Iowa State University Extension farm management specialists are fielding a lot of questions about flexible cash rent leases for cropland these days. Flex leases share some of the risk as well as the rewards, and are an alternative to a traditional straight cash rent lease. With higher prices for corn and soybeans, rising land values, and increasing production costs, landowners and their farm operators are looking for ways to share the risk involved with cash rent.
So how do you determine the base rent in a flexible cash lease for cropland? Steve Johnson, Iowa State University Extension farm management specialist in central Iowa, provides the following observations to help answer that question recently posed to him by a landowner.
Should you try to set the base rent at a high level?
"I suggest you use an average rent for getting your cropland rented in your county," says Johnson. "It's likely closer to an average versus the highest rent possible. Setting the base at a high level takes away the operator's incentive from creating a bonus associated with high yields on that farm and good cash prices for fall delivery bids."
Concern for the future is that there will be reluctance on the part of the landlord to lower this base rent when corn heads below $5 per bushel and soybeans go below $10 per bushel. "Selecting a reasonable base rent allows for very little change in this cash rent guarantee in the foreseeable future," he adds, "but a bonus is paid in the good years based on both yield and price."
What are acceptable profit percentages for owner & tenant?
Are there generally accepted net profit percentages for the owner and tenant on a cash rent lease or a flex lease? "A review of 16 years of cash rent as a percent of gross crop value in Iowa found that average cash rent for corn to be close to 30% and soybeans at 40%," notes Johnson. However, corn and soybean prices spent most of this period below $3 per bushel for corn and $6 per bushel for beans."
Since costs of production are much higher now, Johnson suggests adding a total cost of production or base gross trigger. This trigger would include the base cash rent amount along with all input costs. If an operator prefers not to use their individual cost on the cash rent farm, the crop costs estimates from the land-grant universities for that particular crop rotation and yield expectation could be used for that year the crop is being produced.
"As a result, the bonus will not be triggered until all costs are covered," notes Johnson. "I suggest using a percentage of 33% of the difference for both crops is better than the 40% of soybeans; which can be a disincentive for planting soybeans in a high cash rent environment. Some farm operators paying high cash rent are reluctant to rotate to soybeans."
Flexible cash rent leases tend to be multi-year
In summary, flexible cash leases tend not to be terminated annually, but adjustments to the base rent or gross triggers might be included in an addendum to the original cash lease. The USDA's Farm Service Agency considers a flex lease as a cash lease and any government payments are limited to the operator, or the party deemed "at risk".
Since flex leases tend to use the farm's actual yields, the landlord should designate a copy of the crop insurance "proven yield" on this farm be provided annually. "I suggest the price used in flex leases should be the new crop cash delivery bid for harvest at a local elevator or co-op," says Johnson. "Spread the time frame that this price is determined across the period of January through October and if a bonus is paid, that final base rent and potential bonus can be made in late November or December when all factors are known regarding that crop."
Lease rates and agreements are being negotiated this winter
There are a number of variable cash rent leases being developed currently, as landowners and farm operators get their rental agreements firmed up for the 2012 crop. The leasing year begins March 1, so a lot of negotiating will be going on between now and then.
The FarmDoc website at the University of Illinois has one that specifically includes a bonus feature as a permanent clause in the lease. You and your landlord may want to review it for items to use in your negotiations. It can be found at www.farmdoc.illinois.edu.
Iowa State University has information on flexible cash farm lease agreements (a publication and spreadsheet on its Ag Decision Maker site at www.extension.iastate.edu/agdm/wholefarm/html/c2-21.html). Information and examples of flex leases are at www.extension.iastate.edu/polk/news/Flexible+Cash_Farm_Leases.htm.