Fort Dodge Messenger, IA
04-11-07
Flexible farm leases: Sharing risk with rewards
By Randy Mudgett, Managing editor
AMES — An unprecedented raise in corn prices last fall brought with it gross
revenue increases for Iowa farmers that in many cases were double from the
year before. For landowners who cash rent their land, revenues were
unchanged.
‘‘We have had a lot of calls from landowners and farmers, especially when they
see prices this high for corn,’’ said William Edwards, Iowa State University
Extension economist. ‘‘They want to know how they can make the cash rent
scenario more equitable on both sides.’’
Flexible farm lease agreements are fairly common in Iowa, however due to
federal rules anytime a lease is adjusted, the rules change as well. According to
Extension, flexible leases have advantages in some cases. In the case of a
flexible farm lease, the risks are shared between the owner of the land and the
tenant, however the landlord is not involved in the actual farming decisions. Also,
the risk is divided when prices drop for grains.
The most common arrangement requires the landlord to receive a specific share
of the gross revenue of the crop. Based on whether the crop is corn or soybeans,
the revenue share is adjusted. If the quoted 40 percent share of gross revenue is
used for corn while 47 percent is used for soybeans, the landowner’s share
would be equal from year to year.
‘‘When prices for corn or soybeans are somewhat stable ($2.10 corn or $6.50
soybeans) landlords never talk about changing the structure of cash rents,’’
Edwards said. ‘‘Last year changed everything when we saw corn coming out of
the field and selling for $3.50 a bushel. The price of grain raised a lot of
eyebrows.’’
If the gross revenue became much closer to $700 an acre on corn last year, and
tenants offered 40 percent of the crop as payment for the land, the cash rent
equivalent would have been closer to $280 an acre in 2006.
Roger McEowen, Extension economist, said landlords are expressing interest in
adjusting existing cash leases to capture more of the profit, but many are
concerned that they will not conform to federal regulations. In some instances,
McEowen said leases that have been altered to compensate a landowner have
been viewed as crop share leases rather than cash rent leases. In turn, Farm
Service Agency rules dictate that tenants must repay the direct payments to the
government.
‘‘Under Farm Service Agency regulations, if a lease is a cash lease, the tenant is
entitled to the government payments (direct farm payments). For share leases,
the payments are split according to the crop share lease,’’ McEowen said.
While the majority of Iowa farmland is rented on a cash basis, McEowen said
tenants can benefit from the adjustable cash rent scenario, especially if the
tenant is worried about payment limitations.
‘‘Being a cash rent tenant may not always work to their advantage,’’ he said.
‘‘Government subsidies are also gained through loan deficiency payments and
marketing loan gains. These benefits represent the difference between the
average world price of the commodity and the market price as determined by
USDA and count against the producer’s $75,000 payment limitation for all
commodities. So, in a cash rent situation, the entire subsidy counts against the
tenant’s payment limitation. A cash rent tenant could end up leaving a lot of
subsidy payments on the table that could have been counted against a separate
payment limit for the landlord.’’
One type of lease, according to Edwards, is the base rent plus bonus scenario. In
this lease, cash rent is often set lower, then, when revenues exceed a certain
level agreed upon by the owner and tenant, the revenue is shared. For example,
if the price for soybeans is $5 a bushel and the farmer harvests a 50 bushel per
acre crop, the gross revenue would be $250 or the base level for sharing
revenue. Once the price increases to say $7 a bushel, the revenue increases to
$350. In this scenario, the landlord would gain $50 per acre plus the base rent of
$100, an equitable exchange for the crop.
‘‘Right now, there have been a lot of calls about shifting to a flexible farm lease
system,’’ Edwards said. ‘‘It is really between the landlord and the tenant on how
best to go forward with this system.’’
McEowen recommends discussing any changes in existing leases with Farm
Service Agency representatives before making changes. ‘‘The FSA gets pretty
concerned about these cash rent provisions. They could take the position that the
lease is a share lease even though the lease is labeled a cash lease, so make
sure the lease complies with FSA rules.’’