Flexible Lease Agreements Offer Alternatives

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  • Flexible cash rental lease is potentially fairer to both the landlord and the farm operator
  • Best way to establish base rental rate is to have a rental rate per acre that is agreeable to both landlord and farm operator
  • Flexible lease agreements, as well as all land rental contracts, should be finalized with a written agreement

 

The rapid rise in corn and soybean commodity prices in the past few months – and the resulting projected increase in gross crop income per acre – has caused many landlords to consider significant increases in cash rental rates on rented farmland for 2011. This comes after substantial increases in many rental rates from 2008-2010. Many crop producers are concerned that the favorable crop prices may not last long term, and that the gross income per acre in future years may not be high enough to justify the higher cash rental rates that are being proposed for the 2011, or potential future rental rate increases. In addition, crop input costs for seed, fertilizer, chemicals, fuel and crop drying are likely to be higher in 2011, as compared to the 2010 crop year. An alternative to the proposed high cash rental rates for 2011, or potentially even higher rental rates in the future, may be for producers and landlords to consider a flexible cash leaseagreement, which allows the final cash rental rate to vary as crop yields and market prices vary, or as gross revenue per acre exceeds established targets.

The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on the situation and how the flexible lease is set up. A true flexible cash lease allows for the landlord to receive additional land rental payments for a crop year above a base land rental rate, if the actual crop yields and market prices – or the gross revenue per acre – exceed established base figures. A true flexible cash lease would also allow for the base rent to be adjusted downward, if the actual crop yields and prices – or revenue per acre – fall below the established base figures. However, many flexible leases have been modified, and only flex upward with added rental payment to the landlords if the base crop yield and prices are exceeded. The modified cash lease approach is probably acceptable if the base cash rental rates are within a reasonable range.

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