Status of the Wisconsin Farm Economy, 2015 Bruce L. JonesDirector, Renk Agribusiness InstituteCollege of Agricultural and Life SciencesUW-Madison(608)265-8508

Farm Income and Expenses

Wisconsin 2012 2013 2014 Est  Million $ Million $ Million $       Value of agricultural sector production 13,603.24 14,121.66 15,007.04Production Expenses 7,153.17 7,422.58 7,673.76       Gross value added 6,450.07 6,699.08 7,333.28Capital consumption 1,036.52 1,147.65 1,152.04Net value added 5,413.55 5,551.43 6,181.24       Hired labor and employee compensation 924.57 924.72 978.35Net rent received by nonoperator landlords 249.55 211.93 233.53Total interest expenses 673.97 691.35 708.69       Net farm income 3,565.46 3,723.43 4,260.68

United States Change Wisconsin Change2013 2014F 2013 2014 Est

Million $ Million $ Million $ Million $

Value of crop production 233,628.95 200,600.85 -33,028.09 4,264.96 3,750.00 -514.96

Value of livestock production 182,114.77 206,552.30 24,437.53 8,050.02 9,587.49 1,537.47

Dairy products, Milk 40,276.93 49,685.17 5,541.49 6,775.00 1,233.51Meat animals 92,087.09 107,017.55 1,717.72 1,996.22 278.50

Revenues from services and forestry 54,247.16 49,555.64 -4,691.52 1,806.68 1,669.55 -137.13

Value of agricultural sector production 469,990.88 456,708.79 -13,282.09 14,121.66 15,007.04 885.38

Purchased inputs 244,083.79 257,791.78 13,707.98 7,228.67 7,461.80 233.13

Payments to stakeholders 62,835.97 66,685.05 1,828.00 1,920.57Hired labor and employee compensation 27,742.00 29,351.10 1,609.11 924.72 978.35 53.64Net rent received by nonoperator landlords 17,695.28 19,499.06 1,803.78 211.93 233.53 21.60Total interest expenses 1/ 17,398.69 17,834.88 436.19 691.35 708.69 17.33

Net farm income 128,988.14 97,316.34 -31,671.81 3,723.43 4,260.68 537.25

@ 25% decrease @ 15% increase

19.97%

28.39%

26.37%26.21%

27.27%

21.48%

23.61%27.44% 21.31%

27.35%

Variation In Wisconsin Net Farm Income

Period Change in Net Farm Income

Billion $ Percent

2008 - 2009 -1.3 @ -70%2014 – 2015 (Forecast)*

-1.9 @ -45%

* Assumes $7/CWT drop in milk price for 2015, all other factors at 2014 levels

Farm Balance Sheets

Wisconsin ARMS Balance Sheet 2011 2012 2013All Farms: TOTAL Million $ Million $ Million $ Assets: Livestock inventory 817.90 829.79 916.35 Assets: Crop inventory 2,805.22 2,829.66 2,143.94 Assets: Purchased inputs 435.98 592.26 514.36 Assets: Cash invested in growing crops 77.08 103.93 75.11 Assets: Prepaid insurance 67.99 75.18 74.27 Assets: Other 2,347.61 3,892.10 2,325.56

Assets: Current 6,551.78 8,322.93 6,049.51

Assets: Investment in cooperatives 361.21 354.24 401.36 Assets: Farm equipment 7,364.91 8,790.67 8,544.20 Assets: Breeding animals 3,103.22 3,020.15 3,166.52 Assets: Land and buildings 52,530.01 51,906.54 55,725.21

Assets: Non-current 63,359.35 64,071.52 67,837.36

Farm assets 69,911.13 72,394.46 73,886.87

Liabilities: Notes payable within one year 499.43 1,027.19 995.99 Liabilities: Current portion of term debt 886.59 826.65 872.93 Liabilities: Accrued interest 259.26 259.73 269.22 Liabilities: Accounts payable 174.64 260.50 241.51

Liabilities: Current 1,819.92 2,374.07 2,379.66

Liabilities: Nonreal estate 1,191.90 1,098.18 1,186.83 Liabilities: Real estate 6,063.91 5,705.67 5,917.87

Liabilities: Noncurrent 7,255.80 6,803.92 7,104.69

Farm liabilities 9,075.72 9,177.92 9,484.35

Farm equity 60,835.41 63,216.53 64,402.52

Assets: Operators dwelling 8,356.61 8,667.47 8,199.03

D/A =12.8 13.0 12.712.8

D/A =12.1 11.9

11.010.7

Distribution of Farms, Farm Income, and Wealth For Wisconsin

Source: ERS-USDA ARMS

Source: ERS-USDA ARMS

Source: ERS-USDA ARMS

Dairy Situation and Outlook, 2015

Mark StephensonDirector of Dairy Policy AnalysisCollege of Agricultural and Life SciencesUW-Madison(608) 890-3755

U.S. All Milk Price

Wow!

MPP Ration Cost

Strong Profits Encourage Output

Farms Retained Cows

Number of Cows

Milk per Cow

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

Grain and Livestock Situation and Outlook

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

World Agricultural Supply and Demand EstimatesWorld Agricultural Outlook Board

Farm Production Costs 

Bruce L. JonesDirector, Renk Agribusiness InstituteCollege of Agricultural and Life SciencesUW-Madison(608)265-8508

Short-Term Energy Outlook Forecast

Corn Nitrogen Rate CalculatorFinding the Maximum Return To N and Most Profitable N RateA Regional (Corn Belt) Approach to Nitrogen Rate Guidelines

http://extension.agron.iastate.edu/soilfertility/nrate.aspx

$6 to $5: -5.26%$6 to $4: -7.02%$6 to $3: -12.28%

Dairy and Cropping Benchmarks

Farmland Values

Annual Growth in Farmland Values

Wisconsin Minnesota Illinois Iowa

1950-1999 5.95 5.62 5.44 4.96

1974-1980 17.74 21.05 21.47 20.76

1980-1989 -6.08 -11.10 -8.82 -13.22

2000-2014 6.80 9.46 8.55 12.35

Supply and Ownership of Midwest Farmland

Determinants of Farmland Values

(1 )

( )

gV R

r g

Land Valuation Model

V = Value of Land

R = Return From Land

g = Annual Growth in Return (R)

r = Opportunity Cost of Capital

Annual Growth in Gross Farm Income

Period Illinois Iowa Minn Wisc

1970-1999 2.44 2.69 3.50 3.84

2000-2013 10.02 10.06 9.34 6.33

Annual Growth in Net Farm IncomePeriod Illinois Iowa Minn Wisc

1970-1999 1.75 3.05 0.28 1.24

2000-2013 15.71 13.24 17.66 6.19

Annual Growth in Cash Rents

Period Wisconsin Minnesota Illinois Iowa

1967 - 1973 4.85 2.77 2.92 5.39

1974 - 1981 9.59 10.84 11.10 9.67

1982 - 1987 -5.17 -8.26 -6.08 -8.12

1988 - 2005 2.58 2.57 1.94 1.90

2006 - 2014 8.57 10.04 7.44 8.75

(1 )

( )

gV R

r g

Land Valuation Model

V = Value of Land

R = Return From Land

g = Annual Growth in Return (R)

r = Opportunity Cost of Capital

Interest rates in early 1980s

Current interest rates

Farmland Affordability:Purchasing and Leasing

Present Value (PV) Purchase Cost = PV Rents

PV Purchase Cost

a) Down-paymentb) PV P&I mortgage payments (After-tax)c) Less: PV Net Sale (Sale – Loan Balance) (After-tax)

PV RentsRent * (1-t) * USPVr,Y (After-tax)

Rent Equivalent * (1-t) = PV Purchase Cost / USPVr,Y

Cash Rent Equivalent

TaxesOrdinary Income 28Capital gains 15

Years to hold 5Opportunity Cost of Capital (%) 7

Current Market Value of Land 5000Expected Annual Growth in Land Value 2

Mortgage Life Years 30Loan Rate (%) 6Percent Down 20

Rent per Acre (Before tax) 234.11Rent per Acre (After tax) 168.56Mortgage Payment 290.60

Rent Equivalent For Farmland Purchase

Bruce L. Jones, DirectorRenk Agribusiness InstituteUW-Madison CALSJune 2015

Cash Rent EquivalentsDown-Payment Percentage

Expected Annual Percent Growth in Land Value

0 10 20 30 40

-2 403.27 421.42 439.56 457.71 475.86

0 304.65 322.80 340.94 359.09 377.24

2 197.82 215.97 234.11 252.26 270.40

Potential Investor Interest in Farmland

1970 -2014

Mean Std Dev Coef Var

Inflation 4.27 2.88 0.68

10-year T. Bond 7.90 9.63 1.22

S&P 500 11.84 17.02 1.44

Farmland

Minnesota 14.58 11.74 0.81

Wisconsin 12.60 9.25 0.73

Illinois 12.79 10.79 0.84

Iowa 15.36 12.76 0.83

Simple Correlation1970 - 2014

Inflation10-year T. Bond

S&P 500

Minn Wisc Illinois Iowa

Inflation 1.0000

10-year T. Bond -0.0627 1.0000

S&P 500 -0.1192 -0.0232 1.0000

Minnesota 0.5537 -0.2701 -0.1389 1.0000

Wisconsin 0.5685 -0.2416 -0.2881 0.7845 1.0000

Illinois 0.3865 -0.2883 -0.2142 0.8668 0.6792 1.0000

Iowa 0.3879 -0.2491 -0.1710 0.9043 0.6592 0.9348 1.0000

1970-1995 1989-2014

Mean Std Dev Coef Var Mean Std Dev Coef Var

Inflation 5.67 3.01 0.53 2.71 1.13 0.42

10-year T. Bond 9.31 10.00 1.07 7.36 9.21 1.25

S&P 500 12.99 15.79 1.22 11.91 17.80 1.49

Farmland

Minnesota 14.78 14.81 1.00 13.73 4.88 0.36

Wisconsin 13.45 10.83 0.81 10.85 5.84 0.54

Illinois 12.96 13.19 1.02 12.48 5.54 0.44

Iowa 14.86 15.76 1.06 15.58 6.35 0.41

Simple Correlation1970 - 1995

Inflation10-year T. Bond

S&P 500

Minn Wisc Illinois Iowa

Inflation 1.00

10-year T. Bond -0.35 1.00

S&P 500 -0.16 0.40 1.00

Minnesota 0.67 -0.38 -0.20 1.00

Wisconsin 0.64 -0.45 -0.31 0.86 1.00

Illinois 0.46 -0.42 -0.30 0.89 0.80 1.00

Iowa 0.51 -0.40 -0.22 0.94 0.81 0.95 1.00

Simple Correlation1989 - 2014

Inflation

10-year T. Bond

S&P 500

Minn Wisc Illinois Iowa

Inflation 1.00

10-year T. Bond 0.44 1.00

S&P 500 -0.23 -0.22 1.00

Minnesota 0.41 0.10 0.00 1.00

Wisconsin 0.17 0.17 -0.20 0.32 1.00

Illinois 0.29 0.08 0.00 0.60 0.09 1.00

Iowa 0.28 0.24 0.01 0.58 -0.03 0.81 1.00

Capital Asset Pricing Model

Risk / Return Trade-off

Capital Asset Pricing Model

RA Under-performing Asset

Capital Asset Pricing Model

RA Over-performing Asset

Capital Asset Pricing Model For US Farm Real Estate

Variable Barry (AJAE 1980)

Irwin, Forster, Sherrick (AJAE 1988)

  1950 - 77 1950 - 77 1947 - 84

Intercept (Alpha) 4.78(t=2.53)

7.80(4.25)

4.40(1.73)

Market (Beta) 0.19(1.70)

0.15(0.78)

0.25(1.49)

Inflation   0.60(0.96)

0.86(2.37)

R2 0.26 0.28 0.55

Capital Asset Pricing Model For Midwestern Farmland

State Intercept(Alpha)

Market Risk Premium

(Beta)

Excess Inflation R2

Wisconsin 11.12(t = 5.61)

-0.05(-1.05)

2.00(4.02)

0.44

Minnesota 16.21(7.50)

-0.004(-0.07)

3.36(5.81)

0.58

Illinois 13.56(6.09)

-0.06(-0.85)

2.95(4.84)

0.48

Iowa 18.12(7.19)

-0.02(-0.28)

3.82(5.65)

0.58

For 1968 – 2014 period, using S&P 500 as measure of market return and 10 year Treasury Bond as risk free rate

Where Are We Headed?