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Flexible Lease Agreements For 2014

Written by: Kent Thiesse

The strength in corn and soybean commodity prices in the past few years, and the resulting increases in gross crop income per acre, has caused many landlords to significantly increase cash rental rates in recent years. Many crop producers are now facing the prospects of much lower crop prices for the next few years, and fear that the gross income per acre in coming years may not be high enough to justify the higher cash rental rates that are currently being charged. In addition, crop input costs for seed, fertilizer, chemicals, fuel, and crop drying are not projected to decline much in 2014, as compared to the 2013 crop year, and in fact some expenses may even increase for 2014. An alternative to the proposed high cash rental rates for 2014 and beyond, may be for producers and landlords to consider a “flexible cash lease” rental agreement, which allows the final cash rental rate to vary as crop yields and market prices 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 market prices, or the gross revenue per acre, exceed established “base” figures. A “true” flexible cash lease would also allow for the “base” rent to be adjusted downward, if the actual crop yields and prices, or revenue per acre, fall below the established “base” figures. However, many flexible leases have been modified, and only “flex” upward with added rental payment to the landlords, if the “base” crop yield and prices, or revenue per acre, are exceeded. The modified “base rent plus a bonus” approach is acceptable if the “base” cash rental rates are kept within a reasonable range.

 

Flexible leases also work well for newer or younger farm operators that may not be able to afford the higher cash rental rates for farm land. A flexible lease makes it easier to use a crop revenue insurance policy, along with some forward pricing of grain, as risk management tool for farm operators. Most Ag Lenders are quite supportive of the use of flexible leases by farm operators, as a risk management tool. 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 yields and crop prices exceed expectations. Flexible leases are a nice 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.

 

The biggest challenge with flexible cash rental leases is determining the “base rent” per acre, the “maximum” (and possible “minimum”) cash rent per acre, and the method to determine the flexible rent payments. The “base rate” should be adjusted upward or downward annually, depending on the projected “break-evens” for crop production in 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. Most Land-Grant Universities, and some farm management associations, publish annual average land rental rates on a yearly basis, and also have crop budget projections for the coming year, which could be used as a resource for arriving at an equitable “base” rental rate. It is also important for producers to have a maximum cash rental amount, in order to assist them with crop budgeting, grain marketing strategies, and crop insurance decisions. Typically maximum annual rental rates in a flexible lease arrangement are $50.00-$125.00 above the base rate.

 

The “base yield” for a crop can be determined by either using the proven yield (APH) for Federal Crop Insurance, which is updated annually, or some other acceptable method of yield determination. Actual yield calculation on the farm can be determined 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.

 

In many cases, the “base price” for a crop is the “new crop” price at the local grain elevator or processing plant for that crop on a specified date (ex. - April 1 for corn and soybeans), and the final price is the price for that crop at the same location on a specified date in the Fall (ex. --- October 15). In some cases a weekly or monthly average price at the local level from planting to harvest is used to determine the final price. Another alternative that is easy to follow, is the use the Revenue Protection (RP) crop insurance base price for a crop as the “base price” for the flexible lease, and the RP harvest price as the final price, which are based on Chicago Board of Trade (CBOT) futures prices. Whatever method is used to determine both the “base” and final prices should be consistent, using either local cash prices, or RP prices from the CBOT. The details for determining prices and yields should be spelled out in a written land rental agreement that is signed by all parties.  

 

With the occurrence of much higher crop input costs in recent years, some flexible cash leases have been modified, and are now based on gross revenue triggers that exceed the cost of production, rather than on crop yield and price triggers. In this type of lease the landlord only receives additional cash rental payments beyond the “base rent” when the final gross revenue per acre (yield x price) exceeds the established cost of production for the year. Typically, the added “flex” rent payment to the landlord would be a set percentage of the added gross revenue per acre above the established cost of production per acre, which is typically about 35 percent for corn, and about 40 percent for soybeans, with a “maximum” rental rate per acre. Just as with crop yields and prices, determining the established cost of production for a crop for the year can be a challenge. Some possibilities would be to use cash flow statements for the year prepared by a farm management advisor, ag lender, or the producer themselves. Again many Universities and farm management associations have average cost of production data available. There also probably needs to be allowances in a flexible lease to allow for added costs or expenses due to weather or emergencies.

 

There are many other variations to setting up a flexible lease agreement between a landlord and farm operator, including using a base crop revenue compared to a harvest crop revenue, without using cost of production, to determine flexible rental rates (see below). 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  LEASE  EXAMPLES 

There are many examples and variations of “flexible cash rental” contracts and agreements. Following are simple examples of flexible cash rental lease calculations for corn and soybeans in the Upper Midwest :

 

  • Cash rental contract with a base cash rental rate (ex. = $250.00 per acre), plus the farm operator will pay the landlord and additional percentage (ex. = 35 % for corn and 40 % for soybeans) of the amount that the final crop revenue (ex. = final yield x Oct. 15 local price) exceeds the base crop revenue (ex. = Crop Ins. APH yield x April 1 new crop local price).

(Please see specific crop revenue flexible lease examples in the adjoining Tables.)

 

  • Cash rental contract with a base cash rental rate (ex. = $250.00 per acre), plus the producer will pay the landlord an additional amount (ex. = $25.00 per acre), if actual yield exceeds the APH crop insurance yield by 10 percent or more. (Corn ex. = APH of 190 bushels per acre, and final yield of 209 bushels per acre or higher.)                                   

 

  • Cash rental contract with a base cash rental rate (ex. = $250.00 per acre), plus the producer will pay the landlord an additional amount (ex. = $25.00 per acre), if harvest-time (ex. = October 15) local grain price exceeds the base (ex. = April 1 local grain price) by 10 percent or more. (Soybean ex. = $12.00 per bushel local price on April 1, and October 15 price of $13.20 per bushel or higher.)

 

  • Cash rental contract with a base cash rental rate (ex. = $250.00 per acre), plus the landlord will receive 35 percent of the excess bushels for corn yields that exceed 190 bushels per acre (APH), and 40 percent of the excess bushels for soybean yields that exceed 50 bushels per acre (APH). The Landlord would be responsible to market their share of the excess bushels. Final corn yield of 210 bushels per acre would result in landlord receiving 7 bushels of corn (20 bu. x .35).                      

     

  • Cash rental contract with a base cash rental rate (ex. = $250.00 per acre), and the producer will pay the landlord an additional 35 percent of the difference between final gross crop revenue and the base crop revenue for a Revenue Protection (RP) crop insurance policy.

              Soybean Example --- Base Revenue    =  $600.00/acre (50 bu./acre x $12.00/bu.)

                                                 Final Revenue    =  $715.00/acre (55 bu./acre x $13.00/bu.)

                                                 Final Cash Rent  =  $290.25 per acre

     ($715.00/acre - $600.00/acre = $115.00/acre x .35 = $40.25/acre + $250.00/acre = $290.25/acre)

 

  • Cash rental contract with a base cash rental rate (ex. = $250.00 per acre), with no additional  provisions; however, the producer decides to give the landlord an additional $25.00-$100.00 per acre land rent because of excellent crop yields, and/or very  good commodity prices.

 

 

FLEXIBLE  LEASE  RESOURCES

Iowa State University has some very good resources on flexible cash leases and written cash rental lease contracts, 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 flexible land rental leases, forward an e-mail to : kent.thiesse@minnstarbank.com

 

BOTTOM  LINE

Utilizing “flexible cash leases 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, if the tighter crop margins that are projected become reality in the next few years. It is extremely important that all aspects of a flexible land rental lease agreement, including base rent, yield, and price determination, be spelled out in detail in a written rental contract, which is signed by all parties. Successful “flexible cash lease agreements” have always involved cooperation, trust, and good communication between the farm operator and the landlord.

 

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Note --- For additional information contact Kent Thiesse, Farm Management Analyst and

              Vice President, MinnStar Bank, Lake Crystal, MN. (Phone --- (507) 381-7960) ; 

            E-mail --- kent.thiesse@minnstarbank.com)  Web Site --- http://www.minnstarbank.com/

*********************************************************************************************************

 

 

CROP  REVENUE  FLEXIBLE  LEASE  EXAMPLES  FOR  CORN

 

Following are simple examples of flexible cash rental lease calculations, based on projected and

final crop revenues, for corn in Southern Minnesota :

 

Corn Example :

Base Rent                    =   $250.00 per acre

Base Corn Yield          =  190 bushels per acre (Crop Insurance APH Yield) 

Minimum Crop Yield  =  142.5 bushels per acre (Crop Insurance APH Yield x .75)

Base Crop Price           =  $4.00 per bushel  (Local new crop corn price on April 1.)

Base Revenue              =  $760.00 per acre  (Base Yield x Base Crop Price)

Landlord’s Share         =  .35  (35 % of the difference between Final Crop Revenue and Base Revenue.)

Maximum Rent            =   $350.00 per acre  (Base Rent plus $100.00 per acre)

 

Final Scenario #1 :

Actual Corn Yield              =  210 bushels per acre

Final Crop Price                 =  $5.00 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $1,050.00 per acre

Flexible Revenue Amount =  $290.00 per acre  ($1,050.00 - $760.00)

Landlord’s Share                =  $101.50  ($290.00 x .35) 

Final Cash Rental Rent    =  $350.00/Acre  ($250.00/Acre + $101.50/Acre exceeds max. rent )   

 

Final Scenario #2 :

Actual Corn Yield              =  215 bushels per acre

Final Crop Price                 =  $3.50 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $752.50 per acre

Flexible Revenue Amount =  $ 0  (Final crop revenue is lower than Base Revenue of $760.00)

Landlord’s Share                =  N/A 

Final Cash Rental Rent   =  $250.00/Acre  (Base cash rental rate is final.)  

 

Final Scenario #3 :

Actual Corn Yield              =  165 bushels per acre

Final Crop Price                 =  $6.00 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $990.00 per acre

Flexible Revenue Amount =  $230.00  ($990.00 - $760.00)

Landlord’s Share               =  $80.50  ($230.00 x .35) 

Final Cash Rental Rent   =  $330.50/Acre  ($250.00  +  $80.50)

 

Final Scenario #4 :

Actual Corn Yield              =  190 bushels per acre

Final Crop Price                 =  $4.50 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $855.00 per acre

Flexible Revenue Amount =  $95.00  ($855.00 - $760.00)

Landlord’s Share               =  $33.25  ($95.00 x .35) 

Final Cash Rental Rent   =  $283.25/Acre  ($250.00  +  $33.25)

 

 

CROP  REVENUE  FLEXIBLE  LEASE  EXAMPLES  FOR  SOYBEANS

 

Following are simple examples of flexible cash rental lease calculations, based on projected

and final crop revenues, for soybeans in Southern Minnesota :

 

Soybean Example :

Base Rent                    =  $250.00 per acre

Base Soybean Yield    =   50 bushels per acre (Crop Insurance APH Yield)

Minimum Crop Yield  =  37.5 bushels per acre (Crop Insurance APH Yield x .75)

Base Crop Price           =  $12.00 per bushel  (Local new crop soybean price on April 1.)

Base Revenue              =  $600.00 per acre

Landlord’s Share         =  .40 (40 % of the difference between Final Crop Revenue and Base Revenue)

Maximum Rent           =   $350.00 per acre  (Base Rent plus $100.00 per acre)

 

Final Scenario #1 :

Actual Soybean Yield        =  62 bushels per acre

Final Crop Price                 =  $14.00 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $868.00 per acre

Flexible Revenue Amount =  $268.00 per acre  ($868.00 - $600.00)

Landlord’s Share                =  $107.20  ($268.00 x .40) 

Final Cash Rental Rent    =  $350.00/Acre  ($250.00/Acre + $107.20/Acre exceeds max. rent )  

 

Final Scenario #2 :

Actual Soybean Yield        =  35.0 bushels per acre (Use minimum of 37.5 bu. /acre)

Final Crop Price                 =  $15.00 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $562.50 per acre

Flexible Revenue Amount =  $ 0  (Final crop revenue is lower than base revenue of $600.00)

Landlord’s Share                =  N/A 

Final Cash Rental Rent    =  $250.00/Acre  (Base cash rental rate is final.)  

 

Final Scenario #3 :

Actual Soybean Yield        =  45 bushels per acre

Final Crop Price                 =  $15.00 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $675.00 per acre

Flexible Revenue Amount =  $75.00 per acre  ($675.00  -  $600.00)

Landlord’s Share                =  $30.00 per acre  ($75.00 x .40) 

Final Cash Rental Rent    =  $280.00/Acre  ($250.00  +  $30.00)

 

Final Scenario #3 :

Actual Soybean Yield        =  55 bushels per acre

Final Crop Price                 =  $14.00 per bushel  (Local cash price on Oct. 15.)

Final Crop Revenue           =  $770.00 per acre

Flexible Revenue Amount =  $170.00 per acre  ($770.00  -  $600.00)

Landlord’s Share                =  $68.00 per acre  ($170.00 x .40) 

Final Cash Rental Rent    =  $318.00/Acre  ($250.00  +  $68.00)

 

*** Table developed by Kent Thiesse, Farm Management Analyst ***