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Crop-share rent creates a bond

Agriculture.com Staff 12/15/2009 @ 2:36pm

Crop-share leases are about as scarce as corn pickers throughout the heart of the Corn Belt, where cash rent has become the norm over the past 30 or 40 years. In some states, more than 70% of the land that is rented is cash rented. But some tenants, landowners, and advisers think it is time to give crop-share leases another look.

"In times like this, the crop-share lease is the most fair to all," says Bruce Johnson, a University of Nebraska ag economist.

Cash rent has worked pretty well over the years or it wouldn't have kept growing in popularity. But with the tremendous volatility in grain prices and input costs we've experienced since late 2006, some of the inherent problems with cash rent have surfaced.

"Extremely volatile input prices and crop prices make negotiating fixed cash rents very difficult and risky," says Kevin Dhuyvetter, a Kansas State University ag economist. "Most crop-share arrangements have a built-in buffer to much of this risk." He cites fertilizer as an example of where sharing costs reduces risk in the current business environment. Kansas is a state where crop-share leases are still common.

As grain prices soared in 2007 and the first part of 2008, tenants on cash-rented ground experienced a windfall. That's why a lot of them paid their landlords a bonus in an effort to maintain good relationships. And that's why some farms changed hands.

Cash rents went up, but not as far or as fast as commodity prices. There is always a lag time with cash rent. Then, in the second half of 2008 and on into 2009, as input prices (primarily for fertilizer) skyrocketed while grain prices fizzled, rents lagged the downturn.

Now, as the 2010 renting season is under way, landowners and operators are once again trying to negotiate cash rents in the face of volatility, although fertilizer prices have subsided significantly.

There is compelling evidence that crop-share arrangements or flexible cash rent arrangements are more equitable than fixed cash rent leases, and that they foster a greater degree of cooperation. Historically, operators come and go more often on cash-rented land than they do on land that is crop-shared.

There are lots of advantages and disadvantages with each type of rental arrangement. Which one is best often hinges on personal circumstances.

The ability to handle risk is frequently a major factor. Tenants are taking the most risk with cash rent. Landowners take the most risk with custom farming, followed by a crop-share lease. (Lots of other factors such as social security regulations, material participation, management flexibility, and landowner knowledge and goals affect which type of rental arrangement is chosen).

The premise behind crop-share leases is that each party shares in the costs, returns, and risks in an equitable manner. But crop-share leases aren't as static as some people assume.

Dhuyvetter emphasizes the need to review crop-share leases regularly. "Keep the automatic rollover clauses out!"

Johnson says, "Traditional shares may need adjusting due to changing farming practices and shifting landowner contributions."

Dhuyvetter and fellow Kansas State ag economist Terry Kastens have devoted a lot of time and energy to informing farmers in Kansas and beyond about land rental issues. They maintain there is a difference between "traditional" and "equitable" crop-share arrangements.

"In a traditional arrangement, income and shared expenses (if any) are shared in the same proportion as what has been done in the past," they say. "Share rent based on tradition may, or may not, be equitable. In an equitable arrangement, income is shared in the same proportion as the contribution of total inputs."

Dhuyvetter says, "Typically, landowners and tenants resort to some sort of negotiation and claim to want a crop-share lease arrangement that is fair and equitable to both parties. The term 'fair' really cannot be defined because what is fair is in the eye of the beholder. But the term 'equitable' can be defined and, thus, this is the fundamental principle upon which crop-share lease arrangements are based."

Dhuyvetter and Kastens like to discuss crop-share arrangements in terms of the following 5 basic principles.

Crop-share leases are about as scarce as corn pickers throughout the heart of the Corn Belt, where cash rent has become the norm over the past 30 or 40 years. In some states, more than 70% of the land that is rented is cash rented. But some tenants, landowners, and advisers think it is time to give crop-share leases another look.

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