profitability outlook 2012 flex leases march 20, 2012 greg halich [email protected]...

Profitability Outlook 2012 Flex Leases

March 20, 2012

Greg [email protected]://www.ca.uky.edu/agecon/index.php?p=169

Dept. Agricultural EconomicsUniversity of Kentucky

Agricultural Economics

Projected Profitability 2012

• Evaluate range of commodity prices.• Estimate production costs.• Compare returns to land rents.


Agronomic Assumptions

Corn Yield

Soybean Yield

Corn/Soybean Yield Ratio

125 bu 39.0 bu 3.2150 bu 45.5 bu 3.3

175 bu 51.5 bu 3.4


Budget AssumptionsFertilizer Quantity (per acre)

150 bu corn: → 160 units N

→ 60 units P2O5

→ 53 units K2O

45.5 bu soybeans:→ 32 units P2O5

→ 50 units K2O


Budget AssumptionsFertilizer Quantity (per acre)

175 bu corn: → 170 units N

→ 70 units P2O5

→ 61 units K2O

51.5 bu soybeans:→ 36 units P2O5

→ 57 units K2O


Budget Assumptions

Base Scenario

Fertilizer: $/ton $/unit Anhydrous (N) $850 $.52 DAP (P2O5) $660 $.51 Potash (K2O) $630 $.53


Budget Assumptions

Land Rent:• Highly variable.• Not included in budgets.

→ Subtract from net revenue.


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).


Critical Budget Assumptions

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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.


Corn and Soybean PricesNew Crop 2012

Price Scenario: Corn Soybeans Low $4.50 $10.00 Baseline $5.50 $12.25 High $6.50 $14.50

Projected 2012 Costs (per acre)Inputs: Corn (150 bu) Soybeans (45.5 bu)

Seed $76 $45

Nitrogen $83 $0

P, K, and Lime $68 $53

Pesticides $35 $25

Total Inputs $263 $123

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 $251+ Land Rent


Summary Revenues/Costs (per acre)

Yield and Price: Corn Soybeans

Expected Yield (rotation) 150 45.5

Future's Price Fall 2011 $5.50 $12.25

Grain Revenue $825 $557

Direct Gov’t Payment $20 $20

Total Revenue $845 $577

Total Costs (Less Land Rent) $454 $251

Gross Return (Less Land Rent) $391 $326


Baseline Scenario (per acre)$ 12.25 Soybeans (elevator)

$ 5.50 Corn (elevator)$.52-N; $.51-P; $.53-K

Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $277 $254 $265

150 bu corn $391 $326 $358

175 bu corn $506 $392 $449

Note: Subtract land rent to get Net Return.


High Commodity Price Scenario$14.50 Soybeans (elevator)


Gross Return

CornGross Return


Rotation

125 bu corn $402 $342 $372

150 bu corn $541 $428 $485

175 bu corn $681 $508 $595



Low Commodity Price Scenario$ 10.00 Soybeans (elevator)


Gross Return

CornGross Return


Rotation

125 bu corn $152 $166 $159

150 bu corn $241 $223 $232

175 bu corn $331 $277 $304



Nightmare Price Scenario$ 7.50 Soybeans (elevator)


Gross Return

CornGross Return


Rotation

125 bu corn $90 $86 $88

150 bu corn $162 $128 $145

175 bu corn $234 $169 $201



Risk Management Options

1) Flexible Cash Leases

2) ACRE Program


ACRE Program

FSA Program:

• Give up portion of direct payment.

• Get downside revenue protection.

• Revenue guarantee can only go up/down 10% per year.


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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.


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Why Consider a Flex Lease?

1) Negotiating tool with landowners.

2) Risk management.


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


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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.


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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


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1) Price Ratio Simplest Flex Lease. Have a base rent and adjust for price. 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


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2) Bushel Equivalent

Price-based Flex Lease. Landowner gets a set number of bushels

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


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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


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4) Revenue Percentage Cash-lease version of a crop-share. But usually with min. base rent. No inputs contributed by landowner.

Example: Landowner gets 35% of revenue.150 bushels X $4.50 X 35% = $236


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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


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


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



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Let’s Work Through Other Scenarios


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4) Revenue Percentage Landowner gets 25% of corn revenue.Minimum rent of $150

100 bushels X $4.00 X 25% = $100 → $150125 bushels X $4.80 X 25% = $150150 bushels X $5.33 X 25% = $200200 bushels X $5.00 X 25% = $250200 bushels X $6.00 X 25% = $300


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Example: Revenue % Flex Lease (#4) $150 Minimum Flex Rent

Total Revenue 25% Corn 30% Corn 35% Corn

$400 $150 $150 $150

$600 $150 $180 $210

$800 $200 $240 $280

$1,000 $250 $300 $350

$1,200 $300 $360 $420Note: $800 revenue = 150 bushel x $5.33 per bu


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$150 base rent; $600 base revenue; 30% of revenue above base.

100 bushels X $4.00 = $400$400-$600 = - $200 revenue above base.

→ No Bonus


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150 bushels X $5.33 = $800$800-$600 = $200 revenue above base.

$200 X 30% = $60 bonus.$60 bonus + $150 base = $210 total rent.


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200 bushels X $5.00 = $1000$1000-$600 = $400 revenue above base.

$400 X 30% = $120 bonus.$120 bonus + $150 base = $270 total rent.

Example: Base + Bonus Flex Lease $600 Base Revenue and $150 Base Rent


$400 $150 $150 $150

$600 $150 $150 $150

$800 $210 $220 $230

$1,000 $270 $290 $310


Example: Base + Bonus Flex Lease $800 Base Revenue and $150 Base Rent


$400 $150 $150 $150

$600 $150 $150 $150

$800 $150 $150 $150

$1,000 $210 $220 $230


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Base + Bonus Flex Lease $600 Base Rev. $150 Base Rent

30% Revenue Above Base

Corn: Crop Share and Flex Rent Payments

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Flex Lease Summary

Won’t work in all situations. Need to be understandable to landlords. Need to understand risk-reward tradeoff. Not for all landlords. Crop-Share may be good option.


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Helpful Sites

Iowa Flex Leases:

http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-21.pdf


Northcentral Farm Mgt Lease Site:

http://www.ncfmc.org/publications.aspx

http://aglease101.org/



http://www.ncfmc.org/publications.aspx

http://aglease101.org/

profitability outlook 2012 flex leases march 20, 2012 greg halich [email protected]...

Documents

bu soybeans

bu change

acre175 bu corn

acre150 bu corn

bu seed

corn price

units p2o5

units n