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The Ohio State University

Ohio Ag Manager

Dec
05
2013

Farmland Value, Cash Rent and Crop Input Outlook 2014

by: Barry Ward, Leader, Production Business Management
Department of Agricultural, Environmental and Development Economics

Cropland values in Ohio have increased again in 2013. Data from the Oho Ag Statistics Service shows an increase of 12% for bare cropland in Ohio for 2013. According to their data, bare cropland averages $5600/acre, up from $5000/acre the previous year.

The Ohio Cropland Values and Cash Rents Survey (AEDE) conducted in January 2013 shows that the increase in value of Western Ohio cropland in 2013 would be 6.8 to 15.4% depending on region and land class. The Chicago Federal Reserve Bank and Purdue University both conducted land value surveys in 2013. The Chicago Fed survey (October 1) of bankers found Indiana land values of “good” farmland increased by 18% year-over-year (the entire 7th Fed District increased 14%) while Purdue (June 30) found that the Indiana statewide annual increase in cropland values ranged from 14.7 to 19.1% depending on the productivity of the farmland.

Crop profitability prospects were positive in 2013 as they have been for the most part since 2007. Profit margins in 2013 are projected to be positive as high yields should compensate for lower prices in most regions of Ohio.

This past seven year period has been one of the most profitable periods in the last 50 years of crop production. These profit streams and healthier balance sheets have led many farmers to seek an investment option for these profits and many have chosen to invest in land. Investors outside of agriculture have also been actively seeking farmland as an investment alternative.

With many dollars and buyers chasing farmland, it isn’t a surprise to see land values increase again substantially in 2013. Crop profitability along with low interest rates have been the primary drivers of this run-up in cropland values. The relative scarcity of farmland has been a contributing factor in increasing cropland values.

So all of this begs the question, “Where are land prices headed in 2014?” The key factors – crop profitability and interest rates – both show indications of “unfriendly” moves in 2014. Crop profits are projected to be lower (possibly negative) and interest rates have moved higher since last year. Does this mean land values will decline?

The projected numbers for 2014 point towards flat to lower cropland values for 2014. Projected budgets for Ohio’s primary crops for 2014 show the potential for little to no profits (possibly losses). The Federal Reserve has indicated that it plans to maintain current low interest rates through mid-2015 although mortgage rates have moved higher.

Returns to Land (Gross Revenue minus all costs except land cost) are projected to be $12-$213/acre for Ohio Corn in 2014 depending on the land production capabilities. Budget projections for 2014 soybeans show returns to land to be $62-$248. Wheat budget projections for 2014 find returns to land to be between $25 and $159 per acre. This is assuming current prices of inputs and present December, November and September 2014 futures prices, respectively. These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/research/osu-farm-management/enterprise-budgets
The Income Method of Capitalization, an appraiser’s method of valuing assets, yields flat to lower land valuations based on 2014 projections for returns to land and interest rates.

For example, using a $213/acre return to land (the high yield scenario of the projected corn return to land for 2014) and a 4% capitalization rate, farmland would be appraised (valued) at $5325/acre. Using the return to land of the high yield scenario for 2014 soybeans ($248) yields an appraised value for land of $6200. These are only examples and are not meant to reflect the land value for your area. Lower “returns to land and/or higher interest rates would yield lower “appraised” land values using this approach.

There should be a note of caution in deriving budgets and using the Income Method of Capitalization for valuing cropland for 2014 and beyond. Assumptions used to formulate these budgets and appraisals may change. Profit margins may change from what we are presently projecting. Interest rates, currently at low levels, may increase further.

One factor that may support land values heading into 2014 is the financial strength in the sector. Crop farmer balance sheets have generally improved during this past seven year period. Financial health in the sector may counter-balance the effects of lower profits and potentially higher interest rates to underpin land values. Which of these opposing set of forces is the strongest will determine which direction land values head in 2014.

Cash rental rates will move based on where they are in relation to the current market. Rents at the low end of the market may have some upside potential yet as they catch up to the current market. Rents at the high end of the market will be sticky as operators may be reluctant to ask for relief after one year of low prices for fear of losing part of their land base. Flex leases will likely decline due to lower crop prices.

Producers that want to continue to operate their existing rented land base will have to pay at or near the market rate for their area. See the “Western Ohio Cropland Values and Cash Rents 2012-13” Factsheet online at:
http://aede.osu.edu/about-us/publications/western-ohio-cropland-values-and-cash-rents-2012-2013
to see data on yields and cash rents for various land classes.

To manage risk of volatile crop and input markets, producers and landowner should also consider flexible cash leases. Producers and landowners should also understand and attempt to quantify in some way the non-cash benefits provided by the producer to the landowner and vice-versa.

Fertilizer
Fertilizer continues to be the most volatile of the crop input costs and cost management of this important input may be a primary factor between being a low cost or high cost producer. Fertilizer prices are lower compared to last year at this same time and many producers are asking themselves if this is the right time to buy. While it is hard to know exactly what direction and when prices will move it is smart to keep up-to-date on important fertilizer product fundamentals.

Healthier farmer balance sheets and continued positive crop profit prospects have signaled the global marketplace to increase planted acreage. These same factors have also caused producers to maintain or increase fertilizer application rates which has led to strong global demand. Healthy balance sheets may allow producers to continue to invest in high levels of fertility to attempt to capture high yields.

On the flipside, large northern hemisphere crops have dampened prices which may lead to tighter profit margins in the short to medium term. These tighter margins may be a precursor to more judicious use of fertilizer as producers look to cut input costs. In addition, recent profits in the fertilizer sector have spurred investment and expansion in fertilizer manufacturing. This expansion may potentially lead to larger supplies that may weigh on prices. One other factor weighing on global demand has been the depreciation in currencies of certain developing nations that have been important fertilizer importers.

Nitrogen (N)

Retail prices have decreased year-over-year for all 3 commonly used nitrogen fertilizers in Ohio. Urea Ammonium Nitrate (UAN) 28% Nitrogen price has decreased approximately 15% while Anhydrous Ammonia (NH3) price has decreased 24% since one year ago. Urea prices have declined approximately 25% at the retail level.

Nitrogen fertilizer price fundamentals are slightly different for the three primary nitrogen fertilizers used in Ohio as their supply and demand fundamentals differ. For example, urea is used as a nitrogen fertilizer in many parts of the world that UAN and NH3 are not due to its relative ease of handling and application.

Key issues impacting nitrogen fertilizer prices are crop profit margins, specifically corn profit margins, and nitrogen fertilizer production expansion both domestically and globally.
These two primary fundamentals should dictate nitrogen fertilizer prices in the short to medium term as they will be the primary determinants of the supply/demand balance.

Potentially lower corn profit margins due to lower global corn prices and somewhat “sticky” crop input costs will possibly dampen N fertilizer demand. This result may lead to supply outpacing demand and may weaken prices. We may already be seeing nitrogen prices react to lower corn prices and lower potential net returns in 2013 and 2014 as nitrogen manufacturers attempt to move product in an ever increasing wait-and-see marketplace.

The other primary fundamental issue impacting nitrogen fertilizer markets is actual and proposed expansion in nitrogen manufacturing both domestically and globally. A combination of lower domestic natural gas prices (the primary ingredient in manufactured nitrogen fertilizers) due to the expansion of natural gas extraction and the recent period of relatively high net profits in crop production have led to higher profit margins in nitrogen manufacturing. These high margins in nitrogen fertilizer manufacturing have led to a number of brownfield expansion and greenfield (new manufacturing site) development proposals. Although several existing manufacturing sites have been expanded or brought back on line and several new sites have moved forward with permitting and design, many potential additional expansions and new site developments are not certain to be built. Industry sources reports that 30 some nitrogen manufacturing expansions or new constructions are being considered in the U.S. alone. The same industry source proposes that less than half will be finished.

With lower potential crop margins affecting demand and more manufacturing capacity globally affecting supply, the short and medium term prospects for nitrogen prices appear to be flat to lower.

Factors that may lead to N price increases include:
+ Large corn acreage prospects for the U.S. again
+ Strong crop farm balance sheet

Factors that may lead to N price decreases include:
- Lower crop prices leading to tighter margins
- Low domestic natural gas price
- More domestic N production coming online Giesmer, La; Donaldsville, La; Augusta, Ga; etc.
- More domestic N production to potentially be built

Phosphorous (P2O5)
Retail prices of phosphorous fertilizers have decreased approximately 15-20% since last year at this time. With low crop prices in store for next year and probable low to negative margins, phosphate fertilizer prices will likely be flat to lower. A short, fall application window may further burden demand and increase world supply. The Ma’aden Phosphate facility in Saudi Arabia is at or near full capacity and should also keep the relative supply/demand balance at a surplus.

One wildcard may be farmers’ potential willingness to fertilize at high levels in spite of low crop prices to attempt to offset those low prices with higher yield. Crop farmer balance sheets are in excellent shape and they may be willing to continue to spend on higher levels of fertilizer inputs.

Potassium (K20)
The retail price of potash has declined approximately 12% since one year ago. The potash industry essentially operates as a duopoly (two firms, in this case, two consortiums, with dominant control of the market) with Canpotex (Canadian Potash Exporters – Members: Potash Corp., Mosaic, Agrium) and Belarusian Potash Co. (Members: OAO Uralkali and OAO Belaruskali) controlling much of the global potash supply. One estimate is that these two entities control 70% of the global potash marketed. In recent years these two entities have utilized a strategy known as “matching supply with demand”. In other words, they have curtailed supply to support potash prices. This strategy has worked well enough that some analysts contend that the potash mining and manufacturing business has had profit margins of up to 75% in recent years. But all of that may be changing.

On July 30th, Russia’s OAO Uralkali’s board of directors announced that it would no longer export potash through Belarusian Potash Co. (BPC). This most likely will change the dynamics of the global potash trade and has already impacted global prices. Some analysts have stated that there have been disagreements in the past between Uralkali and Belaruskali that have been resolved rather quickly. Vladislav Baumgertner, Uralkali CEO, cited violations of the exclusive exporting arrangement by their partner, Belarusian Potash, as the reason for Uralkali’s decision to leave the consortium. Decree No. 566 by the Belarusian President on December 22, 2012 cancelled the exclusive right of BPC to export Belarusian potash. Following this decree, Belaruskali has made a number of export deals outside of BPC.

Baumgertner, Uralkali CEO, has stated that that this is not a temporary fall out between Uralkali and Belaruskali and that Uralkali will pursue a volume over price strategy to meet profit goals. He has also been quoted stating that the international potash price may decline up to 25% in one interview.

Potash Corp. CEO, William Doyle has downplayed the breakup of the other potash consortium first of all stating that the break-up would be temporary and that “logic would prevail.” He also stated that no one producer can determine price in response to Baumgertner’s assertion of global price declines.

With the August arrest of Baumgertner at the hands of Belerusian authorities, the messy affair in eastern Europe took an unfortunate turn. Baumgertner was eventually moved from jail into a house arrest setting. A sale of 21.75% of Uralkali from Suleiman Kerimov to Mikhail Prokorov’s Onexim Group was seen as a first step in reuniting the Russian and Belarussian companies and allowed for Baumgertner to be finally extradited back to Russia on November 22nd where he remains in detention awaiting trial. Whether he will actually stand trial is anyone’s guess. A recent purchase of a 20% share in Uralkali by Uralchem may signal a reunion of the two potash companies. The CEO of Uralchem, Dmitry Konyayev, said his company would support a reunion of the two potash giants. And since Uralchem is controlled by Belarus born Dmitry Mazepin, more weight may be given to this possibility.

The bottom line is that with the break-up of BPC (temporary or not), the global potash market price has declined. Midwest wholesale prices have declined $25/mt and more in some areas. The short term prospects will likely be dictated by the consortium events and potential crop returns (dictated by crop price levels) for 2013 and prospects for 2014. The fundamentals suggest flat to lower (possibly much lower depending on Uralkali’s export activities) potash prices through the end of the year.

Another important long term supply and demand issue in the potash industry is BHP Billiton Group’s announcement on August 20th that it will invest an additional $2.6 billion in the Jansen Potash project in Saskatchewan. Jansen may be the world’s best undeveloped potash resource and may be capable of supporting a mine with annual capacity of 10 million metric tons for more than 50 years.

Factors that may lead to K price increases include:
+ Strong crop farm balance sheet
+ Canpotex members may further curtail production?

Factors that may lead to K price decreases include:
- Lower crop prices leading to tighter margins
- Belarusian Potash Co. breakup may increase potash available on the global market?

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, industry newsletters, futures markets and retail sector surveys. While gauged to the best of this author’s capabilities, forward looking statements contained in this document may prove to be incorrect due to changes in supply and demand and other political and economic related events.

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