The rapid rise in corn and soybean commodity prices in the past two years – and the resulting projected increase in gross crop income per acre for the 2008 and 2009 crop years – has caused many landlords to consider sharp increases in cash rental rates on rented farmland for 2009. Many 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 being implemented for the 2009 crop year and beyond.
In addition, crop input costs for seed, fertilizer, chemicals and fuel will also be considerably higher for 2009. As an alternative to the higher cash rental rates for 2009, some producers and landlords are considering a flexible cash rental leaserental agreement, which allows the final cash rental rate to vary as crop yields and market prices vary.
In 2007, the USDA and the Farm Service Agency (FSA) issued a rules interpretation that caused many flexible cash lease agreements to be regarded the same as a share rental agreement, rather than be considered a cash rental agreement. If FSA views a flexible cash lease agreement as a share lease, the landlord would be entitled to a portion of direct (DCP) and counter-cyclical payments (CCP), which is similar to a share rental agreement. The landlord will have to meet all FSA requirements to qualify for receiving DCP payments. In a typical cash rental lease, all DCPs and CCPs go directly to the producer, and not to the landlord. Following are the FSA definitions for a cash lease and a share lease:
Cash Lease – Provides a land rental payment for a guaranteed sum, certain cash payment or a fixed quantity (bushels or pounds) of a crop. There is no production or price risk to the landlord. For example: $180/acre cash rent or 20 bu. of soybeans/acre land rent.
Share Lease – This type of lease consists of one or a combination of the following: rent payment based on the percentage quantity produced (yield); rent payment based on crop proceeds (producer price or gross revenue); guaranteed cash rent rate plus a bonus, based on actual yield and/or price.
Here are example flexible lease agreements and the likely type of rental consideration by FSA:
- Cash rental contract states that base cash rent is $180/acre and producer will pay landlord an additional $30/acre if actual corn yield exceeds 175 bu./acre or soybean yield exceeds 50 bu./acre. Likely FSA determination: share lease (based on producer’s yield).
- Cash Rental contract states that base cash rent is $180/acre and producer will pay landlord an additional $30/acre if the monthly average corn price (April-October) at the local grain elevator exceeds $5.50/bu. or the monthly average soybean price exceeds $10/bu. Likely FSA determination: cash lease (based on external price).
- Cash Rental contract states that final cash rent is equal to 35% of the producer’s final gross value of the crop (yield x price).Corn example: 180 bu./acre x $4.50/bu. x .35 = $252/acre final rent. Likely FSA determination: share lease (based on producer’s data).
It should be noted that the “likely FSA determination” in the examples above were based on USDA rules and regulations as of Sept. 30, 2008, for DCP eligibility with flexible cash lease agreements. USDA is still reviewing the current flexible cash lease interpretations and rules, and there could be some changes or clarifications coming for the 2009 crop year related to flexible cash leases and DCPs. Watch for notices from county FSA offices for more details.
Before a producer enters into a flexible cash lease agreement with a landlord, it is probably a good idea to have the local county FSA director review the proposed rental agreement, regarding whether or not the lease would be considered a cash rent lease or a share rent lease. A producer should also find out what effects a flexible cash lease agreement would have on potential DCPs, and, if necessary, what the requirements would be for the landlord to qualify for a portion of the DCPs.
It’s better to check these things out in advance, rather than have them show up later in an FSA payment audit. The penalties for knowingly and willfully violating FSA rules is ineligibility for FSA programs, plus repayment of all past DCPs plus penalties. This would be a very difficult penalty for many farm operators to deal with.
Utilizing flexible cash leases agreements with landlords may still be a good management strategy for farm operators to consider as an alternative to extremely high straight cash rental rates. However, both the farm operator and the landlord must be aware that the FSA will likely view some types of flexible cash leases as share rental agreements.
This means that the landlord will be eligible for a portion of all potential DCPs on a given farm unit, including the new ACRE farm program payments in 2009-2012, provided that the landlord meets all FSA DCP eligibility requirements. Landlords who are eligible for social security also need to pay attention as to what effect the reception of farm program payments may have on the status of their future social security benefits. Successful flexible cash lease agreements have always involved good cooperation and communication between the farm operator and the landlord, and this will be extremely important when dealing with the FSA requirements for flexible cash leases.
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 firstname.lastname@example.org.