Land Values, Policy, and Markets Kansas City, Missouri Oct. 2, 2014 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911 1 1

Corn Prices vs. Costs Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre Sources: USDA-NASS for Prices, Duffy for Costs

Soybean Prices vs. Costs Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre Sources: USDA-NASS for Prices, Duffy for Costs

Crop Prices for the Next Decade Source: USDA-ERS

Crops Livestock 5 5

Net Farm Income

Net Farm Income

Iowa Land Values Source: Mike Duffy, ISU

Iowa Land Values – Log Scale Source: Mike Duffy, ISU

Land Values and Income Source: Mike Duffy, ISU

Land Values and Income Source: Mike Duffy, ISU

Net Farm Income

Farm Bill: Old vs. New Direct Payments (DP) Countercyclical Payments (CCP) Marketing Loans (LDP) Revenue Countercyclical Payments (ACRE) Countercyclical Payments (PLC) Marketing Loans (LDP) Revenue Countercyclical Payments (ARC) New programs, but they have strong similarities to previous programs

Three Choices PLC + SCO ARC-County ARC-Individual Price protection with top-up county-level insurance protection ARC-County County-level revenue protection based on historical averages ARC-Individual Farm-level revenue protection based on historical averages Choice holds for 2014-2018 crop years

PLC: Corn 2014 Payment Potential Reference Price = $3.70 per bushel Payment Yield = 150 bushels per acre Marketing Year Price ($/bu) PLC Payment Rate ($/bu) PLC Payment ($/base acre) $3.10 $0.60 $76.50 $3.20 $0.50 $63.75 $3.30 $0.40 $51.00 $3.40 $0.30 $38.25 $3.50 $0.20 $25.50 $3.60 $0.10 $12.75 $3.70 $0.00 For PLC, the payment rate is the difference between the reference price and the maximum of either the marketing year average price or the loan rate (if the difference is negative, then the payment rate is zero). Take the payment rate times the payment (or base) yield times 85% to get the PLC payment per base acre. Notes: PLC payments are made on 85% of base acres.

ARC-CO: 2014 Corn Revenue Guarantee Year Yield MYA Price ARC Price 2009 163.4 $3.55 $3.70 2010 184.1 $5.18 2011 174.2 $6.22 2012 133.2 $6.89 2013 146.3 $4.45 Oly. Ave. 161.3 $5.28 Here’s the 5 years of price and yield data for Howard County, Iowa corn. The gray numbers are the high and low ones that are not used in the Olympic average (remember the Olympic average throws out the high and low). Also, the price used in the average can not be below the reference price specified in the farm bill (in this case, $3.70 for corn). So as the black circle above shows, the price in 2009 was replaced by the reference price. So the 5-year Olympic average yield is 161.3 bushels per acre. The 5-year Olympic average price is $5.32 per bushel. Combine the two to get the benchmark revenue of $858.12 per acre. The ARC revenue guarantee is 86% of the benchmark, so it’s $737.98 per acre. Benchmark Revenue = $852.20 per acre ARC Revenue Guarantee = $732.89 per acre Notes: Howard County, Iowa actual corn yields. Revenue Guarantee equals 86% of Benchmark.

ARC-CO: 2014 Potential Corn Payment ARC Revenue Guarantee = $732.89 per acre ARC Max Payment Rate = $85.22 per acre But ARC-CO is paid on 85% of base acres and 85% of $85.22 is $72.44 Price: $3.50 $4.00 $4.50 $5.00 Yield: 100 $72.44 125 150 $49.21 $0.00 175 $27.96 200 Let’s say that in 2014, the Howard County, Iowa average corn yield turns out to be exactly the 5-year Olympic average yield (161.3 bushels per acre). Then, if the corn price falls below $4.57 per bushel, ARC will begin to pay. As the table shows, under this scenario, if the corn price falls below $4 per bushel, the ARC payment rate will hit its maximum (based on 10% of the benchmark revenue or $86 in this case). Since ARC-CO is only paid 85% of a farm’s base acres, you can view the ARC payment per base acre as 85% of the ARC payment rate.

ARC-IC: 2014 Corn & Soybean Combined Revenue Guarantee Year Corn Yield ARC Price Revenue Soy Yield 2009 163.4 $3.70 $604.58 43.3 $9.59 $415.25 2010 184.1 $5.18 $953.64 54.5 $11.30 $615.85 2011 174.2 $6.22 $1083.52 51.1 $12.50 $638.75 2012 133.2 $6.89 $917.75 45.7 $14.40 $658.08 2013 146.3 $4.45 $651.04 40.1 $13.00 $521.30 Oly. Ave. $840.81 $591.97 For farm-level ARC (ARC-IC), the 5-year Olympic average is taken over the revenues (as opposed the prices and yields separately, as in ARC-CO). For each covered crop, a benchmark revenue is determined. Here, corn has a benchmark revenue of $846 per acre and soybeans has a benchmark revenue of $593 per acre. Then an overall benchmark revenue is calculated, based on the percentages of planted acres by crop on the farm in the current year. For this example, let’s assume the farm is a 60/40 corn/soybean split. Then the overall ARC benchmark revenue is $745 per acre (= 60%*$846 + 40%*$593). The ARC revenue guarantee is 86% of the benchmark, so $641 per acre. In 2014, if the farm is planted 60% to corn and 40% to soybeans, then Benchmark Revenue = $741.27 per acre Revenue Guarantee = $637.49 per acre Source: Schulte, ISU Extension, June 2014

ARC-IC : 2014 Potential Corn & Soybean Combined Payment Actual 2014 farm yields: Corn 150 bushels per acre Soy 45 bushels per acre Marketing year prices: Corn $4.00 per bushel Soy $10.50 per bushel Calculated revenues: Corn $600.00 per acre Soy $472.50 per acre ARC Revenue: 60%*$600.00 + 40%*$472.50 = $549.00 ARC-IC is paid on 65% of base acres ARC-IC Payment = $48.18 per acre (65% of $637.49-$549.00) To calculate the actual revenue, the revenue for each crop is computed and the same percentages of planted acres are applied to create an overall actual revenue for the farm. Here, for example, if corn has an actual revenue of $677 per acre and soybeans has an actual revenue of $502 per acre. Then the overall actual revenue is calculated as $607 per acre (= 60%*$677 + 40%*$502). The ARC payment rate would be $34 per acre ($641 - $607) and the ARC payment per base acre would be $22 per acre (= 65%*$34, as ARC-IC is paid on 65% of base acres). Source: Schulte, ISU Extension, June 2014

Supplemental Coverage Option (SCO) An additional policy to cover “shallow losses” Shallow loss = part of the deductible on the producer’s underlying crop insurance policy SCO has a county-level payment trigger Indemnities are paid when the county experiences losses greater than 14% Premium subsidy: 65% Starts in 2015 Can’t have ARC and SCO together If owner/operators choose PLC, then they are also eligible to purchase SCO in 2015. SCO is a county-based crop insurance product that covers yield or revenue losses below 86% of the county guarantee. The SCO coverage sits on top of your other crop insurance (RP, YP, etc.). An example is shown in the following slide.

Supplemental Coverage Option (SCO) RP RPHPE YP For example, if a producer currently buys 80% RP, then SCO covers county losses between 80-86%. If the producer moves their crop insurance down to 70% RP (click to trigger the animation), then SCO coverage expands to 70-86% for the county.

PLC pays, ARC does not Neither pay Both pay ARC pays, PLC does not The choice depends on where you expect prices and yields to be over the next 5 years. There are price/yield combinations where PLC pays and ARC does not. There are also price/yield combinations where ARC pays and PLC does not. ARC pays, PLC does not

U.S. Corn Supply and Use 2010 2011 2012 2013 2014 Area Planted (mil. acres) 88.2 91.9 97.2 95.4 91.6 Yield (bu./acre) 152.8 147.2 123.4 158.8 171.7 Production (mil. bu.) 12,447 12,360 10,780 13,925 14,395 Beg. Stocks 1,708 1,128 989 821 1,181 Imports 28 29 162 35 30 Total Supply 14,182 13,517 11,932 14,781 15,607 Feed & Residual 4,795 4,557 4,329 5,175 5,325 Ethanol 5,019 5,000 4,648 5,125 Food, Seed, & Other 1,407 1,428 1,403 1,375 1,405 Exports 1,834 1,543 731 1,925 1,750 Total Use 13,055 12,528 11,111 13,600 13,605 Ending Stocks 2,002 Season-Average Price ($/bu.) 5.18 6.22 6.89 4.45 3.50 Source: USDA-WAOB 23 23

U.S. Soybean Supply and Use 2010 2011 2012 2013 2014 Area Planted (mil. acres) 77.4 75.0 77.2 76.5 84.8 Yield (bu./acre) 43.5 41.9 39.8 43.3 46.6 Production (mil. bu.) 3,329 3,094 3,034 3,289 3,913 Beg. Stocks 151 215 169 141 130 Imports 14 16 36 80 15 Total Supply 3,495 3,325 3,239 3,509 4,058 Crush 1,648 1,703 1,689 1,730 1,770 Seed & Residual 88 90 5 114 Exports 1,501 1,365 1,320 1,645 1,700 Total Use 3,280 3,155 3,099 3,379 3,583 Ending Stocks 475 Season-Average Price ($/bu.) 11.30 12.50 14.40 13.00 10.00 Source: USDA-WAOB 24 24

Projected Corn Yields Top: 2014 Yield Bottom: Change from last month Units: Bu/acre Source: USDA-NASS

Corn Objective Yield Data Source: USDA-NASS

Projected Soybean Yields Top: 2014 Yield Bottom: Change from last month Units: Bu/acre Source: USDA-NASS

Soybean Objective Yield Data Source: USDA-NASS

World Corn Production Source: USDA-WAOB 29 29

World Soybean Production Source: USDA-WAOB 30 30

Hog Crush Margin The Crush Margin is the return after the pig, corn and soybean meal costs. Carcass weight: 200 pounds Pig price: 50% of 5 mth out lean hog futures Corn: 10 bushels per pig Soybean meal: 150 pounds per pig Source: ISU Extension

Cattle Crush Margin The Crush Margin is the return after the feeder steer and corn costs. Live weight: 1250 pounds Feeder weight: 750 pounds Corn: 50 bushels per head Source: ISU Extension

U.S. Meat Production & Prices Source: USDA-WAOB 33 33

Corn Export Shifts Source: USDA-FAS

Corn Export Sales Source: USDA-FAS

Soybean Export Sales Source: USDA-FAS

Soy Export Shifts Source: USDA-FAS

Corn Grind for Ethanol

Current Corn Futures 3.60 3.27 Source: CME Group, 9/19/2014

Current Soybean Futures 9.44 9.38 Source: CME Group, 9/19/2014

2014/15 Crop Margins

2015/16 Crop Margins

1-Month Temperature Outlook Source: NOAA-CPC

1-Month Precipitation Outlook Source: NOAA-CPC

Thoughts for 2015 and Beyond Supply/demand concerns Projected record corn and soybean crops Markets have adjusted downward to absorb projected supplies Projected negative margins for 2014 and 2015 crops Cool, wet conditions may hamper harvest and impact crop quality 2013/14 USDA 2014/15 Futures (9/19/14) 2015/16 Corn $4.45 $3.50 $3.27 $3.60 Soybeans $13.00 $10.00 $9.44 $9.38

World Corn Markets Source: USDA 46 46

Arable Land

Thank you for your time. Any questions. My web site: http://www. econ Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/~chart/ Iowa Farm Outlook: http://www.econ.iastate.edu/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/