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Flexible land rental agreements

Farmland Rental Rates have increased dramatically in the last few years as commodity prices have reached record levels and remain high compared to historic averages. But grain prices will go lower again and rental rates often lag and do not decline as rapidly. This will leave farmers with high rental rates locked in that will create a loss for the year. One way to share the risk and rewards with the landlord is to enter into a flexible land rental agreement. In 2008 Iowa State Extension, reported that nearly 12 percent of all cash leases were flexible.

  • Flexible leases have several advantages:
  • The actual rent paid adjusts automatically as yields and or prices fluctuate as determined by agreement.
  • The yield and price risks are shared between the landlord and the tenant.
  • Owners are paid in cash so they do not have to be involved in the cropping management decisions.
  • If the agreement includes a base cash rent agreement with a bonus, FSA will consider the lease a cash rental agreement; therefore, all government payments would go to the tenant and not have to be divided.

A common type of flexible agreement is a Share of Gross Revenue. What have the Minnesota cash rents been compared to the percentage of gross revenue? Table 1 below utilizes FINBIN data from 1996 to 2020 crop years for farmers across southern Minnesota in the Adult Farm Management programs from the University of Minnesota and Minnesota State College and Universities. Average prices and yields and cash rents paid in the Southwest, South Central and Southeastern Minnesota were utilized for this analysis.

Average southern Minnesota cash rent as a percentage of gross revenue

Year Average cash rent paid per acre in Southern Minnesota Average gross revenue, dollars per acre - corn Average gross revenue, dollars per acre - soybeans Average cash rent as % of gross revenue - corn Average cash rent as % of gross revenue - soybeans Corn price Soybean price
1995 84.51 $330.47 $246.69 26% 34% $2.74 $5.78
1996 91.17 $329.89 $282.20 28% 32% $2.46 $6.84
1997 94.89 $321.49 $272.32 30% 35% $2.37 $6.37
1998 97.04 $287.29 $254.93 34% 38% $1.77 $5.15
1999 95.61 $269.76 $228.68 35% 42% $1.73 $5.10
2000 98.31 $267.31 $237.56 37% 41% $1.75 $5.11
2001 97.89 $228.38 $208.52 43% 47% $1.75 $5.15
2002 101.57 $344.09 $258.52 30% 39% $2.18 $5.31
2003 103.74 $358.05 $246.81 29% 42% $2.23 $6.85
2004 105.9 $351.40 $228.30 30% 46% $2.00 $5.45
2005 110.4 $375.47 $300.10 29% 37% $2.03 $5.65
2006 114.83 $511.27 $316.05 22% 36% $2.90 $6.05
2007 125.44 $611.21 $472.76 21% 27% $3.68 $9.52
2008 146.55 $681.06 $432.32 22% 34% $3.89 $9.65
2009 158.86 $716.55 $474.32 22% 33% $3.74 $9.66
2010 168.25 $884.41 $564.02 19% 30% $4.68 $10.87
2011 169.32 $893.43 $462.95 19% 37% $5.66 $11.40
2012 199.88 $1182.80 $693.11 17% 29% $6.50 $13.77
2013 243.47 $748.00 $593.99 33% 41% $4.45 $12.63
2014 241.36 $639.96 $476.24 38% 51% $3.93 $10.15
2015 231.92 $723.29 $514.71 32% 45% $3.52 $8.60
2016 226.85 $683.96 $575.14 33% 39% $3.34 $9.39
2017 212.57 $679.36 $498.06 31% 43% $3.22 $9.22
2018 214.84 $621.16 $468.95 35% 46% $3.47 $8.71
2019 208.00 $647.69 $523.98 32% 40% $3.64 $8.60
2020 208.06 $829.56 $602.89 25% 35% $4.05 $10.32
10 year average 30% 41%

Table 1 indicates that corn cash rental rates were an average of 30 percent of gross corn revenue for the last 10 years from 2011 through 2020 crop years. With soybeans, the average was 41 percent of gross soybean revenue for the same 10 years. The percentages were much lower this was due to higher prices and higher gross revenue amounts from 2006 through 2012, this adjusted higher in 2013. The last two columns in Table 1 show the average price farmers received in Southern Minnesota for the crop sold that year. When corn prices are above $2.50, the cash rent as a percent of gross fall below 30 percent to an average of 21 percent of gross for 1995, 2006, 2007, 2008 2009, 2010, 2011, 2012 and 2020. In 2013 cash rent increased significantly by $44 per acre and the percent of gross increased accordingly. When soybeans prices are above $9.50 in 2007 through 2012, the cash rent as a percent of gross declined to 31 percent from the 37 percent of gross average from 1994 to 2013. Higher rental rates caused this percent to increase to 41% in 2013 for soybeans.

Most Flexible Rental Agreements have a base rent component that assures the landlord this income and will allow the tenants to cover expenses even after a bad year with good crop insurance coverage. Base rents vary by area but for Southern Minnesota, the range for base rents could be from $100 to $200. Then a flexible component is added, either based on price, yields, gross revenue, or some combination of these components. There are many ways to set up a flexible land rental agreement. The farmer and landlord should determine what both are looking for. The higher the base rent the more risk the farmer has, the lower the base rent the landlord is increasing their share of the risk with no crop insurance to protect their revenue.

Here are some short definitions of different types of flexible rental agreements:

Flexible Rents based on gross revenue:

This is a rental agreement where rental payments are based on the gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined.

Base rents plus a bonus:

This is a rental agreement where a base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal. Then these additional bushels would be shared between landlord and tenant. The bonus can also be determined by yield and price together or price alone as well.

Flexible rent based on yield only:

This is a rental agreement where the landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment. This can also be done with a cash payment based on yield and then price at an elevator.

Flexible rent based on price only:

This is a rental agreement where the rental payment is based on crop prices. Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the bushels agreed to. Rental payments can be made at the quarterly price-setting times or half and half or after harvest.

Profit-sharing flexible rent agreements:

This is a rental agreement where the landlord and the tenant share the profit from the farmland. This agreement is similar to a 50-50 crop share lease where they share crop yields 50% to the landlord and 50% to the tenant and some of the expenses are paid by each party.

David Bau, Extension educator

Reviewed in 2017

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