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Would Flexible Lease Work For You?

Would Flexible Lease Work For You?
Craig Dobbins asks farm tour hosts about how they rent ground.

Craig Dobbins has worked with crop rental leases and budges for a long time in his years in the Purdue university ag economics department. So he was well qualified to lead discussion at the Del Unger farm on the farm management tour last week about working with landlords, and about different rent arrangements you can try with landlords. Already halfway through this season, it's not too early to consider thinking about how you will approach your landowners on the rent issue for the 2012 crop year.

Lance Unger is involved in this side of the family farming business. He graduated from Purdue just over a year ago. He told Dobbins during a discussion on the farm tour that while they cash rent some ground, they like to move landowners toward flexible rents when they can.

Howard Doster, retired from the Purdue ag economics department, has talked about flexible cash leases for years. What the Ungers do is a spin-off form that, tailored to their own needs and situation.

Basically, as explained by Lance Unger and Dobbins, they set a base rent. For sake of argument, say it's $100 per acre. Then they set a base yield. That might be 150 bushels per acre. Anything they harvest above the 150 bushels per acre are considered as bonus bushels. The landlord will receive extra payment from those bonus bushels.

One option is to offer the landowner a set amount, say $1, for every bonus bushel above 150 bushels per acre. Some landlords who don't mind taking a little risk like that option. There are still some who want no part of the risk, and are satisfied with the traditional, straight-out cash rent approach.

They still do some 50-50 share and two-thirds/one-thirds farms, but those involve more risk to the landowner. And in today's high input price environment, it may also mean that the landlord has to put out money, perhaps even borrow money, for his share of the inputs, long before he sees any income, just like the farmer does. So at least in their area, they're seeing more demand for either straight cash rent or a flexible lease.

The other flexible lease they use is to give the landlord one-third of the bonus bushels. Then they calculate a price for those bushels based on four set dates during the year. In this case, the landowner is taking both price and season production risk. Bonus checks are typically issued in mid-December.

They believe their approach gives landowners a chance to earn more if they're willing to take part of the risk. Taking risk to get reward is what Doster has preached when he was a professor, and now where he is an individual, private farm management coach and consultant.

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