Crop prices are expected to decline this fall, as the futures market already indicates. A trend to lower prices for the fall of 2013 would be the opposite of what happened the past few years at harvest. Looking ahead, tenant operators see the potential risk of paying high fixed cash rental rates for 2014, while many landowners recognize the need to create a reasonable cash rental rate.
As an alternative to using a straight cash rental agreement, a flexible cash rental arrangement can serve both parties well by sharing the risk and the reward.
Tenants paying high cash rent now carry most of the production and crop price risk
During the past few years, most of the production and crop price risks have been transferred to the tenant operator, says Steve Johnson, Iowa State University Extension farm management specialist in central Iowa. Since 2010, Iowa cash rental rates have increased by nearly 47%. The statewide average cash rent in 2013 is estimated at $270 per acre, with even higher amounts for more productive farmland.
However, much of the increase in cash rental rates was fueled by cash crop prices that averaged $5 to $7 per bushel for corn and $11 to $14 per bushel for soybeans over the past three years, notes Johnson. The USDA midpoint cash price for the 2013 crop is currently forecast at $4.80 per bushel for corn and $10.75 per bushel for soybeans, respectively.
Johnson offers the following reasons why tenants and landlords should consider a flexible cash rent lease for 2014.
Survey shows 16% of farmland cash rented in Iowa now uses flex leases
A 2012 survey of farmland owners in Iowa indicated 16% of the farmland that's cash rented uses some sort of flexible arrangements. Landowners who adopt a flexible cash farm lease typically receive a guaranteed base cash rent amount, in addition to a potential flex payment triggered by higher gross revenue (yields times price) that often subtracts the total cost estimate of producing the crop.