FSA RULE CHANGE SPURS INTEREST IN FLEXIBLE LEASES

Flexible cash rent leases are still uncommon, but a USDA rule change is likely to encourage wider use.

In Iowa, flexible leases make up only about 12% of all cash farm leases, says Ann Johanns, Iowa State University Extension program specialist. But interest in flex leases is up sharply, she says, and farm management experts are fielding more questions about them. That's partly because of a recent change in FSA rules, says Kent Thiesse, vice-president of MinnStar Bank in Lake Crystal, MN. Rental agreements that provide for a guaranteed base plus a bonus are now considered cash rent leases, rather than crop-share leases.

This means USDA farm program payments no longer have to be shared between the farmer and the landlord — a provision that had stifled innovation, Thiesse says. The rule change “has opened the door to creative flexible lease agreements.”

A CAUTIONARY NOTE ON CERTAIN FLEXIBLE LEASES

Flexible cash rent leases that adjust the rent based on yield alone or price alone can increase the farm operator's risk in some years, cautions Jim Jensen, Iowa State University Extension farm management field specialist.

This could happen with leases that flex for price only, in years when prices are high but yields are low; or with leases that flex for yield only, when yields are high but prices are low, he says. Growers with these types of flex leases should use additional risk-management tools, such as crop revenue insurance, Jensen says.

Baxter, IA, farmers Curt and Brock Hansen have a flexible lease with one of their eight landlords. This lease, which Curt first negotiated during the 1980s farm crisis, flexes for crop prices only. The landowner receives a payment based on a fixed number of bushels per acre. The bushel value is set by averaging crop prices for six pre-set dates over a six-month period.

The rent isn't due until December — a cash flow advantage for the Hansens and evidence of their long, trusting relationship with the landowner. The terms set a minimum and maximum rent, which “protects us both” by keeping rent within a desirable range, Curt Hansen says.

As with a fixed cash rent lease, though, the Hansens bear all the yield risk. To offset that risk, Curt says, “I hedge with crop insurance and I forward market.”