Flexible Lease Agreements and DCP Payments

The rapid rise in corn and soybean commodity prices in the past year, and the resulting projected increase in gross crop income per acre for the 2007 crop year, has caused many landlords to consider sharp increases in cash rental rates on rented farm land for 2008. 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 2008 crop year. In addition, crop input costs for seed, fertilizer, chemicals and fuel are also expected to be considerably higher for 2008. As an alternative to the higher cash rental rates for 2008, 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.

Earlier in 2007, the USDA and Farm Service Agency (FSA) issued a rules interpretation that will likely cause 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 DCP direct and counter-cyclical payments (CCP), which is similar to a share rental agreement. The landlord would have to meet all FSA requirements to qualify for receiving DCP payments. In a typical cash rental lease, all DCP direct payments and CCPs go directly to the producer, and not to the landlord. USDA defines the difference between a cash lease rental agreement and a share lease rental agreement between a landlord and producer as follows: 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. Example – $130/acre cash rent or 20 bu. soybeans/acre land rent.

Share Lease – This type of lease consists of one or the 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 Flexible lease agreements and the likely type of rental consideration by FSA:
- Example 1 – Cash rental contract states that base cash rent is $150/acre, and producer will pay landlord an additional $25/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).

- Example 2 – Cash rental contract states that base cash rent is $150/acre, and producer will pay landlord an additional $25/acre, if the monthly average corn price (April–October) at the local grain elevator exceeds $3.50/bu., or the monthly average soybean price exceeds $8/bu.
Likely FSA determination – cash lease (based on external price).

- Example 3 – Cash rental contract states that final cash rent is equal to 40% of the producer’sfinal gross value of the crop (yield x price). Corn Example – 180 bu./acre x $3/bu. x .40 = $216/acre final rent.
Likely FSA determination – share lease (based on producer’s data).

Bottom Line
Before a producer enters into a flexible cash lease agreement, it is probably a good idea to discuss this agreement with the local county FSA director to see what effects this agreement would have on potential DCP payments, and if necessary, what the requirements would be for the landlord to qualify for a portion of the DCP payments. It is better to check these things out in advance than to have them show up later in an FSA payment audit and severe penalties.

Utilizing flexible cash lease agreements with landlords is probably still 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, meaning that the landlord will be eligible for a portion of all potential DCP payments on a given farm, provided that the landlord meets all FSA DCP payment eligibility requirements. 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.

National 4-H Week
Oct. 7-13 is National 4-H Week across the U.S. It is a time to recognize the significant contribution that the 4-H Youth Development Program has made to our youth and families in the nation, in our states and in our local communities. Through our schools, the Extension service and other educational units, we constantly hear of improved teaching tools to better equip and prepare our young people for adult life. As we analyze all the new and innovative ideas, many of which are quite sound and very excellent methods, we find that the 4-H Youth Development Program is one of the oldest and greatest teaching tools that we have to teach youth life skills. The 4-H program has been a big part of the lives of many families over the years!

Check with your local Extension service office for details on the 4-H Youth Development Program in your area.

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.