Flexible Cash Rents

I am not a farm rental contract guru by any means. However over the past couple of weeks I've received several calls requesting what is an appropriate cash rent level in Clinton County. Obviously this depends on several factors which I'm not going to cover here. Instead, I want to talk a little bit about, or at least offer some resources on, flexible cash rents.

Among the calls I've been getting has been one which generally asks, "How do I put a rent together which lets both me and the farmer take advantage of really good years?" My response has been to take a look at a flexible contract. Flexible contracts set a floor or base rent for cropland with the landowner capturing a certain amount of income above a set level.

As an example, a landowner and farmer may set a base rent of $200/acre based on 200 bushels of $5 corn (I'm using these figures because it makes the math easy) or a gross revenue of $1000/acre.

If corn price is $6 and yield is 200 bushels, then the gross is $1200 and in a flexible rent system the landowner would receive a certain percentage of the $200 overage. The same type of overage might apply with a very good yield - say, 220 bushels at $5.

These systems are pretty simple in concept but because of the uncertainties they can be pretty complicated in practice. A key point is, How do you set the price? Is it a)local cash price twice a year b)averaged on a certain day of each month through the year, or c)some other way? From a farmer's perspective this type of rental agreement fails to take input costs into account. Crop prices may look very good but input costs have this pesky habit of rising when prices are good so this isn't the entire story. Also, if you want to share in the potential upward benefit, you should be prepared to share in some of the downward risk as well.

I'll also caution landowners that a 50-50 split of the overage isn't appropriate (at least that I can see). Keep in mind that for every additional bushel of grain harvested, the farmer has some costs associated with it. That bushel must run through the combine and be hauled to the elevator. For corn it will usually need to be dried and, in theory at least, each additional bushel will require additional fertilizer.

Rather than summarize what people more experienced and informed than I have to say about this, I'm going to refer you to an online resource (initially I was going to include links to Ohio State, Illinois and Iowa State but those are on this page).

Purdue's Farmland Leasing Page - This page has a variety of land rental resources including a link to the cash rent and land values survey. Toward the bottom of the first section are a couple of Purdue resources including a flex rent calculator. If you move further down the page under "Flexible Cash Rent Leases" you'll find information from other Universities.

Flexible rents can be a useful way of allowing landowners and farmers to share in profitable years. I do caution people to remember that to date, these agreements do not typically account for variations in input costs, something which will have a tremendous impact on profitability. Hopefully in the future this type of adjustment may also start being factored into agreements.