Iowa grower Jay Johnson recently sold a farm – but he didn’t quit farming it. Johnson raises about 2,000 acres of corn and soybeans with his brother Steve at Stratford, IA. In June 2010, Johnson bought a 72.5-acre farm, paying just over $6,100/acre.

Eight months later, in February 2011, as land prices soared to historic levels, Johnson sold the land to an investor with a leaseback provision tied to the sale.

This strategy let him realize a nice profit while continuing to farm productive ground with a corn yield potential of 180 bu./acre. He also freed up cash, which he used to tile another farm and buy a 40-acre land parcel closer to home.

The need for drainage improvements was the main motivation for the sale, he adds. After enduring three wet years in a row in central Iowa, “I decided I’d rather have the tile than own the extra acres. I traded quantity for quality.”

Johnson’s approach is one of the dynamics emerging in the Midwest’s sizzling land markets, says Sam Kain, regional sales manager for Farmers National Company. Since January 2011, land values in Iowa and other parts of the Corn Belt have jumped 20%. Many folks – Kain among them – “don’t believe it can continue at this rate.” That’s prompting “very strong interest in selling, to take advantage of these high prices now.” At the same time, he says, more growers are asking about sales with leaseback terms. “If they can get a good lease, they don’t have to have a million dollars invested in land.”

Other farmers “are taking advantage of these prices to do estate planning,” says Lee Vermeer, vice president of real-estate operations for Farmers National Company. A land sale with leaseback terms offers a way for farmers “to provide for their retirement, and divide the estate to the beneficiaries, while they continue to farm the same ground,” he says.

 

Johnson offered his 72.5 acres for salewith a leaseback condition, knowing he was probably sacrificing top dollar for the land. However, in these types of deals, Kain says, it may be “better to take a reasonable price for the land and then pay a reasonable rent.”

Johnson sold the land through private placement to an investor who agreed to a three-year variable cash-rent lease as a sale provision. The flexible lease stipulates a base rent, which is close to the Hamilton County average, plus a variable bonus of 50¢/acre for every penny increase in the price of corn above $4/bu. That’s for December corn futures on March 1 of each year.

The flex lease – which grew out of “coffee shop talk,” Johnson says – “is one I can make money at, even at $4 corn. Not a lot of money at $4,” he adds, “but enough that it was worth the risk.”

On March 1, Johnson paid the base rent plus the bonus, and the same day sold 12,000 bu. of corn for $6.08/bu., the federal crop-insurance guaranteed price. “All of the yield risk stays with me,” Johnson says. He hedged that risk with federal crop insurance. “Everything was set on March 1, so I know where I’m at. There’s no guessing.”