Impact of High Commodity Prices on Land Rent by ivk15474

VIEWS: 20 PAGES: 12

									                                                                                          Factors/issues impacting land values
                                                                                                           (alphabetical order)

WHERE HAVE WE BEEN? WHERE ARE WE HEADED?                                            • Farm profitability
                                                                                    • Farm size
            Impact of High Commodity                                                • Government programs
                                                                                    • Input costs (e.g., fuel and fertilizer)
               Prices on Land Rent
                                                                                    • Interest rates
                                                                                    • Outside investors (i.e., stock market money)
           Kevin C. Dhuyvetter -- kcd@ksu.edu -- 785-532-3527
          Terry L. Kastens -- tkastens@ksu.edu -- 785-626-9000                      • Recreation uses (e.g., hunting)
                                                                                    •   Renewable fuels (ethanol and bio-diesel)
                 Department of Agricultural Economics
                                                                                    •   Section 1031 tax exchanges
                       Kansas State University
                                                                                    •   Technology (e.g., no-till, precision ag, bio-tech, DNA)
                                                                                    •   Urban sprawl
                                                                                    •   Weather (i.e., drought, flood)
                                              Manhattan, KS. January 18, 2008   1                                                                 2




                         Returns to land

       • Capital gains (growth)

       • Cash returns (rent)
                                                                                                      Historical data

       • The two returns to land are similar to
         other investments such as the stock
         market (capital gains and dividends)



                                                                                4                                                                 5
                                                                                                                       Crop Land Average Annual Growth Rate
                                  KS land value (incl. bldgs); 1880-2006                                               Jan 1, 2002 to Jan 1, 2007, percent (geo mean)
                           average growth = 3.97%; geometric growth = 3.74%
                         $1,200                                                    40%
                                         land value
                         $1,000          growth rate                               30%




                                                                                          annual growth rate (%)
                                         geometric growth
   land value ($/acre)




                          $800                                                     20%


                          $600                                                     10%


                          $400                                                     0%


                          $200 geometric growth                                    -10%


                            $0                                         -20%                                              National average = 11.2%

                              1880  1900  1920  1940  1960  1980  2000
                                 1890  1910  1930  1950  1970  1990                                                    Source: USDA NASS Land Values and Cash Rents 2007 Summary and Dhuyvetter and Kastens, August 2007
 1879 starting land value for Kansas was $10.30
                                                                                                                   6                                                                                                                                       7




Pasture Land Average Annual Growth Rate
Jan 1, 2002 to Jan 1, 2007, percent (geo mean)                                                                                                     KS non-irrigated crop land rent; 1967-2007
                                                                                                                                                   1967-2007: avg growth = 3.12%; geo growth = 2.91%
                                                                                                                                                   1988-2007: avg growth = 1.63%; geo growth = 1.55%
                                                                                                                                           $45                                                                            30%
                                                                                                                                                                                geo growth
                                                                                                                                           $40                                                                            25%




                                                                                                                                                                                                                                  annual growth rate (%)
                                                                                                                                           $35                                                                            20%


                                                                                                                           rent ($/acre)
                                                                                                                                           $30                        rent $                                              15%

                                                                                                                                           $25                                                                            10%

                                                                                                                                           $20                                                                            5%

                                                                                                                                           $15                                                                            0%
                                                                                                                                                                      growth rate
                                                                                                                                           $10                                                                            -5%

  National average = 15.0%                                                                                                                 $5                                                                              -10%
                                                                                                                                                 1967          1975          1983          1991          1999          2007
                                                                                                                                                        1971          1979          1987          1995          2003
Source: USDA NASS Land Values and Cash Rents 2007 Summary and Dhuyvetter and Kastens, August 2007

                                                                                                                        Suggested expected ag growth rate = 2.75% (but if ethanol continues . . . ?)
                                                                                                                   8                                                                                                                                       9
Cropland Rent Average Annual Growth Rate
Jan 1, 2002 to Jan 1, 2007, percent (geo mean)                                                                                                  KS pasture land land rent; 1967-2007
                                                                                                                                           1967-2007: avg growth = 2.89%; geo growth = 2.65%
                                                                                                                                           1988-2007: avg growth = 1.20%; geo growth = 1.09%
                                                                                                                                   $16                                                                            30%
                                                                                                                                                                                   geo growth
                                                                                                                                   $14                               rent $                                       24%




                                                                                                                                                                                                                          annual growth rate (%)
                                                                                                                                   $12                                                                            18%




                                                                                                          rent ($/acre)
                                                                                                                                   $10                                                                            12%

                                                                                                                                   $8                                                                             6%

                                                                                                                                   $6                                          growth rate                        0%

                                                                                                                                   $4                                                                             -6%

  National average = 3.5%                                                                                                          $2                                                                              -12%
                                                                                                                                         1967          1975          1983          1991          1999          2007
                                                                                                                                                1971          1979          1987          1995          2003
Source: USDA NASS Land Values and Cash Rents 2007 Summary and Dhuyvetter and Kastens, August 2007

                                                                                                         Suggested expected ag growth rate = 2.47% (but if ethanol continues . . . ?)
                                                                                                    10                                                                                                                                               11




Pasture Rent Average Annual Growth Rate
Jan 1, 2002 to Jan 1, 2007, percent (geo mean)                                                                                     Kansas (Jan 1) non-irr land value & cash rent, 1967-2007
                                                                                                                                                                 Correlation = 93%
                                                                                                                                   1100                                                                             45
                                                                                                                                   1000
                                                                                                                                                                                                                    40
                                                                                                                                    900
                                                                                                                                                                                          rent
                                                                                                                                    800                                                                             35


                                                                                                             land value ($/acre)




                                                                                                                                                                                                                                cash rent ($/acre)
                                                                                                                                    700                                                                             30
                                                                                                                                    600
                                                                                                                                                                                          value                     25
                                                                                                                                    500
                                                                                                                                    400                                                                             20
                                                                                                                                                                                                  Land
                                                                                                                                    300                                                           value
                                                                                                                                                                                                  Cash rent         15
                                                                                                                                    200
  National average = 5.5%                                                                                                           100                                                                             10
                                                                                                                                           1967 1973 1979 1985 1991 1997 2003
                                                                                                                                              1970 1976 1982 1988 1994 2000 2006
Source: USDA NASS Land Values and Cash Rents 2007 Summary and Dhuyvetter and Kastens, August 2007

                                                                                                    12                                                                                                                                               13
                       Kansas (Jan 1) non-irr land value & rent-to-val, 1967-2007
                                               Correlation = -90%
                       1100                                                           8                                                Result of ethanol push is
                       1000
                        900
                                                                                                                                       higher commodity prices
                                                      rent-to-value                   7
                        800                                                   value
 land value ($/acre)




                                                                                          rent-to-value (%)
                        700
                        600                                                           6
                        500
                        400
                                                                                                                                       Higher crop prices lead to
                                                                                      5
                        300                                      Land value                                                                higher land rents
                        200                                      rent-to-value
                        100                                                           4
                              1967  1973  1979  1985  1991  1997  2003
                                 1970  1976  1982  1988  1994  2000  2006

                                                                                                              16                                                                                      29




How long will strong prices stick around?                                                                          How long will strong prices stick around?

                                       Harvest (CBT-Z) futures for corn, 1982-2010                                                          Harvest (CBT-X) futures for soybeans, 1982-2010
                              harvest in October; 08-10 based on futures prices 01/16/2008                                             harvest in October; 08-10 based on futures prices 01/16/2008
                                      07-10 average is 94% above 82-06 average                                                                 07-10 average is 98% above 82-06 average
                                                                                                                               13.00
                       5.00                                                                                                    12.00
                                                                                                                               11.00
                                                              82-06 average                                                    10.00
                       4.00                                                                                                                                           82-06 average
                                                                                                                                9.00
                                                                                                                                8.00
  $/bushel




                                                                                                                    $/bushel
                       3.00                                                                                                     7.00
                                                                                                                                6.00
                       2.00                                                                                                     5.00
                                                                                                                                4.00
                                                                                                                                3.00
                       1.00
                                                                                                                                2.00
                                                                                                                                1.00
                       0.00                                                                                                     0.00
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                                                          year                                                                                                     year
                                                                                                              30                                                                                      31
 How long will strong prices stick around?                                              Some negatives are creeping in . . .
                    Harvest (KBT-N) futures for hard red winter wheat, 1982-2010
                     harvest in June; 08-10 based on futures prices 01/16/2008          • Corn for ethanol increases food prices
                           07-10 average is 125% above 82-06 average
                                                                                          – Probably okay on this one (at least in the U.S.)
             9.00                                                                            • CARD: 30% higher corn price: 1.1% higher food prices
             8.00
                                                                                        • Ethanol is dirty environmentally
             7.00
                        82-06 average
                                                                                          – Probably okay on this one (i.e., it is fairly clean)
             6.00
                                                                                        • Livestock industries are getting louder
  $/bushel




             5.00
             4.00                                                                       • Infrastructure & technical issues
             3.00                                                                         – Ethanol/gasoline separation; small refineries
             2.00
                                                                                          – Cars can use 10% (14 bgy); 5% (7 bgy) easily
             1.00
                                                                                             • 25% of cars will be FFV since foreign car makers aren’t
             0.00                                                                              making that pledge (they sell half the cars)
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                                                                                   32                                                                    35




Future ethanol production . . .

• Not sure whose crystal ball to believe
     – Today’s 7 bgy easy to sustain; next 7 bgy                                                KSU study of impact of
       reasonable over time; beyond ???
     – Hard to predict politics                                                                high commodity prices on
• Impact of cellulosic ethanol                                                                        rental rates
     – Maintaining SOM will allow only 6.5 bgy from corn
       stover; alternatives will be slowwww
                                                                                                Two approaches:
• Most predictions in the 11-15 bgy over the
  next 3-5 years                                                                                    Crop budgets & KSU-Lease
     – Reflects current actual + planned capacity                                                   Historical relationships
     – Approximates E10 nationwide

                                                                                   36                                                                    37
In recent years, the majority of leasing                                                  Landowner/producer risk-return tradeoff
questions received pertain to:
                                                                                          x
             • Impact of adopting new technologies
                                                                                                                                   Cash rent
             • Cash renting
                                                                                                                                               Custom farm
             • “Non-traditional” leases                                                                      Crop share
                                                                                                                                Crop share
                -- Net share rent




                                                                                 Return
                -- Flexible cash rent                                                          Custom farm
                                                                                                             Cash rent
                -- Bushel rent
                                                                                                                                Where do other types of
                -- Combination cash/cropshare                                                                                   leases fall on this line?

  … while current “hot topic” is slightly different,
method of addressing questions has not changed.                                                                                                        sx
                                                                            38
                                                                                                                         Risk                                39




         Landowner/producer risk-return tradeoff                                 Methods of establishing cash rent values …
         x                                                                       •            Crop share equivalent (adjusted for risk)
                                                                                          -     Converts equitable crop share rent to an
                                               Cash rent                                        expected dollar amount per acre
                                    Bushel rent
                                                              Custom farm
                            Net share                Crop share
                                                                                 •            Landowner’s cost
                     Crop share               Net share
                                                                                          -     Based on the premise of landowner’s
Return




                                  Bushel rent
             Custom farm                                                                        continuing to receive comparable returns to
                           Cash rent                                                            what has been received in the past

                                  What about flexible cash
                                                                                 •            Amount tenant can afford to pay
                                  rents (bonuses, etc.)?                                  -     Residual approach – after tenant pays all
                                                                                                expenses, whatever income is left represents
                                                                      sx                        cash rent
                                       Risk                                 40                                                                               41
                                                                                                                                 Estimated cash rents for Central Kansas
Alternative Prices to Consider for Central Kansas                                                                                [long run (2008-2012) projected prices]

                                               Alternative Price Scenarios                                                                                          Returns to Land -- Cash Rent
               14.00
                            Long-run prices
               12.00        Short-run prices                                                                                      Tenant breakeven                                                                          $46.96
                            Current forward contract bids                               $11.49
               10.00
                                                                                                                                        Crop-share
                                                                                                                                                           (~68/32 sharing fertilizer & chemicals (F&C))             $43.60
                                                                                                                                        equivalent
 Price, $/bu




                8.00                                                                $8.40
                                                                                                                    $8.00

                6.00                                                        $6.60
                                                                                                                                   Landowner's cost                                                                $42.00
                                                                                                            $5.59
                                       $4.87                     $4.64
                4.00                                                                                $4.29
                               $3.78                     $3.66
                       $2.76                     $2.64                                                                               Return over TC    $4.96                                                       LR prices
                2.00


                0.00                                                                                                                                  $0       $5     $10    $15       $20   $25     $30     $35     $40       $45   $50
                                Corn                     Milo                     Soybeans              Wheat-R
                                                                                                                                                                                       Cash rent, $/ac

Long-run (08-12) and short-run (08) from MF-1013, current bids from McPherson (1/11/08)                                          Based on KSU Farm Management Guides (October 2007) and KSU-Lease.xls
                                                                                                                            42   (available at www.agmanager.info                                                                           43




Estimated cash rents for Central Kansas                                                                                          Estimated cash rents for Central Kansas
[short-run (2008) projected prices]                                                                                              [forward contract bids (1/5/08) for 2008 harvest delivery]

                                            Returns to Land -- Cash Rent                                                                                            Returns to Land -- Cash Rent



 Tenant breakeven                                                                             $117.35                             Tenant breakeven                                                             $209.07



                  Crop-share                                                                                                             Crop-share
                                     (~68/32 share F&C)          $66.26                                                                                    (~68/32 share F&C) $95.80
                  equivalent                                                                                                             equivalent



   Landowner's cost                              $42.00                                                                            Landowner's cost          $42.00




               Return over TC                                            $75.35                  SR prices                           Return over TC                                                $167.07
                                                                                                                                                                                                                   Current bids


                                $0         $20       $40            $60           $80       $100        $120         $140                             $0              $50           $100            $150            $200             $250

                                                                  Cash rent, $/ac                                                                                                      Cash rent, $/ac

Based on KSU Farm Management Guides (October 2007) and KSU-Lease.xls                                                             Based on KSU Farm Management Guides (October 2007) and KSU-Lease.xls
(available at www.agmanager.info)                                                                                           44   (available at www.agmanager.info)                                                                          45
Estimated cash rents for Central Kansas                                                                                Really high rent potential . . .
(alternative price scenarios)

                                  Returns to Land -- Cash Rent
                                                                                                                       • Previous example suggested that price
                                                                                      $209.07   +345%                    increases of 35% to 80% could mean a rent
 Tenant breakeven
                                           $46.96
                                                     $117.35 +150%
                                                                                                                         increase of 150% to 345% (elasticity of 4.3)
                                                $95.80
        Crop-share
                                      $66.26
        equivalent
                                       $43.60                                                                          • Will this happen?
                                                                                  Current bids
                             $42.00
                                                                                  SR prices
  Landowner's cost           $42.00
                                                                                  LR prices
                                       $42.00                                                                          • No!
                                                                       $167.07
                                                                                                                          – Farmers bid up production inputs as they try to
    Return over TC                      $75.35
                          $4.96                                                                                             increase acres or yield/a to get the high profits:
                     $0                $50            $100              $150             $200           $250
                                                                                                                            • Fertilizer, chemicals, machinery, labor
                                                          Cash rent, $/ac

Based on KSU Farm Management Guides (October 2007) and KSU-Lease.xls
(available at www.agmanager.info)                                                                                 46                                                                   47




Estimated cash rents for Central Kansas
(alternative price scenarios)
                                                                                                   Fertilizer +20%
                   Returns to Land -- Cash Rent -- High Cost Scenario                              Glyphosate + 25%
                                                                                                   Machinery +10%
                                                                                                   Land +50%
                                                                                 $190.78
    Tenant breakeven                                       $99.06
                                                 $28.67

                                                             $113.37       (61/39 sharing
 Crop-share equivalent                              $77.21                 fertilizer and
                                                      $49.47               chemicals)                                                                        Great year to be in the
                                                 $63.00
    Landowner's cost                             $63.00
                                                                                                                                                             fertilizer business
                                                           $63.00
                                                                                      Current bids
                                                                $127.78               SR prices
       Return over TC                   $36.06                                        LR prices
                  ($34.33)


                     ($50)            $0            $50         $100           $150         $200        $250
                                                           Cash rent, $/ac

Based on KSU Farm Management Guides (October 2007) and KSU-Lease.xls
(available at www.agmanager.info)                                                                                 48                                                                   49
    A KSU study of three scenarios                                                                                         Assumptions in KSU study

    • Scenario 1 – baseline (no ethanol)                                                                                   • Growth in corn yield and price determines
          – Historical average growth rates of corn yield and
                                                                                                                             rent growth
            price drive rents, which drive land values                                                                       – Yield grows at historical (1950-2007) rate in all
                                                                                                                             – Price grows at historical rate in baseline but
                                                                                                                               different rates in other two scenarios
    • Scenario 2 – ethanol comes and stays
          – Corn price grows rapidly to new plateau by 2010,
                                                                                                                           • Rent growth assigned to ag portion of land
            then follows normal growth thereafter                                                                          • Non-ag portion of land value grows at 3%
                                                                                                                           • Miscellaneous assumptions:
                                                                                                                                        –   start 1/1/06; 30-year land ownership analysis (show 12 years)
    • Scenario 3 – ethanol comes and leaves                                                                                             –   interest = 7%; income tax rate = 25%; cap gain = 15%
          – Corn price grows rapidly to new plateau by 2010,                                                                            –   property tax = 0.4% of land value
            then falls back to growth path that would have                                                                              –   2010-to-2006 price ratio with ethanol is 1.50
            occurred without ethanol                                                                                                    –   starting rents, values, crop prices from USDA-NASS

                                                                                                                     50                                                                                                         51




                                                                                                                                                                         KS: Corn price
A KSU study in January 2008 (Kastens & Dhuyvetter)                                                                                   5.50          baseline
              a 1% change in
              corn revenue                                                                                                                     ethanol stays
            i.e., yield or price, 1950-1972 avg       2007          1950-2007 avg 1950-2007 avg 1950-2007 avg                        5.00
           leads to a change rent-to-value          % of land      ann. grow th rate ann. grow th rate ann. grow th rate
                                                                                                                                                   ethanol
                of this % in            ratio      value due to        in %, for         in %, for         in %, for
   state             rent         (ag cap rate, %)  agriculture   non-ag land value     corn yield        corn price                               leaves
                                                                                                                                     4.50
    AR              0.87               8.15           44.12             12.69              3.92              1.45
    IA              1.24               7.61           53.43              9.77              2.01              1.46

                                                                                                                              $/bu
     IL             1.31               6.63           50.03             12.01              1.84              1.54
    KS              0.76               7.78           57.98             11.17              3.15              1.58                    4.00
    MO              1.33               8.05           43.56             10.55              2.22              1.47
    NE              1.07               8.06           60.37              7.12              2.88              1.51
                                                                                                                                     3.50
    AL             0.99               8.37               14.51          15.85             2.98              1.67
    ND             1.10               9.02               72.51          9.29              3.01              1.57
Notes:
                                                                                                                                     3.00
 Results don't materially change if use w heat or soybeans in analysis.
 Most mathematical models explained 85 to 95% of variation in dependent variable.
 Rent/(ag cap rate) equals agricultural portion of land market value.
                                                                                                                                     2.50
                                                                                                                                            2006          2008          2010          2012          2014          2016
                                                                                                                                                   2007          2009          2011          2013          2015          2017
       AL and ND included as examples of high and low non-ag influence

                                                                                                                     52                                                                                                         53
                                             KS: Cash rent                                                                                                 KS: Land value
          80             baseline                                                                                      1750          baseline

                       ethanol stays                                                                                            ethanol stays
          70
                         ethanol                                                                                       1500          ethanol
                         leaves                                                                                                      leaves

          60
$/acre




                                                                                                          $/acre
                                                                                                                       1250

          50


                                                                                                                       1000
          40



          30                                                                                                            750
                2006          2008          2010          2012          2014           2016                                   2006          2008          2010          2012          2014          2016
                       2007          2009          2011          2013          2015           2017                                   2007          2009          2011          2013          2015          2017


                                                                                                     54                                                                                                           55




                                                     Debt                                                                                      Debt-to-assets (leverage ratio)
                              ROE 3 scenarios: 10.87%, 13.46%, 11.47%                                                                   ROE 3 scenarios: 10.87%, 13.46%, 11.47%
                                        Start at 50% leverage                                                          60%
          500

          450                                                                                                          50%

          400


                                                                                                          leverage %
                                                                                                                       40%
          350
 $/acre




                               baseline                                                                                          baseline
          300                                                                                                          30%
                           ethanol stays                                                                                       ethanol stays
          250             ethanol leaves                                                                                       ethanol leaves
                                                                                                                       20%
          200

          150                                                                                                          10%
                 2006          2008          2010          2012          2014          2016                                   2006          2008          2010          2012          2014          2016
                        2007          2009          2011          2013          2015          2017                                   2007          2009          2011          2013          2015          2017


                                                                                                     56                                                                                                           57
Late to game: don’t buy until January 2010                                                                       Late to game: don’t buy until January 2010

                                                    Debt -- Buy in 2010                                                                         Debt-to-assets (leverage ratio) -- Buy in 2010
                                      ROE 3 scenarios: 11.12%, 12.07%, 9.46%                                                                       ROE 3 scenarios: 11.12%, 12.07%, 9.46%
                                               Start at 50% leverage                                                               60%
                  650

                  600                                                                                                              50%

                  550
                                                                                                                                   40%




                                                                                                                      leverage %
                  500
       $/acre




                                                                                                                                            baseline
                  450                                                                                                              30%
                                   baseline
                                                                                                                                          ethanol stays
                  400            ethanol stays
                                                                                                                                          ethanol leaves
                                                                                                                                   20%
                  350            ethanol leaves


                  300                                                                                                              10%
                        2010          2012          2014          2016          2018          2020                                       2010          2012          2014          2016          2018          2020
                               2011          2013          2015          2017          2019          2021                                       2011          2013          2015          2017          2019          2021


                                                                                                            58                                                                                                               59




Late to game AND LEVERAGE AT 75% rather than at 50%                                                              Ethanol will be good to states like ND, which is dominated by ag

                               Debt-to-assets (leverage ratio) -- Buy in 2010                                                                           ROE (return on equity) three areas
                                   ROE 3 scenarios: 11.64%, 13.25%, 9.02%                                                                                            Start at 50% leverage
                  90%                                                                                                              25%
                                                                                                                                                baseline
                                                                                                                                                ethanol stays
                  80%                                                                                                              20%          ethanol
                                                                                                                                                leaves

                  70%
     leverage %




                                                                                                                                   15%
                                                                                                                      ROE, %
                  60%
                                 baseline                                                                                          10%

                               ethanol stays
                  50%
                                                                                                                                   5%
                           ethanol leaves

                  40%
                        2010          2012          2014          2016          2018          2020                                 0%
                               2011          2013          2015          2017          2019          2021                                          KS                          ND                          AL


                                                                                                            60                                                                                                               61
Closing Thoughts…                                  Closing Thoughts…
• Historically, ag land has been a good            • Ethanol is inducing higher crop prices and it
  investment                                         looks like they’ll be around for awhile
  – RUN THE NUMBERS!                               • Higher crop prices have the potential to
• Non-ag features have been an important             substantially increase rental rates
  driver of ag land values in recent years         • There is considerable interest in non-
• Ethanol may stop or reverse that trend to          traditional rental arrangements
  ever greater importance of non-ag factors          – RUN THE NUMBERS!
  behind ag land values                            • If ethanol goes away in a few years it’s not
• Government payments have diminished as a           the end of the world
  driver of land values in recent years              . . . unless you’re late to the game
                                                     . . . AND you’re highly leveraged

                                              62                                                     63




                Questions?




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                                              64

								
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