Flexible Cash Lease Programming in NE
Flexible Cash and
Alternative Lease
Programming in Nebraska
Presented by:
T. Lemmons
University of Nebraska – Lincoln Extension
tlemmons2@unl.edu
Flexible Cash Lease Programming in NE
Agenda
• What does Flexible Cash and Alternative Leasing
education look like in Nebraska?
• What is our approach to education?
• What are the predominant methods of flex leasing
we use?
• What are the challenges we are addressing?
• How can we assist you with flex and alternative
lease education in your communities?
• Questions
Flexible Cash Lease Programming in NE
Nebraska Program Goals
and Educational
Approach
Flexible Cash Lease Programming in NE
Programming in Nebraska
• Flexible cash leases presented over the past 5 years in
more than 100 locations across the state
• Typically will dedicate 45-50 minutes of presentation
time to the topic
• Most recently, grant funding will provide for a 2.5 hour
program focusing on flexible cash and alternative lease
programming
• Educational outreach includes:
• Face-2-Face workshops
• Awareness educational events (conferences, clinics, farm
shows, etc.)
• On-line tools (Excel-based tools, white papers, NebGuides,
Ext. Circulars, Webinars, Online Video, individual education)
Flexible Cash Lease Programming in NE
Goals of the Programs
• Improve awareness of flex leases as a risk management and
asset investment tool for producers and land owners
respectively
• Improve the current use of flex leases – focus on greater
efficiency and cleaner application of the tools
• Improve the use of the future flex leases – focus on greater
efficiency and cleaner application of the tools with increased
adoption
• Improve the adaptation of existing lease types to achieve
regional impact and individual operational/investment
objectives
• Demonstrate/report positive cost/benefit to all users
Flexible Cash Lease Programming in NE
Approach to
Programming in
Nebraska
Flexible Cash Lease Programming in NE
Our Approach to Programming
A. Establish a “base rent”
B. Decide on how the rent will be adjusted
C. Establish the ceiling and floor
D. Set the payment dates
E. Get the lease in writing
F. Communicate and maintain the lease
Flexible Cash Lease Programming in NE
Our Approach to Programming
Rent per
Bushel
Rent per Unit
Price
Unit Change
Share Leases
Bushel Bonus
And Sched.
Percent/Ratio
Yield
Flexible
Lease
Net Change
Price Bonus
And Sched.
Percent/Ratio
Price
Percent/Ratio
Income
Overall Yield
Cash Lease
Gross Change
Overall
Income
Flexible Cash Lease Programming in NE
Examples of Methods
Used in Nebraska
Flexible Cash Lease Programming in NE
Alternative Leasing Methods
• Scheduled rents
• Yield schedules
• Price schedules
• Bonus rents
• Based on yield
• Based on price
• Based on income
Total Production – Actual Yield
Adjusted Rent
180 bu./acre – 189 bu./acre
$274/acre
190 bu./acre – 199 bu./acre
$289/acre
200 bu./acre – 209 bu./ acre
$304/acre
210 bu./acre – 219 bu./acre
$319/acre
220 bu./acre +
$334/acre
Farm Base Rent
5-yr Farm Olympic APH
$320
210 bu.
Final Farm Production
230
Additional Bushels Produced
20
Rent Adjustment
$1.50 x 20
$30
New Rent
$350
Flexible Cash Lease Programming in NE
Rent by Unit of Production
• Understanding that there is a historic or expected value
attached to each unit of production that pays for cash rent
• Therefore…
• If…
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑛𝑡
𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐 𝑜𝑟 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑌𝑖𝑒𝑙𝑑
$300 𝑝𝑒𝑟 𝐴𝑐𝑟𝑒 𝑅𝑒𝑛𝑡
= Some Rent per Bushel
𝐹𝑎𝑟𝑚 𝐴𝑃𝐻 𝑖𝑠 200 𝐵𝑢𝑠ℎ𝑒𝑙𝑠 𝑝𝑒𝑟 𝐴𝑐𝑟𝑒
Then the Rent-per-Bushel is $1.50
• Apply this to the final yield to arrive at a final rent due
Flexible Cash Lease Programming in NE
Percent or by Ratio Rent Changes - Yield
• Multiple methods to arrive at same final rent
1.
Use a percent change equation -
2.
Use a ratio of -
3.
Use a ratio of –
𝐴𝑐𝑡𝑢𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒
𝑁𝑒𝑤 𝑉𝑎𝑙𝑢𝑒 −𝑂𝑙𝑑 𝑉𝑎𝑙𝑢𝑒
𝑂𝑙𝑑 𝑉𝑎𝑙𝑢𝑒
x BR
𝐴𝑐𝑡𝑢𝑎𝑙 −𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑
where BR = Base Rent
+ 1 ∗ BR
∗ 100 ∗ 𝐵𝑅
Flexible Cash Lease Programming in NE
Simple Example of this Approach
Farm Base Rent
$320.00
Expected Yield (in this case, 5yr farm APH)
210 bu.
Actual Production
220 bu.
Difference (Actual – Expected)
+ 10 bu.
Ratio of Change
=
New Rental Payment
($320) x (104.76) =
𝟐𝟐𝟎 𝑩𝒖.
𝟐𝟏𝟎 𝑩𝒖.
104.76%
~$335
Represents a farm that realized 104.76% of expected
production, thus receives 104.76% of expected rental
payment
Flexible Cash Lease Programming in NE
Other Approaches Using Ratios/% Change
• Variable rent by price – except……
Flexible Cash Lease Programming in NE
Percent Change in Income
Farm Base Rent
$320
Farm Base Rent
$320
Expected Yield
210 bu.
Expected Yield
210 bu.
Expected Farm Price
$3.50
Expected Farm Price
$3.50
Exp. Farm Income (less Govt.)
$735.00
Exp. Farm Income (less Govt.)
$735.00
Actual Yield
205 bu.
Actual Yield
225 bu.
Actual On-Farm Price
$3.98
Actual On-Farm Price
Actual Farm Income (less Govt.)
~$815
Actual Farm Income (less Govt.)
Difference (Ratio/%, $)
New Rent
~$80 / 8.0%
$345.60
Difference (Ratio/%, $)
New Rent
$3.20
~$720.75
~-$14.25/ -2.4%
$312.32
Flexible Cash Lease Programming in NE
Other Methods Examined
• Percent of Gross Yield produced
• Based on a historic average of an area’s rent against
average yield
• Based on a farm’s base rent against the farm’s expected
on-farm-price cash received and expected rent
• Equations for converting bushels needed to cover
rent into final landowner payments – exceeds the
discussion today
Flexible Cash Lease Programming in NE
Challenges in Education
and Adoption
Flexible Cash Lease Programming in NE
Challenge #1
• How do you find a “fair” base rent?
•
•
•
•
•
•
Use historic average?
Use an area average?
Use an expected average?
Use a return on investment?
Adopt from crop-share?
Etc.
• Ultimately, the answer is – “Whatever the landowner is
willing and able to accept and the tenant is willing and
able to pay”
Flexible Cash Lease Programming in NE
Challenge #2
• No floor or ceiling on the contracts
If Rent Falls Above $340, the Default Max Payment is
Made
Maximum Rent
$340
Base Rent
$320
Minimum Rent
$300
If Rent Falls Below $300, the Default Min Payment is
Made
Rent
Range
Flexible Cash Lease Programming in NE
Challenge #3
• Too complex for all to use….
• Majority of program participants are aged 60+
•
•
•
•
Do not want to learn how to use flex leases
Do not think they can learn flex leases
Look at the formulas and assume it’s too tough to implement
Are resistant to converting oral leases to written leases
• Early adopters of flex leases
• Young farmers and ranchers
• Farm management companies and independent consultants
• Estate owners savvy with managing financial investments
Flexible Cash Lease Programming in NE
Challenge #4
• Equations are just too simple to use
• Argument that using percentages of change or ratios
develops a linear relationship that is not realistic to actual
need…
Optimum Rent Change
Red Line Represents APH Yield
Rent
Change
Should
Decrease
Rent
Change
Should
Decrease
Yield or Price Change Spread
Flexible Cash Lease Programming in NE
Challenge #5
• Should flexible rents include:
• Lien on growing crops?
• Insurance payments with preference to the landowner?
• Government farm bill payments with a percentage to the
landowner?
• Conservation payments included to adjust price
received?
• Crop grazing or harvesting income, to adjust price
received?
Flexible Cash Lease Programming in NE
Challenge #6
• Do these contracts actually work?
• The approach:
• Using historic yield data on irrigated and dryland corn farms in
Pierce, NE
• Simulated 500 farm yields on irrigated and dryland corn farms
• Performed 10,000 simulated draws (Monte Carlo) across multiple
years and applied rules of ratio of actual yield against expected yield
and base rent
• Outcome:
• On irrigated farms – rent paid to landowners was 2% higher than crop
producers
• On dryland farms – rent paid to producers was 1% higher than landowners
• Neither were statistically significant, but…
• On years where yields were less than expected, the producer got a rentbreak
• On years where yields were better than expected, the landowner got a
bonus
• More robust statistical analysis is currently being completed
Flexible Cash Lease Programming in NE
Challenge #7
• No tools are available to do more robust what-if analysis of flex rents
• NE has developed analytical tools that assist producers and landowners
in understanding and evaluating flexible cash-lease options
Flexible Cash Lease Programming in NE
How Nebraska Might
Help Your Educational
Efforts
Flexible Cash Lease Programming in NE
How Can We Assist?
• Extension resources are available to assist you in
developing flexible cash lease programming in your
state
• We are willing to travel to location to perform trainthe-trainer events and conduct producer/landowner
education workshops
• Academic research had been conducted and is being
conducted in Nebraska that validates the use of
these tools as effective risk management options to
provide improved income to investors (landowners)
and risk protection (producers)
Flexible Cash Lease Programming in NE
For More Info or Assistance
• Contact:
Tim Lemmons
Nebraska Extension Educator
402-370-4061
tlemmons2@unl.edu (preferred method)
Northeast Research and Extension Center
601 E. Benjamin Ave. Suite 104
Norfolk, NE 68701
Flexible Cash Lease Programming in NE
Questions
Extension is a Division of the Institute of Agriculture and Natural Resources at the University of Nebraska–Lincoln cooperating with the Counties and
the United States Department of Agriculture.
University of Nebraska–Lincoln Extension educational programs abide with the nondiscrimination policies of the University of Nebraska–Lincoln and
the United States Department of Agriculture.