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Flexible Lease Details

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We have received a large number of inquiries for information on the potential use of flexible cash leases for the 2013 crop year. Flexible leases also work well for newer or younger farm operators who may not be able to afford the higher cash rental rates for farmland. A flexible lease makes it easier to use a crop revenue insurance policy, along with some forward pricing of grain, as risk management tool for farm operators. Most ag lenders are quite supportive of the use of flexible leases by farm operators as a risk-management tool. A flexible lease with a fair base rental rate allows landlords the security of a solid base rental rate, while having the opportunity to share in added profits when yields and crop prices exceed expectations. Flexible leases are a nice alternative for landlords who want to continue to work with long-standing farm operators with cash rental arrangements, without setting cash rental rates too high to keep the current tenants.

The biggest challenge with flexible cash rental leases is determining the base rent per acre, the maximum (and possible minimum) cash rent per acre and the method to determine the flexible rent payments. The best way to establish the base rental rate is to have a rental rate per acre that is agreeable to both the landlord and farm operator. Most land-grant universities, and some farm management associations, publish annual average land rental rates on a yearly basis, which could be used as a resource for arriving at an equitable “base” rental rate. It is important for farmers to have a maximum cash rental amount, in order to assist them with crop budgeting, grain marketing strategies and crop insurance decisions. Typically maximum annual rental rates are $100-150 above the base rate.

The base yield for a crop can be determined by either using the proven yield (APH) for federal crop insurance, which is updated annually, or some other acceptable method of yield determination. Actual yield calculation on the farm can be determined by warehouse receipts, settlement sheets, scale tickets, bin measurements, grain cart weigh wagons, yield monitors or any other method that is acceptable to both the landlord and farm operator. Many times, yield determination requires a certain degree of trust between the landlord and the farm operator.

In many cases, the base price for a crop is the new-crop price at the local grain elevator for that crop on a specified date (example: April 1 for corn and soybeans), and the final price is the price for that crop at the same local elevator on a specified date in the fall (Oct. 15). In some cases a weekly or monthly average price at the local grain elevator from planting to harvest is used to determine the final price. Another alternative that is easy to follow, is the use the Revenue Protection (RP) crop insurance base price for a crop as the base price for the flexible lease, and the RP harvest price as the final price, which are based on Chicago Board of Trade (CBOT) futures prices. Whatever method is used to determine both the base and final prices should be consistent, using either local cash prices, or RP prices from the CBOT. The details for determining prices and yields should be spelled out in a written land rental agreement that is signed by all parties.  

With the occurrence of much higher crop input costs in recent years, some flexible cash leases have been modified, and are now based on gross revenue triggers that exceed the cost of production, rather than on crop yield and price triggers. In this type of lease the landlord only receives additional cash rental payments beyond the base rent when the final gross revenue per acre (yield x price) exceeds the established cost of production for the year.

Typically, the added flex rent payment to the landlord would be a set percentage of the added gross revenue per acre above the established cost of production per acre – typically about 35% for corn and about 40% for soybeans – with a maximum rental rate per acre. Just as with crop yields and prices, determining the established cost of production for a crop for the year can be a challenge. Some possibilities would be to use cash flow statements for the year prepared by a farm management advisor, ag lender or the producer themselves. Again, many universities and farm management associations have average cost of production data available. There also probably needs to be allowances in a flexible lease to allow for added costs or expenses due to weather or emergencies.

There are many other variations to setting up a flexible lease agreement between a landlord and farm operator, including using a base crop revenue compared to a harvest crop revenue, without using cost of production, to determine flexible rental rates. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement. Successful flexible cash lease agreements have always involved cooperation, trust, and good communication between the farm operator and the landlord.

For additional information on flexible land rental leases, including sample lease contracts, send an e-mail to kent.thiesse@minnstarbank.com.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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