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Corn+Soybean Digest

Flexible Lease Agreements Offer Alternative

The rapid rise in corn and soybean commodity prices in the past few years, and the resulting projected increase in gross crop income per acre, has caused many landlords to increase cash rental rates on rented farmland in 2008 and 2009. In some areas, there has been discussion of further cash rental rate increases for the 2010 crop year. Many producers are concerned that the favorable crop prices may not last long term, and that the gross income per acre in future years may not be high enough to justify the higher cash rental rates that were implemented for the 2009 crop year, or potential future rental rate increases.

In addition, crop input costs for seed, fertilizer, chemicals, fuel and crop drying will were considerably higher for 2009, and while there may be some modification in expenses for the 2010 crop year, total crop expenses are only expected to drop slightly. An alternative to the high cash rental rates of 2009, or potentially even higher rental rates for 2010, may be for producers and landlords to consider a flexible cash lease, which allows the final cash rental rate to vary as crop yields and market prices vary or as gross revenue per acre exceeds established targets.

The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on the situation and how the flexible lease is set up. A true flexible cash lease allows for the landlord to receive additional land rental payments for a crop year above a base land rental rate if the actual crop yields and market prices – or the gross revenue per acre – exceed established base figures. A true flexible cash lease would also allow for the base rent to be adjusted downward if the actual crop yields and prices – or revenue per acre – fall below the established base figures. However, many flexible leases have been modified, and only flex upward with added rental payment to the landlords if the base crop yield and prices – or revenue per acre – are exceeded. The modified cash lease approach is probably acceptable if the base cash rental rates are within a reasonable range.

The biggest challenge with flexible cash rental leases is determining the base rent per acre, the maximum (and possible minimum) cash rent per acre and the method to determine the flexible rent payments. The best way to establish the base rental rate is to have a rental rate per acre that is agreeable to both the landlord and farm operator. Most land-grant universities and some farm management associations publish annual average land rental rates on a yearly basis, which could be used as a resource for arriving at an equitable base rental rate. It is important for producers to have a maximum cash rental amount, in order to assist them with crop budgeting, grain marketing strategies and crop insurance decisions. Typically maximum rental rates are $50-$75 above the base rate.

The base yield for a crop can be determined by either using the proven yield for federal crop insurance, which is updated annually, or some other acceptable method of yield determination.

Actual yield calculation on the farm can be determined by warehouse receipts, settlement sheets, scale tickets, bin measurements, grain cart weigh wagons, yield monitors or any other method that is acceptable to both the landlord and farm operator. In many cases, the base price for a crop is the new-crop price at the local grain elevator for that crop on a specified date (e.g., April 1 for corn and soybeans), and the final price is the price for that crop at the same local elevator on a specified date in the fall (e.g., Oct. 15). In some cases a weekly or monthly average price at the local grain elevator from planting to harvest is used to determine the final price. Another alternative that is easy to follow, is the use the RA/CRC crop insurance base price for a crop as the base price for the flexible lease, and the RA/CRC harvest price as the final price. Whatever method is used to determine both the base and final prices and yields, it should be spelled out in detail in a written land rental agreement that is signed by all parties.

With the occurrence of much higher crop input costs in recent years, some flexible cash leases have been modified, and are now based on gross revenue triggers that exceed the cost of production, rather than on crop yield and price triggers. In this type of lease the landlord only receives additional cash rental payments beyond the base rent when the final gross revenue per acre (yield x price) exceeds the established cost of production for the year.

Typically, the added flex rent payment to the landlord would be 35-40% of the added gross revenue per acre above the established cost of production for a given crop, up to the established maximum rental rate. Just as with crop yields and prices, determining the established cost of production for a crop for the year can be a challenge. Some possibilities would be to use cash flow statements for the year prepared by a farm management advisor, ag lender or the producer themselves. Again many universities and farm management associations have average cost of production data available. There also probably needs to be allowances in a flexible lease to allow for added costs or expenses due to weather or emergencies, such as the added corn drying costs in 2009.

FSA Farm Programs and Flexible Leases
Most flexible cash leases for land rental contracts are now considered cash leases by FSA for farm program payment determination during the 2009-2012 crop years, according to revised regulations in the current farm bill. The revised regulations state that any rental contract with a guarantee plus a bonus will be considered a cash lease, regardless of how that bonus is set-up or structured. Previously, FSA considered any flexible cash lease that was based on actual farm yields, prices or revenues to be a share rent lease, which meant that eligible landlords had to receive a portion of all farm program payments, provided that they met FSA eligibility criteria. Farm operators and landlords should contact their county FSA office for further clarifications and details on FSA requirements for flexible cash leases.

Flexible Lease Resources
It is very important to have a written land rental lease between the landlord and farm operator for flexible cash rental leases that specifies all details for both base and final yield, price and revenue determination, as well as for specifics on cost of production details, if that method is used for flexible leases. Iowa State University has some very good resources available on flexible cash leases and written cash rental lease contracts on their Ag Decision Maker Web site.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at [email protected].

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