Flexible cash rent leases interest landowners who like to capture the upside in years with relatively high crop prices, yields or both. They may also be attractive to landowners reluctant to lower cash rents, particularly given the uncertainty with respect to crop prices in 2021 and beyond.
Switching from a fixed cash rent lease to a flexible cash rent lease allows a lower base rent to be established while simultaneously allowing landowners to share in relatively high crop revenues, if they occur. Given the potential for low net returns in the next few years, using a flexible cash lease rather than just dropping cash rent may be attractive to landowners.
Parameters to consider when developing a flexible cash rent lease include a base cash rent, crop revenue triggers and landowner shares above the revenue triggers. For the illustration here, let’s set base cash rent at 90% of current cash rent. The crop revenue triggers are computed by adding base cash rent to nonland costs. The landowner share above the triggers can vary, but let’s use 50%. A bonus is added to the base case rent if actual crop revenue is above the triggers.
Assume current cash rent is $240 per acre. Base cash rent will be set at $216, or 90% of current cash rent. This farm uses a corn-soybean rotation. Using cost budgets for corn and soybeans, crop revenue triggers are set at $800 per acre for corn and $590 for soybeans.
Let’s see how high crop yields or crop prices must be to trigger a bonus. The first scenario uses above-trend yields and expected prices while the second scenario uses trend yields and relatively high prices. Assume trend yields are 188 bushels per acre for corn and 57.5 bushels per acre for soybeans. Expected corn and soybean prices are $3.35 and $8.50 per bushel, respectively.
Under the first scenario, corn and soybean yields must be higher than 238.8 and 69.4 bushels per acre, respectively, to trigger a bonus payment. Using trend yields, under the second scenario, corn and soybean prices must be higher than $4.26 and $10.26 per bushel, respectively, to trigger a payment. Notice that if just one crop has a higher yield or price, a bonus would not necessarily be paid.
Let’s use another example to illustrate computing the bonus. Assume prices and yields are 15% higher than base yield and prices. So, corn and soybean yields are 216.2 and 66.1 bushels per acre, and corn and soybean prices are $3.85 and $9.78 per bushel.
Corn and soybean revenue are $833 and $646 per acre, respectively. For both corn and soybeans, actual crop revenue exceeds the trigger. Using trigger revenue amounts and a landowner share above the trigger of 50%, cash rent is $232.50 for corn: $216 base plus ($33 above trigger times 50%) and $244 for soybeans: $216 plus ($56 times 50%).
Average the two together. In this example, the landowner would receive $238.25 per acre in cash rent. Note that cash rent for the flexible cash lease is still lower than market cash rent, $240 per acre.
More information on cash rents and land values is available from the Purdue Center for Commercial Agriculture.
Langemeier is a Purdue University Extension agricultural economist and associate director of the Purdue Center for Commercial Agriculture.