January 8, 2013

Agronomists Notes

Hello Reader,

Thank you Tom for noticing the correction in Strategy 2 in the article land rental agreements. See below!

Welcome to Volume 8 of Beyond Agronomy News! It all started as a random email update to clients and today we are humbled (also honored, enriched, and amazed) to have readers in over 12 countries. Feedback from those readers makes this newsletter more like a community and less than simply an information source. And that makes my 46 weeks of homework feel worthwhile! So, welcome back to our long standing subscribers and our new ones. Here’s to a tremendous 2013.

Now, on to the state of affairs in fertilizer pricing. The market has softened a touch over Christmas with urea hovering around $580, MAP at $700, potash at $600 and dropping and sulphur at $450 a tonne. It’s hard to say where prices will go but they have remained flat for some time which tells me the market is not likely to drop further.

This week we’ll look at fine-tuning air delivery systems on our air drills to improve seed placement. Next, we’ll look at five innovative land rental agreements to help you compete for land in the intense land market. Last, we’ll look at my top three picks for agriculture apps; I’ll update you as new ones come on the market throughout the year. We’ll finish with technical grain market news.

Have a great week!

Fine-tuning air delivery systems

Remember the time when air drills were less than 40 feet wide, seeding rates were no more than 90 lbs/ac and fertilizer rates were below 200 lbs/ac? Fast forward to today and air drills are now 50, 60 or 70 feet wide, seeding rates are pushing 140 to 170 lbs/ac and fertilizer rates range between 250 and 400 lbs/ac. Do you know what hasn’t changed? The air delivery systems on air carts that now send twice as much product down airlines twice as long with varying hose lengths. The result is inaccurate seed and fertilizer placement, plugging, bunching of seed in the furrow, gaps in the furrow, destruction of seed hitting manifolds and openers at high velocities. The list goes on.

If you go back to earlier recommendations, manufacturers suggested that we keep all primary and secondary hoses the same length. As soon as we went to 50, 60 and 70 ft wide air drills, hose length no longer mattered. Why? Because it wasn’t possible to keep hoses in the center section the same length as hoses on the wings. If you did you’d have to wrap hoses multiple times in the center section to keep them the same length as the hoses on the wings. Wrapping hoses creates more friction, which alters the velocity and distribution of seed in each hose. Add varying secondary hose lengths from the manifold to the shanks and you compound the problem.

I was curious enough to measure the wind speed of six different drills last year ranging from 56 to 70 feet wide in 2012. The chart above shows that air velocity differed by 14 km/hr on the same drill. Add seed and restriction to the lines and the difference could be greater. These three drills were set for canola and the average wind speed was between 20 and 30 km/hr. What would you expect of a canola seed hurled into a furrow at 25 km/hr at a ground speed of 7 km/hr? You would find seeds inside the furrow, on top of the ground, in the fertilizer band or completely outside the furrow. Sound familiar?

The proper way to manage airflow at each opener is through air brakes that allow you to adjust airflow at each shank. Air brakes are designed to release up to 100% of the air prior to dropping into the opener, which allows gravity to take seed into the furrow, not a 30 km/hr air blast.

Who would benefit from using air diffusers?

Those with wide air drills and high product volumes. You need at least 1200 to 1800 rpm wind speed to keep product suspended. The wider the drill the more wind speed you need to keep the seed suspended.
Those with steep or long hills. High wind speed is needed to push product while traveling up hill while sacrificing high wind speeds going down hill resulting in poor placement.
Those with disk drills and fast travelling speeds. Trying to push large product volumes at high speeds requires higher wind velocities.
Tow-behind tanks require more air to push product down longer hoses compared to tow-between tanks. Granted, tow-between tanks still need higher wind speeds to push product long distances.
Those with openers separating seed and fertilizer horizontally like the Dutch precision paired-row openers. A narrow paired row less than 3 inches wide can bounce seed easily into the fertilizer row.

There are two very good seed break units on the market and one is made by Dutch Industries in Western Canada called the Air Guard system and the other is the D-Cup diffuser made by Invenco Pty Ltd from NSW, Australia. The Dutch Air Guard is unique as it allows you to adjust the amount of wind you release. The D-Cup diffuser releases 100% of the air and with some closed bottom paired row openers you need a certain amount of velocity to force seed out of the opener.

To see how they work watch the videos: Dutch Air Guard, D-Cup Diffuser

The bottom line, today’s air delivery systems do a good job but not a great job of delivering seed to the opener. Today’s air delivery systems weren’t designed to move product down airlines with differences in length, bends and elevation. They all lead to restrictions in the airlines, which cause inaccurate seed placement and distribution across the drill. The Dutch Air Guard costs $20.00 per unit and the D-Cup Diffuser in $70.00, which is quite reasonable given the cost of an air drill. I’ve already ordered the Dutch Air Guards for our drill. SL

Chart: Seed tube velocity measurements. Source: S. Larocque

Creative land rental agreements

How to compete with high rents

The competition for land continues to rise in Alberta with many of us shaking our heads at the high cash rents we’re up against. So, how do you compete against outrageous rent? The only way to get in the game while managing risk is to be innovative in the offer. Here are the top five rental agreements that I’ve come across.

Strategy 1: This land rental agreement links payments to grain prices thereby allowing the landowner to share in the risks and returns.

Example: In some cases, the November Pool Return Outlook on wheat from the Canadian Wheat Board is being used, but you could use the price of canola or another crop at a specific time. In this example, there's a base amount per acre paid to the landlord. If wheat is $7.25 a bushel or better net to farmers at the end of November, the cash rent goes up by $5 an acre. If wheat is above $8.25, the cash rent goes up $10 an acre. If the wheat PRO is above $9.25 a bushel, the rent increase is $15 an acre above the base. However, if the tenant collects crop insurance for the crops on the leased land, there are no rental increases no matter what grain prices do.

CORRECTION

Strategy 2: Let’s look at offering a 3-year lump sum of rent on 1,000 acres at $60.00 an acre using 5.25% interest.

$60.00 acre × 1,000 acres = $60,000 annual rent
$60,000 × 3 years = $180,000 one lump payment for 3-year lease
$180,000 × 5.25% with a 3 year term = $14,967.27 in interest cost
$14,967.27 interest ÷ 1,000 acres + $60.00 base rent = $74.97 acre

In this example offering a lump sum to cover three years of rent would cost $74.97 an acre after interest and increase the land rental cost by 25%. This strategy does tie up capital for three years but you can write off the interest. The land rent offer would be lower than the area average in return for receiving three years of rent up front.

Strategy 3: Take 25% of the long-term yield average of the crop to be planted and multiply this by the expected price and subtract 25% for risk and uncertainty. This can be calculated for the length of the lease or year-by-year. In this example the average wheat yield on similar land for given area is 50 bu/ac. The expected wheat price for fall 2013 is $7.60 bu. Crop insurance is one way to generate the average yields and prices to work from.

50 bu/ac × 25% = 12.5 bu/ac
12.5 bu/ac × $7.60 bu = $95.00 ac
$95.00 – 25% = $71.25 ac

This agreement makes allowances for grain price movements but not yield which is one downside. This example is based on my area and the value it comes up with is very close to what is currently being offered.

Strategy 4: This agreement includes a base rent value and a percentage of the revenue above a certain gross margin.

For example, base rent of $65.00 acre with 5% of gross margin above $400.00 acre. Canola yield is 48 bu/ac and price is $12.00 bu.
48 bu/ac × $12.00 bu = $576.00 ac
$576.00 ac - $400.00 ac × 5% + $65.00 ac = $73.80 ac
or,
Wheat yield is 65 bu/ac and price is $7.90 bu.
65 bu/ac × $7.90 bu = $513.50
$513.50 - $400.00 × 5% + $65.00 ac = $70.67 ac

This example allows you to bid what the area average land rent would be but sweeten the pot when yields and prices are favorable and when you can afford to give up some margin.

Strategy 5: This example allows the landlord to retain farming status for tax purposes. You start with a base rent slightly lower than the area average and include a revenue share above the tenants cost of production including hail and crop insurance payments. The revenue share can be 30, 40 or 50% of the first $50.00 or $60.00 acre above the cost of production and is calculated the end of July. The remaining revenue goes to the tenant. Here’s an example:

Cost of production = $300.00 acre
Gross revenue = $450.00 acre
Net margin: $150.00 acre
Rent = $60.00 base rent plus 50% of first $50.00 acre
Total rent to landlord= $85.00 acre.
Total net margin to tenant: $450 - $300 - $25.00 = $125.00 acre

This structure would require more paperwork to track all machinery passes and associated costs with each pass including variable input costs. Machinery costs are based on custom rates. It also requires trust on the landlords part know that the costs of production are real. The variable costs include the land rent and the cost of crop and hail insurance.

The land rental agreements that appeal to me the most are Strategy 3 and 4. Strategy 3 is a good formula to come up with a fair market value for land rent based on the productive capacity of the land and current prices. Strategy 4 works well because it allows you to give up margin when you can afford to. Also, if the bidding comes down to you and another offering the same cash rent, a revenue share may put you over the top to win the bid.

There is merit in all these agreements and they can be tweaked to suit your own situation. What is real is the competition for land and only those who do a good job of farming on top of offering innovative land rental deals will out compete todays high cash rent offers while minimizing risk. SL

New smartphone and tablet apps on the market

The world of smartphone apps for agriculture continues to grow each month. Here are my top three apps for this week. With shameless self-promotion, let me recommend one of ours first:

Beyond Agronomy Air Cart Maximizer
It calculates the maximum acres per fill of your air cart based on compartment sizes (up to four compartments), seed and fertilizer rate. We currently can do two products but are working on the next app which includes multiple fertilizer products including liquid and up to five tanks.
Buy the app for Apple
Buy the app for Android

Farm At Hand
This app has gained the acceptance of a number of farmers who use it to track fields, grain in storage, grain contracts, field activities and deliveries. It stores the data you enter on the device until you reach your wifi connection and then uploads the information on to your ipad or personal computer. Best of all, it’s free!
Find it here

AgPhD Fert removal calculator
This app allows you to select a crop and enter a yield goal to calculate the amount of N,P,K and S the crop will take up in total, remove in the grain and in the straw. The nutrient values are courtesy of the International Plant Nutrition Institute. I have a spreadsheet designed to do this but now I have this handy, simple to use app on my phone. It’s free!
Get it here