Focus on Ag

High Cash Rental Rates Increase Risk

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An alternative to the proposed high cash rental rates for 2013, or potentially even higher rental rates in the future, may be for producers and landlords to consider a flexible cash lease rental agreement, 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 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, or revenue per acre, are exceeded. The modified cash lease approach is probably acceptable if the base cash rental rates are within a reasonable range.

There are many variations to setting up a flexible lease agreement between a landlord and farm operator. 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 extremely important that all aspects of a flexible land rental lease agreement be spelled out in detail in a written rental contract, which is signed by all parties. Successful flexible cash lease agreements, as well as normal land rental agreements, have always involved cooperation, trust and good communication between the farm operator and the landlord.

For additional information on flexible land rental leases and sample land rental contracts, send an e-mail to Kent Thiesse at 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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