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Flex Your Lease Muscle

February 4, 2010
 
 
 

TopProducer@farmjournal.com

Searching for a more equitable way to manage his lease arrangements, landowner Wayne Geadelmann of Adel, Iowa, has been studying multiple-year flexible cash leases.

"These arrangements take into account market highs and lows, as well as farm yield, to the benefit of both parties,” says Geadelmann, who has about 1,000 acres in crop-share and cash lease agreements. "It offers advantages compared with picking a fixed rental number.”

It also gives Geadelmann the benefit of locking in a long-term lease arrangement, something that's not easy in a volatile market.

A flexible cash lease is exactly that: flexible. When input costs and commodity prices can significantly rise and fall within a year, it offers another way to manage risk.

"A flexible cash lease allows the tenant and the landlord to mutually share the additional risks and benefits of volatile price moves,” says Paul Mitchell, assistant professor of agricultural and applied economics, University of Wisconsin-Madison.

Multiple-Year Approach. Flexible cash leases can help secure an equitable landlord-tenant agreement for several cropping years.

"Cash rental rates can trail market prices by a year or more, and that can make setting a fixed rental price very difficult from year to year,” says Steve Johnson, farm and ag business management specialist with Iowa State University.

For the tenant, crop price volatility and higher input costs are two reasons why flexible cash leases may make sense. The delay in negotiating cash rents before the lease termination deadline can create indecision regarding fall tillage, fertilizer application and input buying.

Flexibility Lessens Risk.
Another advantage of a flexible lease is that the rent reflects the yields and/or cash prices, so the cost risks can be shared between the landowner and tenant. In addition, the landowner can be guaranteed a base rent plus a bonus based on the revenue. A landowner may receive the actual yields on the farm, and the tenant can negotiate a multiple-year lease.

"With a multiple-year lease, tenants can bank fertility on the land, better match machinery needs for the entire operation and pre-pay expenses,” Johnson says.

Multiple-year flex leases can be developed so the rent varies with price and yield, yield only or price only. Johnson notes most parties prefer leases that use price and yield, similar to crop insurance revenue products. 

Bear in mind that developing a multiple-year flexible cash lease can be more complex than a typical lease, Johnson says. The terms are set in advance, however, so there are no protracted lease negotiations.

"Once a flexible cash lease is in place, the arrangement automatically adjusts to changing market conditions,” he says.



Steps For Writing A Lease

There is no set method for establishing a flexible cash lease arrangement, but there are basic rules to follow, says Steve Johnson, farm and ag business management specialist with Iowa State University.

The cash rent amount must be fair and equitable, and the formula must work for both parties, Johnson says. There needs to be open and honest communications between the tenant and landowner, and good land stewardship is necessary. The lease should provide the tenant a profit.

Here are basic steps to create a flexible cash lease:

1. Record the rent formula in writing.

2. Test the formula with several examples of yields and prices to determine gross revenue triggers.

3. Develop a table of possible results.

4. Consider three or four pricing periods for new-crop cash bids.

5. Set a minimum and maximum rent.

6. Put the flexible lease in writing.




Top Producer, February 2010

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FEATURED IN: Top Producer - FEBRUARY 2010

 
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