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New Flexibility for Cash Rents?

January 8, 2009
By: Sara Schafer, Farm Journal Media Business and Crops Editor
 
 

Greg Vincent, Top Producer Editor
 
Iowa State University Extension Farm Management Specialist, Steven Johnson believes the Farm Service Administration (FSA) will loosen regulations for renters who use flex lease agreements. Johnson says the new rules, part of the 2009 DCP Regulations that he expects to be released in January, will mean farmers canactual farm yields to determine flex payments, and not require government payments to be shared with landowners. These expected changes will mean the tenant can receive full percentage of direct payment, counter-cyclical payments and potentially the new Average Crop Revenue Election (ACRE) payment.
 
In anticipation of these changes, Johnson suggests landowners require actual yield data with any new flexible cash farm lease. "This will give you a ‘one up' on enrolling your farm in the new 2009 ACRE program. You might also consider determining cash rent on FSA Certified Planted Acres collected each summer by FSA from your tenant. Cash rent can adjust to actual planted acres and recognize the actual yield provided annually for the new ACRE program calculations.
 
"This would put a lot more transparency into planted acres and actual yields, and encourage tenants to share cost of production. This could allow for these flexible cash lease arrangements to continue for all 4 years of the farm program (2009, 2010, 2011 and 2012),” says Johnson. "The tenant knows they will get to farm that farm, thus working on ACRE enrollment and banking fertility, matching machinery/equipment and benefitting from pre-paid expenses. The December cash rent, plus flex payment, likely matches their year-end income-tax strategies and keeps the landlords income in one taxable year.”
 
Landlords also benefit because they are guaranteed a base rent, with the potential for a bonus reflected by the flex payment triggered by gross revenue on the farm.
 
The owners would receive a copy of the FSA planted acreage form each year as well as the FSA form for the Actual Farm Yield. Johnson says the leases should include an end date of February 28, 2013, coinciding with a typical Iowa farm lease. If crop production costs appear to be too high or too low annually, then changes could be made to: base rent, maximum rent and the flexible cash lease triggers that more accurately reflect cost of production. For 2009, Johnson suggests these triggers cover all costs, including the base rent, before a flex payment is made.
 
Johnson provides the following suggestions for rental agreements:
  • Use the farm's actual farm yield (dry weight for corn adjusted to 15.5%) and either grain bin measurements, scale tickets, settlement sheets, yield monitor data, grain cart scales, etc.
  • The simplest price would be the FSA's Posted County Price (PCP) for October and November. With FSA moving to a 30-day moving average of PCP in 2009, this will be pretty easy to access on their web site. However, this amount could underestimate the value of the harvested crop since it uses only the fall pricing period. The landlord should not benefit from the decision of the tenant to store or sell their crop. Prices post-harvest largely reflect basis and futures market carry, and the landlord isn't paying storage or interest on the crop.
  • A creative idea is to use the local co-op/elevator Fall Delivery Cash Price during the 9 months prior to harvest. Consider a simple average of the Fall Delivery Forward Cash Contract Price using at least 4 dates (January 15th, April 15th, July 15th and October 15th). Simply collect this data at during the year or at harvest and ask the co-op/elevator's grain merchandiser to record these for both corn and soybeans and have them sign and date what that average price is for those dates. 
 

 

For More Information
Click here to see an example of these arrangements provided by Iowa State University.
 
Download the Flexible Cash Lease Calculator, courtesy of Ohio State University
 

 
You can e-mail Greg Vincent at gvincent@farmjournal.com.
 

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RELATED TOPICS: News, MoneyWise

 
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