Economics In The Choice Between Corn And Soybeans - Barry Ward, from the 2018 Conservation Tillage and Technology Conference, March 6 - 7, Ada, OH, USA.
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Barry Ward - Economics In The Choice Between Corn And Soybeans
1. 1
Economics in the Choice Between Soybeans
and Corn
Conservation Tillage Conference 2018
Ada, Ohio
Barry Ward
Ohio State University Extension
The Ohio State University
3. 3
USDA Projection
USDA predicts corn and soybean acres will match—
with 90 million acres dedicated to each crop, as
shared at the USDA Ag Outlook Forum by USDA
Chief Economist Robert Johansson. February 22nd.
9/26/2018 Barry Ward, OSU Extension
17. 17
Current Soybean/Corn Price Ratio
November Soybean Futures ~ $10.44
December Corn Futures ~ $ 4.05
Ratio: 2.57
9/26/2018 Barry Ward, OSU Extension
18. 18
What Soybean/Corn Price Ratio Do We
Need To Breakeven Variable Expenses?
9/26/2018 Barry Ward, OSU Extension
November Soybean Futures ~ $10.44
December Corn Futures ~ $ ?
21. 21
Soybean/Corn Price Ratio Needed to
Break Even at Current Variable Costs
November Soybean Futures ~ $10.44
December Corn Futures ~ $ 4.16
Ratio: 2.51
9/26/2018 Barry Ward, OSU Extension
24. 24
What Soybean/Corn Price Ratio Do We Need
To Breakeven Against Total Expenses?
9/26/2018 Barry Ward, OSU Extension
November Soybean Futures ~ $10.44
December Corn Futures ~ $ ?
27. 27
What Soybean/Corn Price Ratio Do We
Need To Breakeven All Expenses?
9/26/2018 Barry Ward, OSU Extension
November Soybean Futures ~ $10.44
December Corn Futures ~ $ 4.50
Ratio: 2.32
Current PLC Price Ratio (8.40/3.70) = 2.27
30. 30
Other considerations in determining crop
mix:
Agronomic advantages for crop rotation
Infrastructure
Planting and harvest capacity
Hauling capacity
Storage capacity
Labor capacity
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31. 31
Other considerations
Crop choice based on high yield point?
Consideration given with regards to machinery cost
differences between a corn acre and a soybean acre?
Crop insurance creates a solid floor
Allows for more aggressive planting choice
More corn acreage?
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33. 33
Rental Rates: Outlook
Competing Fundamentals:
-Crop Net Income will again be low or negative
-Farmer equity positions are healthy but weakening
-ARC-Co payments in 2018
versus
-Farmer equity positions are healthy in an historical context
-ARC/PLC payments in 2017
-Yields were relatively solid in 2017
-CAUV/Property Taxes
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38. 38
9/26/2018 Barry Ward, OSU Extension
Credit Conditions at Seventh District Agricultural Banks
The Ag Newsletter - Chicago Fed
Operating Feeder Real
Loans Cattle Estate
percent percent percent
2016
Jan–Mar 4.91 5.01 4.65
Apr–June 4.89 5.05 4.57
July–Sept 4.87 4.95 4.57
Oct–Dec 5.03 5.1 4.71
2017
Jan–Mar 5.13 5.27 4.8
Apr–June 5.2 5.25 4.86
July-Sept 5.16 5.25 4.84
Oct–Dec 5.34 5.44 4.93
39. 39
Farmland Values: Outlook
Competing Fundamentals:
-Crop Net Income will again be low or negative
-Farmer equity positions are healthy but weakening
-ARC-Co payments in 2018
-Livestock/Dairy income mixed
-Higher interest rates
versus
-Farmer equity positions are healthy in an historical context
-ARC/PLC payments in 2017
-Yields were relatively solid in 2017
-Phosphorous regulations
9/26/2018 Barry Ward, OSU Extension
40. 40
New Tax Legislation – TCJA - General Issues
1. Modified Tax Brackets
2. Increases the Standard Deduction (12K or 24K)
3. Eliminates the Personal Exemptions
4. Eliminates or Changes Many Deductions
a. State/Local/Property Tax Limit $10,000/Yr (5K SF)
b. Home Mortgage Interest Deduction Limited (750K Loan)
c. Personal Casualty & Theft Loss Deductions Eliminated
d. Charitable Contribution Deductions Left Intact
e. Misc. Itemized Deductions Subject to 2% Floor Eliminated
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41. 41
New Tax Legislation – General Issues
5. Increases Child Tax Credit & Creates New Dependent Credit (2K & 500)
6. Education Provisions Remain Mostly Intact
a. IRC 529 Plans Expanded to Allow Funds to Pay for K-12
7. Alternative Minimum Tax Retained for Individuals But Not Corporations
8. Exclusion for Estate, Gift and Generation Skipping Tax Raised to
$11.2Mil/Person
9. Step-up in basis retained for assets passing through estates
9/26/2018 Barry Ward, OSU Extension
42. 42
New Tax Legislation – Business/Farm Issues
1. Corporate Tax Rate Decreased to 21% (Flat Rate)
2. Lowering Tax Rates for Pass-Through Entities - 20% Deduction of Qualified
Business Income – New Section 199A Deduction
a. Higher Income Individuals and Couples Limited S199A Deduction to 50%
of W-2 Wages Paid or 25% of W-2 Paid + 2.5% of basis of qualified
property (157.5K SF or 315K JF)
3. Service Trades or Businesses Not Eligible for This Deduction (Health, Law,
Consulting, Athletics, Financial Services Etc.) if they fall in the high income
ranges
4. Ag & Hort Co-ops Eligible for S199A Deduction
5. Trusts and Estates Generally Eligible for S199A Deduction
9/26/2018 Barry Ward, OSU Extension
43. 43
New Tax Legislation – Business/Farm Issues
6. First Year Bonus Depreciation – 100% on New and Used Property
7. Section 179 Expensing - $1Million
8. Farm Equipment Depreciation – 5 Years
9. NOLs Limited to 80% of Taxable Income – Carryback Now Limited to 2
Years
10.Like-kind Exchange Retained but Only for Real Property (Land)
11.DPAD Eliminated
12.Cash Accounting Retained
9/26/2018 Barry Ward, OSU Extension
44. 44
Reevaluating for 2018
1.Re-evaluate crop production inputs - re-examine ROI with lower soybean/corn prices
Specialty fertility products, prophylactic fungicide usage, consider generic crop production
products, seeding rates, seed treatments….
2.Re-evaluate P and K fertilizer applications (where possible according to soil tests)
3.Re-evaluate N rates and application timing
4.Re-evaluate seed technology investment - re-examine ROI with soybean/corn prices
5.Re-evaluate machinery and equipment line, sizing and add-ons
6.Renegotiate cash leases – lease decreases may decline in symmetry with the manner in which
they increased
7.Reconsider hired labor and purchased service - consider more self repair and services
(equipment repair, spraying, soil sampling etc.)
8.Re-evaluate farm yield ratios together with price ratios when determining crop mix
9.Re-examine family living expenses
9/26/2018 Barry Ward, OSU Extension
45. 45
Management Reminders
Seek corroborating research and evidence – don’t rely on one advisor
only
Borrowing Capacity Check – Many growers have borrowed little
operating funds lately
Stress Test - Conduct Balance sheet Sensitivity analysis – 5, 10 and
20% land value decrease
Farm financial analysis – FINPACK
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46. 46
Last Words…..
Tax Legislation
RFS
Farm Bill
Trade
Interest Rates
Ag Seed/Chem Company Mergers – Long Term Concerns with Industry
Consolidation and Competition
Debt restructuring and bankruptcies
Current Downturn Will Likely Result in Additional Farm Consolidation
9/26/2018 Barry Ward, OSU Extension
47. 47
Barry Ward
(614) 688-3959
ward.8@osu.edu
9/26/2018 Barry Ward, OSU Extension
48. 48
Concentration of ag loans in Corn Belt but low ag delinquency rates
Source: FDIC
Commercial agricultural banking performance by state in 2017 Q2
50. 50
Ohio farm bankruptcy rate is half of the U.S. rate
Source: U.S. Courts, Table F-2Farm bankruptcies filed per 10,000 farms
Annualized across 1997 to 2016: 2.33
51. 51
Agricultural delinquency rates and bankruptcy rates have
declined over the last two decades
1.7
1.3
0
1
2
3
4
5
6
7
8
9
1992 1996 2000 2004 2008 2012 2016
Financial stress indicators
Agricultural delinquency rate (%) Bankruptcy rate (per 10,000 farms)
52. 52
Number of farm bankruptcies (chapter 12 filings) in Ohio
increased in 2017
Source: U.S. Courts, Table F-2
0
5
10
15
20
0
200
400
600
800
Numberofbankruptcies,OH
Numberofbankruptcies,U.S.
Number of farm bankruptcies (chapter 12 filings), 2001-
2017 Q2
Number of farm bankruptcies, U.S.
Number of farm bankruptcies, OH
53. 53
Negative relationship between farmland values and bankruptcy rates
Note: 2017 bankruptcy information relates to the 2nd Quarter. The number of farms in 2017 were approximated using the number
in 2016.
0
5
10
15
20
25
30
35
0
500
1000
1500
2000
2500
3000
3500
1987 1992 1997 2002 2007 2012 2017
Farmbankruptcyratesper
10,000farms
Farmlandvaluesperacre,$
Bankruptcy rates vs farmland values in the U.S.
Land values Farm bankruptcy rate
Editor's Notes
A proposal has recently surfaced to cap the price of all RIN credits for the RFS at $0.10 per gallon, far below the level of RINs prices in recent years. If implemented, a $0.10 cap would have profound impacts on biofuels production and consumption in the U.S. because RINs prices and mandate levels are directly related--one cannot be changed without changing the other. For example, our analysis indicates that a $0.10 price cap without a biodiesel tax credit would eliminate all biomass-based diesel production and consumption in the U.S. and would reduce ethanol consumption to the level of the E10 blend wall or lower. Hence, the proposal to institute a $0.10 cap on RIN prices strikes at the heart of the RFS because it would reverse the technology-forcing intent of the statutory mandate. We are skeptical that the EPA can implement such a policy on its own under the current RFS statute. The only path forward on this idea that does not violate the Constitutional limitations on EPA authority is for Congress to amend the RFS and fundamentally change its purpose.
A proposal has recently surfaced to cap the price of all RIN credits for the RFS at $0.10 per gallon, far below the level of RINs prices in recent years. If implemented, a $0.10 cap would have profound impacts on biofuels production and consumption in the U.S. because RINs prices and mandate levels are directly related--one cannot be changed without changing the other. For example, our analysis indicates that a $0.10 price cap without a biodiesel tax credit would eliminate all biomass-based diesel production and consumption in the U.S. and would reduce ethanol consumption to the level of the E10 blend wall or lower. Hence, the proposal to institute a $0.10 cap on RIN prices strikes at the heart of the RFS because it would reverse the technology-forcing intent of the statutory mandate. We are skeptical that the EPA can implement such a policy on its own under the current RFS statute. The only path forward on this idea that does not violate the Constitutional limitations on EPA authority is for Congress to amend the RFS and fundamentally change its purpose.
A proposal has recently surfaced to cap the price of all RIN credits for the RFS at $0.10 per gallon, far below the level of RINs prices in recent years. If implemented, a $0.10 cap would have profound impacts on biofuels production and consumption in the U.S. because RINs prices and mandate levels are directly related--one cannot be changed without changing the other. For example, our analysis indicates that a $0.10 price cap without a biodiesel tax credit would eliminate all biomass-based diesel production and consumption in the U.S. and would reduce ethanol consumption to the level of the E10 blend wall or lower. Hence, the proposal to institute a $0.10 cap on RIN prices strikes at the heart of the RFS because it would reverse the technology-forcing intent of the statutory mandate. We are skeptical that the EPA can implement such a policy on its own under the current RFS statute. The only path forward on this idea that does not violate the Constitutional limitations on EPA authority is for Congress to amend the RFS and fundamentally change its purpose.
A proposal has recently surfaced to cap the price of all RIN credits for the RFS at $0.10 per gallon, far below the level of RINs prices in recent years. If implemented, a $0.10 cap would have profound impacts on biofuels production and consumption in the U.S. because RINs prices and mandate levels are directly related--one cannot be changed without changing the other. For example, our analysis indicates that a $0.10 price cap without a biodiesel tax credit would eliminate all biomass-based diesel production and consumption in the U.S. and would reduce ethanol consumption to the level of the E10 blend wall or lower. Hence, the proposal to institute a $0.10 cap on RIN prices strikes at the heart of the RFS because it would reverse the technology-forcing intent of the statutory mandate. We are skeptical that the EPA can implement such a policy on its own under the current RFS statute. The only path forward on this idea that does not violate the Constitutional limitations on EPA authority is for Congress to amend the RFS and fundamentally change its purpose.
Net farm income, a broad measure of profits, is forecast to decrease $4.3 billion (6.7 percent) from 2017 to $59.5 billion in 2018, the lowest net farm income level in nominal dollar terms since 2006. Net cash farm income is forecast to decrease $5.0 billion (5.1 percent) to $91.9 billion, the lowest level since 2009. In inflation-adjusted (real) 2018 dollars, net farm income is forecast to decline $5.4 billion (8.3 percent) from 2017 and, if realized, would be the lowest real-dollar level since 2002. Real net cash farm income is forecast to decline $6.7 billion (6.8 percent) from 2017, which would be the lowest real-dollar level since 2009. Net cash farm income includes cash receipts from farming as well as farm-related income, including government payments, minus cash expenses. Net farm income is a more comprehensive measure that incorporates noncash items, including changes in inventories, economic depreciation, and gross imputed rental income.
Too much market concentration may allow seed firms to hold firm on prices.
At this point, ARC-CO payments for 2017 corn and soybeans will likely occur if actual county yield equals or is less than the county's benchmark yield. ARC-CO payments for wheat are more likely as an actual yield that is somewhat larger than the benchmark yield will likely trigger payment. Significant uncertainties even with these conditional statements. The outlook for 2017 payments will come into clearer focus when NASS releases their estimates of county yields in late February.
Interest rates are at their lowest levels in years. That's because the 10-year Treasury note yield fell to 1.46% on July 1, 2016. Investors fled from European investments after Great Britain voted to leave the European Union.
The interest rate had been 2.24% at the beginning of the year. That was before a stock market slide in January. Rates will rise again when the economy improves enough. That's when investors switch to stocks and real estate investments.
Most important, the Fed is expected to raise the Fed funds rate in 2016. It raised it 1/4 point in December 2015. For more, see When Will Interest Rates Go Up?
U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do interest rates. That's because investors who want a steady and safe return compare interest rates of all fixed-income products. These include Treasuries, Certificates of Deposits (CDs), money market funds, home loans, and corporate bonds. All bond yields are affected by Treasury yields since they compete for the same type of investor.Treasury notes are the safest since the U.S. government guarantees them. CDs and money market funds are slightly riskier since they aren't guaranteed. To compensate for the higher risk, they offer a higher interest rate. For more, see The Day a Money Market Fund Nearly Went Broke.
Mortgages offer a higher return for more risk. Investors purchase securities that are backed by the value of the mortgages. These are called mortgage-backed securities. When Treasury yields rise, banks can charge higher interest rates for mortgages. Investors in mortgage-backed securities also demand higher rates to compensate them for the greater risk.
Treasury Yields Only Affect Fixed-Rate Home Loans
It is important to know that Treasury yields only affect fixed-rated mortgages. The 10-year note affects 15-year conventional loans while the 30-year bond affects 30-year loans.
The Fed funds rate affects adjustable rate mortgages. The Federal Reserve, the nation's central bank, sets a target for the Fed funds rate. It's the rate banks charge each other for overnight loans needed to maintain their reserve requirement. The Fed funds rate affects LIBOR. That's the rate banks charge each other for one, three and six-month loans. It also affects the prime rate. That's the rate banks charge their best customers. For these reasons, the Fed funds rate affects adjustable-rate loans. These typically reset on a regular basis. Here's the Historical Fed Funds Rate.
How Do Treasury Notes Work?
The U.S. Treasury Department sells bills, notes, and bonds are to pay for the U.S. debt. It issues notes in terms of 2, 3, 5, and 10 years. Bonds are issued in terms of 30 years. Bills are issued in terms of one year or less. People also refer to any Treasury security as bonds, Treasury products, or even just Treasuries. The 10-year note is the most popular product.
The Treasury sells bonds at auction. It sets a fixed face value and interest rate for each bond. If there is a lot of demand for Treasuries, they will go to the highest bidder at a price above the face value. That decreases the yield or the total return on investment. That's because the bidder has to pay more to rec receive stated interest rate. If there is not a lot of demand, the bidders will pay less than the face value. That increases the yield. The bidder pays less to receive the stated interest rate. That is why yields always move in the opposite direction of Treasury prices. For more, see Why Do Bonds Prices and Bond Yields Move in Opposite Directions?
Treasury note yields change every day. That's because investors resell them on the secondary market. When there's not much demand, then bond prices drop. Yields increase to compensate. That makes it more expensive to buy a home because mortgage interest rates rise. Buyers have to pay more for their mortgage, so they are forced to buy a less expensive home. That makes builders lower home prices. Since home construction is a component of GDP, that slows economic growth.
Low yields on Treasuries mean lower rates on mortgages. Homebuyers can afford a larger home. The increased demand stimulates the real estate market. That boosts the economy. Lower rates also allow homeowners to afford a second mortgage. They'll use that money for home improvements, or to purchase more consumer products. Both stimulate the economy.
Rate increase in December – Target Range 1.25-1.5% - 3 more increases in 2018?
Changes in the federal funds rate will always affect the U.S. dollar. When the Federal Reserve increases the federal funds rate, it normally reduces inflationary pressure and works to appreciate the dollar.
Chained CPI 2.0%
Kansas City Fed - “Rates on loans used to finance current operating expenses increased nearly a full percent, from 3.7 percent in 2016 to 4.5 percent in the fourth quarter of 2017. In addition, for the first time since 2014, more loans were issued with interest rates greater than 6 percent than loans with rates of 3 percent or less.”
Janet Yellen – Current Fed Chair - dove turned more hawkish
John Taylor – Stanford Economist – favored by conservatives – more hawkish – Trump prefers a low interest rate policy
Jerome Powell – Current Fed Governor – Lawyer and Investment Banker
Kevin Warsh – Current Fed Governor
Rate increase in December – Target Range 1.25-1.5% - 3 more increases in 2018?
Changes in the federal funds rate will always affect the U.S. dollar. When the Federal Reserve increases the federal funds rate, it normally reduces inflationary pressure and works to appreciate the dollar.
Chained CPI 2.0%
Kansas City Fed - “Rates on loans used to finance current operating expenses increased nearly a full percent, from 3.7 percent in 2016 to 4.5 percent in the fourth quarter of 2017. In addition, for the first time since 2014, more loans were issued with interest rates greater than 6 percent than loans with rates of 3 percent or less.”
Janet Yellen – Current Fed Chair - dove turned more hawkish
John Taylor – Stanford Economist – favored by conservatives – more hawkish – Trump prefers a low interest rate policy
Jerome Powell – Current Fed Governor – Lawyer and Investment Banker
Kevin Warsh – Current Fed Governor
Farmer’s (crop) equity still solid but will likely weaken again in 2018
U.S. Farms (USDA) Debt to Asset (D/A) Ratio ~ 12.7% (2017F)
(Down from14.7% in 2002...up from the low of 11.26% in 2012)
Grain Farms (Illinois FBFM) D/A Ratio (Median) ~ 19.9% (2016)
(Down from 30.7% in 2002, 27.4% in 2005, up from low of 18.0% in 2012)
Family Living Illinois FBFM Data:
$85/A in ‘06 - $110/A in 2015
Family Living Illinois FBFM Data:
$85/A in ‘06 - $110/A in 2015
Family Living Illinois FBFM Data:
$85/A in ‘06 - $110/A in 2015
Family Living Illinois FBFM Data:
$85/A in ‘06 - $110/A in 2015
Family Living Illinois FBFM Data:
$85/A in ‘06 - $110/A in 2015
I wanted to drop you a line regarding the interesting conversation at Ottawa Ag Lender Seminar with experienced lender from Northwest Ohio. Here are a few highlights that I didn’t want to slip through the cracks and if I can share or encourage the comments to go to the right people, just let me know.
Bankruptcy
Pioneer/DuPont Finance & Monsanto Finance offering unsecured, signature loans on crop inputs
Risky loans compared to collateral loans for equipment, buildings, land
Risky loans reduce the need for traditional operating line of credit from lender
In Bankruptcy court, traditional loans get paid before signature loans?
Farm Stress
Signs are sometimes hard to see
Stressed farms can hide revenue by selling grain or products where their name is not on the banks “Lien List.”
Young farmers have not seen tough times, yet in their career.
Stress and lead to the big “D’s”
Divorce
Drugs (is the opioid crisis occurring in the farming community?)
Death (suicide)