One way to share the risk and rewards between the operator (renter) and landlord is to enter into a flexible land rental agreement. Iowa State Extension reported that nearly 12 percent of all cash leases were flexible in 2008.
Advantages of flexible leases
- 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, so all government payments would go to the tenant and not have to be divided.
Different types of flexible rental agreements
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. A lower base rent increases the landlord's share of the risk with no crop insurance to protect their revenue.
Flexible rents based on gross revenue
This is a rental agreement where rental payments are based on 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 12 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 crop yields are shared 50% to landlord and 50% to the tenant and some of the expenses are paid by each party.
Minnesota cash rents compared to percentage of gross revenue
The table below uses FINBIN data from 1995 to 2018 crop years for farmers across southern Minnesota in the Adult Farm Management programs from the University of Minnesota and Minnesota State Colleges and Universities. Average prices and yields and cash rents paid in the Southwest, South Central and Southeastern Minnesota were used 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|
|10 year average||28%||39%|
Rental rates do not always adjust with crop prices
Farmland rental rates increased dramatically the last few years as commodity prices reached record levels, and they remain high compared to historic averages. When grain prices go lower, 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.
- The table above shows corn cash rental rates were an average of 26 percent of gross corn revenue from 2007 through 2016 crop years. With soybeans, the average was 37 percent of gross soybean revenue for the same 10 years.
- The previous three years the percentages were much lower due to higher prices and higher gross revenue amounts. This adjusted higher in 2013.
- The last two columns in the table 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 percent of gross falls below 30 percent to an average of 21 percent of gross for 2006, 2007, 2008 2009, 2010, 2011 and 2012.
- In 2013, cash rent increased significantly by $44 per acre and the percent of gross increased accordingly.
- When soybeans prices are above $9.50, such as in 2007 through 2012, the cash rent as a percent of gross declines to 31 percent from the 37 percent of gross average from 1994 to 2013. Higher rental rates caused this percent to increase to 41 percent in 2013 for soybeans.
Reviewed in 2017