS Inc. - Spiritwood, ND
Northern Plains Nit. - Grand Forks, ND
Magnida Nitrogen Idaho - American Falls, ID
AM Agrigen Nitrogen - Kilona, LA
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Cost
952,000,000
2,400,000,000
1,400,000,000
1,800,000,000
3,000,000,000
1,850,000,000
2,300,000,000
1,200,000,000
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Nitrogen - Brownfield Developments
Plant
CF Industries - Port Neal, IA
CF Industries - Donaldsonville, LA
Rentech Nitrogen - East Debuque, IL
LSB Industries - El Dorado, AR
JR Simplot - Rock Springs, WY
Koch Nitrogen Co. - Enid, OK
OCI Nitrogen - Beaumont, TX
Agrium - Borger, TX
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Cost
1,700,000,000
2,100,000,000
40,000,000
300,000,000
350,000,000
1,300,000,000
245,000,000
720,000,000
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Crop Input Costs
Energy – Lower
Fertilizer – Flat to Modestly Lower?
Seed – Modestly Lower to Modestly Higher
Chemical – Modestly Lower to Modestly
Higher Depending on the Product
Machinery/Equipment Depreciation - Higher
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CORN SELECTED BUDGET STATS - 2015
Item
Receipts
Corn Price
Input
$4.00 /bushel
Variable Costs
Seed Cost
$275 /bag
Nitrogen (NH3)
$720 /ton
P205 (MAP)
$570 /ton
K20 (Potash)
$445 /ton
Chemicals
Fuel/Diesel
$3.00 /gallon
Breakeven Cost
Fixed Costs
Labor and Management
Machinery Cost
Land Rent
Breakeven Cost
Returns
Return to Total Costs
Return to Land
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Yield in bushels/acre
163
196
$652.40
$782.80
$110.00
$77.24
$33.07
$16.33
$55.93
$116.88
$90.41
$39.69
$19.59
$55.93
$2.59
$2.35
$77.62
$123.57
$195.00
$5.02
$84.14
$123.57
$250.00
$4.69
-$166.17
$28.83
-$135.45
$114.55
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SOYBEAN SELECTED BUDGET STATS - 2015
Item
Receipts
Soybean Price
Variable Costs
Seed Cost
P205 (MAP)
K20 (Potash)
Chemicals
Fuel/Diesel
Input
$9.90 /bushel
$0.41 /1000 seeds
$570 /ton
$445 /ton
Yield in bushels/acre
48
57
$471.24
$565.29
$73.80
$20.87
$24.71
$32.92
$73.80
$25.04
$29.64
$32.92
$4.61
$3.86
$3.00 /gallon
Fixed Costs
Labor and Management
$53.56
Machinery Cost
$107.89
Land Rent
$195.00
Breakeven Cost
$12.09
Returns
Return to Total Costs
-$104.46
Return to Land
$90.54
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$58.26
$107.89
$250.00
$10.82
-$79.60
$170.40
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WHEAT SELECTED BUDGET STATS - 2014
Item
Receipts
Wheat Price
Input
$5.35 /bushel
Variable Costs
Seed Cost
N (UAN)
P205 (MAP)
K20 (Potash)
Chemicals
Fuel/Diesel
0.031 /1000 seeds
320
550 /ton
405 /ton
$43.40
$24.16
$24.16
$15.80
$13.00
$43.40
$59.86
$28.99
$17.61
$13.00
$2.90
$2.67
$41.89
$125.86
$195.00
$8.94
$45.77
$125.86
$250.00
$8.29
-$184.86
$10.14
-$188.20
$61.80
$3.25 /gallon
Fixed Costs
Labor and Management
Machinery Cost
Land Rent
Breakeven Cost
Returns
Return to Total Costs
Return to Land
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Yield in bushels/acre
73
87
$387.88
$465.45
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Management Challenges
Low to negative margins in light of lower crop
prices
Sticky cash rents and other input costs
Farm Bill Signup
Section 179 Expensing / Accelerated First Year
Depreciation
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Cost Saving Ideas - 2015
1.Re-evaluate crop production inputs - re-examine ROI with $4 Corn
Specialty fertility products, Prophylactic fungicide usage, Consider generic crop
production products, seeding rates
2.Re-evaluate P and K Fertilizer Applications (Where possible according to soil tests)
3.Re-evaluate seed technology investment - re-examine ROI with $4 Corn
4.Re-evaluate Machinery and Equipment line, sizing and add-ons
Machinery costs (fixed, ownership not including repairs or fuel,oil,grease) per acre
target < $55/ac
5.Renegotiate cash leases – lease decreases may decline in symmetry with the
manner in which they increased
6.Reconsider hired labor and purchased service - consider more self repair and
services (equipment repair, spraying, soil sampling etc.)
7.Consider Enterprise crop insurance
8.Re-evaluate farm yield ratios together with price ratios when determining crop mix
9.Re-examine family living expenses
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Prices
Barry Ward
(614) 688-3959
 [email protected]
 http://aede.osu.edu/about-us/our-people/barry-ward
 http://aede.osu.edu/programs-and-research/osu-farmmanagement

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