FLEXIBLE LEASE AGREEMENTS OFFER AN ALTERNATIVE

Arriving at equitable land rental rates been has always been a challenge for farm operators and landlords alike and will likely continue to be difficult for the 2024 growing season. Many times, land rental rates for a coming crop year are based on the profitability in crop production in the previous year or two before. In some cases, this can present profitability challenges for farm operators, if grain prices drop or if there are yield challenges. On the other hand, there can be extra profit for farm operators in years with above average yields and higher levels of crop prices. Many landlords gradually increased cash rental rates in many areas of the Midwest from 2020 to 2023, in response to improved crop production profit levels. As we head into 2024, crop prices have declined significantly with much tighter projected profit margins for corn and soybean production.

An alternative to flat cash rental rates that may be difficult to “cash flow” would be for producers and landlords to consider using a “flexible cash lease” rental agreement, which allows the final cash rental rate to vary as crop prices and/or yields vary, or as gross revenue per acre exceeds established targets. The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on the situation, and how the flexible lease is set up. A “true” flexible cash lease allows for the landlord to receive additional land rental payments above a “base” land rental rate, if the actual crop yields and/or market prices, or the gross revenue per acre, exceed established “base” figures. It would also allow for the “base” rent to be adjusted downward, if the actual crop yields and prices per acre, fall below the established “base” figures.

Most flexible leases have been modified in recent years into a “bonus rent” agreement. This type of flexible lease uses a reasonable “base rental rate” that can “flex” upward with an added rental payment to the landlord, if the “base” crop yield and/or base crop prices, or the base crop revenue per acre, are exceeded; however, the final rental rate does not drop below the base rental rate. There are many variations to setting up a flexible lease agreement between a landlord and farm operator, including using yield only, price only, a base crop revenue compared to a harvest crop revenue, and many more. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement.

Flexible leases can work well for newer or younger farm operators that may not be able to afford the higher cash rental rates for farmland. A flexible lease makes it easier for producers to utilize risk management tools such as crop revenue insurance policies and forward pricing of grain. A flexible lease, with a fair base rental rate, allows landlords the security of a solid base rental rate, while having the opportunity to share in added profits when crop prices and/or yields exceed expectations. Flexible leases provide an alternative for landlords that want to continue to work with long-standing farm operators, without setting cash rental rates too high to keep the current tenants.

Utilizing “flexible cash lease agreements” between farm operators and landlords can be a good management strategy as an alternative to extremely high straight cash rental rates; however, these agreements need to be fair and equitable to all parties. Landlords also need to be willing to adjust the “base” cash rental rates lower as necessary, if crop margins become quite tight, such as occurred from 2015-2019 and could possibly occur again in the coming years. It is extremely important that all aspects of a flexible land rental lease agreement be detailed in a written rental contract that is signed by all parties. The agreement should include the base rent, yield and price determination, as well as other provisions of a flex lease. Successful “flexible cash lease agreements”, just as any other long-term cash rental agreement, have always involved cooperation, trust, and good communication between the farm operator and the landlord.

 

“Base Rent” Determination

One of the biggest challenges with flexible cash rental leases is determining the “base rent” per acre, which in most instances is the minimum rental rate for the year on a land parcel. The “base rate” should be adjusted upward or downward annually, depending on changes in crop price expectations, average crop yields, or the projected “break-evens” for crop production for the coming year. The best way to establish the “base” rental rate is to have a rental rate per acre that is agreeable to both the landlord and farm operator, with an established method of calculation. There are several ways to approach the determination of a “base rental rate”, including utilizing average land rental rates for a given area from land grant universities or the USDA National Ag Statistics Service (NASS). Several universities and NASS publish annual updates on land rental rates in many areas.

A good flexible lease will detail method and calculations that will be used to determine any potential added (bonus) flexible rental payments. In addition to a base (minimum) rental rate, many flexible leases also contain a “maximum” cash rent per acre. Typically, maximum annual rental rates in a flexible lease arrangement are set an established rate above the base rental rate (ex- $50 to $100 per acre)a. In most cases, any added or bonus rental payments are paid with the final rental payment for the year.

 

Determining Yields, Prices, and Revenues for Flexible Leases

Many flexible cash leases require a “base yield” of some type. The easiest method to get a base yield is to use the crop insurance APH yield on a given land parcel, which is updated annually. Actual yield calculation on the farm for a given year can be also be determined by the verified crop insurance yield for the year, or by warehouse receipts, settlement sheets, scale tickets, bin measurements, grain cart weigh wagons, yield monitors, or any other method that is acceptable to both the landlord and farm operator. Many times, yield determination requires a certain degree of “trust level” between the landlord and the farm operator.

The crop “base price” for a flexible lease could be the projected harvest (October) price at the local grain elevator or processing plant for that crop on a specified date prior to planting (ex.– March 1 or April 1) for corn and soybeans. The final price that crop would be the price at the same local location on a specified date in the Fall (ex.- October 15 or November 1). In some cases, weekly or monthly average price at the local level from planting to harvest is used to determine the final price. Another alternative is to use the Spring crop insurance price (finalized on March 1) as the base price and the Fall harvest crop insurance price (finalized on Nov. 1) as the final price to determine flexible rental rates. Whatever method is used to determine the “base” and final prices, it should be consistent, using either crop insurance or the same grain elevator or processing plant as a source.

 

Resources for Land Rental Agreements and Flexible Leases

There are many variations when setting up a flexible lease agreement between a landlord and farm operator, including using yield only, price only, revenue based, and many more. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement. Iowa State University has some very good resources on flexible cash leases, including sample cash rental contracts, which are available on their “Ag Decision Maker” web site, which is located at: http://www.extension.iastate.edu/agdm/.

 

For additional information on cash rental arrangements or for assistance with setting up flexible cash leases and with negotiating land rental contracts, contact Kent Thiesse, Farm Management Analyst, by phone at: (507) 381-7960 or by email at: kentthiesse@gmail.com

Note — For additional information contact Kent Thiesse, Farm Management Analyst, Green Solutions

Phone — (507) 381-7960; E-mail — kentthiesse@gmail.com