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Brush up on your farm land lease options

The deadline is looming in some states for nailing down farm leases for the coming year. It's important to know what your options are before stepping to the farm lease arrangement table, as decisions made now will likely have ramifications through the 2008 crop year.

Finding the right land lease agreement "requires some careful thought," according to Iowa State University Extension economist William Edwards. While there are a number of options available to farmers and landowners, Edwards says a big factor to consider is the level at which the landowner wants to participate in the farm's operation. With straight cash leases, Edwards says the landowner has little or no involvement in the farm.

"Cash lease agreements are popular with landowners because they provide a fixed income, at least for the length of the contract, and require very little involvement in the management aspects of growing and marketing the crop," Edwards says. "Many tenants prefer cash leases as well. When a tenant is renting from multiple owners, cash rents reduce the amount of record-keeping needed and let the tenant manage all the rented acres as a single unit."

Other cash lease advantages include the ability to commingle grain for storage and marketing, as well as the ability by the tenant to rent land based on average expected yields, generating extra income through achieving above-average yields. But, cash leases are not without disadvantages, Edwards warns.

"The primary disadvantage of a cash lease is the need to agree on a rental rate that accurately reflects the profit potential of the farm. Tenants and owners need to re-evaluate the amount of rent periodically, sometimes annually," Edwards says. "When yields and prices are relatively stable, setting the rent may be fairly easy. However, when conditions are more volatile it becomes more difficult to determine a mutually agreeable rent."

If the landowner seeks an active role in the management of costs and returns with the farmer, a crop share may be the desired agreement. Personality is an important indicator of whether a crop share is the right way to go, according to Edwards.

"Whether landowners are willing to take on the added financial risk and management considerations of a crop share lease is a very individual question. Retired operators who still want to have active involvement are good candidates for share lease agreements," he says. "In other cases, a professional farm manager may be hired to carry out the owner's management and marketing responsibilities."

Crop share leases can typically work well for young or beginning farmers, as they can require a smaller capital expenditure and can expose the younger operators to landowners who may be well-experienced in managing farm ground.

"Both parties automatically share in increases or decreases in profits, making yearly negotiations about rental terms unnecessary," Edwards says. "Share leases also allow young operators to benefit from the expertise of experienced landowners, and decrease the amount of operating capital the tenant has to supply by over 50%."

Landowners who are inclined to sharing the most management and risk with the farmer should look to custom-farming. This type of agreement makes it possible for the farmer to avoid all operating risk while putting his or her machinery to full use.

"Tenants who custom farm often find that adding some extra land with a guaranteed return allows them to fully utilize their machinery and labor with adding financial risk," Edwards says.

Flexible cash leases comprise another group of options for farm rental agreements. These use different factors -- including price ratios and fixed commodity quantities -- for pricing. It's a cash rent, but allows the landowner to share some price risks with the farmer, unlike conventional cash leases.

The deadline is looming in some states for nailing down farm leases for the coming year. It's important to know what your options are before stepping to the farm lease arrangement table, as decisions made now will likely have ramifications through the 2008 crop year.

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