The following information is bonus material from Top Producer. It corresponds with the article, "Hang Onto Land" by Greg Vincent on page 38 in the September 2008 issue.
Use Flex Leases With Caution
As negotiations on rental contracts begin in earnest for 2009, keep in mind that flex lease or other non-traditional rental arrangements may be viewed differently by the Farm Service Administration (FSA). When considering cash leases with special provisions like flexible rates, bonuses or other adjustments, "careful analysis" is needed to ensure it does not affect your participation with farm programs, says Brad Lubben, farm program specialist with the University of Nebraska, Lincoln.
Lubben's interpretation of the program is that adjustable cash rents based on performance of the crop can be interpreted by FSA as a crop-share lease.
"This means the landlord 1) becomes a participant in farm programs, 2) must meet eligibility guidelines (AGI, payment limits, material participation, etc.), and 3) must receive part of the farm program payment (may be a very small share, but a share none the less)," Lubben says.
To avoid being caught in this rule interpretation, Lubben suggests basing adjustments on off-farm measures such as a county yield adjustment rather than farm yield. "Similarly, a price adjustment would need to be some reference market price, either futures, terminal elevator, local elevator, etc. It cannot be the actual farm price received."
The concerns Lubben expresses do not include single bonus payments many farmers have paid to landlords recently, but he stresses the importance of making sure these payments are not tied to any actual farm production or "price compared to some baseline."
"I also know some producers and landlords are using a bushel rent contract, which looks like it adjusts naturally to the higher price movements. However, in a longer-run market, the bushel rent may not be very feasible because if prices move higher (lower) when yields move lower (higher), the bushel rent formula actually moves rents in a direction counter to actual production and revenue.