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.”