Donald J. Breece
District Specialist, Farm Management
Southwest District, Ohio State University Extension
D. Lynn Forster
Professor, Agribusiness Management
Ohio State University
The traditional crop-share lease is meant to reflect how income, expenses, and risk are shared between the tenant farmer and the landlord. The sharing levels are determined by each party's contributions to the business. As agricultural technology and production practices change over time, shared leases should be reviewed by both parties to see that income continues to be distributed according to contributions.
Most share leases are based upon customary methods of sharing production and expenses in a community. More than 75% of share leases in Ohio are 50-50. About 15% of tenant farmers receive from 60% to 75% of income/production in a 2/3-1/3 type arrangement. A smaller number keep more than 75% of income. As a general rule, tenants receive a greater share of the value of crop production on poorer-quality soils and a lesser share on better soils.
Shared leases have stood the test of time, largely by all parties observing several basic principles.
Examples of variable expenses include seed, fertilizer, and crop-protection chemicals. Sharing costs, in the same percentage as income, encourages each party to use the amount of input that will maximize long-run net returns.
A new input cost may be a substitute for prior costs of either tenant or landlord. For example, custom application of herbicides replaces normal tenant costs for machinery, labor, and fuel. In general, substitution items should be paid for by the party who would have paid for the item being replaced.
If an input is income increasing and a substitute, then the lease should be reviewed to determine the impact. Changes like improved drainage, no-till, and variable rate technologies (VRT), to name a few, have potential advantages and costs for each party. Sometimes, the change is hard to measure. What is the value of no-till production for soil conservation or for the additional management expertise required for using advanced technologies?
If a tenant contributes one-half of all resources, including management and risk bearing, the tenant should receive one-half the crop. This assumes an equal contribution of resources.
The tenant's machinery, fuel, and labor costs for tillage, planting , and harvest will not change drastically between an acre of ground capable of 100 bushels of corn and an acre with 150 bushels potential. But the total value of all input (seed, land, management, etc.) is greater on the higher yielding land. Hence, the tenant's share of all costs may be less than 50% on high-yielding land but more than 50% on poorer ground. Rent on poor quality land may be adjusted by changing the share of the crop going to each party or by the landlord picking up additional costs.
A major problem with crop-share leasing is that crop shares are influenced strongly by local custom. Customarily, shares tend to change slowly even though relative values of land, machinery, labor, and management may change markedly. As a result, good farms and poor farms may rent for the same share of the crop. Worksheets and computer programs are available from Ohio State University Extension to help evaluate shares of production and adjust contributions, if needed, in a share lease.
In the case of tenant-applied lime, the lease should provide the tenant with a pro-rata share of the cost at lease termination. If such arrangements cannot be provided, then the party who will likely control the item at lease termination should make the contribution. Usually, tiling is paid for by the landlord. Alternatively, a tenant with a long-term lease could make the investment in exchange for a greater share of annual production and a guarantee of compensation, for a pro-rata share of the residual value, when the lease ends.
Crop-share leases once dominated farmland rental agreements but are now used on only 25 percent of leased land in Ohio. Traditionally, the tenant supplies all the labor and the machinery, including paying for all fuel and machinery maintenance. The landlord provides the land, pays property taxes, and pays major land maintenance improvement expenses. Typically, the tenant and landlord both pay 50 percent of production costs such as all seed, fertilizer, and crop-protection chemicals. The crop and government payments are split 50-50.
In some situations, custom application of fertilizer or chemical is substituted for application by the tenant, and these costs are often shared by both parties. Results of a 1999 Ohio survey of farmers show that about two-thirds of custom application costs are paid by the tenant and one-third paid by the landlord. This diverges from the traditional 50-50 lease whereby the tenant is responsible for these application costs. This variation for custom hire is shown on Table 1.
A small proportion (about 15%) of the share leases in Ohio are two-thirds/one third leases. That is, the tenant receives two-thirds of the gross farm receipts, and the landlord receives one-third. (These shares may vary slightly in some leases, 60-40 or 70-30). In these leases, seed, fertilizer, and chemical expenses are paid almost entirely by the tenant, as are application costs (Table 1). As with the traditional share lease, the tenant supplies all labor- and machinery-related resources while the landlord furnishes land-related resources. Column B demonstrates variations of the standard 1/3-2/3 lease. Sometimes, the landowner will pay for part of certain production costs. This is the bargaining "give and take" that, in some cases, better reflects the shared costs to justify the income share split.
Customary Shared Leases in Ohio
|Type of Lease1||50 - 50||33 - 675|
|Landlord (L), Tenant (T)||L-T||L-T||L-T||L-T|
|Crop||50 - 50||50 - 50||33 - 67||33 - 67|
|Government Payments||50 - 50||50 - 50||33 - 67||33 - 67|
|Land||100 - 0||100 - 0||100 - 0||100 - 0|
|Real Estate Taxes||100 - 0||100 - 0||100 - 0||100 - 0|
|Maintenance:||Labor||0 - 100||0 - 100||0 - 100||0 - 100|
|Materials||100 - 0||50 - 50||100 - 0||33 - 67|
|Improvements:||Labor||100 - 0||100 - 0||100 - 0||100 - 0|
|Materials||100 - 0||100 - 0||100 - 0||100 - 0|
|Depreciation||0 - 100||0 - 100||0 - 100||0 - 100|
|Insurance||0 - 100||0 - 100||0 - 100||0 - 100|
|Repairs||0 - 100||0 - 100||0 - 100||0 - 100|
|LABOR and MANAGEMENT|
|Operator Labor||0 - 100||0 - 100||0 - 100||0 - 100|
|Hired Labor||0 - 100||50 - 50||0 - 100||33 - 67|
|Management||0 - 100||50 - 50||0 - 100||33 - 67|
|Seed||50 - 50||50 - 50||0 - 100||33 - 67|
|Fertilizer:||Annual||50 - 50||50 - 50||0 - 100||33 - 67|
|Buildup2||50 - 50||100 - 0||0 - 100||33 - 67|
|Lime||50 - 50||100 - 0||0 - 100||33 - 67|
|Chemical||50 - 50||50 - 50||0 - 100||33 - 67|
|Custom Hire3||50 - 50||0 - 100||0 - 100||33 - 67|
|Crop Insurance||50 - 50||50 - 50||0 - 100||33 - 67|
|Drying||See Table 2||See Table 2|
|Harvesting||See Table 2||See Table 2|
|Hauling||See Table 2||See Table 2|
|Other4||50 - 50||0 - 100||0 - 100||33 - 67|
1Column A is typical; Column B denotes variations or alternatives to basic lease.
2Division based upon share of receipts; however, buildup fertilizer and lime have value for several years beyond the year of application (usually four years). If lease is terminated, tenant should receive partial credit for past buildup applications of fertilization or lime.
3Custom hire payments by landlord range from 0 to 50% for 50-50 lease and 0 to 10% for 1/3 - 2/3 lease.
4Other items may include soil sampling, variable rate technologies, grid sampling, supplies, etc.
5These shares may vary 40-60 or 30-70, landlord and tenant.
According to an Ohio survey, in 51% of share leases the tenant charges the landlord for harvesting the landlord's share of the crop. For these leases, combining charges for 50-50 share lease average $16-$17 per acre for the landlord's share (Table 2). These harvesting costs are in the lower range of typical charges for custom harvest. In most share leases, tenants also charge landlords for hauling and drying, which average about 16 cents per bu. for corn and 8 to 9 cents per bu. for soybeans and wheat (Table 2). In those situations where variable rate technologies are used, tenants bear most of the soil sampling and other VRT expenses (Table 2).
|Table 2: Average Charges Paid to Tenant by Landlord by Share of Production Received by Tenant|
|Landlord cost of soil sampling
VRT application (%)
|Harvesting Charges ($/acre)||$17||$20||$17||$20||$16||$18|
|On farm corn drying/bushel||8¢||17¢|
|D. Lynn Forster, Jose R. Rodriquez-Solis and Barbara Cote, Factors Affecting Ohio Farm Real Estate Markets, Survey of 2,500 Ohio Farm Operators, Agricultural, Environmental & Development Economics, Ohio State University, 1999.|
Hay rental agreements vary greatly between grass hay and alfalfa or for poorer soil productivity vs. soils capable of higher yields. The traditional 50-50 split may not fit every situation. Eastern Ohio grassland hay is commonly baled 1/4-3/4, with the tenant receiving 3/4 of the crop and providing all machinery and labor. Under high-yield production systems, a 50-50 or 1/3-2/3 split is closer to being fair for both parties.
Grass hay. The landowner grows the crop. The tenant cuts, rakes, and bales the hay. The landowner receives the share in the field behind the baler and is responsible for getting the hay into storage. A typical charge to move hay into the barn is 10 to 15 cents per square bale.
Alfalfa hay. The tenant harvests the crop and shares the cost of annual fertilizer and chemicals. Both the tenant and landowner are responsible for getting their own shares to storage or market.
The percentage of farmers who have their lease in writing is higher for cash-rent leases than in crop-share leases. An Ohio study found that 42% of the farmers who cash rent had their lease ALIGN="JUSTIFY">in writing, while only 15% of those who crop-share lease had written leases. Share leases can be quite complicated. Factors such as the share of harvested crop, share of input costs, variable rate application charges, and harvesting charges are all terms of the agreement made in a crop-share contract. Therefore, one might predict a greater proportion of these more complicated share leases would be in writing. However, that was not the case in a survey of Ohio farmers.
Lease preferences in Ohio are evolving. The historical dominance of share leases is being challenged by an increase of cash leasing. It is hard to change customs and traditions, but changes in farming methods and technology should at a minimum cause tenants and landlords to review existing agreements.
Each crop-share leasing agreement is unique and should be in writing. These agreements will reflect the contributions made by each party and represent the negotiation strength of each party. Application of the principles set forth in this fact sheet should lead toward the most profitable level of production and an equitable distribution of returns.
This series of fact sheets is produced under the Acker Professional Improvement Program, Department of Agricultural, Environmental, and Development Economics, The Ohio State University. Reviewed by LeeAnn E. Moss and Robert D. Fleming of Agricultural, Environmental, and Development Economics, The Ohio State University.
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