How do you set a fixed cash rent for cropland for 2012 in the summer of 2011, as farmers face extreme price volatility and increasing costs of production? That's a common question Iowa State University Extension farm management specialists are receiving these days—from both landlords and tenants. One option to consider is using a flexible cash farm lease.
Steve Johnson, ISU Extension farm management specialist in central Iowa, has put together a webcast titled Flexible Cash Rent Leases That Work. He provides the following answers to some questions he recently received.
Question: I normally revisit my contract with my renter every August for the next year's crop. This year, my renter seems especially anxious to get a cropland rental contract in place for 2012 because of suppliers' increases in costs for the crop inputs he buys, and the worry that next year's crop prices are going to be dropping this fall. How early can he sell next year's crops?
Answer: I empathize with you because it is difficult to set a fixed cash rent for 2012 in the summer of 2011. Farm operators are facing extreme price volatility and likely increasing costs, especially fertilizer and fuel. Cash rent landlords feel as though they fixed 2011 cash rents too early last year and missed out on much higher rents that they could have negotiated last winter.
The corn futures market has contracts that trade all the way out to the 2014 crop, but many grain buyers only offer cash bids out to May 2012. Having spoken to many farm operators, as they are buying 2012 crop inputs, there is a tendency that they may be selling 2012 cash bushels to manage the profit margin available.
Question: What are your thoughts on operators selling the 2012 crop?
Answer: I'm a big proponent of farm operators managing their revenue risks by getting some 2012 corn sold now, considering the great uncertainty of 2011 crop size.
December 2012 corn futures have traded as high as $6.40 per bushel. I encourage farm operators who have secured farm ground for 2012 to sell 2012 corn as they negotiate 2012 leases and if they will apply fertilizer this fall. Since April of 2011, demand for corn has declined for both livestock and exports as a result of the higher corn prices forecast. By mid-June the mood of the U.S. Congress in Washington D.C. was starting to turn against ethanol, and eliminating ethanol subsidies beginning in 2012 is likely. This may mean a decrease in demand for the 2011 corn cash crop and lower cash prices in 2012.
Question: Sometimes I think August is even a little early for me to be thinking about a cash rent price for next year so now that it is only June, I'm not sure I want to negotiate a rent already. I realize our tenant likes to know ASAP so he can get input supplies in place but what is a fair equilibrium?
Answer: I have two suggestions.
1) Write an addendum to the existing fixed cash lease that states if the lease is terminated for the 2012 crop year, you agree to pay the operator for fall tillage work at the custom rates reported in the most recent Iowa Farm Custom Rate Survey, which is conducted annually by ISU Extension.
If fall-applied fertilizer is to be applied, you must approve of the purchase and the application costs. If the lease is terminated for 2012, you agree to pay the fertilizer cost and application fee. Set a goal of renegotiating the 2012 cash lease on or before, say February 1, when more is known about 2012 prices and costs.
2) Move to a flexible cash farm lease. This involves determining a base rent, maximum rent, percentage of gross revenue to share and gross base revenue. This base gross revenue is roughly the total cost of production for that farm. ISU Extension has done a great deal of work in this "flexible lease" area. Here's a link to our webcast recorded this month: http://www.extension.iastate.edu/polk/news/efarmmanagement.htm.
When you get to that page click on the word "Webcast" to view and listen to it. You'll also see the word "Handout." The handout can be printed off and it, like the video, also helps explain how flex leases work.
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.