Bruce Jones, Agricultural Economist
Department of Agricultural and Applied Economics
UW-Madison College of Agricultural and Life Sciences
2012 Farm operating cost outlook
3:21 – Total Time
0:19 – Fertilizer and fuel outlook
0:42 – Credit and interest rates outlook
1:22 – Land prices and rent
1:53 – Flex leases to manage land rent costs
3:10 – Lead out
Farming and the cost of doing business. We’re visiting today with Bruce Jones, Department of Agricultural and Applied Economics, University of Wisconsin, in the College of Agricultural and Life Sciences, Madison, Wisconsin and I’m Sevie Kenyon.
Sevie Kenyon: Bruce, welcome to our microphone. Bruce, can you give us a sense of what it costs to do business out there on the farm?
Bruce Jones: Fertilizer is still expensive, but it’s not nearly as expensive as it was in ’08. We have supplies of fertilizer more in line with farmer demands. On the fuel side, tempered a little bit lately, but there’s a lot of uncertainty about what it might do. We’ll hope for stability and plan for maybe some, some increases.
Sevie Kenyon: And Bruce, as a farmer looks at the finances for the season, he’s got what to consider?
Bruce Jones: Federal Reserve of Chicago does a lender survey every year, and the news out of that survey is pretty good, from the farmer’s perspective. Farmers have been repaying their loans, on the flip side, loan demands are down. The farmers who have had the profits have probably put them in savings accounts and they’re financing their own operations versus borrowing money. Because of those situations on the low demand, and, and the high repayment, banks have plenty of money available…and much more then they had, say two or three years ago. Finally, interest rates have continued to be relatively low. Those farmer’s that are gonna use credit are gonna find that it’s quite affordable.
Sevie Kenyon: And Bruce, what can you tell us about land?
Bruce Jones: Prices are up significantly, because of the improved demand for land, because of the high commodity prices and everybody expecting that they can get good returns in the land. That’s been up maybe 20-30 percent maybe not as much in Wisconsin, more like about 10 percent according to the USDA. But those higher land prices are turning into higher rents as well. And so we’ve seen rents go up about 40 percent in Wisconsin over the last three or four years.
Sevie Kenyon: Bruce, do you see any new developments in land rents?
Bruce Jones: Landlords saw commodity prices go up. They saw 6 dollar corn, 12 dollar beans and they said, boy we’d like to have some of that upside opportunity! And so what has been perking through the system is a thing they call a flex lease, and a flex lease is the combination of a cash-rent and a share-lease arrangement. The way it works is we negotiate a minimum rent, regardless of what happens in the market place. Then, if yields are up and we have a great growing season, or prices go up and there’s more income then we had expected, the landlord gets a portion of that and so they share it.
The typical flex-lease arrangement we’ll do is maybe we’re guaranteed 150 dollars an acre. I’ll ratchet it back to 130 dollar minimum then in return for giving up that 20 dollars, I’m going to get a chance to share in some of that up-side opportunity. You and I sitting down, talking about a flex-lease…you and I have to agree to a minimum, we have to agree on a trigger point, and we have to agree on a percentage we’re going to share when those triggers are met through market conditions. These things are in vogue right now because of the high corn and soybean prices. If commodity prices start tempering, I don’t see landlords being nearly as excited about flex-leases, because there’s not going to be as much upside opportunity.
We’ve been visiting with Bruce Jones, Department of Agricultural and Applied Economics, University of Wisconsin, in the College of Agricultural and Life Sciences, Madison, Wisconsin and I’m Sevie Kenyon.
Tags: Bruce Jones, ag economics, flex-leases, farm finances