Gaining Acceptance
Lease terms are changing rapidly. In the past, the overwhelmingly popular lease standard was the 50/50 crop share lease. Gradually, the trend began to swing toward cash rent leases. The past couple of years, flexible cash rents have become increasingly popular.
The reason for the gaining acceptance of flexible cash rent leases has been the extreme variability in grain prices and expenses, resulting in wide swings in net farm income. During 2008, the price of corn varied from less than $3.00 per bushel to over $7.00 per bushel. Fertilizer costs increased from $122 to $230 per acre of corn.
These factors had a dramatic impact on a farm’s profitability and, thereby, appropriate lease terms. With the wildly changing economy of farming, a cash rent that met the landowner and tenant’s needs one year, might severely tilt the balance toward one of the parties in subsequent years.
The flexible cash rent lease can be designed in any number of different ways. These leases can be very aggressive in maximizing the return to landowner, or providing tenant profitability in all but extreme economic circumstances. Most flexible cash rent leases are designed to provide a landowner an acceptable base cash rent, with the potential of sharing in additional income during the good times.
Designing a Flexible Cash Rent Lease
When we design a flexible cash rent lease, we project average gross farm income. We use the farm’s actual trend line yield and project grain prices. Farm expenses are also estimated. Gross income and expense estimates allow us to project a tenant farmer’s net income before lease payments.
We then discuss the projected net farm income with the landowner and compare it to the range of traditional cash rents and returns to crop share leases. The owner informs us of his or her goals and objectives. Some have goals to maximize their potential net income to their farmland investment. Other owners prefer to insure, under average conditions, the tenant make at least a certain amount of net income over the base cash rent payment and prior to the bonus going into effect.
An example of a simple flexible cash rent lease:
Base rent = $230/acre
Bonus clause = actual farm yield x avg price (ex. Jan 1 - Dec 1 at local elevator) x 33% - base rent
Example = 190 bu/acre x $4.00/bu x 33% = $253/ acre - $230/acre base rent = $23/acre bonus rent
Other Lease Terms
We require the tenant apply and pay for fertilizer and limestone in quantities that will maintain soil fertility at optimum yield potential. We require Farm Service Agency planted acreage information and grain elevator harvest delivery sheets, thereby tracking final yield per acre. We calculate the average price for that year’s crop at the local elevator.
Flex cash rent leases share in risk and reward with tenant
Advantages to owner over average traditional cash rent:
- Guaranteed base income
- Higher income in years of higher profitability
Disadvantages to owner:
- Lower guaranteed income
- Lower income in years of lower profitability
Recently, gross income, expenses and cash rent levels have varied dramatically. We feel it is important to keep up to-date with these trends so your lease can accurately reflect your goals and objectives.
Please feel free to contact us regarding any questions you may have on flexible cash rent leases and our assistance in farm management. We can also discuss all variations of leases from traditional cash rent, crop share, crop share with bonuses and custom farming arrangements. Today’s leases are custom designed using each farm’s distinct characteristics and the owner’s goals and objectives.
