1 / 40

Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012

Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012. Greg Halich 859-257-8841 Greg.Halich@uky.edu http://www.ca.uky.edu/agecon/index.php?p=169. Dept. Agricultural Economics University of Kentucky December, 2010. Projected Profitability 2012.

miller
Download Presentation

Profitability Outlook 2012 Flex Leases Union County Grain Day January 27, 2012

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Profitability Outlook 2012 Flex LeasesUnion County Grain DayJanuary 27, 2012 Greg Halich 859-257-8841 Greg.Halich@uky.edu http://www.ca.uky.edu/agecon/index.php?p=169 Dept. Agricultural Economics University of Kentucky December, 2010.

  2. Projected Profitability 2012 • Evaluate range of commodity prices. • Estimate production costs. • Compare returns to land rents.

  3. Risk ManagementWhat if Commodities Collapse? • ACRE Program • Flex Leases

  4. Agronomic Assumptions

  5. Budget AssumptionsFertilizer Quantity (per acre) 150 bu corn: → 160 units N → 60 units P2O5 → 53units K2O 48.0 bu soybeans: → 34 units P2O5 → 53units K2O

  6. 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

  7. Budget Assumptions

  8. Budget Assumptions Land Rent: • Highly variable. • Not included in budgets. → Subtract from net revenue.

  9. 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).

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

  11. Critical Budget Assumptions Does not include land rent. Includes “non-cash” costs. → depreciation/overhead, unpaid labor. P and K application at removal rate. Grain trucked directly to elevator.

  12. Risk Management Options • Flexible Cash Leases • ACRE Program

  13. ACRE Program FSA Program: • Give up portion of direct payment. • Get downside revenue protection. • Revenue guarantee can only go up/down 10% per year.

  14. ACRE Price GuaranteesWorst-Case Scenario(Assumes Avg. State Yield) CornSoybeans 2011-2012 $4.37 $10.45 2012-2013 $3.93 $9.41 2013-2014 $3.54 $8.46

  15. 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.

  16. Why Consider a Flex Lease? • Negotiating tool with landowners. • Potentially protect you if prices fall.

  17. More Specifically: • Landowner shares price/yield risk. • Limits profit potential when revenue high. • Limits loses when revenue low.

  18. 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.

  19. Options for Flex Leases • Price Ratio Price • Bushel Equivalent Price • Revenue Ratio Price/Yield • Revenue Percent Price/Yield • Revenue Base + % Price/Yield

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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.

  25. 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.

  26. Flex Lease Program • Farmers and landowners. • Henderson County 1/12/12 (Pilot). • Meetings scheduled Feb-March.

  27. 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/

More Related