Using flexible cash rental agreements
Recent weather conditions and unprecedented volatility in crop prices and input costs are encouraging many farmers to find new ways of managing risk, notes a University of Missouri Extension agriculture business specialist.
"Land rental agreements are one aspect of crop production many farmers are reconsidering as part of their risk management plan," said Whitney Wiegel.
For many years, Midwestern tenant farmers have used crop share and cash rental agreements to secure land for raising crops. Today, more farmers are looking at flexible cash rental agreements, which are a sort of hybrid of the two, Wiegel said.
In crop share agreements, landowners and tenants have typically shared the harvested crop or gross revenue in proportion to the total production expenses paid by each party.
In cash rental agreements, the tenant agrees to pay a fixed dollar amount for a given area of land. This type of lease has grown in popularity as more land has been inherited by heirs who don't farm or purchased as an investment by people with no farming experience.
"They typically require less time and effort to maintain than crop share agreements," Wiegel said. "Also, since the landowner is not typically involved in any aspect of growing the crop, tenants have a greater freedom to make their own management decisions."
Boom and bust
However, one of the advantages of cash rental agreements--both tenant and landowner know how much they will pay or receive for the land--can also be a source of stress.
"Because the rent amount is fixed, neither the tenant nor landlord is protected if actual yield or market price differs from their expectations," Wiegel said.
When yields fall short or market prices plummet, the tenant takes a big financial hit. Conversely, the landowner receives no additional benefit during production booms or times of high market prices.
This year was particularly stressful for many tenants and landowners because much of the western Corn Belt saw both extreme weather and highly volatile crop prices.
"Because of this, many tenants and landowners are exploring the use of flexible or variable cash rental agreements," Wiegel said.
Risk and reward
Under a flexible cash rental agreement, the rental rate adjusts in accordance with actual yield, market prices or both.
"These types of payment arrangements capture some of the benefits of both crop share and standard cash rental agreements," he said. Flexible cash rental agreements provide a more equitable sharing of the risks and rewards of farming and land ownership.
Under this type of arrangement, the tenant gives up some profit potential in return for reduced risk. Landowners receive less rental income if crop yields or market prices fall short of expectations, but they get more when there's an exceptional harvest or a big increase in crop prices.
Like a standard cash rental agreement, flexible cash rental agreements are relatively easy to maintain for landowners who do not have extensive knowledge of farming practices. Agreements typically define a base rent, which may be adjusted up or down based on yield, on prices or on revenue. The agreement may also define a minimum (floor) and maximum (ceiling) rental rate.
For examples of different types of flexible cash rental arrangements and more information about farm lease agreements, see these MU Extension publications: Flexible Cash Rental Arrangement (G423) is available for free download at www.extension.missouri.edu/g423; Farm Lease Agreement (G426) is at www.extension.missouri.edu/g426; and an interactive Flexible Cash Rental Arrangement calculator is available at www.extension.missouri.edu/scripts/explore/g00423a.asp.