Profitability Outlook 2012 Flex Leases
Union County Grain DayJanuary 27, 2012
Greg [email protected]://www.ca.uky.edu/agecon/index.php?p=169
Dept. Agricultural EconomicsUniversity of KentuckyDecember, 2010.
Agricultural Economics
Projected Profitability 2012
• Evaluate range of commodity prices.• Estimate production costs.• Compare returns to land rents.
Agricultural Economics
Risk ManagementWhat if Commodities Collapse?
1) ACRE Program
2) Flex Leases
Agricultural Economics
Agronomic Assumptions
Corn Yield
Soybean Yield
Corn/Soybean Yield Ratio
125 bu 41.3 bu 3.03150 bu 48.0 bu 3.13
175 bu 54.3 bu 3.23
Agricultural Economics
Budget AssumptionsFertilizer Quantity (per acre)
150 bu corn: → 160 units N
→ 60 units P2O5
→ 53 units K2O
48.0 bu soybeans:→ 34 units P2O5
→ 53 units K2O
Agricultural Economics
Budget AssumptionsFertilizer Quantity (per acre)
175 bu corn: → 170 units N
→ 70 units P2O5
→ 61 units K2O
54.3 bu soybeans:→ 38 units P2O5
→ 60 units K2O
Agricultural Economics
Budget Assumptions
Base Scenario
Fertilizer: $/ton $/unit Anhydrous (N) $850 $.52 DAP (P2O5) $660 $.51 Potash (K2O) $630 $.53
Agricultural Economics
Budget Assumptions
Land Rent:• Highly variable.• Not included in budgets.
→ Subtract from net revenue.
Agricultural Economics
Budget Assumptions
Machinery and Labor: • Fuel, Repairs, Deprecation, Labor.• Based on Custom Machinery Rates.
→ Increased 25%.• Adjusted to $3.50 fuel price.• Trucking – 15 miles (one-way).
Agricultural Economics
Budget AssumptionsOther:• $2.50/gallon LP 3 pts removed.• Direct Payment $20/acre.
Agricultural Economics
Critical Budget Assumptions
11
1. Does not include land rent.2. Includes “non-cash” costs.
→ depreciation/overhead, unpaid labor.3. P and K application at removal rate.4. Grain trucked directly to elevator.
Agricultural Economics
Corn and Soybean PricesNew Crop 2012
Price Scenario: Corn Soybeans Low $4.25 $9.50 Baseline $5.25 $11.75 High $6.25 $14.00
Projected 2012 Costs (per acre)Inputs: Corn (150 bu) Soybeans (48 bu)
Seed $76 $45
Nitrogen $83 $0
P, K, and Lime $68 $55
Pesticides $35 $25
Total Inputs $263 $125
Machinery and Labor $121 $85
Other:
Drying Grain $23 $0
Crop Insurance $20 $20
Misc. $20 $20
Land Rent Variable Variable
Operating Interest $7 $4
Total Other $69 $44
Total Costs $454+ Land Rent $254+ Land Rent
Agricultural Economics
Summary Revenues/Costs (per acre)
Yield and Price: Corn Soybeans
Expected Yield (rotation) 150 48.0
Future's Price Fall 2011 $5.25 $11.75
Grain Revenue $788 $564
Direct Gov’t Payment $20 $20
Total Revenue $808 $584
Total Costs (Less Land Rent) $454 $254
Gross Return (Less Land Rent) $354 $330
Agricultural Economics
Baseline Scenario (per acre)$ 11.75 Soybeans (elevator)
$ 5.25 Corn (elevator)$.52-N; $.51-P; $.53-K
Gross Return
CornGross Return
SoybeansGross Return
Rotation
125 bu corn $245 $259 $252
150 bu corn $354 $330 $342
175 bu corn $463 $396 $429
Note: Subtract land rent to get Net Return.
Agricultural Economics
High Commodity Price Scenario$14.00 Soybeans (elevator)
$ 6.25 Corn (elevator)$.52-N; $.51-P; $.53-K
Gross Return
CornGross Return
SoybeansGross Return
Rotation
125 bu corn $370 $352 $361
150 bu corn $504 $438 $471
175 bu corn $638 $519 $578
Note: Subtract land rent to get Net Return.
Agricultural Economics
Low Commodity Price Scenario$ 9.50 Soybeans (elevator)
$ 4.25 Corn (elevator)$.52-N; $.51-P; $.53-K
Gross Return
CornGross Return
SoybeansGross Return
Rotation
125 bu corn $120 $166 $143
150 bu corn $204 $222 $213
175 bu corn $288 $274 $281
Note: Subtract land rent to get Net Return.
Agricultural Economics
Risk Management Options
1) Flexible Cash Leases
2) ACRE Program
Agricultural Economics
ACRE Program
FSA Program:
• Give up portion of direct payment.
• Get downside revenue protection.
• Revenue guarantee can only go up/down 10% per year.
Agricultural Economics
ACRE Price GuaranteesWorst-Case Scenario
(Assumes Avg. State Yield)
Corn Soybeans
2011-2012 $4.37 $10.45
2012-2013 $3.93 $9.41
2013-2014 $3.54 $8.46
Agricultural Economics
21
What is a Flex Lease?
• Lease rate will vary from year to year.
• Based on price and/or yield.
• Usually has a base rate (floor).
→ Lease cannot go below this.
Agricultural Economics
22
Why Consider a Flex Lease?
1) Negotiating tool with landowners.
2) Potentially protect you if prices fall.
Agricultural Economics
23
More Specifically:
• Landowner shares price/yield risk.
• Limits profit potential when revenue high.
• Limits loses when revenue low.
Agricultural Economics
Example:Cash and Flex Lease
Expected Price of $5.00/bu
Final Corn Price
Cash Lease Rate
Flex Lease Rate
$4.00 $200 $175
$5.00 $200 $225
$6.00 $200 $275
Agricultural Economics
25
Options for Flex Leases
Important Point:
• These are only examples.
• Need to tailor Flex Leases.
→ Both farmer and landowner.
• Infinite ways to write Flex Leases.
→ Use your imagination.
Agricultural Economics
26
Options for Flex Leases
1) Price Ratio Price
2) Bushel Equivalent Price
3) Revenue Ratio Price/Yield
4) Revenue Percent Price/Yield
5) Revenue Base + % Price/Yield
Agricultural Economics
27
1) Price Ratio Simplest Flex Lease. Have a base rent and adjust for price
increases. If price increases by 25% than base rent
increases by 25% (typical).
Example: $200 base rent. $4.00 base corn price. If actual price is $5, then $5.00/$4.00 = 1.25
$200 x 1.25 = $250 rent for year
Agricultural Economics
28
2) Bushel Equivalent
Price-based Flex Lease. Landowner gets a set number of bushels
as rent along with the final harvest-time price.
Thus final price determines the rent.
Example: 50 bu base X $4.00 = $200 rent for year. 50 bu base X $5.00 = $250 rent for
year
Agricultural Economics
29
3) Revenue Ratio
Just like the price ratio Flex Lease. Have a base rent, a base revenue, and
adjust for final revenue increase. If revenue increases 20% from the
base, then rent increases 20%.
Example: $200 base rent. $700 revenue. If actual revenue is $840, then
$840/$700 = 1.20 $200 x 1.20 = $240 rent for year
Agricultural Economics
30
4) Revenue Percentage Cash-lease version of a crop-share. But usually with min. base rent. No inputs contributed by landowner. Can link yield to county average (or
some % of the average)
Example: Landowner gets 35% of revenue.150 bushels X $4.50 X 35% = $236
Agricultural Economics
31
5) Revenue Base + Bonus
Base rent, base revenue, and % landowner gets above the base.
Sounds more complicated that it is.
Example: $150 base rent; $600 base revenue; 40% of revenue above base.
150 bushels X $5.00 = $750 total revenue.$750-$600 = $150 revenue above base.$150 X 40% = $60 bonus.$60 bonus + $150 base = $210 total rent.
Base Plus Bonus Flex LeaseFlex Lease Information:
Cash Rent (for comparison) $200
Base Land Rent $150
Can final rent go below base rent? No
Corn Soybeans
Total Costs (including base land rent) $600 $400
Base Gross Revenue $600 $400
Rent - % of Gross Revenue above base 40% 40%
Bonus Land Rent $60 $38
Flex Rent (Base + Bonus) $210 $188
Flex Rent (rotation) $199
Increase from Cash Lease -1%
Example:Base + Bonus Flex Lease (#5)
40% Bonus Revenue
Corn Price Flex Lease Cash Lease$3.00 $150 $200$4.00 $150 $200$5.00 $199 $200$6.00 $249 $200$7.00 $299 $200
Soybean Price 2.2 x Corn Price.
Example:Base + Bonus Flex Lease (#5)
40% Bonus Revenue
Corn PriceNet w/Flex
LeaseNet w/Cash
Lease$3.00 -$107 -$157$4.00 $18 -$32$5.00 $94 $93$6.00 $168 $217$7.00 $243 $342
Soybean Price 2.2 x Corn Price.
Revenue Percentage Flex Lease
Flex Lease Information:
Cash Rent $200
Minimum or Base Rent $150
CornSoy-
beans
Land Rent - % of Gross Revenue 35% 40%
Flex Rent $263 $198
Flex Rent (rotation) $230
Increase from Cash Lease 15%
Example:Revenue % Flex Lease (#4)
35%-Corn 40%-Soybeans Rev.
Corn Price Flex Lease Cash Lease$3.00 $154 $200$4.00 $184 $200$5.00 $230 $200$6.00 $276 $200$7.00 $322 $200
Soybean Price 2.2 x Corn Price.
Example:Revenue % Flex Lease (#4)
35%-Corn 40%-Soybeans Rev.
Corn PriceNet w/Flex
LeaseNet w/Cash
Lease$3.00 -$110 -$157$4.00 -$16 -$32$5.00 $62 $93$6.00 $141 $217$7.00 $219 $342
Soybean Price 2.2 x Corn Price.
Agricultural Economics
38
Flex Lease Summary
Flex leases advantages/disadvantages. Need to be understandable to landlords. Need to understand risk-reward tradeoff. Not for all landlords. Crop-Share may be good option.
Agricultural Economics
39
Flex Lease Program
Farmers and landowners. Henderson County 1/12/12 (Pilot). Meetings scheduled Feb-March.
Agricultural Economics
40
Helpful Sites
Iowa Flex Leases:
http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-21.pdf
http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-22.pdf
Northcentral Farm Mgt Lease Site:
http://www.ncfmc.org/publications.aspx
http://aglease101.org/