Wondering if you should propose a flexible farm lease with your landlord? With the prospect of low grain and soy prices facing farmers in the months ahead, many producers are considering a variety of options to protect their profitability.
Cash rents, which represent a significant expense line for farmers, are an understandable place to start. “At this point, even average cash rent rates are tough on tenants. If a producer is paying anywhere near average rent, the math likely translates to a loss, says Gary Schnitkey, University of Illinois agricultural economist," Farm Journal’s Chris Bennett wrote earlier this fall.
Ready for an alternative to that prospect of red ink? Here are some common questions—and answers—about flex leases.
- How many types of flexible farm leases are there? According to Iowa State University, there are two primary sorts of flex farm leases. One is a revenue share, where the cash rent for the land is based upon a certain percentage of the crop’s gross revenue. The other is a “base rent plus bonus,” where a grower agrees to pay a certain amount per acre to rent the farmland and, if crop revenue exceeds a certain level, an additional payment to the landlord.
- What’s a reasonable base rent? It depends from farm to farm, but generally, it should be lower than what the fixed-cash rent would be. “Otherwise, the landowner does not share in any of the downside risk,” according to the extension economists at Iowa State University. Schnitkey suggests $200 per acre would be appropriate for high-productivity land in central Illinois for a cash-rent plus bonus lease.
- What’s a reasonable revenue share? You might want to brace yourself. ”Most of the flexible leases in Iowa specify that the rent will be equal to anywhere from 25 to 40 percent of the gross crop value or gross crop revenue,” according to extension economists at Iowa State University. If that sounds painfully high, remember that your landlord has agreed to share both the risk of both price and yield under this arrangement. If you do well, he (or she) will do well; if you have a tough year with poor yields and low prices, well, at least your landowner will understand what you’re going through.
- How well do I need to know my own numbers if I want to do a flex lease? Unless you want to end up with a flex lease that ends up killing your profitability, you need to know your production costs on a per-acre and per-bushel basis. And yes, those are your operation’s production costs, not what your state’s land-grant university projects them to be on average for farmers in your state or country.
- How open will I need to be about my finances to convince my landlord to do this? Prepare to be pretty candid. While some landowners may be sympathetic and understand the challenge of low crop prices and stable input costs, other landlords may not understand how razor-thin margins have become in row-crop country and how or why they should change the lease terms. According to Allan Vyhnalek, educator at Nebraska Extension in Platte County, the grower and the landlord “must have a blunt discussion about their bottom line” if they are considering a flex agreement. “The tenant must share yields and the budget for that piece of ground. Landlords prefer cash rent because it’s packaged without risk. Flex options will put risk on the landlord’s plate.”
- Could I end up paying more rent with a flexible lease vs. a fixed cash rent lease? It’s possible. Schnitkey says that cash rents in central Illinois for good farmland have averaged $226 per acre in recent years, compared to an average of $262 for cash rent with bonus leases.
- What would a flexible farm lease look like? You can find sample leases at Ag Lease 101, which has extensive resources for farmers and ranchers who rent ground.
- How do I know how this would work for my farm? You’ll certainly want to plug in some numbers before you propose anything, much less sign anything. You can find downloadable spreadsheets from University of Illinois’ farmDoc Daily’s FAST Tools, Iowa State University Extension, Ag Lease 101, and more.
Have you ever tried a flexible farm lease, either as a producer or a landowner? How did it go? Let us know in the comments.