Have you recently made a land lease agreement? Was it fair? Is it time to renegotiate? Situations change and can change quickly in farming. What seemed fair a few years ago might not be today. There is more than one way to come to a land lease agreement, and it depends on how the risk is shared.

“An efficient lease is achieved if it allows the farm to realize its total potential returns while protecting the interests of both parties. An equitable lease provides each party shared returns while protecting the interests of both parties. A written lease is highly desirable and can prevent problems in the future,” says Chuck Danehower, University of Tennessee Extension farm management specialist and Southeast Farm Press contributing writer.

Editor’s note: Ths article is part of the Southeast Farm Press “Managing the Margins: 2016” editorial series, which is specifically for Southeast farmers to help them make the best, most-informed decisions in order to manage the financial risks of farming in the Southeast.

“The two parties involved must select the lease type best suited to their situation. The landowner and producer must determine what contributions of labor, capital and management skill they are able and willing to provide and what production and price risks each party will bear. Making these determinations will give a general indication of the type of agreement which best fits. The determination of an appropriate crop-share or cash lease arrangement will have a significant influence on net-farm income and satisfaction of the two parties," Danehower says.

Establish a cash-rent rate

Cash lease has been popular for many years. Landowners like it because they have minimal responsibility. This type of lease also provides tenants maximum operating freedom. If the decision is made to use a cash rental arrangement, what is fair cash rent for the cropland? Prior to 2014, there was an increase per acre in cash rent leases as crop prices stayed in a historically higher range. Now that prices are lower and projected to remain lower, it may be time for a reevaluation of the lease, Danehower explains.

General knowledge of cash rents in the area is needed with adjustments made for differences in land productivity. The National Agricultural Statistic Service has cash rent data available at their Quick Stats website. In many areas it is broken down by county. This can be a good place to start when evaluating rents.

Have you considered a flexible land lease?

Flexible crop leases have been more in place in the Midwest, but within the last few years have seen increased interest in the Southeast and Mid-South.

“Farmers 20 years ago used what I would call an informal flexible lease. They had farmland leased on cash rent. If they had a really good year, they would increase the rent to the landowner. It was not called a flexible lease but the landowner knew if the year was above average, they would receive extra rent. Probably today’s flexible leases are a little more complicated than that, but is still the same concept,” Danehower explains in his article about flexible leases.

“Basically, there is a fixed-cash rent with a mechanism in place that can provide a bump in the rent if certain conditions are met, usually price and/or yield related. Some flexible lease agreements have a base rent which not only can be adjusted upward in good times but can be adjusted downward in a poor year,” he says.

There are many ways to adjust cash rent. The three most common are adjusting for changes in commodity price only, both commodity price and yields, and output price, yields and input costs. Along with these methods of adjustment, there are some leases that are a fixed cash lease or a percentage of the crop whichever is greater, he says.

What about crop-share leases?

What are we really talking about when we talk about a fair rent? We really mean a fair and equitable rent that is based on the equity contributions that both parties are willing to make in this rental arrangement. For a landowner who is interested in generating a higher rent than the going local cash rent and who is willing to take on some risks, a crop share lease should be explored, Danehower explains in his article about crop-share leases.

"Cash rent with essentially little risk should not generate more than an equitable crop share rent that has some production and price risk. A crop share lease also allows the producer or tenant to share in some of the risks with the landowner," Danehower says. "The most effective crop share lease will be structured to reward both parties in proportion to the value of contributions provided."

Danehower gives five important principles to follow in a crop share lease agreement: