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Farmer isn't sure if flexible lease is right answer

Farmer isn't sure if flexible lease is right answer
Profit Planners: Try adjusting flexible lease before giving up on the concept.

Suppose you convinced your major landowner to go with a flexible cash lease a few years back. It seemed like the right thing to do. He gets a bonus if prices and/or yields are higher. Over the past couple of years with high yields, thanks to bonuses, you’ve paid more than you think the land is worth. You’re wondering how you can persuade him to go back to a straight cash rent lease.

The Profit Planners panel sheds light on this dilemma. The panel includes David Erickson, farmer, Altona, Ill.; Mark Evans, Purdue University Extension educator, Greencastle; Steve Myers, farm manager, Busey Ag Resources, Leroy, Ill.; and Chris Parker, farm management specialist, Morgantown.

TIME TO ADJUST: If your flexible cash lease doesn’t seem equitable anymore, experts say it may need adjusting.

Erickson: I would guess that the flex lease is still workable, but the parameters used to establish the bonus or the base rent itself are what need adjusting. I encourage you to look at making changes in those two areas rather than changing the entire lease. You stand to lose personal credibility if you change the whole thing because you advocated for this type of lease in the beginning. It’s not uncommon to adjust yield and price standards based on current values to keep a flexible lease appropriately pertinent.

Evans: Switching back to no flex may not be the best approach to resolving the issue. Rather, it may be renegotiating the terms of the flex agreement. It seems the terms must be too highly centered on yields without price accommodations to balance yield consideration (prices are much lower now). Completely moving away from the flex lease with a major landowner could cost you trust in the long run, assuming you both agreed on the concept in the first place.

Meyer: To construct a lease that never requires some tweaks is nearly impossible. Don’t consider it a failure if the flex lease hasn’t worked out as well as you hoped so far; consider it an evolution of a business agreement that reflects current economic conditions. Yes, you can go back to a straight lease. But you might consider simply modifying the flex provisions of the current lease between the two of you. You don’t have to throw the concept out. Just modify the terms that trigger the "flex."

Parker: The only method I see is open communication explaining commodity price changes over the last few years and the eroding of farmland values. Perhaps this will help you both reach a compromise — possibly by altering the flexible terms of the contract. Farmland rents go up easily. Sliding them downward is a much more difficult action.

Summing up: The panelists are in agreement. None of them would throw the baby out with the bathwater. Instead of abandoning the flexible lease concept, determine how it could be adjusted to better reflect the balance between price changes and upside yield potential. Open communications with your landowner, and be ready to educate him or her on the changing market forces in agriculture today.

Farmer isn't sure if flexible lease is right answer
 

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