A farmer and landowner need to decide whether to use a cash lease, crop share lease or flexible cash lease. The objective of every lease should be providing a fair and equitable return to both parties for inputs they contribute to the farm operation.

A fair and equitable arrangement exists when both parties are paid for use of their inputs according to the contribution those inputs make toward generating income. This article compares cash leases to crop share leases.

The advantages of a cash lease for a landlord include simplicity, known and steady rental income, and low capital requirements. From a tenant’s perspective, a cash lease allows more managerial freedom and more certainty in budgeted costs.

Disadvantages of a cash lease may involve the temptation by the tenant to maximize short-run profits at the expense of long-run productivity, reluctance by the landlord to make improvements, and the tendency for cash rents to be inflexible and slow to change.

Risk sharing varies considerably between cash and crop share leases. With a cash lease, price and production risk are borne by the tenant. With a crop share lease, price and production risk are borne by both tenant and owner. A crop share lease also involves sharing of at least some expenses and requires expertise for the landlord to market his or her share of the crop.

For crop share leases, variable expenses that increase yield, like fertilizer, should be shared in the same proportion as the crop. As new technologies or management practices like no-till or cover crops are adapted, share arrangements need to be adjusted to reflect their impact on costs and returns.

Closer look at net returns

Recent analysis compares net returns to land from a landlord’s perspective associated with a cash lease and a crop share lease using data from 1996 to 2019. For the crop share lease examined, the landlord received 50% of all revenue, and in addition to providing land, paid 50% of seed, fertilizer and chemicals, plus 50% of crop insurance premiums.

Landlord net return to land for the crop share lease was considerably more variable. It increased faster when revenue was increasing from 2007 to 2013, but also decreased more rapidly when revenue was declining from 2014 to 2019. The average net return to land over the 1996-to-2019 period for the landlord was similar for the two leasing arrangements.

However, since 2014, the net return for the crop share lease has been considerably below the cash lease. Whether a landlord with a crop share is interested in switching to a cash lease depends on his or her ability to bear risk and expectations regarding future net return prospects.

If a landlord is very concerned about variability in net returns, cash leases will be attractive. If risk isn’t a large concern and they expect future net return prospects to be better than those from 2014 to 2019, crop share leases will be more attractive.

Communication, regardless of leasing arrangement, is extremely important. It’s prudent for a tenant to provide updates of crop conditions throughout the year and make sure leasing terms are understood by both parties. Even though oral leases are common, they’re not recommended. It’s too easy for memories to fail, causing avoidable disagreements.

Langemeier is a Purdue University Extension agricultural economist and associate director of the Purdue Center for Commercial Agriculture.