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Land rents are moving targets

Most land rental agreements start going out of date the minute they're signed. That's because market prices, yields, government payments, and production costs all change over the course of the contract. Some years they change a little; some years they change a lot. When one of these factors changes a lot, one party benefits at the expense of the other.

Last fall, when grain prices increased dramatically, tenants got a windfall on the portion of the 2006 crop they hadn't sold ahead. And many tenants, who had already signed leases for the 2007 season, may get a windfall on that crop as well, depending on when they sold it. (Some tenants paid landowners bonuses or voluntarily renegotiated rental agreements in an effort to maintain a healthy relationship with the landowners and not lose the ground.) On the other hand, many tenants hadn't made much money on rented ground recently.

Predictably, higher grain prices are causing a lot of turmoil in the land rental market. Many rented farms may change hands this year -- as they did in 1973 when grain markets exploded and in 1996 when government payments were enhanced. This volatility could last for several years until a new equilibrium is reached.

Higher grain prices and upheaval in the rental market have some landowners and tenants looking for alternatives to traditional crop-share and cash-rent agreements.

"Volatile grain prices have created a great deal of interest in flexible cash lease agreements," says Iowa State University Extension economist William Edwards.

"Under a flexible lease, the tenant and owner agree that the cash rent to be paid will be determined after harvest, based on actual yields and/or prices," says Edwards. (Some flexible rental agreements include adjustments for production costs. But since these usually don't change as much or as quickly as prices or yields, they are often dealt with when new base agreements are signed.)

There can be advantages and disadvantages with flexible rental arrangements for both the tenant and the landowner, depending on their individual circumstances.

One of the main advantages is that once agreement is reached on the basic lease, it can be used for many years. The automatic adjusters keep it current as prices and yields fluctuate during a year and from year to year.

Another advantage is that tenants and landowners share the risks and the rewards. Under most flexible rental agreements, tenants have less risk than they would with a cash rent arrangement. They would, in turn, give up some profit potential.

Because flexible rental agreements are more complicated than other lease arrangements, it can be difficult and time-consuming to develop the basic rental agreement and the conditions for using the adjustment factors.

Another drawback is that the final rental payment often can't be made until after harvest.

Perhaps the biggest disadvantage is that some flexible leases create a share lease which requires that the landowner and tenant share direct and counter-cyclical payments.

Before he retired from Purdue University as an Extension economist, Howard Doster devised a flexible rental arrangement that uses what he calls outside-the-farmgate adjusters. (The sidebar above tells how to access a bulletin on the Purdue Web site that explains the terms of that lease arrangement. Doster can be reached by phone at 765/412-1495 or by e-mail at: bhdoster@earthlink.net.)

Doster's lease uses a county yield figure rather than yield figures from the farm being rented. That distinction means the USDA-Farm Service Agency (FSA) views his lease as a cash lease. If yield figures from the actual farm were used, the FSA would treat it as a crop-share lease.

There has been a lot of confusion on this point. On April 2, the USDA-FSA issued Notice DCP-172 that clarifies its position. That notice was sent to state and county offices. It's also available at the FSA Web site (see above sidebar).

Prices are adjusted by using the average prices for certain dates at a local elevator. Those dates need to be agreed upon in advance, of course.

Doster says one of the best things about flexible leases is that they let you "nurture a relationship with your landowners." That's in contrast to having to renegotiate rental agreements every year or two.

"Plus," Doster adds, "with this lease, the landlord need not monitor the tenant's actual performance, and the tenant can plant, harvest, and market the crop whenever he or she chooses. And they don't even have to share yield information with the landowner."

Most land rental agreements start going out of date the minute they're signed. That's because market prices, yields, government payments, and production costs all change over the course of the contract. Some years they change a little; some years they change a lot. When one of these factors changes a lot, one party benefits at the expense of the other.

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