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Variable cash rent lease: Good for landowners, farmers

Legal Matters: Risks and profits are shared by both parties in this type of lease agreement.

May 8, 2020

3 Min Read
Farmer walking on road through crops
LEASE AGREEMENTS: In a variable cash rent lease, the farmer generally pays a fixed amount of rent per acre plus an additional amount that is calculated in accordance with some measure of productivity of the leased land, such as yield, price or a combination of both.John Fedele/Getty Images

In the past few years, the price per acre paid by farmers for leased cropland has not been favorable, as many landowners seem to only remember the days when milk and commodity prices were high, and farmers were competing to lease more land. Over the past four years, low milk and commodity prices have reduced cash flow and placed limitations on the amount many farmers are willing to pay to lease cropland.

Our firm has helped many farmers and landowners work together to resolve their competing interests through the negotiation of variable cash rent leases that are mutually beneficial to both parties.

Mutually beneficial lease

In a variable cash rent lease, the farmer generally pays a fixed or base amount of rent per acre plus an additional amount that is calculated in accordance with some measure of productivity of the leased cropland, such as crop yields, grain prices or a combination of both. Variable cash rent leases generally have the following advantages:

  • the actual rent paid adjusts automatically as crop yields and commodity markets and prices fluctuate

  • the lease may reflect a more equitable rental payment based upon the productivity of the leased cropland

  • risks and profit opportunities are shared by the farmer and the landowner

  • the farmer can retain decision-making authority regarding the leased cropland

For example, consider the following illustration: Farmer A leases 100 acres of cropland to plant corn at $200 per acre, for a total annual rent of $20,000. Farmer B leases the same 100 acres under the terms of a variable cash rent lease on the following terms:

  • base rent of $150 per acre

  • base yield of 168 bushels per acre

  • base price of $3.185 per bushel based upon May 1 prices

  • base rent is adjusted up or down based on actual yield and local cash price paid at the nearest elevator on the first trading day for each month during the lease year

At the end of the crop year, Farmer B’s actual yield from the leased cropland is 190 bushels per acre due to the high productivity of the land. The average local price per bushel for the crop year increased to $4. Farmer B will pay a total annual rent of $21,287.28 — ($150 x (190 bpa / 168 bpa) x ($4 / $3.1850)) = $212.87 x 100 acres.

Farmer B will pay $1,287.28 in additional rent for the leased cropland due to its exceptional productivity, because the leased cropland is worth more to Farmer B. Alternatively, had the leased cropland only yield 150 bushels per acre, Farmer B would have paid rent of $16,825, because the leased cropland is not worth as much to Farmer B.

Various structures for cash rent leases

This illustration is only one example of how a variable cash rent lease can be structured. Farmers and landowners can structure variable cash rent leases in any manner agreeable to both parties. However, it is important that the parties clearly define the method and procedure for calculating rent and determining crop yields. 

It is also important to note that for farmers receiving governmental program payments for the leased cropland, the variable cash lease should be structed so it includes a minimum base rent that will be paid to the landowner. This is necessary to meet the definition of a “cash lease” for Farm Service Agency purposes; otherwise, if FSA deems it not to be a cash lease, the landowner may be entitled to a share of crop payments received by the farmer in relation to the leased cropland.

Guidance published in the FSA handbook regarding this issue provides: “If a lease provides for a guaranteed amount and share of the crop or crop proceeds, such agreement will be considered a cash lease if the lease provides for both: (a) a guaranteed amount such as a fixed dollar amount or quantity; and (b) a share of the crop proceeds.”

Headshot of David Meyer

Meyer is an attorney in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.

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