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.