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Keep up with land rents in a drought year

The longer the drought of 2012 persists, the more wrinkles the devastating weather pattern develops for farmers.

The latest one has ramifications well beyond when the rain starts to fall. This summer's drought was preceded by years of skyrocketing farmland values that have jacked up crop breakeven prices and, consequently, revenue needs for farmers buying or renting land that costs twice what it did just a few years back.

Now, a drastically shortened crop could make thriving in this land value environment a heavy lift for some farmers, especially with land rental agreements.

"The ability to meet rent payments will vary widely among tenants due to the differing financial impacts of the 2012 drought," says Purdue University Extension ag economist Chris Hurt.

Unfortunately, a contract's a contract, so legally there's not much recourse for the farm renter if the crop falls apart and he or she bears all the yield burden. But, if the landowner structured a contract that, in one way or another, shares some of that burden of production, it puts the farmer in a much better position.

"If it is a crop share lease, the landowner is in a similar position to the tenant," says Hurt's colleague and fellow Purdue Extension ag economist Gerry Harrison. "If the lease is a 'flex' lease, what is the flex provision? If the flex is based on crop yield, the lack of yield may remove any liability the tenant has, based on the flex provision. If the flex lease is based on price for the crop, the tenant with a short crop may have a serious problem."

These conditions make it important for landowner and tenant to come together and create a plan for the inevitable yield cut because of drought. Though just keeping communication between the 2 parties is important, it's just as important for both to be willing to bend a bit if everyone's going to make it through the drought.

"At the very least, some flexibility in non-payment of rent by the due date might be needed this year until a crop insurance payment or a loan becomes available to the tenant," Harrison says.

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