Good Reasons To Use Flexible Cash Farm Lease

With lower crop prices expected this fall and in 2014, tenants and landlords can benefit from sharing risk with a flexible cash farm lease.

Published on: Jul 12, 2013

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.

GET SET FOR LOWER PRICES: Corn and soybean prices are expected to decline this fall, the opposite of the harvest trend the past few years. Tenant operators see the potential risk of paying high fixed cash rental rates for 2014. Landlords want a reasonable cash rental rate. A properly structured flexible cash rent lease can help share risk and reward.
GET SET FOR LOWER PRICES: Corn and soybean prices are expected to decline this fall, the opposite of the harvest trend the past few years. Tenant operators see the potential risk of paying high fixed cash rental rates for 2014. Landlords want a reasonable cash rental rate. A properly structured flexible cash rent lease can help share risk and reward.

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.~~~PAGE_BREAK_HERE~~~

The use of a flexible cash farm lease will likely be fairer to both the landowner and tenant. However, the challenge is coming up with a base rent amount, maximum cash rent and a way to determine a flexible payment that both parties can understand and deem as being fair.

How to determine yield and prices when using a flexible cash rent lease

The lease agreement needs to establish how the farm's actual yield (dry weight for corn adjusted to 15% moisture) is determined. It might require grain bin measurements, scale tickets, settlement sheets, yield monitor data, grain cart scales or other verifiable methods.

You can simplify the yield information to be the same as the Actual Production History, or APH, provided annually for crop insurance purposes. A copy of the farm's actual proven yield for APH purposes can be provided to the landlord on or before December 1 in order to calculate the farm's potential flexible lease payment.

Averaging a series of harvest delivery bids at a local co-op or elevator is worth consideration for establishing the crop price on a flex lease. Such a price overcomes the potential low harvest price bias, and yet reflects the cash price for say an October delivery period. This is a price the tenant could have received during the year if they decided to forward contract a portion of their crop on that farm for fall delivery.

Average price for payment could be a harvest cash price bid, set by the local elevator

The average cash price for a flex lease payment could be the harvest bid set by a local elevator, perhaps four times during the year: mid-January, mid-April, mid-July or mid-October. Specific days of the month should be established. If you specify the 15th of the month, include in the lease that if the 15th falls on a weekend, then use the trading day closest to the 15th.~~~PAGE_BREAK_HERE~~~

If a larger number of pricing periods is desired, choose one day of the month to collect the harvest delivery bids. If both parties prefer to reflect a longer period of monthly averages, consider January through October. To avoid having to record this price every month, you might want to have the local grain merchandiser simply print out this average price at the conclusion of harvest. Also request that they sign and date this information so that both the tenant and landowner are comfortable with the source of this data.

You need to establish gross revenue parameters and base crop cost estimate triggers, for both corn and soybeans

How to determine the flexible lease triggers for both corn and soybean crops needs to be established in your rental agreement. If crop production costs appear to be too high or too low annually, then changes could be made to: base rent, maximum rent, and the flexible cash lease triggers that more accurately reflect cost of production. For 2014, consider not triggering the flex payment until the gross crop revenue exceeds the base crop cost estimate trigger for each crop.

ISU Extension publication FM-1712, "Estimated Costs of Crop Production" could be used to set an estimate for cost of production. This publication is printed annually and will be released next in early 2014. Those non-land costs in 2013, for conventional tillage and a medium yield, are $501 per acre for corn following soybeans in rotation, and $272 per acre for soybeans following corn.

Let's assume that the base rent used to determine the crop cost estimate will be the Iowa average cash rental rate of $270 per acre. Thus, for corn the base crop cost estimate (non-land plus land costs) is $771 for corn and $542 for soybeans.~~~PAGE_BREAK_HERE~~~

Once the base crop cost triggers are established, consider a flex payment of roughly 33% of the difference between the final gross crop revenue minus the base crop cost estimate.

* Corn example:  A farm produces a 168 bushel per acre actual dry weight corn yield and the average cash price during the year for harvest delivery is $5 per bushel (168 x $5 = $840 per acre). Subtract from this amount the base crop cost estimate of $771 per acre to get $69 per acre difference. The flex payment would thus be 33% of this amount, or an additional $23 per acre on all corn acres. This could be paid in addition to any unpaid portion of the base rent in early December since both the price and yield is known.

* Soybean example:  A farm produces a 48 bushel per acre actual soybean yield and the average cash price is $11 per bushel (48 x $11 = $528 per acre). The actual revenue falls below the base crop cost estimate of $548 per acre, so there would be no flex payment on soybean acres, in this example.

Websites with flexible cash farm lease information

Check out the following websites for assistance in helping you put together a workable, flexible cash farm lease for 2014.

* ISU Extension Flexible Farm Lease Arrangements publication and Decision Tool. You can find these on the ISU Ag Decision Maker site.

* ISU Polk County Farm Management Flexible Cash Farm Leases. Look for webcast, handout and examples. You can find them at the Polk County Extension website.