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Grain Profitability Outlook Cash Rents Land Values Greg Halich Univ. of Kentucky 859-257-8841Greg.Halich@uky.edu Slide 2 December 2015 Corn Futures Slide 3 Corn Futures CME MonthSettle 2015 - Dec387'4 2016 - July409'2 2016 - Dec399'0 2017 - July421'0 2017 - Dec407'0 2018 - July426'6 2018 - Dec405'2 Settled on August 11, 2015 Slide 4 Soybean Futures CME MonthSettle 2015 - Nov971'4 2016 - July965'0 2016 - Nov925'4 2017 - July942'2 2017 - Nov919'6 2018 - July928'6 2018 - Nov912'4 Settled on August 11, 2015 Slide 5 Agricultural Economics 2016-2020 Prices Corn$4.00/bu Soybeans$9.00/bu Slide 6 Budget Assumptions Machinery and Labor: Fuel, Repairs, Deprecation, Labor. Fuel, Repairs, Deprecation, Labor. Based on Custom Machinery Rates. Based on Custom Machinery Rates. Increased 25%. Adjusted to $2.25 fuel price. Adjusted to $2.25 fuel price. Trucking 25 miles (one-way). Trucking 25 miles (one-way). Slide 7 Slide 8 Slide 9 Slide 10 Budget Assumptions Base Scenario Fertilizer:$/ton$/unit Anhydrous (N)$725$.45 DAP (P 2 O 5 )$550$.40 Potash (K 2 O)$475$.40 Slide 11 Agricultural Economics Budget Assumptions Fertilizer Quantity (per acre) 175 bu corn: 190 units N 190 units N 70 units P 2 O 5 61 units K 2 O 61 units K 2 O 51.5 bu soybeans: 36 units P 2 O 5 57 units K 2 O 57 units K 2 O Slide 12 Soil Productivity Levels Corn Yield Soybean Yield Corn/Soybean Yield Ratio 125 bu39.0 bu3.2 150 bu45.5 bu3.3 175 bu51.5 bu3.4 200 bu57.0 bu3.5 Slide 13 Projected 2016 Costs (per acre) Inputs: Corn (175 bu)Soybeans (51.5 bu) Seed $100$70 Nitrogen $86$0 P, K, and Lime $63$47 Pesticides $55$45 Total Inputs $303$162 Machinery and Labor $121$82 Other: Drying Grain $22$0 Crop Insurance $20$15 Misc. $20 Land Rent Variable Operating Interest $7$4 Total Other $69$39 Total Costs $494 + Land Rent$283 + Land Rent Note: 25 mile one-way trucking included in machinery and labor costs. Slide 14 Machinery and Labor Costs Corn 150 bu Soybeans 45.5 bu Fuel and Lube$18$11 Repairs$30$21 Labor$23$16 Depreciation/Overhead$51$33 Total$121$82 Note: Assumes grain trucked directly to elevator (25 miles one-way) and not stored. Slide 15 Summary Revenues/Costs (per acre) Yield and Price:CornSoybeans Expected Yield (rotation)17551.5 Expected Price$4.00$9.00 Grain Revenue700$464 Crop Insurance$35$25 Govt Payment$20$15 Total Revenue$755$503 Total Costs (Less Land Rent)$494$283 Gross Return (Less Land Rent)$261$220 Slide 16 Baseline Scenario 2016-20 (per acre) $9.00 Soybeans (elevator) $4.00 Corn (elevator) $.45-N; $.40-P; $.40-K Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$100$120$110 150 bu corn$181$171$176 175 bu corn$261$220$241 200 bu corn$342$266$304 Note: Subtract land rent to get Net Return. Slide 17 Agricultural Economics Critical Budget Assumptions 17 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. 4.No-till planting 5.Machinery costs best-case scenario Slide 18 Baseline Scenario 2016-20 (per acre) $9.00 Soybeans (elevator) $4.00 Corn (elevator) $.45-N; $.40-P; $.40-K +$25 Increase Fixed Costs Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$75$95$85 150 bu corn$156$146$151 175 bu corn$236$195$216 200 bu corn$317$241$279 Note: Subtract land rent to get Net Return. Slide 19 December 2015 Corn Futures Slide 20 Perceived Profits 2012-14 (per acre) $11.50 Soybeans (elevator) $5.00 Corn (elevator) $.55-N; $.45-P; $.50-K; $3.25/gal fuel Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$194$207$200 150 bu corn$296$274$285 175 bu corn$399$336$368 200 bu corn$502$396$449 Note: Subtract land rent to get Net Return. Slide 21 http://www2.ca.uky.edu/cmspubsclass/files/ ghalich/2013LandValueSurvey.pdf Slide 22 Agricultural Economics Kentucky Rents $5/bu Corn $11.50/bu Soybeans Competitive Areas: 175 bu $275-350/acre rents 175 bu $275-350/acre rents 150 bu $225-300/acre rents 150 bu $225-300/acre rents Slide 23 Baseline Scenario 2016-20 (per acre) $9.00 Soybeans (elevator) $4.00 Corn (elevator) $.45-N; $.40-P; $.40-K Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$100$120$110 150 bu corn$181$171$176 175 bu corn$261$220$241 200 bu corn$342$266$304 Note: Subtract land rent to get Net Return. Slide 24 Agricultural Economics Why Farmers Will Pay Rents that will Guarantee Losses? Slide 25 Baseline Scenario 2016-20 (per acre) $9.00 Soybeans (elevator) $4.00 Corn (elevator) $.45-N; $.40-P; $.40-K +$25 Increase Fixed Costs Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$75$95$85 150 bu corn$156$146$151 175 bu corn$236$195$216 200 bu corn$317$241$279 Note: Subtract land rent to get Net Return. Slide 26 Kentucky Rents $4/bu Corn $9/bu Soybeans Short-run: 175 bu $200-275/acre rents 175 bu $200-275/acre rents 150 bu $150-225/acre rents 150 bu $150-225/acre rents Long-run: 175 bu $175/acre rent 175 bu $175/acre rent 150 bu $125/acre rent 150 bu $125/acre rent Slide 27 Cropland Value ($/acre) at Various Yearly Profitability and Capitalization Rates Capital- ization Rate Expected Profitability ($/acre/year) $100$200$300$400$500 5.0% 4.0% 3.0% 2.0% Slide 28 Baseline Scenario 2013-14 (per acre) $11.50 Soybeans (elevator) $5.00 Corn (elevator) $.55-N; $.45-P; $.50-K; $3.25/gal fuel Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$194$207$200 150 bu corn$296$274$285 175 bu corn$399$336$368 200 bu corn$502$396$449 Note: Subtract land rent to get Net Return. Slide 29 Cropland Value ($/acre) at Various Yearly Profitability and Capitalization Rates Capital- ization Rate Expected Profitability ($/acre/year) $100$200$300$400$500 5.0% $2,000$4,000$6,000$8,000$10,000 4.0% $2,500$5,000$7,500$10,000$12,500 3.0% $3,333$6,667$10,000$13,333$16,667 2.0% $5,000$10,000$15,000$20,000$25,000 Slide 30 Agricultural Economics Kentucky Cropland Values $5/bu Corn $11.50/bu Soybeans Competitive Areas: 175 bu $8-12K /acre 175 bu $8-12K /acre 150 bu $6-9K /acre 150 bu $6-9K /acre Slide 31 Baseline Scenario 2016-20 (per acre) $9.00 Soybeans (elevator) $4.00 Corn (elevator) $.45-N; $.40-P; $.40-K +$25 Increase Fixed Costs Gross Return Corn Gross Return Soybeans Gross Return Rotation 125 bu corn$75$95$85 150 bu corn$156$146$151 175 bu corn$236$195$216 200 bu corn$317$241$279 Note: Subtract land rent to get Net Return. Slide 32 Cropland Value ($/acre) at Various Yearly Profitability and Capitalization Rates Capital- ization Rate Expected Profitability ($/acre/year) $100$200$300$400$500 5.0% $2,000$4,000$6,000$8,000$10,000 4.0% $2,500$5,000$7,500$10,000$12,500 3.0% $3,333$6,667$10,000$13,333$16,667 2.0% $5,000$10,000$15,000$20,000$25,000 Slide 33 Agricultural Economics Long-run KY Cropland Values $4/bu Corn $9/bu Soybeans Competitive Areas: 175 bu $4-7K /acre 175 bu $4-7K /acre 150 bu $3-5K /acre 150 bu $3-5K /acre Slide 34 Agricultural Economics KY Cropland Values Comparison Competitive Areas Estimated Price per acre $5/bu Corn $4/bu Corn $5/bu Corn $4/bu Corn 175 bu $8-12K $4-7K 175 bu $8-12K $4-7K 150 bu $6-9K $3-5K 150 bu $6-9K $3-5K Slide 35 Agricultural Economics Lowest Long-Term Price? Marginal ground drops out production 125 bu corn ground 125 bu corn ground Assume no govt payments Assume no govt payments Slide 36 Agricultural Economics 125 bu Corn Ground $4.00 corn $68/acre gross return $3.50 corn $17/acre gross return Lowest long-term price $3.75/bu corn and $8.50/bu soybeans