Ohio State University Extension Factsheet

Ohio State University Fact Sheet

Agr., Env., and Devel. Economics

2120 Fyffe Road, Columbus, Ohio 43210


Flexible-Cash Rents for Farmland

FR-0002-01

Robert D. Fleming,
District Specialist, Farm Management, Northwest District

Donald J. Breece,
District Specialist, Farm Management, Southwest District

Farmers face many business risks relating to production, prices, technological change, legal and social issues, and human resources. A tenant can share production and price risks with the landlord through a crop-share lease. This enables the landlord to share in higher or lower-than-expected yields and/or prices. However, the typical crop-share lease also requires the landlord to share the cost of fertilizer, seed, and chemicals and pay to have his share of the crop harvested. Income from such a share lease is usually considered as self-employment income for the landlord, which some landlords would prefer to avoid. A subsequent fact sheet in this series will address farm-rental tax issues.

In contrast, a flexible-cash lease will allow landowners to share some of these risks without becoming subject to self-employment taxes. And, like a fixed-cash lease, the tenant doesn't have to keep track of the landowner's share of expenses. Nor does the landowner have to make grain marketing decisions.

Flexible-cash rent usually pertains only to cropland, with fixed rents for buildings, farmstead facilities, and relatively minor acreages of pasture, hay, or woodland. Both parties need to agree on the amount of these "non-flexible" rents prior to start of the lease period. In addition, the flexible-cash rent keeps the landowner eligible for potential "windfall profits" should they happen.

Some disadvantages include the requirement of more records and a written lease agreement compared to a possible fixed-cash rent. In addition, the tenant should expect less income over time because he is transferring more of the risk to the landowner.

An Ohio 1999 research project revealed that at least 8 percent of cash leases had some flexibility provisions. A 1996 Ohio study revealed few flexible cash leases.

Types of Flexible Rents

There are a number of ways to create a flexible-cash rent arrangement including adjustments for crop price only, yield only, or based on both price and yield changes.

Flexing Rents for Price

At least four methods can be used to flex for price only:

  1. Price ratio
  2. Fixed quantity of commodity
  3. Base rent with adjustments
  4. Base rent with upward adjustments

Let's consider each method individually:

  1. The price ratio method requires that a base rent be established then multiplied by a ratio of current price to base price. An example would be a base rent of $80/acre, expected base price of $2.50:

    $80 x Current Price ($2.00) = $64.00
      Base Price ($2.50)  

    The current price would be determined at harvest time based on a multi-week average.

  2. A simple way of flexing for price is to set rent at a fixed number of bushels per acre. The rent could then be paid, either in the actual commodity with the landowner doing his own marketing, or in cash with the tenant using an average price over several weeks at harvest. The range could be 20-33 percent of expected yield with higher rates on more productive ground.
  3. A third method is to agree on a base rent with adjustments for prices outside a specified range. For example, a base rent of $80/per acre could be changed by $5 per acre for each 10 change in corn price outside a range of $1.80-$2.20. If the corn price was $2.75, the tenant would add $27.50 to the $80 base rent.
  4. A base rent with upward adjustments would set a minimum rent that could not be lowered, but could be increased based on an increase in crop prices.

Flexing for Both Price and Yield

Four methods could also be used to flex for both price and yield. The first method here is to agree upon a fixed share of the yield as rent, regardless of the actual production. The lease might say 25 percent of the crop, paid either in the actual commodity or cash using the actual prices during the harvest period.

Leases that set rents only on either price or yield may actually increase a tenant's risk in some years. Adjustments for a combination of price and yield will more closely reflect net income at the crop.

A second way is to use the ratio method by using a formula of:

Base Rent x Current Price x Actual Yield
  Base Price Base Yield

An example for soybeans might be:

$80 x $5.50 x 45 = $82.50 per acre
  $6.00 40

The base price is the expected harvest time price, while the base yield is a multi-year average.

A third method would be to agree upon a stated percent of the crop value, again calculated at harvest time. In the soybean example, 30 percent of $5.50 x 45 bushels = $74.25.

Table 1 shows the average cash rent paid in Iowa over 10 years as a percent of gross income each year, including government payments. Ohio does not have comparable data.

Table 1. Rent as percent of gross income


Year Corn Soybeans
1989 33% 38%
1990 33% 38%
1991 35% 42%
1992 33% 38%
1993 48% 49%
1994 32% 36%
1995 29% 36%
1996 31% 35%
1997 33% 36%
1998 42% 44%
Average 35% 39%

Source: William Edwards, Iowa State University

The final method is to set a minimum base rent plus a share of any increased value of the crop over a base expected gross receipt. Again, using a soybean example, the rent could be the base plus 30 percent of any crop value over $240/per acre.

Determining Yield

It is important to agree ahead of time on the procedure for determining the factors that will be used to calculate the final rent. These factors should be based on information that is available to both parties. Actual yields can be determined by:

When crops stored on the farm are ultimately sold, any variation from the estimated yield can be used to adjust the rent for the following year. Estimated yields should be corrected to a standard moisture level, for example, 15.5 percent moisture for no. 2 yellow corn.

Government Payments

Because the purpose of a flexible lease is to adjust the amount of rent to reflect the income received from crops each year, payments received from participation in government programs should also be considered. If rent is to be calculated as a percentage of gross income, then gross income can include both crop sales and government program payments received or expected. For leases that include selling price in the rent calculation, income received from a loan deficiency payment or through an F.S.A. marketing loan can simply be included by using the local loan rate as the actual market price.

Actual Flexible-Cash Rent Leases

A 1999 survey in Iowa revealed these actual agreements being used:

Flexible Rent Based on Both Price and Yield

The most common type of flexible lease bases the final cash rent on some combination of actual yields and actual prices. In many cases, the rate is simply a percentage of the price times the yield (gross revenue). Some agreements also include government payments in the gross revenue, and some specify a maximum and/or minimum rent. Below are examples:

Flexible Rent Based on Yield Only

Some flexible-lease agreements specify a base or minimum rent per acre plus a bonus based on the actual yields harvested. Below are examples:

Flexible Rent Based on Price Only

A few flexible-rent agreements base the final rent on price only. Alternatively, the rent may be defined as a fixed number of bushels. With these agreements, the tenant bears all of the yield risk. Crop insurance protection would be advisable in this type of lease. Below are some examples:

Source: Edwards, Ag Decision Maker, Iowa State University (1999).

Summary

Once you have selected a potential type of flexible-cash rent, test it using a number of price and yield possibilities. Consider both a minimum and a maximum rent plus some type of crop insurance to control the risk. Under a flexible lease, a split payment may be used, the variable portion becomes the final payment with an advance fixed payment. Iowa examples may not fit Ohio conditions.

Flexible rents almost always require the agreement to be in writing. Details need to be agreed upon prior to the start of the lease term and be reviewed by an attorney for accuracy and completeness. Be sure to describe it in writing (with an example) and include it with the written lease. The following worksheet (developed by William Edwards, Iowa State) can help you start the negotiation process. Sample lease forms are available from your local OSU Extension office.

References

NCR75, NCR 76 - Fixed & Flexible Cash Rental Arrangements for Your Farm, Lease Form

Web-site: www.extension.umn.edu

Web-site: www.ag.ohio-state.edu

Edwards, William, Flexible Farm Lease Arrangements, FM-1724, June 1999, Iowa State University

This series of fact sheets is produced under the Acker Professional Improvement Program, Department of Agricultural, Environmental, & Development Economics, The Ohio State University. Reviewed by Lynn Forster and Lee Ann Moss of the Department of Agricultural, Environmental, & Development Economics, The Ohio State University.

Flexible-Lease Agreement Worksheet

Basic Information: Corn Soybeans
Expected yield–bushels per acre _______ bu. ________ bu.
Expected price–$ per bushel $_______ $_______
Base rental rate–$ per acre $_______ $_______
Expected U.S.D.A. payments–$ per acre $_______ $_______
 
Type of Agreement (check one): Corn Soybeans
1. _____ Share of Gross Income
Percent of gross income to equal rent
(base rent divided by price x yield plus govt. payment)
_______% ________%
2. _____ Yield Adjustment Only
Fixed price per bushel of actual yield
$_______ $_______
Or, minimum yield, _______ bu. _______ bu.
And fixed price for each bushel over minimum $_______ $_______
3. _____ Price Adjustment Only
Fixed bushels to pay on
_______ bu. _______ bu.
4. _____ Base Rent plus Bonus
Base rent
$_______ $_______
Minimum gross income or tenant's costs $_______ $_______
Percent of gross income over the minimum added to
rent.
$_______ $_______

Explanations:

  1. How will the price be determined (types 1, 3, and 4)? _______________________________________________

    ________________________________________________________________________________________

  2. How will the yield be determined (types 1, 2, and 4)? _______________________________________________

    ________________________________________________________________________________________

  3. How will the tenant's costs be determined (type 4)? _________________________________________________

    ________________________________________________________________________________________

  4. What U.S.D.A. farm payments will be included (types 1 and 4)? _______________________________________

    ________________________________________________________________________________________

  5. Will crop insurance payments be included (types 1 and 4)? ___________________________________________

    ________________________________________________________________________________________

  6. Will there be a minimum rent? A maximum rent? ____________________________________________________

    ________________________________________________________________________________________

Source: William Edwards, Iowa State University

This series of fact sheets is produced under the Acker Professional Improvement Program, Department of Agricultural, Environmental, & Development Economics, The Ohio State University. Reviewed by Lynn Forster and Lee Ann Moss of the Department of Agricultural, Environmental, & Development Economics, The Ohio State University.

Click HERE for the pdf version of this fact sheet.


All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.

Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.

TDD No. 800-589-8292 (Ohio only) or 614-292-6181



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