Flexible land rental agreements

Farmland rental rates have increased dramatically over the last few years as commodity prices have reached record levels and remain above historic averages.

When grain prices fall, rental rates often lag and decline more slowly. This can leave farmers with high rental rates locked in, resulting in a loss for the year.

One way to share the risks and rewards with the landlord is to enter into a flexible land rental agreement. In Minnesota, over 20 percent of all cash leases are flexible.

Flexible leases have several advantages:

• The actual rent paid adjusts automatically as yields and or prices fluctuate, as determined by the agreement.
• The yield and price risks are shared between the landlord and the tenant.
• Owners are paid in cash, so they do not need to be involved in crop 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.

Types of flexible rental agreements

There are many ways to set up a flexible land rental agreement. The farmer and the landlord should determine what each is looking for.

Flexible rents based on gross revenue

Rental payments are based on the farmland’s gross revenue. The agreement 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

A base rent is paid, and a bonus may or may not be paid, depending on whether yields exceed a base goal. Additional bushels would be shared between landlord and tenant. The bonus can also be determined by yield and price together, or by price alone.

Flexible rent based on yield only

The landlord receives a set base number of bushels, with additional bushels if yields exceed the base payment rate. This can also be done with a cash payment based on yield, and then the price at an elevator.

Flexible rent based on price only

The rental payment is based on crop prices. Often, it is the average price over the previous 12 months or a quarterly price multiplied by the agreed bushels. Rental payments can be made at the quarterly price-setting times, half-and-half, or after harvest.

Profit-sharing flexible rent agreements

The landlord and the tenant share the profit from the farmland. This agreement is similar to a 50-50 crop-share lease, with 50% of the crop yield going to the landlord and 50% to the tenant, and some expenses are paid by each party.