A farmer sent us the following question:
QUESTION: My ag lender mentioned a type of cash lease for cropland which uses a "formula" by which the lease payments are based on a projected total revenue for the farm for that year. Can you explain how we could set that up for our farming operation?
Wallaces Farmer asked Steve Johnson, Iowa State University Extension farm management specialist in central Iowa, to answer this question. Following is Steve's explanation.
ANSWER: What you are looking for is information on flexible cash leases for the farm. With higher grain prices and land values, more landlords and lenders are suggesting tenants look into using a flexible cash lease for cropland instead of a straight cash rent lease. Here's how to get started and some things to consider for putting together a flexible cash rent lease.
Cash rents in Iowa represent about 30% of the value of corn and 40% of the value of soybeans in recent years. If you're not sure about the crop rotation, I suggest using 33% of the total crop revenue (excluding the direct payment from the USDA farm program). You need to negotiate a base price guarantee, with a fixed first half payment of about one-half the base. The second half cash lease won't be known until after harvest, so I suggest an early December payment.
How do you establish the crop price in a flexible lease?
Use the final dry weight yield for that crop on that farm times a cash price. Some people like to use the Posted County Price (which you can find on the FSA website or at your local FSA office) at harvest for, say, a 30-day period in October. I think a forward cash price average at the local elevator for four different periods of time during the calendar year is more fair.
Example: local cash price for new crop delivered in October (Jan 15, April 15, July 15 and Oct. 15). Have the elevator calculate that number after October 15 and print out a copy. Multiply this price times the final yield and adjust the second-half cash rent by roughly 33% of the value of the crop.
Again, the landlord has a guarantee and might collect more in the second half payment if the farm has good yields and if local cash prices for the new crop remain high.
New Extension video "Flexible Cash Farm Leases That Work"
NOTE: Steve Johnson has written quite a bit about flexible leases over the past several years. His latest handout and webcast "Flexible Cash Farm Leases That Work" is posted on the ISU Extension Polk County Farm Management page online. You can access it by clicking on this link:
Web Casts and Training Materials
(Posted on 6/7/2011)
Flexible Cash Farm Leases that Work
Also, consider using the publication and Excel spreadsheet from the ISU Ag Decision Maker web page on "Leasing" at http://www.extension.iastate.edu/agdm/wholefarm/html/c2-21.html.
For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.