Farm Land Value Farm Profitability

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1 Farm Land Value Farm Profitability Dennis Stein, Farm Management March 5, 2014 MSU is an affirmative-action, equal-opportunity employer. Michigan State University Extension programs and materials are open to all without regard to race, color, national origin, gender, gender identity, religion, age, height, weight, disability, political beliefs, sexual orientation, marital status, family status or veteran status.

2 MSU is an affirmativeaction, equal-opportunity employer. Michigan State University Extension programs and materials are open to all without regard to race, color, national origin, gender, gender identity, religion, age, height, weight, disability, political beliefs, sexual orientation, marital status, family status or veteran status.

3 Changes and Trends to notice Production systems have changes Yield trends for crops continue to increase Milk yield continue to go higher Economic situation have changed Commodity prices have increased (or not?) Production inputs have increased 3

4 Plan of Action Update or build a business plan Inventory, SWOT, Cash flow projections, Cost of Production,... Set production and pricing target (and a written plan shared with others) 4

5 First Step Estimate of Gross Margin Gross Income minus Direct Cost Prices Needed to MAINTAIN NET WORTH Adjustments to Meet CASH FLOW Demands Prices Needed to Meet CASH FLOW Demands Economic Profits 5

6 Farm Land Values What is the current cash value of land? It is what every you would pay for land? Economics of production Amount of dividends it can generate Appreciation in value 6

7 HISTORICAL LAND VALUE CHANGES Year Land $ %change % per Yr 1970 $ $ % 10.0% 1990 $ % 15.0% 2000 $ % 13.3% 2010 $ % 12.5% 2013 $ % 16.67% 7

8 What about Land Values? Factors affecting values Competition Local/State wide Land price trend

9 What about Land Values? Factors affecting values Investment opportunities: Dow Jones Index= -15% to +35%; Interest =.017% to 3.5% Expected returns from crop production Yield, Prices, Expenses Perceived risk and protection tools: Irrigation, tile drainage, APH, ACRE, SURE, DP, CC and actual Yield history

10 Land cost 5% for 20 years PAYMENT AMOUNT AT ALTERNATIVE RATES AND AMOUNTS. BORROWED INTEREST RATE % AMOUNT 4.00% 4.50% 5.00% 5.50% 6.00% 80 $3,200 $235 $246 $257 $268 $ $3,600 $265 $277 $289 $301 $ $4,000 $294 $308 $321 $335 $ $4,400 $324 $338 $353 $368 $ $4,800 $353 $369 $385 $402 $418 10

11 Capital Assets & Capital Investments A farm requires capital investments to function Land Equipment Facilities Inventory

12 Capital Assets & Capital Investments What kind of investment are farms making Improvements in the capital assets Building upgrades and construction Land improvements Drainage tile Irrigation

13 Capital Assets & Capital Investments Land improvements Drainage tile; Invest $500 to $800 per acre to gain? 10 Bushels of $5.00 = $50 per acre 15 Bushels of $6.00 = $90 per acre Irrigation: Invest $2,000 to $5,000 per acre to gain? 30 Bushels of $5.00 = $150 per acre

14 CHANGES IN PRODUCTION COSTS 1.Major shifts in a nearly every output 1. Commodity prices for grains down 2. Livestock sector prices going higher 14

15 CHANGES IN PRODUCTION COSTS 1.Shifts in a input costs 1. Land Rent; higher, the same, lower 2. Fertilizer; lower 3. Seed; higher 4. Fuel; the same 5. Interest; higher 6. Depreciation- Equipment; higher 15

16 Figure 1. Fertilizer Prices from May to October 2013 ($/Ton) $/Ton Urea Diammonium Phosphate (DAP) Monoammonium Phosphate (MAP) Potash Anhydrous Ammonia Urea-Ammonium Nitrate (UAN) May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Month-Year Data source: USDA- Illinois Dept. of Ag Market News, Springfield, Ill., cash prices for bulk purchases, granular form unless noted. 16

17 ENTERPRISE BUDGETS CORN WHEAT D.BEANS SOYBEAN S BEETS YIELD/AC VALUE/UNIT $4.50 $6.50 $35.00 $12.00 $50.00 GROSS INCOME $ $ $ $ $1, *CASH COST NITROGEN $69.30 $39.60 $23.76 $0.00 $59.40 Phos $28.13 $23.80 $25.96 $25.96 $15.14 Potash $30.11 $19.48 $21.25 $31.88 $42.50 LIMESTONE $0.00 $0.00 $0.00 $0.00 $0.00 SEED *** $ $24.00 $75.00 $55.00 $ HERBICIDE *** $36.00 $5.50 $38.00 $33.00 $35.00 INSECT&CHEMICALS *** $0.00 $34.00 $25.00 $20.00 $95.75 CROP INS. $15.50 $14.00 $30.00 $12.00 $37.50 FUEL & Lube $24.04 $13.11 $26.22 $15.30 $52.44 REPAIR $29.00 $20.30 $29.00 $20.30 $72.50 SUPPLIES $7.71 $5.40 $7.71 $5.40 $11.57 UTILITIES $13.50 $4.50 $4.50 $4.50 $9.00 MARKETING $6.56 $4.25 $5.00 $3.75 $0.00 DRYING $39.38 $0.00 $0.00 $0.00 $0.00 TRUCKING $18.38 $12.75 $6.00 $7.50 $68.25 T VARIABLE $ $ $ $ $ Breakeven Var Cash $2.44 $2.60 $15.87 $4.69 $

18 **FIXED CORN WHEAT DRY BEANS SOYBEAN S BEETS INSURANCE $5.00 $5.00 $5.00 $5.00 $5.00 LABOR $13.00 $6.50 $13.00 $6.50 $32.50 INTEREST $14.97 $7.72 $11.11 $8.21 $22.28 Breakeven Fixed Cash $0.19 $0.23 $1.46 $0.39 $2.30 RENT $ $ $ $ $ DRAW $/AC $25.00 $25.00 $25.00 $25.00 $25.00 Breakeven Capital/Mgt. $1.14 $2.35 $10.00 $4.00 $9.71 TotalCash Fixed&Capital Exp $ $ $ $ $ T EXPENSE CASH $ $ $ $ $ Breakeven All Cash Costs $3.77 $5.18 $27.33 $9.09 $36.49 DEPRECIATION *** $50.00 $50.00 $75.00 $50.00 $ TOTAL ALL EXP $ $ $ $ $1, BREAKEVEN $4.06 $5.76 $31.08 $10.09 $40.34 EXPENSE ALL AC $ $ $ $ $1, INCOME ALL AC $ $ $ $ $1, Breakeven Yield Return to Investment/Acre $76.94 $62.59 $78.49 $95.71 $

19 Corn cost $/bu $/bu $/ac diff vs 14 YIELD (5.00) PRICE $0.25 Gov. Program Payment $15.00 TOTAL REVENUE $4.58 $4.25 -$81.25 CASH EXPENSES SEED $0.58 $0.63 $5.00 FERTILIZER $1.05 $0.73 -$61.77 PESTICIDE $0.19 $0.21 $2.00 CROP INSURANCE $0.14 $0.09 -$9.50 LAND COST * $1.11 $1.00 -$25.00 sub Tot. Cash Expenses $4.12 $3.48 -$ OVERHEAD COSTS Interest $0.12 $0.09 -$6.57 Depreciation $0.28 $0.27 -$3.00 sub Tot Overhead $0.63 $0.59 -$9.57 Total Expenses $4.75 $4.08 -$ Net Enterprise Budget $0.17 $0.17 $

20 Corn cost $/bu $/bu $/ac diff vs 14 YIELD PRICE ($2.50) Gov. Program Payment 15 0 ($15.00) TOTAL REVENUE $6.84 $4.25 ($385.00) CASH EXPENSES SEED $0.64 $0.63 $5.00 FERTILIZER $1.16 $0.73 ($63.52) PESTICIDE $0.13 $0.21 $15.00 LABOR - HIRED $0.08 $0.08 ($0.25) CROP INSURANCE $0.15 $0.09 ($9.50) LAND COST * $0.91 $1.00 $25.00 sub Tot. Cash Expenses $3.84 $3.48 ($31.89) OVERHEAD COSTS Interest $0.13 $0.09 ($6.57) Depreciation $0.18 $0.27 $17.00 sub Tot Overhead $0.57 $0.59 $10.43 Total Expenses $4.41 $4.08 ($21.46) Net Enterprise Budget $2.43 $0.17 ($348.54) 20

21 Land Rent Values What can be Paid for Land Rent? Cost of Production and Break Even Analysis Rent Methods: cash, flex, share Conclusions 21

22 What about Land Rent? Factors affecting rental rate Expected Yield Prices Expenses Perceived risk and protection tools Irrigation APH, ACRE, SURE, DP, CC and actual Yields Manure availability and usage Value of manure - Depends on how utilized Competition Local/State wide.etc.

23 Tiled vs non-tiled land Cash rent value Tiled Non-tiled difference 2012 $179 $128 $ (51) 71.51% 2011 $146 $100 $ (46) 68.49% 2010 $106 $76 $ (30) 71.70% 2009 $108 $76 $ (32) 70.37% 2008 $107 $75 $ (32) 70.09% 2007 $94 $69 $ (25) 73.40% 23

24 What is the maximum price you can pay to rent land? Cover all cost? Cover only Direct Cost? Get some return to Overhead Cost --- Yes or No? How much does overhead cost change if add direct cost from more land? I have the machinery line to cover more acres? I have the personnel to cover more acres? I have the desire to cover more acres? 24

25 Revenue/Rent Expense RISK!! Self Insure Crop Insurance Various options Share Crop ¼ -3/4, 1/3-2/3, 50/50 Variable Cash Rent / Flex Rent 25

26 Revenue/Rent Expense RISK!! Who bares the RISK in your rental agreement? Landlord versus Tenant The more risk one takes, the more one expects in net returns! 26

27 Revenue/Rent Expense RISK!! Variable cash rent Negotiate at end of year Pay Bonus if good year Flex Cash Rent Combo insurance price (Dec futures in October) Local elevator cash Depends on expected yields Possible Crop Insurance Issues Who is at risk? Share in cost and revenue of insurance 27

28 - Commodity prices - Most commodity prices doing well - Milk prices higher than we have sustained over a five year period - Beef prices have skyrocketed to all time high levels - Hay and alfalfa prices very strong - Soybeans have an excellent price - Wheat prices hold in a profitable range - Back to more normal levels at $4.00 per bu.

29 Commodity prices The King - CORN has trended lower that the record high prices that were posted during the past three years. Net returns over costs have dropped $ 385 per acre from 2012 to projected 2014 with a $4.50 ($3.75??) per bushel average price Positive net returns in the $ 30 to $ 50 per acre depending on where a farm pegs its input cost and average land cost/ land values. 29

30 Return on assets Will the investment give a return to the bottom line (more bushels, cwt or pounds) If some of the bulk profit margin decreases some of the fluff of the past several years will need to be cut and cut quickly 30

31 Capital Cost and Income change change Depreciation $ % machine % buildings % total depreciation % Capital Purchases machine % buildings % total capital investment % Net farm income

32 Capital Cost and Income Depreciation $44,754 / 1170 acres = $38.25/ ac, $100,572 / 925 acres = $108.73/ ac, Capital investment $46,503 / 1170 acres = $38.75/ ac, $138,163 / 925 acres = 32 $$149.37/ ac.

33 Business Plan Design structure of the farm business LLC, Corp.,. Economics' Production system Marketing- pricing Profitability Management 33

34 Setting Up Business Structure Sole proprietor : single owner of business, files income on schedule C or Schedule F (Totally Liable) Pass Through Entities Partnership: more than one owner, generally files on form General, Limited, Limited Liability Limited Liability Company: treated as prt, corp business privilege tax return required Corporation: Sub Ch. S (<100 share

35 Projection for Some land values have peaked and will stay the same Some land values will go higher Some land values will trend lower Some land rents have peaked and will stay the same Some land rents will go higher Some land rents will trend lower 35

36 Actions Develop a cash flow management plan Monitor production and overhead costs Establish a commodity price risk management plan Identify your farms profit center and focus on building strength in that enterprise Insure the farms future through a sound business and transition plan 36

37 Thank you! Dennis Stein, Extension Educator, Michigan State University Extension 362 Green Street, Caro, MI Phone: Web: Web MSUE: 37

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