Can You Pay $300/acre Land Rent with $4 Corn? November 18-20, 2013

Can You Pay $300/acre Land Rent

with $4 Corn? November 18-20, 2013

Greg Halich859-257-8841Greg.Halich@uky.edu

311 CE Barnhart Dept. Agricultural EconomicsUniversity of KentuckyLexington, KY 40546

Can You Pay $300/acre Land Rent

with $4 Corn?

Agricultural Economics

Commodity Prices

Agricultural Economics

Corn and Soybean PricesNew Crop 2014

Price Scenario: Corn Soybeans Low Current Est. High

Agricultural Economics

Corn and Soybean PricesNew Crop 2014

Price Scenario: Corn Soybeans Low Current Est. $4.50 $11.50 High

Agricultural Economics

Corn and Soybean PricesNew Crop 2014

Price Scenario: Corn Soybeans Low Current Est. $4.50 $11.50 High $5.50 $13.75

Agricultural Economics

Corn and Soybean PricesNew Crop 2014

Price Scenario: Corn Soybeans Low $3.50 $9.25 Current Est. $4.50 $11.50 High $5.50 $13.75

Agricultural Economics

Fertilizer Prices

Agricultural Economics

Budget Assumptions

Base ScenarioFertilizer: $/ton $/unit Anhydrous (N) $680 $.41 DAP (P2O5) $510 $.39 Potash (K2O) $475 $.40

Agricultural Economics

Budget AssumptionsLand Rent:• Not included in the budgets.

→ Subtract from net revenue.

Agricultural Economics

Budget AssumptionsMachinery and Labor:

Agricultural Economics

Budget AssumptionsMachinery and Labor: • Fuel, Repairs, Deprecation, Labor.

Agricultural Economics

Budget AssumptionsMachinery and Labor: • Fuel, Repairs, Deprecation, Labor.• Based on Custom Machinery Rates.

→ Increased 25%.

Agricultural Economics

Budget AssumptionsMachinery 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

Three Soil Productivity Levels

Corn Yield

Soybean Yield

Corn/Soybean Yield Ratio

Agricultural Economics

Three Soil Productivity Levels

Corn Yield

Soybean Yield

Corn/Soybean Yield Ratio

125 bu 39.0 bu 3.2

Agricultural Economics

Three Soil Productivity Levels

Corn Yield

Soybean Yield

Corn/Soybean Yield Ratio

125 bu 39.0 bu 3.2150 bu 45.5 bu 3.3

Agricultural Economics

Three Soil Productivity Levels

Corn Yield

Soybean Yield

Corn/Soybean Yield Ratio

125 bu 39.0 bu 3.2150 bu 45.5 bu 3.3175 bu 51.5 bu 3.4

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed Nitrogen

P, K, and Lime PesticidesTotal InputsMachinery and LaborOther: Drying Grain Crop Insurance

Misc. Land Rent Operating Interest Total OtherTotal CostsNote: 15 mile one-way trucking included in machinery and labor costs.

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed $76 $45 Nitrogen $66 $0 P, K, and Lime $54 $42 Pesticides $45 $35Total InputsMachinery and LaborOther: Drying Grain Crop Insurance Misc. Land Rent Operating Interest Total OtherTotal CostsNote: 15 mile one-way trucking included in machinery and labor costs.

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed $76 $45 Nitrogen $66 $0 P, K, and Lime $54 $42 Pesticides $45 $35Total Inputs $241 $122Machinery and LaborOther: Drying Grain Crop Insurance Misc. Land Rent Operating Interest Total OtherTotal CostsNote: 15 mile one-way trucking included in machinery and labor costs.

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed $76 $45 Nitrogen $66 $0 P, K, and Lime $54 $42 Pesticides $45 $35Total Inputs $241 $122Machinery and Labor $121 $85Other:   Drying Grain Crop Insurance Misc. Land Rent Operating Interest Total OtherTotal CostsNote: 15 mile one-way trucking included in machinery and labor costs.

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed $76 $45 Nitrogen $66 $0 P, K, and Lime $54 $42 Pesticides $45 $35Total Inputs $241 $122Machinery and Labor $121 $85Other:   Drying Grain $19 $0 Crop Insurance $20 $20 Misc. $20 $20 Land Rent Variable Variable Operating Interest $8 $5 Total OtherTotal CostsNote: 15 mile one-way trucking included in machinery and labor costs.

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed $76 $45 Nitrogen $66 $0 P, K, and Lime $54 $42 Pesticides $45 $35Total Inputs $241 $122Machinery and Labor $121 $85Other:   Drying Grain $19 $0 Crop Insurance $20 $20 Misc. $20 $20 Land Rent Variable Variable Operating Interest $8 $5 Total Other $66 $45Total CostsNote: 15 mile one-way trucking included in machinery and labor costs.

Projected 2014 Costs (per acre)Inputs:  Corn (150 bu) Soybeans (45.5 bu) Seed $76 $45 Nitrogen $66 $0 P, K, and Lime $54 $42 Pesticides $45 $35Total Inputs $241 $122Machinery and Labor $121 $85Other:   Drying Grain $19 $0 Crop Insurance $20 $20 Misc. $20 $20 Land Rent Variable Variable Operating Interest $8 $5 Total Other $66 $45Total Costs $429 + Land Rent $252 + Land RentNote: 15 mile one-way trucking included in machinery and labor costs.

Machinery and Labor Costs

 Corn

150 buSoybeans

45.5 bu

Fuel and Lube

Repairs

Labor

Depreciation/Overhead

Total

Note: Assumes grain trucked directly to elevator (15 miles one-way) and not stored.

Machinery and Labor Costs

 Corn

150 buSoybeans

45.5 bu

Fuel and Lube $24

Repairs $28

Labor $21

Depreciation/Overhead $48

Total $121

Note: Assumes grain trucked directly to elevator (15 miles one-way) and not stored.

Machinery and Labor Costs

 Corn

150 buSoybeans

45.5 bu

Fuel and Lube $24 $16

Repairs $28 $21

Labor $21 $16

Depreciation/Overhead $48 $33

Total $121 $85

Note: Assumes grain trucked directly to elevator (15 miles one-way) and not stored.

Machinery and Labor Costs

 Corn

150 buSoybeans

45.5 bu

Fuel and Lube $24 $16

Repairs $28 $21

Labor $21 $16

Depreciation/Overhead $48 $33

Total $121 $85

Note: Assumes grain trucked directly to elevator (15 miles one-way) and not stored.

Agricultural Economics

Following Costs Increase with Yield:

• Fertilizer• Machinery and Labor• Drying (corn)

Agricultural Economics

Critical Budget AssumptionsSummary

40

1. Does not include land rent.

Agricultural Economics

Critical Budget AssumptionsSummary

41

1. Does not include land rent.2. Includes “non-cash” costs (e.g.

depreciation/overhead, unpaid labor).

Agricultural Economics

Critical Budget AssumptionsSummary

42

1. Does not include land rent.2. Includes “non-cash” costs (e.g.

depreciation/overhead, unpaid labor). 3. P and K application at removal rate.

Agricultural Economics

Summary Revenues/Costs (per acre)

Yield and Price: Corn SoybeansExpected Yield (rotation) 150 45.5Expected Price $4.50 $11.50Grain RevenueDirect Gov’t PaymentTotal RevenueTotal Costs (Less Land Rent)Gross Return (Less Land Rent)

Agricultural Economics

Summary Revenues/Costs (per acre)

Yield and Price: Corn SoybeansExpected Yield (rotation) 150 45.5Expected Price $4.50 $11.50Grain Revenue $675 $523Direct Gov’t PaymentTotal RevenueTotal Costs (Less Land Rent)Gross Return (Less Land Rent)

Agricultural Economics

Summary Revenues/Costs (per acre)

Yield and Price: Corn SoybeansExpected Yield (rotation) 150 45.5Expected Price $4.50 $11.50Grain Revenue $675 $523Direct Gov’t Payment $10 $10Total RevenueTotal Costs (Less Land Rent)Gross Return (Less Land Rent)

Agricultural Economics

Summary Revenues/Costs (per acre)

Yield and Price: Corn SoybeansExpected Yield (rotation) 150 45.5Expected Price $4.50 $11.50Grain Revenue $675 $523Direct Gov’t Payment $10 $10Total Revenue $685 $533Total Costs (Less Land Rent)Gross Return (Less Land Rent)

Agricultural Economics

Summary Revenues/Costs (per acre)

Yield and Price: Corn SoybeansExpected Yield (rotation) 150 45.5Expected Price $4.50 $11.50Grain Revenue $675 $523Direct Gov’t Payment $10 $10Total Revenue $685 $533Total Costs (Less Land Rent) $429 $252Gross Return (Less Land Rent)

Agricultural Economics

Summary Revenues/Costs (per acre)

Yield and Price: Corn SoybeansExpected Yield (rotation) 150 45.5Expected Price $4.50 $11.50Grain Revenue $675 $523Direct Gov’t Payment $10 $10Total Revenue $685 $533Total Costs (Less Land Rent) $429 $252Gross Return (Less Land Rent) $256 $281

Agricultural Economics

Baseline Scenario 2014 (per acre)$11.50 Soybeans (elevator)

$4.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn

175 bu corn

Note: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$11.50 Soybeans (elevator)

$4.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn $256 $281

175 bu corn

Note: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$11.50 Soybeans (elevator)

$4.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn $256 $281 $268

175 bu corn

Note: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$11.50 Soybeans (elevator)

$4.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $162 $213 $188

150 bu corn $256 $281 $268

175 bu corn

Note: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$11.50 Soybeans (elevator)

$4.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $162 $213 $188

150 bu corn $256 $281 $268

175 bu corn $350 $345 $347

Note: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$11.50 Soybeans (elevator)

$4.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $162 $213 $188

150 bu corn $256 $281 $268

175 bu corn $350 $345 $347

Note: Subtract land rent to get Net Return.

Agricultural Economics

What about $4/bu Corn?

Agricultural Economics

Baseline Scenario 2014 (per acre)$10.38 Soybeans (elevator)

$4.00 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn

175 bu cornNote: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$10.38 Soybeans (elevator)

$4.00 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $100 $169 $134

150 bu corn $181 $230 $205

175 bu corn $263 $287 $275Note: Subtract land rent to get Net Return.

Agricultural Economics

Baseline Scenario 2014 (per acre)$10.38 Soybeans (elevator)

$4.00 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $100 $169 $134

150 bu corn $181 $230 $205

175 bu corn $263 $287 $275Note: Subtract land rent to get Net Return.

Agricultural Economics

Low Price Scenario 2014$9.25 Soybeans (elevator)

$3.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn

175 bu cornNote: Subtract land rent to get Net Return.

Agricultural Economics

Low Price Scenario 2014$9.25 Soybeans (elevator)

$3.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $37 $125 $81

150 bu corn $106 $178 $142

175 bu corn $175 $229 $202Note: Subtract land rent to get Net Return.

Agricultural Economics

Low Price Scenario 2014$9.25 Soybeans (elevator)

$3.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $37 $125 $81

150 bu corn $106 $178 $142

175 bu corn $175 $229 $202Note: Subtract land rent to get Net Return.

Agricultural Economics

High Price Scenario 2014$13.75 Soybeans (elevator)

$5.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn

175 bu corn

Note: Subtract land rent to get Net Return.

Agricultural Economics

High Price Scenario 2014$13.75 Soybeans (elevator)

$5.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn

150 bu corn

175 bu corn

Note: Subtract land rent to get Net Return.

Agricultural Economics

High Price Scenario 2014$13.75 Soybeans (elevator)

$5.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $287 $301 $294

150 bu corn $406 $383 $395

175 bu corn $525 $460 $493

Note: Subtract land rent to get Net Return.

Agricultural Economics

High Price Scenario 2014$13.75 Soybeans (elevator)

$5.50 Corn (elevator)$.41-N; $.39-P; $.40-K

 Gross Return

CornGross Return

SoybeansGross Return

Rotation

125 bu corn $287 $301 $294

150 bu corn $406 $383 $395

175 bu corn $525 $460 $493

Note: Subtract land rent to get Net Return.

Agricultural Economics

Fertilizer Price Effects (decrease in profit)

Increasing Fertilizer Prices $100/ton(per acre)

 Corn

ChangeSoybean Change

RotationChange

125 bu corn $17 $6

150 bu corn $19 $7

175 bu corn $21 $8Note: Increased costs due to $100/ton increase in N, P, and K prices.

Agricultural Economics

Fertilizer Price Effects (decrease in profit)

Increasing Fertilizer Prices $100/ton(per acre)

 Corn

ChangeSoybean Change

RotationChange

125 bu corn $17 $6 $12150 bu corn $19 $7 $13175 bu corn $21 $8 $15Note: Increased costs due to $100/ton increase in N, P, and K prices.

Agricultural Economics

Putting Input Prices in ContextFertilizer:• Corn price drop necessary to equal

$100/ton fertilizer price decrease?

Agricultural Economics

Putting Input Prices in ContextFertilizer:• Corn price drop necessary to equal

$100/ton fertilizer price decrease?→ $.10/bu

Agricultural Economics

Putting Input Prices in ContextFertilizer:• Corn price drop necessary to equal

$100/ton fertilizer price decrease?→ $.10/bu

• How much has corn dropped last year?

Agricultural Economics

Various Commodity Price ScenariosGross Return (per acre)

$3.50 Corn$9.25 Beans

$4.00 Corn

$10.38 Beans

$4.50 Corn

$11.50 Beans

$5.00 Corn

$12.63 Beans

$5.50 Corn

$13.75 Beans

125 bu corn

150 bu corn

175 bu corn

Note: Subtract land rent to get Net Return.Labor, depreciation, overhead accounted for in costs.

Agricultural Economics

Various Commodity Price ScenariosGross Return (per acre)

$3.50 Corn$9.25 Beans

$4.00 Corn

$10.38 Beans

$4.50 Corn

$11.50 Beans

$5.00 Corn

$12.63 Beans

$5.50 Corn

$13.75 Beans

125 bu corn $81 $134 $188 $241 $294

150 bu corn $142 $205 $268 $332 $395

175 bu corn $202 $275 $347 $420 $493

Note: Subtract land rent to get Net Return.Labor, depreciation, overhead accounted for in costs.

Agricultural Economics

Various Commodity Price ScenariosGross Return (per acre)

$3.50 Corn$9.25 Beans

$4.00 Corn

$10.38 Beans

$4.50 Corn

$11.50 Beans

$5.00 Corn

$12.63 Beans

$5.50 Corn

$13.75 Beans

125 bu corn $81 $134 $188 $241 $294

150 bu corn $142 $205 $268 $332 $395

175 bu corn $202 $275 $347 $420 $493

Note: Subtract land rent to get Net Return.Labor, depreciation, overhead accounted for in costs.

Agricultural Economics

Various Commodity Price ScenariosGross Return (per acre)

$3.50 Corn$9.25 Beans

$4.00 Corn

$10.38 Beans

$4.50 Corn

$11.50 Beans

$5.00 Corn

$12.63 Beans

$5.50 Corn

$13.75 Beans

125 bu corn $81 $134 $188 $241 $294

150 bu corn $142 $205 $268 $332 $395

175 bu corn $202 $275 $347 $420 $493

Note: Subtract land rent to get Net Return.Labor, depreciation, overhead accounted for in costs.

Agricultural Economics

Various Commodity Price ScenariosGross Return (per acre)

$3.50 Corn$9.25 Beans

$4.00 Corn

$10.38 Beans

$4.50 Corn

$11.50 Beans

$5.00 Corn

$12.63 Beans

$5.50 Corn

$13.75 Beans

125 bu corn $81 $134 $188 $241 $294

150 bu corn $142 $205 $268 $332 $395

175 bu corn $202 $275 $347 $420 $493

Note: Subtract land rent to get Net Return.Labor, depreciation, overhead accounted for in costs.

Agricultural Economics

Cash Rent Projection

Agricultural Economics

Cash Rent Projection

Likely to stabilize next few years.

Agricultural Economics

Cash Rent Projection

Likely to stabilize next few years. → Highest rents will drop.

Agricultural Economics

Cash Rent Projection

Likely to stabilize next few years. → Highest rents will drop. → Undervalued rents will increase.

Agricultural Economics

Cash Rent Projection

Likely to stabilize next few years. → Highest rents will drop. → Undervalued rents will increase.

Wildcard: Are you willing to walk away?

Agricultural Economics

Profitability Summary

Agricultural Economics

Profitability Summary

• Profits will be squeezed.

Agricultural Economics

Profitability Summary

• Profits will be squeezed.→ Lots of excess machinery capacity.

Agricultural Economics

Profitability Summary

• Profits will be squeezed.→ Lots of excess machinery capacity.• Is this the “New Normal”?

Agricultural Economics

Profitability Summary

• Profits will be squeezed.→ Lots of excess machinery capacity.• Is this the “New Normal”?• Ethanol Mandate?