Flexible Farmland Rental Agreements Shares Risk Between Landlord And Farmer

By David Bau

The vast majority of farmland rental agreements are cash rental agreements where landlord receives a cash amount in spring or half payment in spring and fall or payment in fall.  With cash rental agreements, the landlord knows how much income they will receive and the farmer has the risk to grow a crop sufficient to generate enough income to cover input costs, the rental payment and hopefully have some left for profit. Current 2015 forward contract prices available are $3.50 for corn and $9.00 for soybeans, and that poses a problem for farmers with breakeven prices about $4.50 per bushel for corn and $9.00 for soybeans to cover the cost of production.  With a cash rental agreement, the farmer bears all the risk of prices not reaching the breakeven prices during the year, this is when a flexible rental agreement would work better.

With a flexible agreement landlords can still have a minimum rental payment in spring and then have an additional payment in the fall if criteria of the lease agreement are met.  I completed over 46 talks this fall and winter on rents and outlook for 2015 and used $3.50 corn price and $10.00 soybean price and average input costs to determine farmer profits and farmland rental rates.  I used yields of 180 bushels per acre and 50 bushels for soybeans. I used a cash rental rate of $250 per acre and the farmer would receive $60 per acre for their labor. Using these prices, farmers would lose $304 per acre for corn and $101 per acre on soybeans before government payments.  There will probably be some farm payments on the 2015 crops, using 460 per acre on corn and $30 per acre for soybeans the loss would still be $244 for corn and $71 per acre for soybeans. These numbers would suggest the base rent should be less than $250 based on current 2015 commodity prices.

Most Flexible Rental Agreements have a base rent component that assures the landlord this income and will allow the tenants to cover expenses even after a bad year with good crop insurance coverage.  Base rents vary by area but for Southern Minnesota the range for base rents could be from $100 to $200.  Then a flexible component is added, either based on price, yields, gross revenue or some combination of these components.  There are many ways to set up a flexible land rental agreement.  The farmer and landlord should determine what both are looking for.  The higher the base rent the more risk the farmer has, the lower the base rent the landlord is increasing their share of the risk with no crop insurance to protect their revenue.

Here are some short definitions of different types of flexible rental agreements:

• Flexible Rents based on gross revenue: Rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined.   Prices can be set once a year, twice, three, four or more times and then averaged.
• Base rents plus a bonus: A base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal.  Then these additional bushels would be shared between landlord and tenant.  The bonus can also be determined by yield and price together or price alone.
• Flexible rent based on yield only: The landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment.  This can also be done with a cash payment based on yield and then price at an elevator or averaging multiple pricing dates.
• Flexible rent based on price only: The rental payment is based on crop prices.  Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the bushels agreed to.  Rental payments can be made at the quarterly price setting times or half and half or after harvest.
• Profit sharing flexible rent agreements: The landlord and the tenant share the profit from the farmland.  This agreement is similar to a 50-50 crop share lease where they share crop yields 50% to landlord and 50% to the tenant and some of the expenses are paid by each party.

Flexible rental agreements can be a good way to share yield and price risks between the landlord and the farmer.  If prices and yields are low, the landlord receives only the base payment, but if yields and or prices improve the landlord will receive a higher payment in fall sharing the extra income with the farmer.

Source:umn.edu