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May 8, 2017

AGRIBUSINESS
Important disclosures can be found in Appendix

CASH RENTS: Research Shows Pace Of Rent Declines Is Slowing In Part Because Of
Robust Yields Last Season Benefitting Farmer Incomes; Potential Weather Risks
Loom (CLEVELAND RESEARCH)
Conclusion
The biggest takeaways from our latest round of discussion with US
farmers and extension agents are (1) cash rents are declining by a
smaller rate than the prior two years, (2) the more highly leveraged
farmers are exploring all methods of cost cutting and (3) there
could be 2-3m acres of potential corn plantings that may shift to
soybeans if planting is delayed several more weeks. Our view
remains that US corn/soybean farmer spending for the entire
season has been better than we initially expected last fall due to
higher-than-expected revenues due to higher yields, crop prices
remaining stronger than we thought and Ag lenders not cracking
down on spending by as much as we thought. Should there be a
shortfall in demand this spring, we believe it is more likely to be a
weather-driven event. Looking further ahead, we believe farmer
spending could be under more pressure next year if farmers dont
achieve the price realizations they are hoping for on the unpriced
portion of last years crops and because of increased competition
from an expected record SA corn/soy harvest.

Key Points
1. Our research indicates cash rents declined on average by a
smaller percentage (down 2-5%) versus the prior two years.
Landlords who reduced rents the prior two years and improved
farmer economics from record 2016 yields were two
commonly cited reasons for the smaller rate of decrease.
2. We found more highly leveraged/less capitalized farmers are
walking away from land than in prior years, but landlords have
found replacements quickly in those instances.
3. Even though some growers we spoke with spoke of trade
downs in seed, feedback from MON, DD and some of the seed
dealers we have spoken with suggest pricing has been
relatively flat on corn and soy is seeing mix improvements as
a result of increased Xtend usage.
4. We expect domestic P & K usage to remain relatively flat
versus last year as reduced spending by highly leveraged
farmers is offset by better capitalized farmers replenishing
soils following last years record crop.
5. We believe there could be as much as 2-3m acres shift from
corn to soybeans if planting delays persist for several more
weeks. Precipitation and cold weather has delayed fieldwork
(including N application) across sections of the Midwest.
Michael Piken
Senior Research Analyst
(310)-563-1901
mpiken@cleveland-research.com
Mike Henry
Research Associate
(216) 649-7249
mhenry@cleveland-research.com
AgriBusiness
May 8, 2017
Page 2

KEY HIGHLIGHTS

1. Our research suggests 20-50% of row crop farmers who rent their land (we estimate 40-60% of ground is rented, varying by
region) are likely to see an average 2-5% price reduction in their cash rents this year compared to 4-8% last year and 5-10%
the prior year. We believe this compares to ~50% last year who received a decline and 30-50% the prior year, with wide
areas of regional variation. Feedback indicates the lower rate of decline is a function of some growers seeing a previous
decline in recent years and that in many areas higher than expected yields offset landlords likelihood and willingness to
further decrease rents. Please see Figures 1 and 2 for historical IA Cash Rent data.

2. Compared to prior years we have heard of higher incidences of farmers walking away from ground they could no longer
afford to rent though this remains marginal in total volume and that most of this ground is quickly re-rented at the same or
marginally lower rates.

3. As it relates to land values, we continue to hear that transaction volume remains thin as a result of the pressure on rents and
cheaper grain prices. However, feedback suggests that the thinner volume and tightness in the market may be leading to
stability or slowdown in the decline in pricing. Our work suggests high quality land prices have remained resilient and
mediocre/low quality land, while softer, is down only marginally, at most 5% year-on-year. In some regions, such as IA,
we have seen reports of slightly higher values yr/yr and in others the rate of yr/yr decline are slowing, suggesting we are
nearing a potential bottom. Please see Figures 3-5 for historical Cropland and Pasture values.

4. As a result of continued financial pressure feedback suggests farmers continue to reduce costs through less P & K application,
mining their soil where they can, less preventative fungicide and insecticide usage, trading down to generic crop protection,
and trading down on seed. More industry participants this year indicated seeing farmers trade down on seed than in the past
which is surprising as Monsanto and Dupont both reported seeing relatively stable trait usage and ASPs and our fertilizer
research indicates grower P & K applications were robust last fall. Additionally, we have heard of growers looking at other
ways to cut costs such as bringing more services back on farm that they previously outsourced.

5. Feedback indicates ag lenders continue to remain focused on re-financing loans to longer amortization schedules and forcing
assets sales for those growers under the most severe financial duress, resulting in cash being released from working capital.
Despite scuttlebutt, the ag lenders we spoke with are not dictating growers need to plant soybeans or what inputs they can
utilize to secure a loan. Please see Figures 6 and 7 regarding Minnesota and Illinois farmer working capital trends.

6. Though many industry participants we spoke with earlier in the spring were optimistic there would be an open spring,
allowing planting to go smoothly, we have now seen significant precipitation through the cornbelt, which based on our work
has delayed planting for many, or will cause replants for some. Should this trend continue we believe there could be as
much as 2m acres of corn that could shift to beans as most corn planting dates are earlier than beans. Please see Figures 8
and 9 for typical planting dates for Corn and Soybeans by region.

7. We continue to hear that farmers are largely undersold on last years corn crop versus prior years. Feedback indicates most
farmers sold last years soybean crop on better pricing experienced during the fall but never saw a rally in corn and as a
result are waiting until later this spring/summer to market more of their corn crop. Overall, feedback suggests many farmers
are sitting in 10-20% more of last years corn crop versus what they normally would have on hand this time of the year.

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 3

KEY CHARTS

We estimate, depending on the region, 40-60% of corn and soybean acres are rented. For the 3 rd year in a row we are projecting
a decline in average rents for 2017.

Figure 1.
Cash Rents
$300

$250
CAGR: 4.5%
10-yr CAGR: 6.3%
$200

$150

$100

$50

$0

2017*
1977

1989

1999
1973
1975

1979
1981
1983
1985
1987

1991
1993
1995
1997

2001
2003
2005
2007
2009
2011
2013
2015
*denotes CRC estimate
Source: IA State, Cleveland Research

Figure 2.

Ag Industry
% Y/Y Change In Land Rents, Corn & Soybean Price Since 2001
80%
60%
40%
20%
0%
-20%
-40%

Change In Rent Change in Corn Price YTD Change in Soybean Price YTD
* denotes CRC estimate
Source: IA State, USDA, Cleveland Research

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 4

Figure 3.

Average Farm Real Estate Value - United States


3500

3000 10 yr CAGR = 5.7%

2500
Dollars per acre

2000

1500

1000

500

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: USDA-NASS, August 5, 2016

Figure 4.

Average Cropland Value - United States


4500
4000
10 yr CAGR = 6.6%
3500
Dollars per acre

3000
2500
2000
1500
1000
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: USDA-NASS, August 5, 2016

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 5

Figure 5.

Average Pasture Land Value - United States


1400
1300 10 yr CAGR = 3.7%
1200
Dollars per acre

1100
1000
900
800
700
600
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: USDA-NASS, August 5, 2016

As can be seen below, farmer incomes have been under pressure and working capital has been worked down in recent years to
provide greater operating liquidity.

Figure 6.

Minnesota Farmer Economics


Working Capital & Farm Income
Working Capital As % of Gross Farm

$500,000 50%

$400,000 40%
$/Farm

$300,000 30%
Income

$200,000 20%

$100,000 10%

$0 0%
2001
2000

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

Working Capital Net Operating Income Working Capital (%)


Source: FINBIN, University of Minnesota

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 6

Figure 7.
800 Illinois
700
Average Farm Working Capital Per Acre

600

500
$ per Acre

400

300

200

100

0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Year
Source: University of IL, farmdocdaily

Figure 8.

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 7

Figure 9.

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 8

APPENDIX

Given our recent research, lower fertilizer costs, adjustments in land rent pricing, and our current yield forecasts (non-record,
down yr/yr) we believe US corn farmer profitability is likely to remain under pressure in 2017. Based on current projections, we
estimate growers planting soybeans over corn will see some positive income which is likely to lead to greater soybean acres
planted yr/yr.

Corn on Corn losses are expected to improve from -$129/acre to a -$61/acre loss.
Corn on Soy losses are expected to improve from -$73/acre to near breakeven.
Soy on Corn gains are expected to decrease to $25/acre from $42/acre gain.

Figure 9.
Estimated Returns For An Iowa Farmer Renting Land
CRC Estimates Corn On Corn Corn On Soy Soy On Corn
Item 2012 2013 2014 2015 2016F 2017F 2012 2013 2014 2015 2016F 2017F 2012 2013 2014 2015 2016F 2017F
Price/bu 7.00 5.00 4.40 3.75 3.25 3.60 7.00 5.00 4.40 3.75 3.25 3.60 16.00 12.00 13.80 9.40 9.20 9.50
Yield (bu/acre) 135 170 175 182 189 184 150 185 185 192 192 187 45 52 50 56.5 59 54
Price per acre 945 850 770 683 614 662 1050 925 814 720 624 673 720 624 690 531 543 513

Costs
Pre Harvest Machinery 45 45 45 47 44 44 50 38 41 37 37 37 32 40 43 41 38 38
Seed 100 109 114 115 114 114 100 109 114 115 114 114 49 50 51 51 50 51
Seed As % Of Total Op Cost 24% 27% 29% 28% 30% 31% 25% 30% 32% 33% 35% 35% 21% 24% 26% 25% 26% 27%
Total Fertilizer Cost** 177 152 130 136 113 104 162 135 109 115 95 87 75 57 48 48 37 36
Lime 14 10 10 10 10 10 14 10 10 10 10 10 14 10 10 10 10 10
Herbicide/Insecticide 36 44 46 59 54 54 25 25 46 36 33 33 21 17 18 27 24 25
Crop Insurance 22 25 20 20 20 22 22 25 20 20 20 22 13 17 14 14 14 15
Misc 10 9 10 10 10 10 10 9 10 10 10 10 10 10 10 10 10 10
Interest 16 14 12 12 12 12 16 12 10 10 10 10 16 7 6 6 6 6
Total Operating Costs 420 406 387 408 377 370 399 362 360 352 329 323 230 207 199 206 190 191

Overhead:
Labor 36 35 37 37 37 39 34 32 34 34 34 36 32 28 29 30 30 32
Harvest Machinery 103 102 110 98 85 88 101 107 111 104 90 93 35 41 42 39 37 38
Land 258 276 287 267 244 227 258 276 287 267 244 227 258 276 287 267 244 227
Allocated Costs 397 413 434 402 366 354 393 414 432 405 368 356 325 345 358 335 311 297

Cost Per Acre 817 819 821 810 743 724 792 776 792 757 697 679 555 552 557 542 501 488

Profit Per Acre 128 31 -50 -128 -129 -61 258 149 22 -37 -73 -5 165 72 133 -11 42 25
Corn On Soy Premium Over Soy Over Corn 77 -111 -26 -115 -31
Corn On Corn Premium Over Soy Over Corn -42 -184 -117 -171 -87
*F = CRC Forecast,
Source: Iowa State, USDA, CRC

MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249
AgriBusiness
May 8, 2017
Page 9

APPENDIX
Important Disclosures

Monsanto Company (MON: $116.20 NEUTRAL)


E.I. du Pont de Nemours & Co. (DD: $81.14 Not Rated)

Cleveland Research Company - Ratings Distribution


Rating Percent
Buy 20%
Neutral 78%
Underperform 3%

Disclosures
Buy: The stocks return is expected to exceed the market due to superior fundamentals and positive catalysts.
Underperform: The stocks total return is expected to underperform the market due to weak fundamentals and a lack of catalysts.
Neutral: The stock is expected to be in line with the market due to full valuation and/or a lack of catalysts.
Valuation and Risk: Price targets are established under various valuation methods including P/E, P/S, EV/EBITDA on financial estimates
based on forward earnings. Price targets are not established for every stock. The price targets effectiveness may be affected by various
outside factors. Risk assessments can be found in the most recent research on these stocks.
Other Disclosures: We, Michael Piken and Mike Henry, certify that the views expressed in the research report(s) accurately reflect our
personal views about the subject security(s). Further we certify that no part of our compensation was, is, or will be directly or indirectly
related to the specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this
report have no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or
any company.
Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research
Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services rendered to
third parties.
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MIKE PIKEN MIKE HENRY


mpiken@cleveland-research.com mhenry@cleveland-research.com
(310) 563-1901 (216) 649-7249