Dakota Farmer

Options for cash rent

Bottom Line: Advantages and disadvantages of flex cash-rent agreements.

December 30, 2022

5 Min Read
Corn field aerial view showing plot marked
KEEP OPTIONS OPEN: Land rental rates are susceptible to price changes, so finding options that are agreeable to both tenants and landowners is crucial.RonFullHD/Getty images

In the world of agriculture, nothing seems to be immune to change. Crop prices, input costs and crop insurance policies are changing every year, creating several challenges and discussions between landowners and renters.

At times, it appears farmers need to have their heads on a swivel to deal with the constant variables in crop production. Land cash rental costs are no exception.

What works for one landlord may not work for the other, and this creates a layer of managerial duties for farmers. Sometimes, farmers have to work with a land manager, and anything is fair game during negotiations.

Equitable cash rents

Landowners and farmers have found it increasingly hard to agree on an equitable cash rent as crop prices and input costs have experienced a fair amount of volatility over the last several years. Farmers with full yield and profit information are often reluctant to share this information with the landowner for fear of rent escalation.

Landowners knowing there is significant value in “fringe benefits” that farmers provide the landowner in the cash rent negotiation process may be reluctant to recognize this value.

Each entity may want to stick to something simple. But if landowners and farmers want other options to consider, flex land rental contracts could be an option. Flexible leases are not for everyone, but they are a tool to consider as farmers manage the volatility in crop production and lease agreements.

Flex land rental contracts allow flexibility, but they require more communication between the landowner and farmer. They also require more management and recordkeeping. These flexible leases typically require sharing data from the farming operation and having a set of calculations performed at the end of the lease period.

Since most flex leases require some combination of yield and price, there needs to be verification mechanisms agreed to and written into the lease agreement.

The idea of flexing cash rent usually pertains only to the rent charged for cropland. Rents for buildings, other farmstead facilities, or comparatively minor acreages of pasture, hay and woodland should be on a fixed basis.

Both the landlord and tenant need to agree on the amount of “non-flexible” rent at the beginning of the lease period.

Pros and cons

A flexible cash-rent arrangement for cropland has specific advantages and disadvantages. Advantages of the arrangement include:

  1. A landlord can share in additional income from unexpected increases in crop prices or above-normal changes in yields.

  2. For tenants, risk is reduced. Cash-rent expenses are lower if crop prices or yields are less than normal.

Disadvantages of flexible cash rents include the following:

  1. For the landlord, flexible cash rent increases risk.

  2. Windfall profits that may be realized by the tenant from unexpected price increases are reduced.

  1. If cash rent is flexed according to yield, the landlord becomes more concerned with the level of crop yields as well as the accuracy of reported yields.

  2. If cash rent is flexed according to yield, the tenant may give up part of the benefits from achieving higher yields, which resulted from managerial input, thus reducing incentives to do the best possible job.

  3. Calculating flexible cash rent can be more difficult.

The most common type of flexible lease bases the final cash rent on an estimate of the actual gross revenue realized from the crop each year. In many cases, the rate is simply a percent of the price times the yield. Some agreements also include government payments in the gross revenue, and some specify a maximum or minimum rent.

Another common type of agreement fixes a base level of rent and then adds a bonus to it based on a percent of the gross revenue over a certain level. The base rent is often the minimum rent paid.

The base revenue may be equal to a long-run average value for gross revenue, or the amount of revenue the tenant needs in order to pay all nonland production costs plus the base rent.

Some flexible lease agreements base the final rent on price only, or the rent may be defined as a fixed number of bushels. With these agreements, the tenant bears all the yield risk. Crop insurance protection would be advisable in this type of lease.

Regardless of which type of flexible lease agreement is used, it is important to describe the procedure for determining the final rent in writing, with some examples to illustrate it. For farms enrolled in USDA commodity payment programs, the lease should be on file with the county Farm Service Agency. The terms of the lease may affect how some USDA commodity payments are shared.

Full agreement needed

No matter what type of rental agreement is enacted, ensure everyone completely agrees, and understands how the lease agreement works and each other’s goals.

As a tenant, being upfront will go a long way toward building a solid relationship with your landlord.

As a landlord, be involved with the process early. If not comfortable with a part of the lease, discuss it early so issues can be resolved. Building a solid relationship for both entities will be critical in a long-term relationship.

To learn more about farm succession planning and other financial questions about farms and ranches, visit with an instructor near you. The North Dakota Farm Management Education Program provides lifelong learning opportunities in economic and financial management for persons involved in the farming and ranching business.

Wilcox is a North Dakota Farm Management Education Program instructor at Lake Region State College. Visit ndfarmmanagement.com for more information, or contact Craig Kleven, state supervisor for agricultural education, at [email protected] or 701-328-3162.

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