AuthorThe “FOCUS ON AG” column is sent out weekly via e-mail to all interested parties. The column features timely information on farm management, marketing, farm programs, crop insurance, crop and livestock production, and other timely topics. Selected copies of the “FOCUS ON AG” column are also available on “The FARMER” magazine web site at: https://www.farmprogress.com/focus-ag Archives
June 2024
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The USDA “Prospective Plantings Report” that was released on March 28th projected a 4.9 percent decrease in 2024 U.S. corn acreage compared to a year ago, along with a 3.5 percent increase in 2024 soybean acreage from a year earlier. The USDA planting intentions numbers came in lower than the grain trade expected for corn and similar than trade estimates for soybeans. The USDA “Quarterly Grain Stocks Report” was also released on March 28, which lists the estimated U.S. grain inventory as of March 1, 2024, for both “on-farm” and commercial grain storage. The USDA estimates for U.S. corn inventories came in below the average stocks estimates of the grain traders, while soybean inventories slightly exceeded industry expectations.
The USDA prospective planting acreage is based on survey data collected from about 72,000 crop producers in early March. Total U.S. crop acreage was listed at 313.3 million acres, which was down 6.3 million acres or 2 percent from 2023. Most of that decline was due to low commodity prices and the extended drought conditions in the southern Plains States. The USDA estimates for intended 2024 U.S. corn and soybean acreage was viewed as rather “bullish” for “new crop” corn futures prices, meaning higher price expectations, and was viewed as mainly “neutral” for soybean futures prices on the Chicago Board of Trade (CBOT). After the USDA planting intentions report was released on March 28, December 2024 corn futures closed up 16 cents per bushel and November soybean futures were basically steady. Typically, these late March USDA Reports are very critical to farm operators and grain traders due to their impact on grain market prices in the Spring and early Summer months. During these months, many farm operators try to sell remaining grain inventories from the previous growing season, as well as look for opportunities to forward price a portion of the anticipated crop for the current year. In a majority of years, corn and soybean prices usually reach their “peak-price” during the period from April until June, which is why these reports are so important. Highlights from the March 28th USDA Planting Intentions Report: Corn --- The planting intentions report indicated that just over 90 million acres of corn are expected to be planted in the U.S. in 2024, which is a decrease of 4.6 million acres or 4.9 percent from the 2023 corn acreage of 94.6 million acres. The 2024 U.S. corn acreage would still be above the 2022 corn acreage of 88.2 million acres. The highest corn acreage recorded in recent decades in the March USDA survey was 97.3 million acres in 2012. The current USDA corn acreage estimate was about 1.7 million acres below the average grain trade estimate. Based on the report, 2024 planted corn acreage is likely to decrease in all of the major corn production States. The largest expected decrease in expected corn acreage is 700,000 acres (8.1%) in Minnesota. Other large decreases in corn acreage include Indiana at 350,000 acres (6.4%), Missouri at 350,000 acres ((9.1%), Iowa at 300,000 acres (2.3%), Illinois at 300,000 (2.7%), South Dakota at 300,000 (94.8%), Ohio at 300,000 ((8.3%), and North Dakota at 250,000 (6.2%). Nebraska’s corn acreage was only expected to decrease by 100,000 acres (1%). Soybeans --- Based on the estimates in the March 28th Planting Intentions Report, U.S. soybean acreage in 2024 is projected at 86.5 million acres, which represents an increase of 2.9 million acres from a year ago. The 2024 U.S. soybean acreage estimate compares to 83.6 million acres in 2023, 87.4 million acres in 2022, 87.2 million acres in 2021, and the record 90.2 million acres in 2017. The projected USDA soybean acreage came in very close to the average grain trade estimates for 2024. The highest increase in estimated 2024 soybean acreage was in North Dakota, with an expected increase of 700,000 acres, followed by Missouri with an increase of 400,000 acres. Smaller increases in 2024 soybean acreage are likely to occur in Minnesota, South Dakota, Iowa, Illinois, Indiana, Ohio, Nebraska, and Wisconsin. Kansas was the only major producing State to show a decline in anticipated soybean acreage for 2024. Wheat --- Due to the continued potential impacts on worldwide wheat production that has resulted from the Russian war in Ukraine, there was considerable interest in the U.S. planting intentions for Spring wheat in 2024. The intended total U.S. wheat acreage for 2024 is estimated at 47.5 million acres, which is down 4 percent from 49.6 million acres in 2023 but still exceeds 45.8 million acres in 2022. Spring wheat acreage for 2024 was estimated at 11.3 million acres, which is very similar to last year. Spring wheat acres in 2024 are expected to increase in Minnesota and South Dakota, decrease slightly in North Dakota, and stay the same in Montana. Highlights from the March 28th USDA Grain Stocks Report: Corn --- The total U.S. corn stocks on March 1, 2024, were listed at over 8.35 billion bushels, which is an increase of 13 percent from a year earlier. The March 1st USDA corn stocks estimates were slightly below the average grain trade estimate. The report indicated that a significant number of farmers are still hanging on to their 2023 corn inventory, with nearly 61 percent of the total corn stocks being held in on-farm storage. One negative in the USDA grain stocks report was that implied corn usage from December, 2023 through February, 2024 was down about 12 percent compared to a year earlier. Many farmers are hoping that favorable corn stocks numbers, together with the expected reductions in 2024 U.S. corn acreage, will spur a rally in the cash corn market in the coming weeks. This would allow farmers to liquidate some of the large 2023 corn inventory that is still in on-farm storage. Soybeans --- Soybean stocks on March 1, 2024, were listed at just under 1.85 billion bushels, which is up 9 9 percent from a year ago but is still slightly below the total soybean stocks on March 1, 2022. About half of the total soybean stocks were held in on-farm storage. The total U.S. soybean usage from December, 2023 through February, 2024 was estimated at 1.16 billion bushels, which was down about 13 percent from a year earlier. The March 1 soybean stocks estimate came in slightly above the average estimate of grain traders. The higher levels of grain stocks, together with the expected increase in 2024 soybean acreage may limit any substantial increases in the CBOT soybean futures prices in the coming weeks. Wheat --- Total wheat stocks on March 1, 2024, were listed at just over 1.09 billion bushels, which is up 16 percent from March 1, 2023. Of that total, approximately 25 percent of the wheat stocks were held in on-farm storage. The implied U.S. wheat usage in the past quarter was 334 million bushels, which was down about 10 percent from the same quarter a year ago. Corn and soybean market prices declined considerably in the past 12 months due to increasing supplies and reduced demand compared to previous years. Nearby CBOT corn futures closed at $4.42 per bushel on March 28 following the release of the USDA reports, which compares to $6.60 per bushel on Mach 31, 2023 following the release of the reports a year ago. New crop December corn futures on March 28 closed at $4.76 per bushel, compared to $5.66 per bushel a year ago on March 31. 2023. Nearby CBOT soybean futures closed at $11.91 per bushel following the USDA report on March 28, compared to $15.05 per bushel on March 31, 2023 and new crop November futures closed at $11.86 per bushel on March 28, compared to $13.20 per bushel a year ago. The March 31st USDA report was based on producer surveys of planting intentions, as of March 1st; however, there is potential for these planting intentions to be adjusted slightly when final planting takes place. The lower cost of production for soybeans has likely encouraged the potential for more soybean acres in 2024; however, the potential for early spring planting in many areas of the Midwest could encourage an increase above the intended corn acreage. Any enhancement in corn prices in the coming weeks could also be favorable for increases in corn acreage. In the past twenty years, final corn acreage has increased above the prospective March 1 planting estimate in twelve years and decreased in eight years. Note - For additional information contact Kent Thiesse, Farm Management Analyst, Green Solutions Phone - (507) 381-7960; E-mail - [email protected]
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Farmland Values Reach All-Time Highs3/6/2024 Farmland values in the Upper Midwest continued to move higher in 2023, surpassing the highest levels ever in many areas. The very high net farm income levels in 2021 and 2022 provided many farm operators with some extra cash resources to invest in farmland purchases in 2023. The enhanced farm income levels, together with a somewhat limited amount of land offered for sale in many areas, resulted in continued higher land values in many portions of Iowa, Minnesota and other areas of the Upper Midwest during 2023. Many areas of the Upper Midwest were somewhat dry in 2023 and experienced average to slightly-below average corn and soybean yields in 2023; however, there were some areas that benefitted from timely rainfall to achieve above average yields. Crop prices were solid early in 2023 and then declined later in 2023. These factors and the much higher real estate interest rates in 2023 did not seem to have a major impact on the land values for the year.
Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends in Midwest farmland sales. The Iowa State Land Value Survey is based on actual land sales in Iowa over a 12-month period, as well as from reports by agricultural professionals that are knowledgeable regarding land market conditions, including appraisers, farm managers, and ag lenders. The complete 2023 Iowa State Land Survey results can be found at: https://www.extension.iastate.edu/agdm/ The average value of Iowa farmland in 2023 was of $11,835 per acre, surpassing the 2022 average of $11,411 per acre, which previously was the highest average land price ever recorded since the Iowa State survey was initiated in 1941. Since the recent low point of $7,183 per acre in 2016, the Iowa Land Value Survey has shown an increase of 65 percent, or $4,652 per acre, in the past seven years (2016-2023). This includes a 57 percent increase in land values in a span of three years from December of 2020 until December of 2023. Based on USDA land value data, land values in the Upper Midwest have shown large increases in the past three years (2020-2023). The highest 3-year percentage increases were Kansas at 65 percent, Nebraska at 57 percent, and South Dakota at 50 percent. Other reported increases in land values from 2020 to 2023 were Minnesota at 42 percent, Iowa and Wisconsin at 41 percent, North Dakota at 37 percent, Indiana at 35 percent, and Illinois at 31 percent. Many of these States have been hard-hit by drought at some point during the past three years; however, that has not seemed to slow the trend toward much higher land values. The average land values in 2023 increased in eight of the nine Iowa crop reporting districts as compared to 2022 average values, with only the Northwest district showing a slight decline. The Southeast district in Iowa recorded the greatest year-over-year increase in in land values in in 2023 at a 12.8 percent increase, followed by the South Central district with an increase of 9.8 percent. All of the other Iowa districts, except East Central district, reported land value increases between 2.6 and 3.7 percent in 2023. The Northwest district reported the highest 2023 average land value in Iowa at $14,753 per acre, with the North Central, Northeast, West Central, East Central, and Central districts all averaging over $12,000 per acre. Trends in farmland values in Southern Minnesota have been tracking very closely to the trends shown in the Iowa land value survey for northern crop reporting districts in Iowa. Similar to many areas of Iowa, land values were much higher in 2023 in most portions of Southern Minnesota due to the strong farm income levels in recent years for many farm operators. There have been numerous land sales across Southern Minnesota that have topped $12,000 per acre in the past 12 months, with some isolated sales over $15,000 per acre. Even with the higher land values, there has continued to be a gap between the prices that are being paid for high quality, well-drained land, as compared to lower quality land that is poorly drained. Based on the recent Iowa State Survey, active farmers accounted for approximately 70 percent of the farmland purchases in Iowa in 2023, which was primarily existing farm operators that were expanding their land base. About 24 percent of farmland was purchased by real estate investors, with about half being retired farmers and other local investors and the other half being non-local investors. The remaining 6 percent was sold for other purposes. The main reasons listed for the strength in farmland values was continued strong farm income levels in 2023, the limited supply of land offered for sale, and strong local demand for land in 2023. There has continued to be strong interest for purchasing land among farmers in many areas as we enter 2024. The U.S. Federal Reserve increased the prime interest rate by 5.25 percent in an eighteen-month period, increasing the prime rate from 3.25 percent in early 2022 to 8.50 percent in mid-Summer of 2023, which remains the current prime rate. The Federal Reserve continues to discuss the likelihood of possible modest decreases in the prime interest rate during the balance of 2024; however, that is not certain at this point. Prior to 2022, the prime rate interest rate had not changed in nearly three years which provided a stable financing environment for farmland. Following is an example to show the impact of the rapid rise in long-term interest rates …… Assume that a land buyer purchased a 160-acre parcel of farmland and financed $6,000 per acre ($960,000 total) with a 25-year amortized real estate mortgage (REM). Following are the estimated annual principal and interest (P & I) payments at various prime rates, as the long-term interest rates have increased:
As part of the 2023 Iowa State Land Value Survey, respondents were asked their opinion regarding the future direction of farmland values during the next five years. Forty eight percent of the respondents expect Iowa farmland values to decrease by the end of 2024 as compared to 2023, with most expecting a decrease of 5 percent or less. Twenty-two percent expect farmland values to remain fairly steady in the next 12 months, while 30 percent forecast an increase in Iowa land values the end of 2024. When asked about farmland trends over the next five years, 70 percent of the respondents expect land values to increase, with most expecting an increase of 10-20 percent, while 30 percent feel that future land values will remain steady or decline in the next few years. Currently, most signs point toward stability and possibly some modest decreases in land values in the next 12 months. There are some lingering “caution flags” that could put potentially put even more downward pressure on land values. These potential challenges include:
As we enter a period of lower commodity prices and tighter margins in crop and livestock production, farm operators need to be more cautious on over-extending their farm business to purchase land. This is especially the case for beginning farmers and those borrowing a significant amount of money that will be impacted by the higher long-term interest rates. It is best to sit down with a good farm business financial advisor or ag lender to analyze the potential financial impacts on the farm business before finalizing the farm purchase decision.
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Arriving at equitable land rental rates been has always been a challenge for farm operators and landlords alike and will likely continue to be difficult for the 2024 growing season. Many times, land rental rates for a coming crop year are based on the profitability in crop production in the previous year or two before. In some cases, this can present profitability challenges for farm operators, if grain prices drop or if there are yield challenges. On the other hand, there can be extra profit for farm operators in years with above average yields and higher levels of crop prices. Many landlords gradually increased cash rental rates in many areas of the Midwest from 2020 to 2023, in response to improved crop production profit levels. As we head into 2024, crop prices have declined significantly with much tighter projected profit margins for corn and soybean production.
An alternative to flat cash rental rates that may be difficult to “cash flow” would be for producers and landlords to consider using a “flexible cash lease” rental agreement, which allows the final cash rental rate to vary as crop prices and/or yields vary, or as gross revenue per acre exceeds established targets. The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on the situation, and how the flexible lease is set up. A “true” flexible cash lease allows for the landlord to receive additional land rental payments above a “base” land rental rate, if the actual crop yields and/or market prices, or the gross revenue per acre, exceed established “base” figures. It would also allow for the “base” rent to be adjusted downward, if the actual crop yields and prices per acre, fall below the established “base” figures. Most flexible leases have been modified in recent years into a “bonus rent” agreement. This type of flexible lease uses a reasonable “base rental rate” that can “flex” upward with an added rental payment to the landlord, if the “base” crop yield and/or base crop prices, or the base crop revenue per acre, are exceeded; however, the final rental rate does not drop below the base rental rate. There are many variations to setting up a flexible lease agreement between a landlord and farm operator, including using yield only, price only, a base crop revenue compared to a harvest crop revenue, and many more. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement. Flexible leases can work well for newer or younger farm operators that may not be able to afford the higher cash rental rates for farmland. A flexible lease makes it easier for producers to utilize risk management tools such as crop revenue insurance policies and forward pricing of grain. A flexible lease, with a fair base rental rate, allows landlords the security of a solid base rental rate, while having the opportunity to share in added profits when crop prices and/or yields exceed expectations. Flexible leases provide an alternative for landlords that want to continue to work with long-standing farm operators, without setting cash rental rates too high to keep the current tenants. Utilizing “flexible cash lease agreements” between farm operators and landlords can be a good management strategy as an alternative to extremely high straight cash rental rates; however, these agreements need to be fair and equitable to all parties. Landlords also need to be willing to adjust the “base” cash rental rates lower as necessary, if crop margins become quite tight, such as occurred from 2015-2019 and could possibly occur again in the coming years. It is extremely important that all aspects of a flexible land rental lease agreement be detailed in a written rental contract that is signed by all parties. The agreement should include the base rent, yield and price determination, as well as other provisions of a flex lease. Successful “flexible cash lease agreements”, just as any other long-term cash rental agreement, have always involved cooperation, trust, and good communication between the farm operator and the landlord. “Base Rent” Determination One of the biggest challenges with flexible cash rental leases is determining the “base rent” per acre, which in most instances is the minimum rental rate for the year on a land parcel. The “base rate” should be adjusted upward or downward annually, depending on changes in crop price expectations, average crop yields, or the projected “break-evens” for crop production for the coming year. The best way to establish the “base” rental rate is to have a rental rate per acre that is agreeable to both the landlord and farm operator, with an established method of calculation. There are several ways to approach the determination of a “base rental rate”, including utilizing average land rental rates for a given area from land grant universities or the USDA National Ag Statistics Service (NASS). Several universities and NASS publish annual updates on land rental rates in many areas. A good flexible lease will detail method and calculations that will be used to determine any potential added (bonus) flexible rental payments. In addition to a base (minimum) rental rate, many flexible leases also contain a “maximum” cash rent per acre. Typically, maximum annual rental rates in a flexible lease arrangement are set an established rate above the base rental rate (ex- $50 to $100 per acre)a. In most cases, any added or bonus rental payments are paid with the final rental payment for the year. Determining Yields, Prices, and Revenues for Flexible Leases Many flexible cash leases require a “base yield” of some type. The easiest method to get a base yield is to use the crop insurance APH yield on a given land parcel, which is updated annually. Actual yield calculation on the farm for a given year can be also be determined by the verified crop insurance yield for the year, or by warehouse receipts, settlement sheets, scale tickets, bin measurements, grain cart weigh wagons, yield monitors, or any other method that is acceptable to both the landlord and farm operator. Many times, yield determination requires a certain degree of “trust level” between the landlord and the farm operator. The crop “base price” for a flexible lease could be the projected harvest (October) price at the local grain elevator or processing plant for that crop on a specified date prior to planting (ex.– March 1 or April 1) for corn and soybeans. The final price that crop would be the price at the same local location on a specified date in the Fall (ex.- October 15 or November 1). In some cases, weekly or monthly average price at the local level from planting to harvest is used to determine the final price. Another alternative is to use the Spring crop insurance price (finalized on March 1) as the base price and the Fall harvest crop insurance price (finalized on Nov. 1) as the final price to determine flexible rental rates. Whatever method is used to determine the “base” and final prices, it should be consistent, using either crop insurance or the same grain elevator or processing plant as a source. Resources for Land Rental Agreements and Flexible Leases There are many variations when setting up a flexible lease agreement between a landlord and farm operator, including using yield only, price only, revenue based, and many more. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement. Iowa State University has some very good resources on flexible cash leases, including sample cash rental contracts, which are available on their “Ag Decision Maker” web site, which is located at: http://www.extension.iastate.edu/agdm/. |