Read more articles from Kent Thiesse

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).