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Interest grows in flexible rent

07/06/2012 @ 11:03am

The graph above compares a $250 cash rent to a flex rent with a $150 base and 25% of revenues above $500 per acre. If revenue exceeds $900, the landowner receives rent that is higher than the base.

High grain prices the past two years have caused big increases in cash rent for farmland throughout the Midwest.

Iowa State University (ISU) survey results released in May estimate that the average cash rent for corn and soybean land in the state had increased 18% to $252 per acre. That's a jump of $38 per acre on the heels of a $30-per-acre increase the previous year.

“This is the largest one-year increase since the statewide survey began in 1994,” says William Edwards, an ISU Extension economist. “In many counties, respondents indicated that typical rents were $400 to $500 per acre or more for the higher quality land.”

Iowa is not alone. University of Nebraska ag economist Bruce Johnson says rents in his state for 2012 are up 15% to 20% over 2011 averages. Last fall, Purdue Extension economist Craig Dobbins reported a 13% increase in cash rents for 2011 over 2010.

Those lofty prices illustrate the tremendous volatility in the cash-rent market. Unfortunately, cash-rent agreements don't respond well to volatile markets.

Cash rent has worked fairly well over the years, or it wouldn't have kept growing in popularity. But with the tremendous volatility in grain prices and input costs since late 2006, the inherent problems with cash rent have come to the surface. The primary problem is that conditions start changing the minute you sign a cash-rental agreement.

“Recent volatility in both cash commodity prices and yields has complicated the task of predicting anticipated revenues,” says University of Nebraska Extension educator Tim Lemmons. “Further uncertainty in crop-production expenses has made negotiating cash rents difficult.

5 Flexible Cash Farm Lease Websites

● Iowa State University (ISU) Ag Decision Maker – Extension Economics www.extension.iastate.edu/agdm

● Farm Doc – University of Illinois Extension Economics www.farmdoc.illinois.edu

● Ag Manager – Kansas State Extension Economics www.agmanager.info

● Ag Economics – Purdue University www.agecon.purdue.edu

● Farm Management – ISU Polk County Extension www.extension.iastate.edu/polk/farmmanagement

Source: Steve Johnson, ISU Extension

“In years when crop prices are high and/or yields are good, the landowner may question whether the rent should be raised significantly the following year,” he says. “In years when crop prices are low and/or yields suffer, growers may not receive enough cash income to cover higher cash rents and production expenses.”

This volatility in grain prices, input costs, and, in some regions, yields has created lots of turmoil in the land-rental market. This turmoil, subsequently, seems to be increasing the adoption rate of so-called flex rents.

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