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The latest on flexible cash land leases
Crop prices are expected to decline this fall, as the futures market already indicates. This would be the opposite of what happened the past few years during the late summer months.
Looking ahead, tenant operators see the potential risk of paying high fixed cash rental rates for 2014, while many landowners recognize the need to create a reasonable cash rental rate.
As an alternative to using a straight cash rental agreement, a flexible cash rental arrangement can serve both parties well by sharing the risk and the reward. During the past few years, most of the production and crop price risks have been transferred to the tenant operator of the cash-rented farm. Since 2010, Iowa cash rental rates have increased by nearly 47%. The statewide average cash rent in 2013 is now estimated at $270 per acre, with even higher amounts for more productive farmland.
However, much of the increase in cash rental rates was fueled by cash crop prices that averaged $5 to $7 per bushel for corn and $11 to $14 per bushel for soybeans over the past three years. The USDA midpoint cash price for the 2013 crop is currently forecasted at $4.80 per bushel for corn and $10.75 per bushel for soybeans, respectively.
A 2012 survey of farmland owners in Iowa indicated that 16% of the farmland that’s cash rented used some sort of flexible arrangements. Landowners who adopt a flexible cash farm lease typically receive a guaranteed base cash rent amount, in addition to a potential flex payment triggered by higher gross revenue(yields times price) that often subtracts the total cost estimate of producing the crop.
Using flexible cash farm leases will likely be fairer to both the landowner and tenant. However, the challenge is coming up with a base rent amount, maximum cash rent and a way to determine a flexible payment that both parties can understand and deem as being fair.
The lease agreement needs to establish how the farm’s actual yield (dry weight for corn adjusted to 15% moisture) is determined. It might require grain bin measurements, scale tickets, settlement sheets, yield monitor data, grain cart scales or other verifiable methods.
Or, simplify the yield information so it’s the same as the Actual Production History (APH), provided annually for crop insurance purposes. A copy of the farm’s actual proven yield for APH purposes can be provided to the landlord on or before Dec. 1 to calculate the farm’s potential flexible lease payment.
Averaging a series of harvest delivery bids at a local co-op or elevator is worth consideration for establishing the crop price on a flexible lease. Averaging a price overcomes the potential low harvest price bias, and yet reflects the cash price for late delivery. This is a price that the tenant could have received during the year should they decide to forward-contract a portion of their crop on that farm for fall delivery.
The average cash price for a flexible lease payment could be the harvest bid set by a local elevator, possibly four times during the year: mid-January, mid-April, mid-July or mid-October. Specific days of the month should be established. If you specify the 15th of the month, for example, include in the lease that if the 15th falls on a weekend, then use the trading day closest to the 15th.
If you want more pricing periods, choose one day of the month to collect the harvest delivery bids. If both parties prefer to reflect a longer period of monthly averages, consider January through October. To avoid having to record this price every month, you could ask the local grain merchandiser simply print out the average price when the harvest is finished. Also ask that they sign and date this information so both the tenant and landowner are comfortable with the source of this data.
How to determine the flexible lease triggers for both corn and soybean crops needs to be established in your rental agreement. If crop production costs appear to be too high or too low annually, then changes could be made to the base rent, maximum rent, and the flexible cash lease triggers that more accurately reflect cost of production. For 2014, consider delaying the flexible payment trigger after until the gross crop revenue exceeds the base crop cost estimate trigger for each crop.
ISU Extension publication FM-1712, Estimated Costs of Crop Production could be used to set an estimate for cost of production. This publication is printed annually and will be released in early 2014 and posted to the ISU Ag Decision Maker web page.
Non-land costs in 2013, for conventional tillage and a medium yield, would be $501 per acre for a corn-following-soybeans rotation, and $272 per acre for a soybeans-following-corn rotation. Let’s assume the base rent used to determine the crop cost estimate will be the Iowa average cash rental rate of $270 per acre.
Once the base crop cost triggers are established, consider a flexible payment of approximately 33% of the difference between the final gross crop revenue minus the base crop cost estimate.
Corn example: A farm produces a 168 bushel per acre actual dry weight corn yield. The average cash price during the year for harvest delivery is $5 per bushel. (168 X $5 = $840 per acre). Subtract from this amount the base crop cost estimate of $771 per acre to get $69 per acre difference. The flexible payment would thus be 33%of this amount, or an additional $23 per acre on all corn acres. This could be paid in addition to any unpaid portion of the base rent in early December since both the price and yield is known.
Soybean example: A farm produces a 48 bushel per acre actual soybean yield and the average cash price is $11 per bushel (48 X $11 = $528 per bushel). The actual revenue falls below the base crop cost estimate of $542 per acre, so there would be no flexible payment on soybean acres, in this example.
Check out the following websites for assistance in helping you put together a workable, flexible cash farm lease for 2014: