Time to Offer Your Landlord a Bonus?

September 10, 2015 12:00 PM
 
Time to Offer Your Landlord a Bonus?

With 80% of farmland owned by non-farmers, growers worried about high rents and low crop prices face a challenging situation this year: How do they persuade landlords to lower cash rents so farmers can survive this cycle?

Gary Schnitkey, the agricultural economist at the University of Illinois, has an idea. In his recent farmdoc Daily article, he suggests farmers and landlords consider moving from a fixed cash-rent lease to a  “cash rent with bonus” arrangement, which protects farmers from the downside of the grain markets and allows landowners to benefit from the upside.

“Switching from a fixed cash-rent lease to a variable cash lease allows a lower base rent to be established while simultaneously allowing landowners to share in higher crop revenues if they occur,” Schnitkey writes.

What does a farmer need to know to make this happen? Schnitkey says the two parties—the farmer and the landowner—need to agree upon three key numbers before the crop year begins:

  • The base cash rent for the land, which is the minimum that the farmer will pay, no matter what happens with the crop. Schnitkey suggests $200 per acre would be appropriate for high-productivity land in central Illinois.
  • The per-acre revenue trigger for the crop, which should be enough to cover the farmer’s non-land costs and the minimum rent. Schnitkey pegs those per-acre crop revenue triggers at $750 for corn and $550 for soybeans.
  • The size of the landlord’s bonus after the farmer reaches that key revenue trigger number. Schnitkey suggests 50% to make the arrangement appealing to the landowner; most shares are typically between 40% and 45%.

Could you end up paying more? Perhaps. Schnitkey says that cash rents in central Illinois for good farmland have averaged $226 per acre in recent years, compared to an average of $262 for cash rent with bonus leases. But some farmers might be more than willing to take that chance, given the expectation of lower crop prices in 2016.

Want to see how the numbers might work for your operation--or your tenant's? Click here to download farmdoc’s spreadsheet for cash-rent-with-bonus leases.

Have you tried a cash rent with bonus arrangement on farmland? What was your experience? Let us know in the comments. 

 

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Comments

 
Spell Check

NDGirl
Irvine, CA
9/10/2015 10:22 PM
 

  You have to do better than this when offering a spreadsheet tool. Just attach the spreadsheet so reader doesn't have to "allow this app from an unknown publisher to make changes to your PC". Did anyone road test the instructions on Windows 10 (and other versions)?

 
 
LOWELL
Alvord, IA
9/10/2015 03:34 PM
 

  Ya sure, I offered this to my landlord last year and he laughed, why do that when he can get $400/acre up front in Jan. up here in NW Iowa!

 
 
Kaeb Farms
Sioux Falls, SD
9/11/2015 06:57 AM
 

  What I hear from my landlords who I don't have flexible leases with is that they don't want things that complicated. What I think they're really saying is they want a set return and not any of the risk of the market. I believe the issue is that as landlords and their families become less connected with the production side of farming the more difficult for them to understand the cycles of ag. This plays into why they dont show the willingness to drop rental rates when profitability of the farmer tanks. We have to realize that it's tough for all of us to want to take less income, whether it's the farmer or the landlord.

 
 

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