Flex-Rent Leases Spike

January 7, 2014 06:21 PM

Landlords are more willing to take on risk and receive benefits

Steve Ruh of Big Rock, Ill., is part of a growing movement of farmers switching to flex leases. Within the past two years, he has shifted most of his ground from fixed cash-rent to flex leases.

"Flex leases are fair for both the producer and landlord," Ruh says.

His landlords were open to the change, and they’ve benefitted the past two years with bonus checks.

"Flex leases will ease the pressure in a year of low prices, like 2014 appears to be," Ruh says.

steve ruh

"Flex leases will ease the pressure in a year of low prices, like 2014 appears to be." — Steve Ruh, Big Rock, Ill.

These arrangements are becoming more popular. In 2007, flex leases in Iowa made up 12% of land deals. By 2012, they comprised 19% of rental arrangements, says Mike Duffy, an Iowa State University ag economist. He suspects that the percentage of flex leases was higher in 2013.

Another notable change the study found is the length of leases. In 2007, 14% of leases were for more than three years. By 2012, that number had increased to nearly 25%.

Farmers with long-term leases might be in an uncomfortable position as they try to renegotiate leases to match a lower price outlook during the next few years.

However, some farms are still making big deals. In Cedar County, Iowa, a tract of land went for $525 per acre in a two-year rental auction. With the outlook for $4 corn in 2014/15, Duffy struggles to understand how those numbers work.

"The rubber will hit the road in 2015," says Gary Schnitkey, a University of Illinois ag economist.

That’s when high-priced rents will square off against the new financial reality. His work shows that the burden of higher-than-average land rents falls disproportionately on large farms. Many have been on a rapid growth path in recent years, so they’ve had to shoulder higher rents.

Schnitkey cautions against thinking $400 and $500 per acre rents are typical. The average Illinois cash rent in 2013 was $221 per acre. Even in highly productive Champaign County, it was $255 per acre.

To break even, farmers can’t pay more than $290 to $300 per acre with $4.50 corn, Schnitkey says. 

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