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Volatility fuels flex lease interest

Jeff Caldwell 12/20/2012 @ 7:46am Multimedia Editor for Agriculture.com and Successful Farming magazine.

With sharp variation becoming a common theme in both crop markets and yields, more landowners are turning to flexible leasing arrangements to hedge against potential profit losses, one expert says.

But flexible leases aren't just good for the landlord -- more farmers are seeing the benefit of utilizing flexible terms for a lease agreement, especially when the alternative is a lease rate that's sky-high, says University of Missouri Extension ag economist Ron Plain.

"A lot of landlords are looking to get more money given the higher crop prices, and tenants are uneasy about locking themselves into a high fixed rate because of the yield risk," Plain says in a university report. "So there has been growing interest in a variable rate in which the payment is not a portion of the crop but a cash payment that will vary depending on crop prices and yields."

So, if everyone can benefit from a flexible lease arrangement, what's the best way to structure it? First, consider basing it on historical price, rent, and yield levels, extrapolating what today's rent will be based on that broader context.

If the landowner wants to share in the crop risk, Plain recommends putting part of the crop output on the table. Doing so has its pros and cons, though.

"One that varies just for price is where a tenant pays the landlord the value of X bushels of crop. In the case of beans, for example, say 8 bushels per acre is what the tenant is going to pay. You multiply that times harvest price, and that’s how many dollars per acre the operator pays," Plain says. "One of the drawbacks to these flexible arrangements is that until the harvest comes in and you see harvesttime prices, neither the landlord nor the tenant knows what the rent will be for the year."

Specific to the coming year, land lease levels will depend the most on Mother Nature. If rainfall levels and resulting crop output levels return closer to normal, it's likely to push grain prices lower, in turn lowering lease rates. That's another good thing about flexible leases if they're tied to both crop yield and price.

"If you look at how high we’ve pushed some cash rents, there are probably going to be some situations in which these cash rents are going to have to back down a bit," Plain says. "If it rains more in 2013 and we have a better crop, we are going to see crop prices back down."

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