profitability outlook 2012 flex leases union county grain day january 27, 2012

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.


Risk ManagementWhat if Commodities Collapse?

1) ACRE Program

2) Flex Leases


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


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


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


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).


Budget AssumptionsOther:• $2.50/gallon LP 3 pts removed.• Direct Payment $20/acre.


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 $4.25 $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


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


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.


High Commodity Price Scenario$14.00 Soybeans (elevator)


Gross Return

CornGross Return


Rotation

125 bu corn $370 $352 $361

150 bu corn $504 $438 $471

175 bu corn $638 $519 $578



Low Commodity Price Scenario$ 9.50 Soybeans (elevator)


Gross Return

CornGross Return


Rotation

125 bu corn $120 $166 $143

150 bu corn $204 $222 $213

175 bu corn $288 $274 $281



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.


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


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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) Potentially protect you if prices fall.


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More Specifically:

• Landowner shares price/yield risk.

• Limits profit potential when revenue high.

• Limits loses when revenue low.


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

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


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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


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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. 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


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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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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.


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Flex Lease Program

Farmers and landowners. Henderson County 1/12/12 (Pilot). Meetings scheduled Feb-March.


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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/












profitability outlook 2012 flex leases union county grain day january 27, 2012

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