Farmland is a long-term investment, and like all investments, it offers different levels of risk and reward — much of it based on lease type. Looking directly at cash rent and custom farming, which is the best for you?

Cash rent. Cash rental agreements offer the lowest risk for the landowner and the highest risk for the operator. The landowner’s rental income is established well before he or she receives it and is typically consistent from year to year, and they don’t have to manage much. Operators own 100% interest in the crop and bear all of the risk, but also can get high returns when yields and prices are high. And they can set grain marketing targets when they know their rental expense upfront.

Cash rent is the best option for a landowner who wants reliable income and an operator who’s willing to assume more risk. Cash rent arrangements keep the landowner involved with the farm but not in the day-to-day decisions.

Custom farming. In a custom arrangement, the roles are essentially reversed. The landowner holds 100% interest in the crop, and he or she has the opportunity for stronger returns. These returns will vary from year to year, and this lease does require startup capital as well as a much higher level of management from the landowner.

Farm operators can add additional income via custom farming and can often take on more acres with their current machinery. And, they don’t have to put up capital for crop inputs on additional acres.

In general, whoever has a higher interest in the crop will have a greater return.

If a landowner is willing to put up the capital and take on additional management, a custom operation can be the best opportunity. If the additional management is a landowner’s only concern, he or she can hire a professional farm management company. For the operator, custom farming offers additional income with minimal expenses.

Both options can offer profitable solutions to both the landowner and operator. Choosing the right lease type depends on your particular situation. This is a big decision; take time to decide which option is best.

Warmbir is a farm manager with Hertz Farm Management, Kankakee, Ill., and a member of the Illinois Society of Professional Farm Managers and Rural Appraisers. Email questions to [email protected].