Maximize savings and limit penalties with these guidelines
Wondering if you should propose a flexible farm lease to your landlord? With the prospect of low corn and soybean prices facing farmers in the months ahead, many producers are considering options to protect
profitability. Cash rents are a significant expense, so they’re an understandable place to start. If you’re ready for an alternative to red ink, consider these answers to common questions about flex leases.
1. What types of flex leases are there?
One is a revenue share, where the cash rent for the land is based on a percentage of the crop’s gross revenue. The other is a base rent plus bonus in which a producer agrees to an additional landlord payment if crop revenue exceeds a certain level, according to Alejandro Plastina, William Edwards and Ann M. Johans of Iowa State University Extension.
2. How much is 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 experts at Iowa State University Extension.
3. Exactly what is a reasonable revenue share?
Brace yourself. ”Most of the flexible leases in Iowa specify that the rent will be equal to anywhere from 25% to 40% of the gross crop value or gross crop revenue,” note the experts at Iowa State University Extension. After all, your landlord has agreed to share the risk of both price and yield.
4. What numbers should I crunch in advance?
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.
5. How open do I have to be about numbers?
The producer and landlord “must have a blunt discussion about their bottom line” if they are considering a flex agreement, says Allan Vyhnalek, educator with the University of Nebraska—Lincoln Extension in Platte County. “The tenant must share yields and the budget for that piece of ground. Landlords prefer cash rent because it’s packaged without risk.”
6. Can flex leases cost more than fixed ones?
It’s possible. Cash rents for good farmland in central Illinois have averaged $226 per acre in recent years, compared to an average of $262 for cash rent with bonus leases, says ag economist Gary Schnitkey of the University of Illinois.
7. What would a flexible farm lease look like?
You can find sample leases at aglease101.org, which has extensive resources for farmers and ranchers who rent ground. At the top of the page, click the tab titled Document Library and you’ll find PDFs with details on how to bargain for appropriate rental rates, tips to negotiate payment timing and more.
8. Are decision-making tools available?
You’ll certainly want to plug in some numbers before you propose a figure, much less sign anything. You can find downloadable spreadsheets at farmdoc.illinois.edu/fasttools and extension.iastate.edu/agdm.