profitability outlook 2012 flex leases union county grain day january 27, 2012 greg halich...
TRANSCRIPT
![Page 1: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/1.jpg)
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.
![Page 2: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/2.jpg)
Agricultural Economics
Projected Profitability 2012
• Evaluate range of commodity prices.• Estimate production costs.• Compare returns to land rents.
![Page 3: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/3.jpg)
Agricultural Economics
Risk ManagementWhat if Commodities Collapse?
1) ACRE Program
2) Flex Leases
![Page 4: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/4.jpg)
Agricultural Economics
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
![Page 5: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/5.jpg)
Agricultural Economics
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
![Page 6: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/6.jpg)
Agricultural Economics
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
![Page 7: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/7.jpg)
Agricultural Economics
Budget Assumptions
Base Scenario
Fertilizer: $/ton $/unit Anhydrous (N) $850 $.52 DAP (P2O5) $660 $.51 Potash (K2O) $630 $.53
![Page 8: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/8.jpg)
Agricultural Economics
Budget Assumptions
Land Rent:• Highly variable.• Not included in budgets.
→ Subtract from net revenue.
![Page 9: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/9.jpg)
Agricultural Economics
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).
![Page 10: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/10.jpg)
Agricultural Economics
Budget AssumptionsOther:• $2.50/gallon LP 3 pts removed.• Direct Payment $20/acre.
![Page 11: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/11.jpg)
Agricultural Economics
Critical Budget Assumptions
11
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.
![Page 12: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/12.jpg)
Agricultural Economics
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
![Page 13: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/13.jpg)
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
![Page 14: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/14.jpg)
Agricultural Economics
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 $330
![Page 15: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/15.jpg)
Agricultural Economics
Baseline Scenario (per acre)$ 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.
![Page 16: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/16.jpg)
Agricultural Economics
High Commodity Price Scenario$14.00 Soybeans (elevator)
$ 6.25 Corn (elevator)$.52-N; $.51-P; $.53-K
Gross Return
CornGross Return
SoybeansGross Return
Rotation
125 bu corn $370 $352 $361
150 bu corn $504 $438 $471
175 bu corn $638 $519 $578
Note: Subtract land rent to get Net Return.
![Page 17: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/17.jpg)
Agricultural Economics
Low Commodity Price Scenario$ 9.50 Soybeans (elevator)
$ 4.25 Corn (elevator)$.52-N; $.51-P; $.53-K
Gross Return
CornGross Return
SoybeansGross Return
Rotation
125 bu corn $120 $166 $143
150 bu corn $204 $222 $213
175 bu corn $288 $274 $281
Note: Subtract land rent to get Net Return.
![Page 18: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/18.jpg)
Agricultural Economics
Risk Management Options
1) Flexible Cash Leases
2) ACRE Program
![Page 19: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/19.jpg)
Agricultural Economics
ACRE Program
FSA Program:
• Give up portion of direct payment.
• Get downside revenue protection.
• Revenue guarantee can only go up/down 10% per year.
![Page 20: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/20.jpg)
Agricultural Economics
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
![Page 21: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/21.jpg)
Agricultural Economics
21
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.
![Page 22: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/22.jpg)
Agricultural Economics
22
Why Consider a Flex Lease?
1) Negotiating tool with landowners.
2) Potentially protect you if prices fall.
![Page 23: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/23.jpg)
Agricultural Economics
23
More Specifically:
• Landowner shares price/yield risk.
• Limits profit potential when revenue high.
• Limits loses when revenue low.
![Page 24: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/24.jpg)
Agricultural Economics
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
![Page 25: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/25.jpg)
Agricultural Economics
25
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.
![Page 26: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/26.jpg)
Agricultural Economics
26
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
![Page 27: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/27.jpg)
Agricultural Economics
27
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
![Page 28: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/28.jpg)
Agricultural Economics
28
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
![Page 29: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/29.jpg)
Agricultural Economics
29
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
![Page 30: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/30.jpg)
Agricultural Economics
30
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
![Page 31: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/31.jpg)
Agricultural Economics
31
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.
![Page 32: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/32.jpg)
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%
![Page 33: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/33.jpg)
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.
![Page 34: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/34.jpg)
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
Soybean Price 2.2 x Corn Price.
![Page 35: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/35.jpg)
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%
![Page 36: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/36.jpg)
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
Soybean Price 2.2 x Corn Price.
![Page 37: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/37.jpg)
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
Soybean Price 2.2 x Corn Price.
![Page 38: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/38.jpg)
Agricultural Economics
38
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.
![Page 39: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/39.jpg)
Agricultural Economics
39
Flex Lease Program
Farmers and landowners. Henderson County 1/12/12 (Pilot). Meetings scheduled Feb-March.
![Page 40: Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012 Greg Halich 859-257-8841Greg.Halich@uky.edu](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649da15503460f94a8e28e/html5/thumbnails/40.jpg)
Agricultural Economics
40
Helpful Sites
Iowa Flex Leases:
http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-21.pdf
http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-22.pdf
Northcentral Farm Mgt Lease Site:
http://www.ncfmc.org/publications.aspx
http://aglease101.org/