Q&A: Are Flex Leases A Good Idea?

January 12, 2016 12:00 PM
Q&A: Are Flex Leases A Good Idea?

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.

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Spell Check

Michael E
Dallas City, IL
1/14/2016 03:05 PM

  It's all market based, so finding a average cash rent the farmer and landowner can agree to where everyone benefits is the best. It's never equal but it can be close. Anyone with any Farm Management background knows there are going to be years where the farmer will come out on top and others (Like this year) where break even point may be a struggle. The farmer bears the risk any way the game is played. Keeping a good farmer who does a good job is important thus working with the farmer is key.

Hard Rock
Columbia, MO
1/20/2016 06:22 PM

  Flex leases are not what landlords want they want money and for it to be guaranteed no matter if the farmer makes a penny or looses his ass , they want cash DON'T KID YOURSELF!!!!! I tried to go to a flex this year and lost 400 acres to the 17000 acre guy!yes he is an ass but the land owners aren't any better if all they want is money. That 400 acres will not be worth farming in less than 4 years. Mined of nutrients, ditches will be unable to be crossed with an airplane let alone a planter. God bless the good landlords and good luck to all the rest of them, they will reap what they sow in the end!!!

lost farm
ville, IL
1/13/2016 06:03 PM

  It would seem that by sharing the risk it would be fair.The only problem is the Wizard of Oz that thinks what the farm will produce so his base rent is too high to begin with.So the Wiz can sell his story to the next guy .In 50 years the farm never produced what he thinks , but he is the new farm manager or THE WIZ


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