Flexible rent gains ground
Cash rent has been, far and away, the most popular type of land rental agreement for many years, and it will probably remain so for years to come. Tenants like the flexibility that cash rent provides. Many landowners like not having to market grain or to make other management decisions, and many like knowing exactly how much rent they will receive.
But in tumultuous times like these, it's difficult to determine a realistic rent before the crop is even planted.
“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 or prices. But in recent years, there has been a lot of volatility in input costs as well.
This volatility has spurred interest in flexible cash rents among operators and landowners alike. With this type of lease, the rent is not determined until the crop is harvested. Another factor making flex rents more attractive is that the Farm Service Agency no longer views certain types of flex rental agreements as share leases. Finally, crop revenue insurance can be used to provide income protection for both the tenant and the landowner.
There are many variations of flex rent. Most agreements flex based on yield, commodity prices, or both. (A few also flex as input costs change.) Edwards cautions against agreements that only flex on yield or price rather than both.
“Leases that base the rent on price only or yield only may actually increase the tenant's risk in some years,” he says. “This is because prices may be high when yields are low, or prices may be low when yields are high. So adjusting the rent based on just one factor does not always reflect the actual profits received in that year.
“The most common type of flexible lease calls for the owner to receive cash rent equal to a specified share of the gross revenue of the crop,” he says.
“Another type of flexible lease formula specifies a base or minimum rent, plus the owner receives a share of the gross revenue in excess of a certain base value,” says Edwards. For more information about these agreements, go to www.extension.iastate.edu/agdm. Scroll down to “Whole Farm” and click on the title “Leasing.” Start with the paper entitled Flexible Farm Lease Agreements (C2-21).
There are advantages and disadvantages with flexible rent for both tenants and landowners. One of the main advantages is that once agreement is reached on a lease, it can be used for years. The automatic adjusters keep it current as prices and yields fluctuate. (Input costs may need to be addressed periodically.)
Another advantage is that tenants and landowners share risks and rewards. Under most flex agreements, tenants have less risk than they do with a flat cash rent. They may also give up some profit potential.
There are also disadvantages with flexible cash leases. Because flex agreements are more complicated, it can take longer to develop the basics and the conditions for using the adjustment factors. And the final rental payment often can't be made until after harvest.