Examining Land Values, Cash Rents, Crop Input Costs & Potential Crop Profitability in 2015 Barry Ward Department of Agricultural, Environmental and Development Economics, The Ohio State University

What is Driving Land Value? >> Crop Net Income has been excellent but will be lower in ’14 &’15 >> Higher or Lower interest rates? – 10 Year T-Bill – 2.2% >> Farmer’s (crop) equity still solid but will likely not increase in 2015 U.S. Farm Sector Debt to Asset Ratio ~ 11% (D/A Ratio in 2002 was 14.8%) 9/19/2018 Barry Ward, AED Economics

Ohio Cropland Values Source: NASS 8.9% 9/19/2018 Barry Ward, AED Economics

Land Survey Data - % Increases OSU AEDE (collected Jan. 2014) Projected Decrease for 2014 – 4.0 to - 5.4% Purdue (Indiana) (collected June 2014) Yearly Increase June 13-June 14 + 6.4 to + 7.1% Half Year Decrease – Dec 13 – June14 – 0.9 to - 2.3% Chicago Fed (Collected July 1, 2014) Indiana - Northern 3/4 – “Good” Farmland Yearly Change July13 – July14, +3% (District 7, -2%) 3rd Quarter Change, +3% (District 7, 0%) 9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

U.S. Treasuries – 10 Year T- Bills 9/19/2018 Barry Ward, AED Economics

Interest Rates >>Geopolitical Risk >>Foreign Demand for Treasuries >>Demographics – Shifting Investment to Treasuries and Corp Bonds >>Stalling World Economy 9/19/2018 Barry Ward, AED Economics

Farmland Values: Outlook Competing Fundamentals: -Crop Net Income will be lower or negative -Steady Interest Rates? versus -Farmer equity positions are healthy 9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

What has Driven Rental Rates? >Crop Net Income has been good >Farmers balance sheets have strengthened + Larger pool of tenants + Rental bids highly competitive - tenants understand that once land is leased there is a greater likelihood of retaining the land – transaction costs to the landowner to change tenants >Property tax increases 9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

Barry Ward, AED Economics +3.6% 9/19/2018 Barry Ward, AED Economics

Williams Fulton Lucas Ottawa Defiance Henry Wood Sandusky Paulding Putnam Hancock Seneca Wyandot VanWert Allen Hardin Mercer Auglaize Logan Darke Preble Butler Hamilton Clermont Brown Shelby Miami Montgomery Warren Clinton Champaign Clark Greene Adams Highland Scioto Pike Lawrence Gallia Jackson Meigs Hocking Athens Vinton Washington Ross Fayette Madison Pickaway Franklin Union Delaware Marion Monroe Noble Morgan Licking Fairfield Perry Muskingum Guernsey Belmont Jefferson Harrison Tuscarawas Coshocton Knox Morrow Crawford Richland Ashland Holmes Wayne Stark Carroll Columbiana Mahoning Trumbull Portage Summit Medina Huron Erie Lorain Cuyahoga Lake Geauga Ashtabula

Land Values/Cash Rents 2014 – Northwest 9/19/2018 Barry Ward, AED Economics

Rental Rates: Outlook Competing Fundamentals: Crop Net Income will be lower versus Farm balance sheets are healthy Higher property taxes 9/19/2018 Barry Ward, AED Economics

Managing Rents in a Period of “Normalizing” Profit Margins Strengthen Balance Sheet to survive a reversal Communicating with Landowners of the reality for lower to negative “returns” and the need for rents to decrease… Communicate the value of non-cash benefits to the landowner Consider flexible cash leases 9/19/2018 Barry Ward, AED Economics

Energy Information Administration November 2014 Estimates 9/19/2018 Barry Ward, AED Economics

Energy Information Administration 9/19/2018 Barry Ward, AED Economics

Energy Information Administration 9/19/2018 Barry Ward, AED Economics

Current Ohio Fertilizer Prices NH3 $755 ($715-800) UAN(28%) $328 ($290-380) MAP $600 ($565-626) Potash $470 ($460-510) Source: DTN Fertilizer Index November 20: NH3 – 427 UAN28 – 212 DAP – 367 MAP – 399 K2O – 603 Urea - 382 9/19/2018 Barry Ward, AED Economics

General Fertilizer Fundamentals Lower Crop Prices Fertilizer Manufacturing and Mining Profit Margins have led to generally more global fertilizer production Consolidation in the sector Farmers have had a wait and see attitude This may impact short term fundamentals and prices as a relatively empty supply chain may create shortages and price increases in late winter/ early spring Global fertilizer fundamentals suggest flat to lower prices Logistical issues may create ongoing bottlenecks… Short term retail fertilizer fundamentals may differ… 9/19/2018 Barry Ward, AED Economics

Nitrogen Factors that may lead to N price decreases: - Lower crop prices leading to tighter margins and potentially lighter demand - More domestic N production online - More domestic N production being built or in planning stages Factors that may lead to N price increases: + Strong crop farm balance sheets +Production issues have led to limited supply. The issues are short gas supplies (Trinidad, Egypt), plant turnarounds (Russia, Australia), and political unrest (Russia, Libya, Ukraine) Domestic margins are high 2010 US Demand – 11.8 million tons Flat to lower natural gas prices in the next 5 years Nitrogen – Continued uncertainty about whether NH3 producers are at operating at full capacity CF Industries Holdings Inc and Terra merger – world’s largest N fertilizer manufacturer in the world among publicly traded companies. U.S. fertilizer use will be up in FY 2011, with N approaching 13 MMstons.  All fertilizer prices are up, significantly correlated to crop prices. Major suppliers appear to be sticking with a strategy of supplying/taking orders for one or two months only at a given price, seems more prevalent than in past marketing programs.  So, in a scenario where crop prices (especially corn) keep ramping up, suppliers will have not “oversold” at “current” prices (below opportunity). Or, if crop prices (corn) seriously retreat for some reason, suppliers have the option to drop prices so as to continue to move product. Lessons were actually learned in 2007, 08, 09.  With corn harvest occurring relatively early, demand for P, K, and ammonia for Fall application is/has been pretty strong. Re P&K, though, the uncertainty becomes: if a lot goes down now, to what degree will that impinge on Spring demand?  In absolute terms, we see no basic, inherent shortage of N, P & K supply capability for both the domestic and international market. The principle issues are, as always, supply at what price, and is it/will it be in the right place at the right time? 9/19/2018 Barry Ward, AED Economics

Nitrogen - Greenfield Developments Domestic margins are high 2010 US Demand – 11.8 million tons Flat to lower natural gas prices in the next 5 years Nitrogen – Continued uncertainty about whether NH3 producers are at operating at full capacity CF Industries Holdings Inc and Terra merger – world’s largest N fertilizer manufacturer in the world among publicly traded companies. U.S. fertilizer use will be up in FY 2011, with N approaching 13 MMstons.  All fertilizer prices are up, significantly correlated to crop prices. Major suppliers appear to be sticking with a strategy of supplying/taking orders for one or two months only at a given price, seems more prevalent than in past marketing programs.  So, in a scenario where crop prices (especially corn) keep ramping up, suppliers will have not “oversold” at “current” prices (below opportunity). Or, if crop prices (corn) seriously retreat for some reason, suppliers have the option to drop prices so as to continue to move product. Lessons were actually learned in 2007, 08, 09.  With corn harvest occurring relatively early, demand for P, K, and ammonia for Fall application is/has been pretty strong. Re P&K, though, the uncertainty becomes: if a lot goes down now, to what degree will that impinge on Spring demand?  In absolute terms, we see no basic, inherent shortage of N, P & K supply capability for both the domestic and international market. The principle issues are, as always, supply at what price, and is it/will it be in the right place at the right time? 9/19/2018 Barry Ward, AED Economics

Nitrogen - Brownfield Developments Domestic margins are high 2010 US Demand – 11.8 million tons Flat to lower natural gas prices in the next 5 years Nitrogen – Continued uncertainty about whether NH3 producers are at operating at full capacity CF Industries Holdings Inc and Terra merger – world’s largest N fertilizer manufacturer in the world among publicly traded companies. U.S. fertilizer use will be up in FY 2011, with N approaching 13 MMstons.  All fertilizer prices are up, significantly correlated to crop prices. Major suppliers appear to be sticking with a strategy of supplying/taking orders for one or two months only at a given price, seems more prevalent than in past marketing programs.  So, in a scenario where crop prices (especially corn) keep ramping up, suppliers will have not “oversold” at “current” prices (below opportunity). Or, if crop prices (corn) seriously retreat for some reason, suppliers have the option to drop prices so as to continue to move product. Lessons were actually learned in 2007, 08, 09.  With corn harvest occurring relatively early, demand for P, K, and ammonia for Fall application is/has been pretty strong. Re P&K, though, the uncertainty becomes: if a lot goes down now, to what degree will that impinge on Spring demand?  In absolute terms, we see no basic, inherent shortage of N, P & K supply capability for both the domestic and international market. The principle issues are, as always, supply at what price, and is it/will it be in the right place at the right time? 9/19/2018 Barry Ward, AED Economics

Crop Input Costs Energy – Lower Fertilizer – Flat to Modestly Lower? Seed – Modestly Lower to Modestly Higher Chemical – Modestly Lower to Modestly Higher Depending on the Product Machinery/Equipment Depreciation - Higher 9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

9/19/2018 Barry Ward, AED Economics

Management Challenges Low to negative margins in light of lower crop prices Sticky cash rents and other input costs Farm Bill Signup Section 179 Expensing / Accelerated First Year Depreciation 9/19/2018 Barry Ward, AED Economics

Cost Saving Ideas - 2015 1.Re-evaluate crop production inputs - re-examine ROI with $4 Corn Specialty fertility products, Prophylactic fungicide usage, Consider generic crop production products, seeding rates 2.Re-evaluate P and K Fertilizer Applications (Where possible according to soil tests) 3.Re-evaluate seed technology investment - re-examine ROI with $4 Corn 4.Re-evaluate Machinery and Equipment line, sizing and add-ons Machinery costs (fixed, ownership not including repairs or fuel,oil,grease) per acre target < $55/ac 5.Renegotiate cash leases – lease decreases may decline in symmetry with the manner in which they increased 6.Reconsider hired labor and purchased service - consider more self repair and services (equipment repair, spraying, soil sampling etc.) 7.Consider Enterprise crop insurance 8.Re-evaluate farm yield ratios together with price ratios when determining crop mix 9.Re-examine family living expenses 9/19/2018 Barry Ward, AED Economics

OSU AED Policy & Outlook Fall 2004 Barry Ward (614) 688-3959 ward.8@osu.edu http://aede.osu.edu/about-us/our-people/barry-ward http://aede.osu.edu/programs-and-research/osu-farm-management 9/19/2018 Barry Ward, AED Economics Matthew Roberts