By: Barry Ward, Leader, Production Business Management, Department of Agricultural, Environmental and Development Economics
Cropland values in Ohio have increased again in 2014. Data from the Oho National Ag Statistics Service (NASS) shows an increase of 8.9% for bare cropland in Ohio for 2014. According to NASS data, bare cropland averages $5650/acre, up from $5190/acre the previous year.
The Western Ohio Cropland Values and Cash Rents Survey (AEDE) conducted in January 2014 found that the value of average western Ohio cropland in 2014 would be $7142 per acre. Other data from this survey can be found at: http://ohioline.osu.edu/ae-fact/pdf/Western_Ohio_Cropland_Values_AEDE-15-14.pdf
The Chicago Federal Reserve Bank and Purdue University both conducted land value surveys in 2014. The Chicago Fed survey (October 1) of bankers found Indiana land values of “good” farmland increased by 3% year-over-year (the entire 7th Fed District decreased 2%) while Purdue (June 30) found that the Indiana statewide annual increase in cropland values ranged from 6.4 to 7.1% depending on the productivity of the farmland.
Crop profit margins were low to negative in 2014 as lower crop prices coupled with sticky input costs to create a low margin environment. This past eight year period (2006 through 2013) has been one of the most profitable periods in the last 50 years of crop production. These profit streams and healthier balance sheets have led many farmers to seek an investment option for these profits and many have chosen to invest in land.
So all of this begs the question, “Where are land prices headed in 2015?” Low crop profit margins will put downward pressure on farmland prices. Still healthy equity positions and stable interest rates will lend positive support for farmland values in 2015. Financial health in the sector may counter-balance the effects of lower profits to underpin land values. Which of these opposing fundamentals is the strongest will determine which direction land values move in 2015. At present, these competing fundamentals suggest relatively flat cropland values in 2015.
Variable costs for Ohio’s major field crops for 2015 will be similar to 2014. Variable costs for corn for 2015 are projected to be $376 to $460 per acre. Variable costs for 2015 Ohio soybeans are projected to range from $209 to $229 per acre. Wheat variable expenses for 2015 are projected to range from $188 to $232 per acre.
Returns to land for Ohio corn (Gross Revenue minus all costs except land cost) are projected to be -$43 to $124/acre for Ohio Corn in 2015 depending on the land production capabilities. Budget projections for 2015 soybeans show returns to land to be $10 to $168. Wheat budget projections for 2014 find returns to land to be between $25 and $159 per acre. This is assuming current prices of inputs and present December, November and September 2015 futures prices (less basis), respectively. These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/research/osu-farm-management/enterprise-budgets
Similar fundamentals are at play for cash rental rates. Limited profitability will pressure rental rates to move lower however strong equity positions will continue to support rental rates. As with land values, these competing fundamentals will likely cause rental rates to remain relatively flat compared to last year.
Crop input costs offer a mixed bag of change. Energy costs are predicted to be lower. Seed costs will range from modestly lower to modestly higher depending on seed company, genetic package and newness of hybrid or variety. Crop protection chemicals will likely follow the same pattern as most products will increase in price while some (generic glyphosate in particular) will decrease.
Fertilizer continues to be the most volatile of the crop input costs. Most fertilizer products are at slightly higher prices compared to last year at this time. Production issues, short gas supplies, plant turnarounds and political unrest have lent support to higher prices. Lower profit margins will compete with logistical concerns and strong equity positions to create the potential for relatively flat fertilizer markets in 2015.
At this point there is little evidence to suggest that “normal” winter to spring price patterns will not occur. This would suggest reasonably flat market prices then increasing as demand ramps up into late winter/early spring. Even with this potential scenario likely, low projected crop profit margins will likely restrain demand and restrict fertilizer price increases to relatively small percentage increases.
Weaker than expected demand as a result of low projected crop profit margins could change this scenario if this weaker than expected demand pressures sellers to lower prices to stimulate demand.
Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys. While gauged to the best of this author’s capabilities, forward looking statements contained in this article may prove to be incorrect due to changes in supply and demand and other political and economic related events.