Use Of Variable Cash Rent Leases Is Increasing

Use Of Variable Cash Rent Leases Is Increasing

Grain market price volatility is driving demand for variable cash rents in Iowa and southern Minnesota.

The use of variable cash rent leases, sometimes called flex-leases, for cropland is increasing as a result of current corn and soybean market price volatility. Farmland owners in Iowa and Southern Minnesota are struggling to determine fair yet profitable cash rent levels for their operations as they move into 2014.

FLEX-LEASES GAINING POPULARITY: The use of variable cash rent leases, also known as flex-leases, for cropland is at an all-time high thanks to the current price volatility in commodity markets. Farmland owners in Iowa/Southern Minnesota are increasing their use of these leases, say farm management specialists.

Variable rate cash rents, which provide market performance flexibility, have become more prevalent due to fluctuations, according to Jim Farrell, president of Farmers National Company, the largest farm management and farm real estate company in the country. The deadline to terminate current leases in Iowa is September 1. Thus, leases in Iowa and Minnesota will be negotiated and signed over the next several months.

Local farm management specialists from Farmers National Company estimate 50% of farmland cash rent agreements in Iowa/Southern Minnesota now use variable leases. Many local farm operators and landowners are finding this option provides the best scenario for achieving results for each party.

Challenging for landowners to determine what is "fair rent" for cropland for 2014

What is a "fair" rental rate for landowners to charge tenants for cropland in 2014? It's difficult for most landowners to determine fair rent levels within the currently volatile corn and soybean market. Crop pricing conditions have changed so rapidly over the last couple of years that many landowners now find themselves 20% to 40% below the market on current lease terms for cropland. They have no real idea what the crop lease terms should be for 2014 and beyond, says Farrell.~~~PAGE_BREAK_HERE~~~

Traditional cash rent agreements do not respond well to a volatile market, says Farrell. As a result, more landowners and farm operators are opting for the flexible agreements that adjust and respond to upswings or downturns in crop production profitability.

In contrast to last year, the market is anticipating a possible decline in crop prices for the fall, which could be a game-changer. "Farm operators want to have some remediation for high cash rents in the event of a crop failure or dropping commodity prices," says Farrell. "Like no other time in recent farm history, variable rate cash rents have now become very popular. They allow the farm operator and the landowner to arrive at a base rent, and factor in a 'plus rent arrangement' if things go very well during the crop year."

Flexible cash rent leases can be written so landlord and tenant share both the risk and the reward

A variable cash rent lease is composed of a guaranteed base amount, along with a potential flex payment addition prompted by higher gross revenue.

"Flexible leases are of benefit to both the landowner and farm operator as they provide the ability to adjust and react to the market," points out Larry Hill, area vice president for Farmers National Company. "A flexible lease provides a fair platform that benefits both sides -- the landlord and the tenant, thus making the most of any volatility. The other very important benefit of using a 'cash plus' lease is that it also takes some of the timing of signing a cash rent lease out of the equation. Any additional cash rent above the negotiated market rent will be determined by yield and price next fall. You do not need to try and out-guess when the ideal time is to sign a lease."~~~PAGE_BREAK_HERE~~~

Landowners often rely on the farm operator to help determine a fair rent and even what type of rental arrangement to use, says Farrell. Landowners now have a wider range of choices to consider when they formulate how to best manage their income-producing asset -- the farmland.

Different types of flexible cash rent leases are available -- also known as 'cash rent plus' leases; there are standard 'crop-share' leases you can use, too

In addition to a standard variable cash rent lease, there are also several variations including cash rent plus and share-crop leases. Landowners have more options to consider and analyze to maximize the return on investment for themselves and the farm operator. According to Farrell, for landowners considering a change in lease terms, it's important to terminate any current lease in writing prior to the state deadline.

"Reviewing a lease has never been more important, especially with the income that farms can generate today," says Farrell. "Landowners we work with are asking us for advice on the optimum lease option to use for their situations. We're also getting questions asked about trends in cash rent levels, to use to help determine a fair number. Landlords want to know what is fair for land in their area, as well as the impact land values might have."

Farmers National Company, an employee-owned company, is the nation's leading ag real estate and farm and ranch management company. The company has sold over 3,500 farms and more than $2 billion of real estate during the last five years. Farmers National Company currently manages more than 4,700 farms comprising over 1.5 million acres in 24 states. Additional services provided by the company include auctions, appraisals, insurance, consultation services, oil and gas management, lake management and a national hunting lease program. For information on land listings in your region visit the Farmers National Company online.

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