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A case for flexible land leases after a drought

Jeff Caldwell 10/05/2012 @ 9:48am Multimedia Editor for Agriculture.com and Successful Farming magazine.

Grain prices are at levels where profit's not all that difficult to nail down, if you have a crop. Taken alone, that's good. But, a recent trend in risk exposure on the land rent market has one economist encouraging farmers renting ground to look to share or flex leasing to avoid taking on too much risk in the event that commodity prices fall.

"Trends in land rental rates and agreement types suggest that tenants are taking on more risk exposure. This is a serious concern for all farm operators, but especially for those who are highly leveraged and/or rent a large proportion of their acres," says University of Illinois ag economist Nick Paulson.

After a crop year like 2012, talking a landowner into a flexible or shared lease agreement versus a more typical cash rent may be a tough case to make; this year's drought would have forced risk on the landlord under a flexible cash rent versus in a straight cash rent agreement under which the farmer would have shouldered the full crop risk burden. But, at the same time, some flexible lease arrangements could offer a landowner more financial incentive, Paulson says. That latter point is one renting farmers can use to help encourage their landowners to take the flexible route.

"Given market trends toward cash rental arrangements, convincing landlords to use a share or flex lease may be difficult. The averages for share and flex lease payments do not illustrate the full variability in payment levels associated with these types of arrangements. Moving to a share or flex lease will also shift some risk from the tenant to the landlord," he says. "Price and yield levels since 2008 have resulted in the 'typical' 50-50 share lease, and a similar flex lease payment equal to 40% of gross revenue, providing payments to landowners which may exceed average fixed cash rent levels in Illinois. This might also be true for the 2012 crop year due to high commodity prices despite large yield losses throughout the state."

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