Ep. 43 – Federal Open Market Committee Update and Breakeven Curves Under Different Land Rental Agreements

00;00;07;18 – 00;00;28;25
All right, well, it’s good stuff, man. How’ve you been, man? I’ve been doing great. I’m going to be going to Nashville tomorrow. Oh. Good deal. That’s right. Yeah, tomorrow. It’s craziness. And what are you doing out there? I’m speaking to the American Society of Farm Managers and Rural Appraisers Mid-South chapter. So the Asset Farmer Mid-South chapter.

00;00;28;25 – 00;00;46;25
Good deal. Very short, very short. A, name for their thing. Yeah, it’s it’s about, like, ours. No kidding. Yeah. University of Arkansas system, Division of agriculture, cooperative extension service. Yes. Very short to the point. It is a it is a lot of words. It kind of eats into my word count for the day and. Yes, right.

00;00;46;26 – 00;01;07;06
It doesn’t let me say as much as I want to. That’s right, that’s right. Well, safe travels out that way. That’ll be really good. I’m heading to Pickens, Arkansas. That’ll be the first time I’ve been out there. The big town of Pickens. Yeah, I don’t know what to expect. I’m excited, though, to go out there, present for Arkansas at council and, present for their, you know, their I guess they have two meetings a year for their board of directors.

00;01;07;06 – 00;01;24;26
And so we went to the one in December, and then they have this one now. So, yeah, I think there’ll be another one in August. Oh okay. So they got they got more than two okay I think. Well at least Scott and I’ve done one in August before. But yeah. And I think being in Pickens, I mean, I know that that’ll be a really good conversation.

00;01;24;26 – 00;01;46;23
I think, to get some good highlights on where the markets stand and, the state of, tariffs. Yeah, that’s an uncertainty time. And that’s really the biggest, you know, story about, you know, Scott Scott Stiles is going to go and talk about sort of that domestic production and domestic issues we’re facing here. And then I’m going to come in and talk about the global issues and focus a lot on Brazil and their crop acreage expansion.

00;01;46;23 – 00;02;02;24
And you know, what role China plays in their success for becoming one of the world’s leading exporters of agricultural commodities. It’s going to be an interesting talk. So yeah, I know, just to give a sneak peek to those who might be going to that meeting. Actually, by the time that we post this, it’ll be after the fact.

00;02;02;24 – 00;02;26;05
But there’s a really cool figure that, that Ryan found. And, what is the name of that website? It is like China’s power power grid database. Something along those lines and essentially what it is. And I’ll share it with the group on, on there. On Thursday, it’s essentially it just shows all of the power plants and infrastructure across the world that China has funded.

00;02;26;05 – 00;02;46;01
So it’s like public debt. You know, they come out, they try to they get they try to get a loan to put together this infrastructure, you know, on the country wide scale or even in the smaller regional state scale. But one of the figures is pretty, it’s pretty interesting to see how much has been put towards Brazil, right, compared to the rest of the countries that they have invested in.

00;02;46;01 – 00;03;02;04
So that’s one of the main reasons I’m going to bring that up is just to kind of show, hey, they’ve they’re back in Brazil, they’re putting a lot of money into their infrastructure. And one of the main reasons why they’re being successful. Yeah, I mean, it’s very clear in that figure, just how much investment China is putting in Brazil.

00;03;02;04 – 00;03;22;10
And I mean, we’re we’re seeing it many in many, measures, you know, such as, such as exports. Yeah. And, and, and those and, energy investment numbers. So, but yeah. So I’ll go ahead and pivot us into, what we’re going to talk about today. And I’ll, I’ll do the traditional. Good morning. Good morning everybody.

00;03;22;12 – 00;03;39;16
Welcome to another episode of Morning Coffee and Egg Markets with not your host, not your typical host, not your typical host hunter buyer. Raleigh is out this week, and he will be out next week as well. So, I’m going to be, taking over and sitting in the, in, in the host seat for a couple of weeks.

00;03;39;16 – 00;04;02;02
But today we’re going to talk about ag finance and macro and farm management, all the things that, that doctor Ryan Loy is a specialist in with, with the extension service. And so, just to start off with Ryan, can you, you know, talk about the, the meeting is that, you know, that that’s happening today. It’s happening today.

00;04;02;02 – 00;04;21;25
Yeah. Yep. So, the meeting that Hunter’s referring to is the Federal Open Market Committee meeting, and that’s a lot of words to say. That’s essentially the board of directors of the fed that get together, on average about once a month. Sometimes they have about, there’s a month in between. But they meet and they’re the ones who decide where do short term interest rates go.

00;04;21;25 – 00;04;38;24
And so when I’m talking about that, I’m talking about the fed funds rate, which I’ve talked about several times on this podcast before, and really from a 30,000ft view, you know, the fed funds rate is really going to determine those short term interest rates. So things like operating loans, right. Operating loan interest that you’re paying is going to be directly influenced by that fed funds rate.

00;04;38;24 – 00;05;05;12
And they meet like I said, you know, over the course of the year to try to decide, okay, where is our economy at, where are we heading, and what are some of those hard economic indicators we could look at and say, should we cut the rate and kind of, you know, generate some investment, right, you know, generate some economic growth, or should we maintain a restrictive monetary policy and, you know, kind of just weighed the storm to ensure that we don’t have an uptick of inflation like we did during the Covid times?

00;05;05;15 – 00;05;37;03
And to make sure that, you know, our economic growth keeps up with inflation, which is about 2% a year, which I’ve talked about on here before as well. But they have a meeting today. And, you know, really kind of nobody expects anything to really change this, this meeting. In fact, at the, you know, a few minutes ago, I went and looked at what the fed, the CME Group has a fed watch tool that kind of takes into account probabilities based on trading futures trading for the fed funds rate and based on where people are at, kind of gives a probability as to where the rates are going to go.

00;05;37;06 – 00;05;58;21
And right now it’s sitting at about a 97% probability that they’re going to maintain the four and a quarter to 4.5%, which is what they’ve had since the beginning of the year, and basically have had since December. And so they’re going to maintain that restrictive ness. They may not drop it. And the reason that they’re kind of uncertain right now and don’t want to drop it is really mainly due to a lot of this export market uncertainty.

00;05;58;21 – 00;06;16;29
And we’re talking about where is the trade war going ahead, where are export markets going to go, and where is our imports, and how expensive are those going to be. And under those under, you know, economic uncertainty, it’ll be difficult for them to justify a cut, you know, with, with the, with the threat of maybe, higher prices.

00;06;17;01 – 00;06;33;02
Coming to us in the near future. And so those are the big things, you know, one of the one of the big things, too, is that initially when I had talked about this in January, we were expecting a rate cut in June, and that’s been kicked down the curve a little bit more. June’s basically off the table.

00;06;33;05 – 00;06;50;18
People are thinking they’re kind of, you know, penciling in July, maybe for a rate cut. However, there’s a lot of time between now and July and a lot of things can happen. And so it could be sooner, it could be much later. And so there’s a chance of three rate cuts still, you know, at the end of the year kind of similar to what happened last year.

00;06;50;21 – 00;07;05;22
But again there’s so much uncertainty right now. We don’t know what’s going to go on that. The Fed’s just going to maintain this until they know for sure definitively. So I think naturally the question that I have and then our listeners are probably going to have is why should we care now. Because I mean, loan rules are pretty much right.

00;07;05;28 – 00;07;24;23
You know, wrapping up. So, you know, why should we care about what the interest rate is right now? Well, first of all, there’s a couple angles there. So one is this is going to influence your operating note for next year. Right. So thinking about just already getting into that mindset of what what am I going to be dealing with next year compared to what I’m dealing with now.

00;07;24;25 – 00;07;41;13
And as it stands now, you could be in the exact same scenario for your interest rate and for the cost of borrowing. Or you could be in a much better one. Right? And so those are the kind of things to look at, to say we can what is the fed thinking about? What can I do to plan this for next year or from a different perspective?

00;07;41;13 – 00;07;58;24
If you’re on a variable rate loan, you know, if it’s an intermediate term. Hypothetically, if rates start coming down, well, your your interest rate that you’re paying is also going to come down as well with it. So the timing of that is just going to be a function of when your when your interest rate drops as a response to the federal funds rate.

00;07;58;26 – 00;08;18;19
So really that was the main things to look at, the main things to care about. And when we’re talking about the interest expense, it’s become such an important piece of that operating budget. Right. You know, it was something everybody always considered, but now it’s become such a high cost category in the last couple of years that everybody really has to have it in the forefront of their minds.

00;08;18;22 – 00;08;33;28
And I think that’s kind of one of the main reasons when you’re looking at, okay, what kind of, you know, rental agreement do I need to get into? Should I try to buy this land and those sorts of things, which is kind of the basis for the rest of our discussion today. Yeah. So, I appreciate that update.

00;08;33;28 – 00;08;53;07
And, you know, for those of you who are out there that, you know, are more interested in, you know, what is your bank or charge you the interest rate that they charge you. I encourage you to see the material that we’ve already put out on, these FOMC meetings and, and the macro economy and, you know, visit with your lender about it and absolutely ask them these questions.

00;08;53;07 – 00;09;13;06
I’m sure that they’d be happy to to geek out and nerd out and talk about it. So that’s right. You know, moving into a, I’ll say an adjacent topic where we’re talking about, a farm management decision for some, sometimes that there isn’t a decision, but for some there is. And that that’s looking at different, rental agreements for land.

00;09;13;06 – 00;09;30;04
So, you know, if you’re going to and, you know, land is one of those, key inputs, right? Very important. You gotta have land if you’re going to farm. And, so to get land, you know, you either own it, you come into it or you have it, or maybe you’re going to go under a cash rental agreement or there’s a flat rate that’s fixed.

00;09;30;12 – 00;09;46;28
And then there is that crop share agreement that says, okay, well, there’s going to be a portion of the revenue. Then, you as the landlord would take and then the farmer would get the other portion of that. So this is the these are the three different agreements that we’re going to talk about today. And we’re going to talk about breakeven curves.

00;09;46;28 – 00;10;11;01
Right. And so from there I’m going to pass up to you, Ron, can you tell us about breakeven curves and that concept and why that’s important in this decision. Absolutely. So, you know, when we’re talking about breakeven curves in a really they sound a little bit more complicated than they really are. All that it is, is that on a combination of hypothetical yields that you could hit or prices that you could hit, prices that you could hit in yields?

00;10;11;04 – 00;10;35;21
It’s kind of just a curve, the function that says, okay, if you’re along this curve at that price and yield combination, you’re going to at least cover your operating expenses. So for readers who are looking at these graphs, when you’re looking at them, you can see these curves are kind of downward sloping. And and they kind of, you know, mimic to some degree, a demand curve very similarly.

00;10;35;21 – 00;11;04;27
But the point being here is, is that along these curves and you can see that there’s three in there, we have cash crops here and own land. And any point along this curve on that curve, that is you’re going to be able to break even. So whether it is at a yield of 50, bushels an acre on soybeans and wherever you go up and where it meets that line, whatever that, corresponding prices on the y axis is going to be that price yield combination to get you in the black for that year.

00;11;04;29 – 00;11;23;20
Now, what’s important, too, is if you look at anything to the left of the, of this curve of any of these curves to the left, that is basically in negative territory, you’re not going to be able to cover your expenses. So again, if you’re looking at these curves and look to the left, anything in that area below it, you already know you can’t meet that.

00;11;23;20 – 00;11;39;19
So if you have an expected yield or expected price you’re going to get, this is a good opportunity to you to just kind of look at this and say, okay, I’m at least hitting, my, my margins to get into the black and be positive or at least breakeven. Because remember, breakeven is just covering your exact cost, right?

00;11;39;19 – 00;11;57;20
You have zero profit, but you also covered everything, so you don’t owe anything at the same time. So it’s kind of that baseline that you want to set yourself. And there’s many things you can do without getting into too much of the weeds. And in this case, one of the things we, we kind of assume is we we looked at operating cash expenses.

00;11;57;20 – 00;12;14;10
So one of the important parts when you, if you’re reading through here is that these are cash operating expenses. So these are going to be expenses that you actually pay cash for. So things such as capital or capital recovery and depreciation are not included in here. And so you’re not writing a check for depreciation but you are saving that money.

00;12;14;13 – 00;12;31;25
So that way when it’s gone into useful life you have money saved to purchase a new purchase, new equipment. Here, that’s not considered. We’re just talking about your cash expenses, what you’re writing a check for or what you’re paying cash for in that growing year. The crop share we assume is going to be under a 75, 25 agreement.

00;12;31;25 – 00;12;52;24
So that is 75% of that crop revenue is going to go to the farmer, 25% of it’s going to go to the landowner as a rental payment for the land. The landowner does not share in any expense. So it is 100% expenses that the farmer has to pay and receive 75% of the revenue. The cash rent, we assume, is going to be a flat rate.

00;12;52;26 – 00;13;16;08
So we just add that to your overall production expense or your operating expenses. And I pulled that. It’s just an average for the state of Arkansas. And so cash rent on average for irrigated cropland in the state of Arkansas is about $152 an acre. And so, again, that may not be fully representative of where you’re at. But it’s at least a good way for us to kind of capture what it would look like on average across the state.

00;13;16;08 – 00;13;33;11
That’s for irrigated ground. This is for irrigated ground. That’s right from USDA. It’s from USDA. And yep, it’s going to be a they do a survey at the end of every year. And they go around and of course survey all the farmers and ask them what they are. And you can look at it by county as well. And then they aggregate it into an average at the very end for the year.

00;13;33;11 – 00;13;53;24
So this is for last year, 2024 and about 152 now. I’m sure it’s much higher in some areas and much lower in some. And of course, there’s also in that report, non irrigated land, which looks like a lot different, has a lot, you know, cheaper structure. Right. Of course. Because it doesn’t have those sorts of kind of amenities like irrigation and stuff in it.

00;13;53;24 – 00;14;18;19
Right. Then we used a just to kind of set a baseline, when, when, when people are looking at these graphs, we use the 2025 USDA Risk Management Agency’s harvest price. And for corn, that’s going to be 465. For soybean, that’s 1051. And for rice, that’s 635 a per bushel per acre. So let’s just kind of pick one and we can walk through this.

00;14;18;19 – 00;14;44;26
So if we’re looking at soybeans, you know, I had soybeans on the brain. I’ve been talking about trade. So I’m going to go to soybeans. And when we’re looking at this, we’re assuming a base operating expense for the state of Arkansas, for soybeans of about $510 an acre. Now, again, those are cash expenses. It’s not including, other non-cash things, like, as I mentioned earlier, now at the expected price of 1051, again, just a way to set a baseline.

00;14;44;29 – 00;15;05;12
We can look at that expected price, the horizontal line on the graph. And anywhere that that covered that, that crosses a curve, the corresponding yield value is going to be that breakeven yield. So you can look at the graph and get an estimate. Or you can actually calculate it yourself very easily. So under the owned you’re going to have $510.

00;15;05;12 – 00;15;25;19
No other expenses. Right. That’s one other thing that’s pretty important here. I’m not including things like land taxes, all those other things that you have to pay if you own land, which is part of this equation. But again, we’re just talking about operating expenses, cost of production, cost of production. That’s right. So you take that $510 per, excuse me, $510 per acre and operating expenses.

00;15;25;26 – 00;15;49;05
Divide it by the expected price of 1051. And you’re looking at about a break even yield under full ownership. Land ownership of 49 bushels an acre under the crop share agreement, which again, is 75% of that revenue coming back to you, and you’re taking 100% of the expenses, it’s going to be $510 of operating expenses divided by 1051 times 0.75.

00;15;49;05 – 00;16;16;10
Now I do that 0.75, because again, you’re really only receiving 75% of that 1051 per bushel per bushel. So once you take that into account, you’re looking at about 64 bushels an acre. And I think it’s important that we stop there to really consider something for, you know, in this context, you know, between the owned and the crop share, you’re looking at about a 15 bushel an acre difference, which that is that is really important to consider, right?

00;16;16;10 – 00;16;32;18
That is not statistically insignificant. That is a very significant I mean, that’s about what, 30%. Yeah. Yeah, just about just about. And so when you think about it, you go, well, if I don’t own this land and I’m under a crop share agreement, I have to get 30% more bushels an acre than if I just owned this land.

00;16;32;18 – 00;16;50;07
And and in a time where everything’s so uncertain, we don’t know what harvest is going to look like this year because of the trade war. We don’t know what the end, the end market is for our soybeans this year like we typically would. You know, China being the biggest buyer, we don’t have that on the table and can assume that that’s going to happen.

00;16;50;09 – 00;17;10;21
That would serve to push those prices down even lower in these bushel. These required bushels to break even hypothetically, would be driven up even higher. And and just on that jump from own to crop share, I mean, is this something that you see across the three crops that you’re looking at? Absolutely. For magnitude, similar magnitude? It’s a little bit less extreme when we’re talking about rice.

00;17;10;21 – 00;17;39;10
Rice is actually evenly spaced across the, across the agreements. Now crop share still is the most it requires the most bushels per acre, for rice, 208 bushels an acre. Again, following the exact same logic we did for soybeans. And again, own land is going to be that smallest amount of acre or smallest amount of yield required at about 156 bushels an acre, again, compared to 208 for the crop share.

00;17;39;12 – 00;17;59;00
The cash rent in all three categories is, you know, in between that own land and crop share breakeven yield requirement, the one that’s pretty much on top of each other, that’s pretty indifferent is going to be soybeans. And you can see that where cash rent is going to be about 63 bushels an acre, crop share 64 and owned 49.

00;17;59;00 – 00;18;18;07
So again, when we’re talking about this, unless you own that land, you’re looking at at least a 30%, increase in your yield required to break even compared to if you owned it, which is is just staggering. I think this is a really important discussion. I know that most folks like what I’ve already got my agreements, you know, I’ve already got my land if you’re able to, of course.

00;18;18;07 – 00;18;34;10
And you’re like, I don’t need to really make this decision. But I do think it’s really important to highlight just how important marketing is. And right in this talk, I mean, it all goes together, y’all. It all goes together. And so, you know, Ryan is, you know, talking about these are projected prices and those are futures prices. Right.

00;18;34;13 – 00;19;00;14
So I mean get a consider basis and things like that. So the main point that I’m trying to get at here is for corn, for instance, he’s using the he’s using an expensive price of 465. And so you know those breakeven yields across across own cash rent and crop share going to be 173 206 and 231. So it’s really important to think through, okay, if I’ve got a crop share agreement I got to get 231 bushels per acre at 465.

00;19;00;14 – 00;19;25;11
That’s at 465 for 65. But then you got to think about basis, you know, basis for corn generally runs anywhere from 10 to $0.20 across the state. I know it varies by about ten and $0.20 under that 465. So let’s just say a 450 that’s going to both at 231. That’s right. A bit more as we close from 240 and so it’s really important to just know, like with your agreement and your operation where you are knowing, how to market.

00;19;25;11 – 00;19;40;01
Right. Under these various agreements. And it’s going to be tough this year for a lot of folks if you don’t own your land. I mean, even owning your land, you’re going to need a good year. I mean, it’s it’s not like you can just, you know, hit, hit, hit auto play. That’s right. Just autopilot and let it run.

00;19;40;01 – 00;19;57;17
You got to, you know, still put in your due diligence as you normally would, but just for context, you know, we’re talking about these break even yields the state average yield for course 187 last year. And if you, own own ground, what Ron is showing here is that you’re breaking is about 173 go into, cash rents 206.

00;19;57;20 – 00;20;15;21
That’s above the state average of 187. Just going to cash rent. Yeah. Which is which is staggering again. Now, I’m sure that there are plenty of farms that would hit that or higher. But again, it goes how how certain are you of that actually occurring. Right. And and how how risky do you want this to be. And when you’re talking about the marketing, I’m sorry to go back and I you highlighted it.

00;20;15;22 – 00;20;33;19
I think it’s important to talk about these are expected prices. And if you’re looking at this and you go, well my cost structure is exactly the same, I could hit this yield at this price. Well if you’re watching the futures market, look at when it hits that price. If it does, or at least it gets close and keep and book a portion of your stuff at that time.

00;20;33;19 – 00;20;51;10
Because what you’re doing at that point is you’re just setting a baseline, setting a baseline to where, you know, I’ve heard a very wise man say that if you at least if it can pencil, you’ll never go broke. Right. And so if you think about those certain things about, okay, this portion of booking, I was able to book it for 65, I know I’ll at least break even on this portion.

00;20;51;17 – 00;21;10;01
Let’s see if we can get above or below or at that. For the next portion I book. And one. If you do that systematically, it can vary. It can really help, especially when it comes to harvest. Yeah, it really can. And I mean just it’s so important to know how it all works. That’s right. I think that’s one point that I want to drive home here is that yes, we’re talking about rental agreements.

00;21;10;01 – 00;21;30;21
And you’re probably thinking I’ve already got it. Okay. But I think it’s fair to evaluate under these different agreements, what price do you need to be shooting for in your marketing? And like Ryan said, as soon as that price hits, as soon as you call up a cab or some local elevator and they’ve got that cash price, you’re saying, okay, I want to do 10% today.

00;21;30;22 – 00;21;51;15
That’s right. My expected production. And then, you know, especially if you got crop insurance here last week we talked about that that even plays into this. So it all goes together. And creating a, sound financial state for your operation and a sound risk management. That’s right. That’s a great way to put it. That’s exactly right. So, Ryan, we’re already, you know, close to 21, 22 minutes here.

00;21;51;15 – 00;22;10;03
So I think I’m going to wrap us up. Any parting thoughts? No, no parting thoughts. If anybody has any questions on this, please feel free to reach out at any time. You know, I’ve got my my numbers on the website. I my contact information will be in the newsletter. Please feel free to reach out if you have any questions on how your farm can fit into this and what your cost structure is, and I’d be happy to help.

00;22;10;05 – 00;22;12;21
Great. Thanks, Ryan. Of course. Thank you. Hunter.

00;22;13;29 – 00;22;21;02
Hey! I.

00;22;21;05 – 00;22;22;21
Hey.