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Flexible cash rent + indemnity payments = ?

08/21/2012 @ 2:18pm

Flexible cash leases have grown in popularity immensely over the last few years.

But, what happens in a flexible lease situation when drought slams your crop to the point where indemnity payments are about the the only measurable revenue source you may have this crop year? That's been a common question posed to Iowa State University Extension ag economist William Edwards. A lot depends on whether gross revenue is taken into account on rental rates.

"Crop insurance indemnity payments can be included in the gross crop revenue value used to determine the cash rent payable under a flexible lease, if gross revenue is used to set the rent or the bonus portion of the rent," Edwards says. "The payments should be net of the farmer-paid premiums paid, however."

THe same is true, though, in years when there's no indemnity payment. "Premiums should be subtracted from the gross revenue before the percentage is applied to calculate the rent or bonus," Edwards adds.

In many cases, this allows the landowner to continue to shoulder some of the revenue or loss responsibilities. But, in other cases, a breakdown following the lines of the general flexible lease arrangement may not be fair, Edwards says. That makes it important to take the 2012 scenario into account when farmer and landowner meet to nail down the 2013 lease.

"The landowner is indirectly standing a share of the insurance coverage which is supporting the gross revenue and rent each year. If the acres included in the insurance unit include multiple rented or owned farms, it may not be practical or fair to divide the crop insurance proceeds and premiums among the farms, however," Edwards says. "How to handle crop insurance premiums and payments should be discussed at the beginning of the lease period."