Beside cash rent levels, other terms of cash leasing are changing.
Issued by Gary Schnitkey, University of Illinois
As noted in a previous farmdoc Daily article, cash rent levels have been rising in recent years, with large increases occurring between 2011 and 2012, and more modest increases projected between 2012 and 2013. Besides rent levels, there have been trends in other cash leasing terms.
- A movement toward yearly leases
- Attempts to verify fertilizer applications
- Requirements for yield documentation
Here’s an overview of each of these lease terms:
One-Year Lease Term
In years past, three-year leases were somewhat common and five-year leases occurred occasionally. Even longer-termed leases existed in specific situations. Under these longer-termed leases, rent levels often were set at a fixed amount for the entire lease term.
Many longer-termed leases have been discontinued in favor of a one-year lease term. Two reasons exist for this switch. First, farmland returns have been higher since 2006 than prior to 2006, resulting in an increase in cash rents since 2006. A longer-term lease that had its cash rent level set prior to 2006 often had a level below that which would have occurred after 2006, leading to current concerns about locking in a low rent into the future. Of course the opposite could occur as well: a high rent could be set now that is not sustained by farmland returns in the future.
The second reason for discontinuing longer-termed leases is the variability in farmland returns. Currently, it is difficult to project 2013 returns when setting 2013 cash rents. It is much more problematic to project returns for 2014 and 2015, thereby allowing appropriate cash rent levels to be determined for 2014 or 2015.
As a result, most cash rent leases now are one-year in length, with the possibility of re-negotiating the rent level each year to reflect changes in anticipated farmland returns. If a longer lease-term is desired, variable cash leases often are used.