Farmland Lease Agreements Change

October 27, 2012 07:01 AM

Farmland lease agreements change with the times

Even during one of the worst droughts in history, farmland values remain strong. Demand for ground is keeping cash rent prices competitive and opening the door for creative lease terms.
Gary Schnitkey, University of Illinois farm management specialist, says that because the business of farming is changing, so are leasing agreements.

"Many of the leasing terms are changing as a result of increasing distance in the relationship between landowners and farmers," he says.

Year to year. A key change is the movement toward yearly leases. In the past, three- and five-year, or longer, leases were common. "Under the longer leases, rent levels often were set at a fixed amount for the entire term," Schnitkey says.

Many of these long-term leases have been discontinued in favor of one-year leases. Schnitkey says there are two reasons for the switch.

First, farmland returns have been higher since 2006. Long-term leases that were set prior to that year often were below average, leading to concerns about locking in a low rent going 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," Schnitkey says.

The second reason is the variability in farmland returns. "Currently, it is difficult to project 2013 returns when setting cash rents. It is even more problematic to project returns for 2014 and 2015," Schnitkey says.

As a result, most cash rent leases now are one year, with the possibility of renegotiating the rent each year to reflect changes in anticipated returns.

"If a longer term is desired, variable cash leases often are used," he adds.

Agronomic requirements. In addition to the length of the lease, Schnitkey says, some landlords now want to see proof of fertilizer applications and yield documentation.

"Some landlords, particularly those with high cash rents, are concerned farmers will not apply phosphorus and potassium fertilizer, leading to depletion of soil nutrient levels," he says.

To verify fertilizer applications, landowners can mandate soil testing every third or fourth year and require the farmer to apply enough fertilizer to bring phosphorus and potassium levels to prescribed thresholds. Additionally, landowners might contract fertilizer applications themselves or require the farmer to provide fertilizer receipts or other documentation to prove fertilizer was applied.

Schnitkey advises farmers to be open with their landlords, especially if the landlords don’t completely understand fertility needs. "The difficulties in verifying fertilizer applications point to the need for trust between landowners and farmers."

Yield documentation is also important when it comes to governmental programs. "The 2012 and future farm bills could allow program yields, used to determine program payments, to be updated. This updating likely will require documentation of recent actual yields from a farm," Schnitkey says.

This might lead to landowners requesting yield documentation from farmers. "It is not known what documentation will be considered acceptable for yield updating, and it may be difficult to provide acceptable documentation, particularly if a farmer commingles grain from multiple farms," Schnitkey says.

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