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.