2015 farmland leasing outlook gary schnitkey university of illinois
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2015 FarmlandLeasing Outlook
Gary SchnitkeyUniversity of Illinois
www.farmdocDaily.illinois.edu
Net Farm Income Projected in 2015
2015 Projections• $4.20 corn price• $10.00 soybean price• Normal yields • Slight decreases in costs and cash
rents
From FBFM, averages in 2014:• 1,450 tillable acres• All across Illinois
• 19% owned• 39% share rent• 43% owned
Why 2015 lower than 2014:• Marketing gain• Lower projected yields
Financial Strength Increased Between 2006 and 2013
• Intermediate Asset Values Increased
• Debt-to-Asset Ratio Decreased
• Working Capital Increased
Intermediate Assets Per Acre
Debt-to-Asset Ratio
Debt per Acre
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Working Capital
• Current assets relative to current liabilities
• First line of defense for cash shortfalls
• Measures:
working capital = current assets – current liabilities
Working Capital Per Acre
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Where We Are At?
Strong, but weakening, financial position (e.g., current position)
Strong need to reduce cash flows
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National Corn Price, Monthly, 1975 to 2015
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Change from 2013Item Category 2006 to 2013 Costs
$/acre $/acreFertilizers Direct 111 193Seed Direct 69 114Mach. depreciation Power 43 63Pesticides Direct 26 66Crop insurance Direct 16 27Drying Direct 13 24Fuel and oil Power 10 24Machine repair Power 9 22Hired labor Overhead 8 16Machine hire/lease Power 5 11Building repair and rent Overhead 3 6Utilities Power 2 5Misc. Overhead 2 8Building depreciation Overhead 1 5Insurance Overhead 1 10Storage Direct 0 8Light vehicle Power 0 2Interest (non-land) Overhead -6 11
Total 313 615
Table 1. Change in Non-Land Corn Costs from 2006 to 2013 by Cost Item, Central Illinois, High-Productivity Farmland
• $100 cost reduction for 2016
• It has to come from– Cash rents– Fertilizers– Seed– Machinery depreciation– Pesticides
$ per acre
Crop revenue (200 x $3.75) $750ARC Payment 50
Gross Revenue $800
Cash Rent $290Fertilizers 148Seed 124Machinery depreciation 69Pesticides 60Crop insurance 27Machine repair 25Drying 23Fuel and oil 20Hired labor 19Machine hire/lease 11Interest (non-land) 11Insurance 10Misc. 8Building repair and rent 8Building depreciation 7Utilities 5Storage 5Light vehicle 2
Total Costs $872
Net Income -$72
2016 Crop Budget for Corn.
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Types -- Illinois
• Share rent (27%)
• Cash rent (55%)
• Variable cash rent– Cash rent with bonus
• Owned (18%)
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Typical Share RentNorthern/Central Illinois
• Share the following items (typically 50/50): fertilizer, seed, chemicals, drying, storage, crop insurance
• Landlord provides land, pays taxes• Farmer provides equipment and labor
• Often an additional rent of $20 to $35 per acre
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Cash Rent
• Fixed cash rent
• Usually paid in one or two installments, one in spring, one in fall
• Typically one year in length
• Difficulty in setting cash rent each year
• Concerns with fertilizer applications
• Concerns with yield documentation
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Average and Professionally Managed Rents
Land Productivity 2014 2014 2015 2016 (Expected corn yield) Average Rent Rent Expected
$/acre $/acre $/acre $/acre
Excellent (190 bu bu) 293 374 350 318
Good (170 - 190 bu) 243 322 295 267
Average (150 - 179 bu) 159 285 250 219
Fair (less than 150 bu) 214 200 177
Source: Professional rents from Illinois Society of Professional Farm Managers and Rural Appraisers. Average rent from several sources.
Professionally Managed Farmland
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Variable Cash Rents
• From “Parameters for a 2016 Cash Rent with Bonus”, farmdocDaily, September 9, 2015
• Example is for 195 bushel per acre expected corn yield
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Parameters of Farmland LEase
Panel A. Parameters of Cash Lease (agree on parameters before crop year begins)
A. Base cash rent1
$200
B. Maximum cash rent2
$550
C. Crop Corn Soybeans
D. Crop revenue trigger3
$750 $550
E. Landowner share above revenue trigger4
50% 50%
F. Share of acres5
50% 50%
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Calculatin of Bonus
Panel B. Calculation of Bonus (after yield and price are known)
G. Actual yield6
195 55
H. Price7
$3.65 $9.15
I. Crop revenue (G x H) $712 $503
J. Crop insurance payments 0 0
K. Revenue above crop revenue trigger (I+J-D) $0 $0 (put $0 i f less than $0)
L. Bonus per crop (E x K) $0 $0
M. Acre weighted bonus (F x L) $0 $0
N. Average bonus (sum of M) $0
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Historic Performance
Average
Cash
Year Corn Soybeans Average2 Rent3
$ per acre $ per acre $ per acre $ per acre
2006 200 200 200 1502007 235 218 227 1662008 237 219 228 1972009 200 200 200 2092010 260 254 257 2152011 361 311 336 2482012 388 331 360 2702013 302 291 297 2902014 257 246 252 293
Average 271 252 262 226
Cash Rent with Bonus1
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Ending Thoughts
• Cost cutting environment
• Suggests:– Lowering cash rents– Variable cash rents
• Need to evaluate leases at the each year (my opinion: most cash rents lag economic conditions)