A farmer sent us this 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, an Iowa State University Extension farm management specialist, to answer that question. Following is Steve's answer.
I think you're looking for information on flexible cash leases for the farm. 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). 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.
Information available to help put together flexible leases that work
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.
NOTE: Steve Johnson has written quite a bit about flexible leases. In 2009 he posted his handout "Flexible Farm Leases That Work" and video to the ISU Extension Polk County Farm Management page at http://www.extension.iastate.edu/polk/news/Flexible+Cash+Farm+Leases.htm. 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.