Interest rises in flexible leases
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 cash rent lease, which has a fixed amount of rent per acre.
How do you determine the base rent in a flexible cash lease? Steve Johnson, ISU Extension farm management specialist in central Iowa, provides the following observations and answers. He also suggests you get a copy of ISU’s just-released cost-of-production estimates for 2012 for corn and soybeans.
That information is available on ISU’s Ag Decision Maker site www.extension.
iastate.edu/agdm as file A1-20, “Estimated Costs of Crop Production in Iowa, 2012.” It’s also available from the ISU Online store as publication FM-1712.
• Flexible cash rent leases are an alternative to traditional cash rent leases.
• Tenants may worry about a landlord not lowering rent when crop prices decrease.
• A flex lease that includes a bonus may be of interest to the tenant and the landlord.
Should you try to set the base rent in a flex lease at a high level? Wallaces Farmer recently received that question from a landlord. “I suggest you use an average rent for getting your cropland rented in your county,” says Johnson. “What is fair is likely closer to an average versus the highest rent possible. Setting the base at a high level takes away the operator’s incentive to create a bonus associated with high yields on that farm and good cash prices for fall-delivery bids.”
If you are a tenant, a concern for the future would be any reluctance by the landlord to lower the base rent when corn heads below $5 per bushel and soybeans go below $10. “Selecting a reasonable base rent allows for very little change in this cash rent guarantee in the foreseeable future,” he notes, “but a bonus is paid in the good years, based on both yield and price.”
What are acceptable profit percentages for owner and 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 the average cash rent for corn to be close to 30% and soybeans at 40%,” says Johnson. “However, crop 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 operators prefer not to use their individual cost on the cash rent farm, the crop cost estimates from land-grant universities for that particular crop rotation and yield expectation could be used for the year the crop is produced.
“As a result, the bonus will not be triggered until all costs are covered,” he notes. Johnson advises using a percentage of 33% of the difference for both crops as a better calculation than 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,” he says.
Flexible cash rent leases tend to be multi-year arrangements. Flexible cash leases tend not to be terminated annually, but adjustments to the base rent or gross revenue triggers might be included in an addendum to the original cash lease. 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 lease should specify that the operator provide the landlord a copy of the crop insurance “proven yield” on the farm 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.
This article published in the January, 2012 edition of WALLACES FARMER.