Flexible cash leases appeal to landowners interested in capturing the upside in years with relatively high crop prices, big 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 2023 and beyond. Switching from a fixed cash rent lease to a flexible cash rent lease allows for a lower base rent while simultaneously allowing landowners to share in relatively high crop revenues, if they occur.

Parameters to consider for a flexible cash rent lease include base cash rent, crop revenue triggers and landowner shares above the revenue trigger. For this illustration, parties set base cash rent at 90% of current cash rent. Crop revenue triggers are computed by adding base cash rent to nonland costs. The landowner share above the crop revenue trigger can vary. Here, it’s 50%. A bonus is added to base cash rent if actual crop revenue is above the triggers.

Simple example

Here’s how a flexible cash rent lease works. Assume current cash rent is $250 per acre. Base cash rent will be $225, or 90% of current cash rent. The farm uses a corn-soybean rotation. Using cost budgets for corn and soybeans, crop revenue triggers are $943 for corn and $677 for soybeans.

How high must yields or prices go to trigger a bonus? The first scenario uses above-trend yields and expected prices. The second scenario uses trend yields and relatively high prices. For this example, trend yields are 190 bushels per acre for corn and 58 bushels per acre for soybeans. Expected corn and soybean prices are $4.90 and $12.80 per bushel, respectively.

Under the first scenario, corn and soybean yields would need to be higher than 192.4 and 52.9 bushels per acre, respectively, to trigger a bonus payment. Using trend yields, under the second scenario, corn and soybean prices would need to be higher than $4.96 and $11.67 per bushel, respectively, to trigger a bonus payment.

In both scenarios, it is easier to trigger a payment for soybeans than corn. If just one crop has a higher yield or price, a bonus would not necessarily be paid. Also, a bonus of $25 per acre would be needed to obtain the same total rent as in a fixed cash rent lease.

Figuring bonus amount

Assume actual prices and yields are 10% higher than base yield and prices. Corn and soybean yields become 209 bushels and 63.8 bushels, respectively; and corn and soybean prices are $5.39 and $14.08, respectively. Using these assumptions, corn and soybean revenue are $1,127 and $898 per acre, respectively.

For both corn and soybeans, actual crop revenue exceeds the trigger. Using our trigger revenue amounts and a landowner share above the trigger of 50% results in a cash rent of $326.20. That’s base cash rent of $225 plus the average bonus payment for corn and soybeans. For corn, the bonus is: [($1,127 - $943) x 0.5]. For soybeans, it is: [($898 - $677) x 0.5].

The flexible cash rent payment at $326.20 is considerably higher than fixed cash rent of $250. This scenario illustrates how bonus payments are computed. Assessing if it’s likely that both prices and yields would be up 10% is another matter.

For more information on cash rents and land values, visit the Center for Commercial Agriculture website.

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