By David Bau, Extension Educator, University of Minnesota
Farmland rental rates have increased dramatically the last few years as commodity prices have reached record levels and remained high compared to historic averages. But grain prices will go lower again, and rental rates often lag and do not decline as rapidly. This will leave farmers with high rental rates locked in, creating a loss for the year. A dry year producing lower yields will expand this loss; here the farmers bear all the risk. One way to share the risk and rewards with the landlord is to enter into a flexible land rental agreement. This will reduce the loss for the farmer and share more risk with the landlord.
In 2008, Iowa State Extension reported that nearly 12 percent of all cash leases were flexible. In Minnesota, less than 10 percent of leases are flexible. In a dry year, I encourage farmers and landlords to consider setting up a flexible agreement.
Flexible leases have several advantages:
- The actual rent paid adjusts automatically as yields and/or prices fluctuate as determined by the agreement.
- The yield and price risks are shared between the landlord and the tenant.
- Owners are paid in cash so they do not have to be involved in the crop management decisions.
- If the agreement includes base cash rent agreement with a bonus, FSA will consider the lease a cash rental agreement; therefore, all government payments would go to the tenant and not have to be divided.
- In a dry year with lower yields, the farmer will only be locked into paying a base rent, which is usually lower than the typical cash rent.
Base rents vary by area, but in Southern Minnesota the range could be from $100 to $250. Then a flexible component is added based on price, yields, gross revenue, or some combination of these components.
There are many ways to set up a flexible land rental agreement. The farmer and landlord should determine what both are looking for. The higher the base rent, the higher the farmer's risk. The lower the base rent, the higher the landlord's share of risk with no crop insurance to protect their revenue.
Here are some short definitions of different types of flexible rental agreements:
- Flexible rents based on gross revenue: This is a rental agreement where rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined.
- Base rents plus a bonus: This is a rental agreement where a base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal. Then these additional bushels would be shared between landlord and tenant. The bonus can also be determined by yield and price together or price alone as well.
- Flexible rent based on yield only: This is a rental agreement where the landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment. This can also be done with a cash payment based on yield and the price at an elevator.
- Flexible rent based on price only: This is a rental agreement where the rental payment is based on crop prices. Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the agreed-to bushels. Rental payments can be made at the quarterly price setting times, half and half, or after harvest.
- Profit sharing flexible rent agreements: This is a rental agreement where the landlord and the tenant share the profit from the farmland. This agreement is similar to a 50-50 crop share lease where they share crop yields 50 percent to landlord and 50 percent to the tenant and some of the expenses are paid by each party.
If a farmer and landlord can come to an agreement on a flexible lease agreement, they can share in both the risk and reward. The lower base payment will reduce the farmer's loss in a short crop and/or poor price year caused by the drought conditions. If timely rains are received and/or prices are good, a farmer and landlord can both share in the additional crop and additional revenue caused by higher prices.