The following information is bonus material from Top Producer. It corresponds with the article "Avoid Rent Squeeze” by Greg Vincent. You can find the article in the September 2009 issue.
Initial cost projections for 2010 crops aren't painting a pretty picture. Non-land costs from Iowa State University range from $610/acre on low-yield ground for corn following corn to $738/acre on better acres with higher expectations.
With early calls of $3.85/bu. for cash corn sales this marketing year, good yielding ground will need to yield 191 bu./acre…and that's before land costs are considered. Throw in a $200/acre cash rent, a modest figure for many areas, and that required yield exceeds 240 bu./acre.
Farmers are also seeing these numbers and it has them concerned. Comments in this survey, when compared to those of the past two years, carry a significantly more cautious tone, and many even have an edge of fear and anger.
Most expect rental rates to hold steady next year, if not drop, according to an early August survey of almost 900 Top Producer readers. Many of those readers are going back to landlords to attempt to negotiate new lease terms, and it's driving an increase in flexible lease arrangements.
Farmers like Mark Nuelle of Higginsville, Mo., are taking a new look at the arrangements that pay the landowner a base rate that is lower than a flat cash rent agreement, with the landowner sharing some of the production risk, but also having significant upside potential.
In Iowa, about 12% of cash leases were in flexible agreements this year, says Iowa State University Farm Management Specialist Steve Johnson. That number should jump in 2010, according to our survey, which shows nearly 17% plan to enter into flexible lease agreements.
Nuelle is in the first year of a flexible lease arrangement, and if crop conditions hold up through the growing season, he expects the agreement will be beneficial to him and the landowner. "This is the first year we've done anything like this,” Nuelle says. "We had a new landlord and we offered a choice of a flat cash rent or a flex rate. The cash rental rate was about 20% higher than the flex lease base guarantee. Our landlord chose the flex lease plan because it opened up the opportunity for substantially higher income, while still offering a reasonable base return. We were covering some of our risk by having a lower cash rent obligation should income not turn out as expected.”
"With the flex lease I pay the costs and we split everything that's left over after I pay my costs,” he explains. The income side of the equation is based on the previous nine-month average cash corn price at the Higginsville MFA elevator. On the cost side, Nuelle shows the landlord his cash costs. The difference is the amount to be split. This gives Nuelle extra incentive to maximize his marketing plan and limits the price risk exposure for the landowners.
Changes in the FSA rules regarding the sharing of farm program payments have increased the interest in flex leases among tenants. It no longer is required that you share farm program payments. Still, flex leases are slow to catch on.
"Determining a ‘fair cash rental rate' 12 to 15 months in advance of knowing the production and crop prices is becoming more difficult,” Johnson says. "Where landowners understand the increasing risks faced by their farm operators, interest in flex leases vs. fixed leases has increased. But guessing what would be a fair cash rent is still the preferred method by landlords and operators because it's straightforward.”
Johnson sees significant advantage to multi-year flex leases for both parties though. He says it limits the exposure for both parties and allows both to take advantage of favorable market conditions.
"Educating landlords as to how flex leases work is challenging, but the acceptance is increasing. Most flex leases are written for multiple years with some annual modifications to base and gross revenue triggers.”
For More Information
Results of Top Producer's Farmland Survey: