Three More Ways to Determine Flex Rents

By Jane Fyksen Crops Editor
Thursday, October 23, 2008 7:44 AM CDT

In these turbulent times, producers will be taking a hard look at their farmland leases. Some will reportedly even be letting some rented land go next year to rein in risk and outlays for inputs. Bill Edwards, Iowa State University economist, this week continues to draw upon an ISU survey of flexible cash rental agreements producers have been using.

Last week, this series focused in on flexible rent based on actual gross revenue, as well as “base rent plus a bonus.” This week, Edwards shares actual examples of flexible rents based on yield only or price only, as well “profit-sharing” arrangements.

“Some flexible lease agreements specify a base or minimum rent per acre plus a bonus based on the actual yields harvested,” says Edwards. “In these cases the tenant bears all of the price risk.” Here are some examples:

- $1.25 per bushel for corn over 150 bushels and $3 per bushel for soybeans over 45 bushels, on top of $130.

- Corn yield above 180 bushels adds $10 per acre, while bean yield above 56 bushels adds $10 per acre.

- Corn: Base is $190 up to 170 bushels per acre (175 bushels, $195; 180 bushels, $200; 185, $205; 190, $210; 195, $215; 200, $220). Beans: Base is $190 up to 50 bushels per acre (52.5 bushels, $195; 55, $200; 57.5, $205; 60, $210; 62.5, $215; 65, $220).

- Corn yield over 165 bushels is shared 50/50. Bean yield over 50 bushels is shared 50/50. This keeps rent from getting too high on poor yield.

- Corn: Actual yield X $1.40 a bushel.

- Base cash rent plus bonus when yield exceeds a predetermined level. The example is: $180 an acre base plus $50 per acre if yield exceeds 200 for corn.

Flexible rent can also be based on price.

“Some flexible lease agreements base the final rent on price only, or the rent may be defined as a fixed number of bushels,” Edwards elaborates. “With these agreements the tenant bears all of the yield risk. Crop insurance protection would be advisable in this type of lease.” Examples include:

- Final rent is determined using cash prices Nov. 1 X 60 bushels of corn and 23 bushels of beans.

- Base (minimum) rent and a cap; in between, use an average of 60 bushels of corn and 23 of beans X Nov. 1 local price.

- 35 percent X 160-bushel yield per acre X price; price is the average of 25 pricing dates using December bids at local co-ops.

- $175 base rent, $225 top based on price of corn Nov. 1.

- Average price of 25 sale dates at local elevator X 175 bushels X 38 percent.

- River-market price for corn on Feb. 28 for October delivery X established sliding scale.

- 33 bushels of corn or 10 bushels of beans per planted acre, plus $110 cash on March 1.

- Base price of $190 per acre with cap of $230 per acre, based on price of corn and soybeans Oct. 31 at 2 p.m.

- Average of market price on Jan. 15, March 15, May 15, July 15, Sept. 15 and Nov. 15 for corn and soybeans X 30 percent of 50 bushels per acre for soybeans and 30 percent X 150 bushels for corn.

- High producing ground is 75 times December corn futures based on average of June 1, Sept. 1 and Dec. 1.

- Average of CBOT price Dec. futures for January through June X a factor of 50. Example is: $5 corn price would equal $250 per acre rent.

Still other agreements estimate the profit each year after paying all other production costs and divide it between the tenant and the owner. Under these profit-sharing flexible rent agreements, Edwards says the owner bears some of risk of increasing production costs as well as yield and price risk. Here’s how surveyed producers describe this type of lease:

- Lease is based off of a traditional 50/50 crop share except tenant pays all expenses and sells all grain, and landlord receives 50 percent “cash rent” based off of net income.

- Actual bushels X fall average price, minus inputs, divided by 2, equals final rent.

- Take published county yield for crops grown and the statewide published average price for crops grown to determine gross revenue. Gross revenue n cost of production and base land cost equals net revenue, and tenant and landlord share the net (35 percent for landlord and 65 percent for tenant).

- After expenses, about 10 percent of extra profits to landlord (figure 150 bushels at $4 = cost).

Edwards says regardless of which type of flexible lease agreement is used, it’s important to describe the procedure for determining the final rent in writing, “with some examples to illustrate it.”

For farms enrolled in federal commodity payment programs, the lease should be on file with the county Farm Service Agency, he advises, reminding that the terms of the lease may affect how some USDA commodity payments are shared.

An interactive spreadsheet to analye flexible farm lease agreements is available at www.extension.iastate.edu/agdm/wholefarm/xls/c2-21flexiblerentanalysis.xls.

Indepth analysis of farmland leases can also be had at www.extension.iastate.edu/polk/news/Flexible+Cash+Farm+Leases.htm.

Purdue University has a new collection of farmland leasing resources at www.agecon.purdue.edu/extension/pubs/farmland_values_resources.asp.

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