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Rent roulette

Agriculture.com Staff 02/17/2009 @ 2:10pm

Cash rent has been the arrangement of choice for leasing cropland throughout much of the country for several years. That's especially true in the Corn Belt, where 80% of the rented land in the Seventh Federal Reserve District (Iowa, Indiana, Michigan, Wisconsin, and most of Illinois) is rented for cash. Only 17% is rented on a crop share basis.

Both tenants and landowners have willingly turned from crop share arrangements to cash leasing. Bruce Johnson, a University of Nebraska ag economist, says tenants like the greater management flexibility, while landowners like the fixed cash payment and relief from management responsibility.

But in tumultuous times like these, it's difficult to know how much the cash rent should be. That has created more interest in flexible cash rents among growers and landowners alike.

"When yields and prices are relatively stable, setting the cash rent may be fairly easy," says Iowa State University ag economist William Edwards. "However, when conditions are volatile, it becomes more difficult."

Most years, the volatility relates to yields and/or prices. But now there is also a lot of volatility in input costs, particularly fertilizer and fuel. Risk has also become a bigger factor.

University of Illinois ag economist Gary Schnitkey says farmers now face more risk than they did just a few years ago for three reasons:

  • "First, price variability likely will be higher over the next several years.
  • "Second, federal commodity programs will not provide as much downside price protection.
  • "Third, revenue for crop insurance must fall more in periods of high prices before insurance payments are received.

"The risk, as well as the substantial upside potential, argues for flexibility in leasing arrangements offered by variable cash or share rent arrangements," says Schnitkey.

Howard Doster, a retired Purdue University ag economist and long-time proponent and developer of flexible cash rents, says the problem with most rental agreements is "they start going out of date the minute they are signed."

Kansas State University ag economist Kevin Dhuyvetter has been wrestling with cash rent issues this winter, even though roughly two thirds of the leases in Kansas are crop share arrangements.

"Cash rental terms quickly become inequitable as prices change. Establishing a fair cash rental rate under current economic conditions is very difficult because of the volatile markets," he told a group of farmers at a December meeting.

Dhuyvetter illustrates his point by using KSU-Lease, a what-if spreadsheet that analyzes the terms of virtually any type of lease.

"We used expected prices for 2009 last August to determine the cash rent equivalent of a 1/3-2/3 crop share lease in south-central Kansas, and it came out to over $90 per acre," he says. "When we updated these prices in October, the equivalent cash rent was about $51 per acre. And when we did it again in early December, the value was $31 per acre. While these examples held input costs constant, which is not quite right given recent declines in fuel and fertilizer prices, they do show the tremendous variability that exists and the importance of using a lease with flexibility."

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