Landlords and tenants face a high degree of uncertainty when negotiating lease provisions for 2021. Pandemic events surrounding COVID-19 depressed commodity prices for many commonly grown crops across Nebraska. Lower commodity prices create challenging financial circumstances related to crop budgets for the upcoming year.
To share in this risk, some lease agreements may consider moving from cash rent to crop share. This type of lease more equitability divides the risk and reward from raising a crop. However, some landlords might not find this type of lease arrangement appealing.
The use of a crop share lease requires the landlord to become an operator. Joint decisions might need to be made with the tenant related to selecting crop inputs or marketing grain. How involved the landlord becomes in this process depends on the agreement and professional relationship with the tenant.
And, the tenant may not have as much operating flexibility by moving to a crop share lease compared to paying cash rent. A crop share does, however, improve the equitability of a lease arrangement. Instead of changing lease arrangements, what might a landlord be willing to accept in cash rent instead of having to participate in a crop share?
Cash equivalent from crop share
To answer the question on what a landlord might being willing to accept or a tenant willing to offer for cash rent, the leasing concept "cash equivalent from crop share" provides the basis for establishing an equitable solution.
Under this method, the landlord could accept cash rent from the tenant equivalent to the anticipated return from participating in a crop share lease. Estimating the effective cash rent using this concept allows for a more equitable rate as crop yield, price or expenses can be adjusted in the analysis to reflect market conditions.
Reflecting market conditions for prices, actual crop yield and related crop input expenses better adjusts the effective cash rental rate to account for the true productivity and earning potential on a cropland parcel. Landlords do not have to price risk from accepting a cash equivalent from crop share, and tenants have the ability to make full production and marketing decisions.
Flexibility exists under this concept as different scenarios may be evaluated under different yield, price or input expense. For example, evaluating different crop prices while holding yield and input expenses the same produces a range of cash rents reflecting alternative scenarios.
Cash rental rates under varying price scenarios
To evaluate the basic principles of cash equivalent from crop share, Table 1 outlines three scenarios with varying price levels while holding yield and crop input expenses constant. Under this example the cornfield has an anticipated yield of 160 bushels with seed, fertilizer and chemical expenses of $310 per acre. As part of a 50-50 crop share agreement, the landlord and tenant would each receive half of the production (80 bushels per acre) and pay half of the major input expenses ($155 per acre).
Varying the corn price by $0.25 increments provides a range on cash rents from $105 to $145 with an average of $125 per acre. Varying corn prices by $0.25 per bushel above and below $3.50 per bushel leads to the range in cash rental rates of about $40 per acre. Sensitivity analysis in the scenarios also could vary yield, input expenses or crop type.
Landlords and tenants should actively negotiate these figures to determine the most equitable arrangement given expectations for these figures in 2021. Other expenses covered by the landlord, such as property taxes, and those by tenant, including machinery operations, were not factored into the analysis. Under a cash lease arrangement, the landlord would be responsible for covering property taxes, and the tenant would provide the machinery operations.
Programs administered by the USDA-Farm Service Agency, including ad hoc emergency assistance and federal farm income safety nets, were not accounted for in the scenarios. To participate in these programs, the USDA-FSA requires an operator (landlord and tenant in a crop share) bear production in the raising of crops. A landlord receiving rent estimated by using cash equivalent from crop share would not qualify for these programs as the tenant would bear all of the production risk during the growing season.
For more information, see the North Central Farm Management Extension Committee reports, Fixed and Flexible Cash Rental Arrangements for Your Farm (NCFMEC-01: aglease101.org/DocLib/docs/NCFMEC-01.pdf), and Cash Farm Lease (NCFMEC-01A: aglease101.org/DocLib/docs/NCFMEC-01.pdf).
To learn more, contact Jim Jansen at 402-261-7572 or email@example.com.
Jansen is a Nebraska Extension agricultural economist.