We've looked at the scenario facing many of you this fall. Crop prices are low. Yields may only be mediocre. Yet landowners are not anxious to drop cash rents, and understandably so. The option we discussed was developing a flexible cash lease.
The scenario described in Wednesday's item played out to a cash rent of $195 per acre using average yields and low crop prices possible this fall. In this example the current cash rent would have been $280 per acre.
What would happen to both you and the landlord if you put a flexible cash lease in place now and prices improve over the next year or so? Here is a scenario showing that side of the equation.
Remember, parameters that need to be considered when developing a flexible cash rent lease include a base cash rent, crop revenue triggers and landowner shares above the revenue trigger. For the illustration below, we will set base cash rent at 70% of current cash rent. Non-land costs can be used along with the base cash rent to set the crop revenue triggers. The landowner share above the revenue trigger can vary, but for illustrative purposes we will use 50%.
Suppose the current cash rent is $280 per acre. We'll assume that the farm utilizes a corn/soybean rotation. Using cost budgets for corn and soybeans, revenue triggers are set at $750 per acre for corn and $550 per acre for soybeans.
Assume corn and soybean yields are 200 and 60 bushels per acre, respectively. Corn and soybean prices are $4.50 and $10.85 per bushel, respectively. Using these assumptions corn and soybean revenue are $900 and $651 per acre, respectively. For both corn and soybeans, revenue exceeds the trigger.
Using our trigger revenue amounts and a landowner share above the trigger of 50%, it results in a cash rent of $270 per acre for corn ($195 + ($150 x 50%)) and $246 per acre for soybeans ($195 + ($101 x 50%)). On average under this scenario, the landowner would receive $258 per acre in cash rent.
More information on cash rents and land values can be found on the web site for the Center for Commercial Agriculture.
Langemeier is assistant director of Purdue's Center for Commercial Agriculture