NuWire Investor, WA
12-20-07
Crop Share Leasing Agreements
Growing profits with crop share leasing
Written by: Beth Anderson
Farmland investment is an excellent way of diversifying because of its solid longterm returns that don’t correlate with the stock market. Leasing farmland can
provide a long-term investor with some short-term cash flow. With the profits from
many crops on the rise in the last few years, farmland owners who choose to
share the risks and rewards of farming through crop share leasing may see their
profits grow, too.
Crop shares are more complicated than lump-sum payment cash rent leases.
With a crop share lease, the tenant and owner split the costs and the profits of
the crops. In this case, an investor’s return can be affected significantly by bad
weather, poor farming conditions or a less than stellar tenant. Investors must
maintain records of shared expenses and market their crops, which involves
more time and effort than a cash rent lease.
However, there are a number of benefits to crop share lease agreements, most
notably sharing both the risks and the rewards with the tenant. Experienced
landowners may be able to share their wisdom with a tenant, which could result
in the tenant making more financially rewarding decisions. Landowners who
participate in the management may also be able to time buying inputs, such as
fertilizer and seeds, and selling crops to manage for tax purposes, according to
Colorado State University’s Cooperative Extension.
A healthy crop of ripening apples ready for harvest
Crop share investors must be involved with cropping decisions and marketing
In recent years, investors relying on crop share leases may have seen higher
returns than those using cash rents.
“From the mid '90s up through 2005, cash rental rates were providing higher
returns to landowners than crop share leases without the risk,” Timothy Eggers,
a field agriculture economist with Iowa State University, said in an e-mail
interview. “With the higher prices in 2006 and 2007, crop share leases are
providing a comparable return. The higher prices for the 2006 crop would've
[resulted] in higher returns. Depending on the responsiveness of the cash rental
rate change, the 2007 returns were likely higher as well.”
Nevertheless, crop share leases are still on the decline throughout the country.
“Share rents are decreasing because of their complexity,” Gary Schnitkey, farm
management extension specialist at the University of Illinois, said in an e-mail
interview. “Landlords have to be involved in the cropping decisions and pay for
cropping expenses up front. They have to also market grain and be involved with
the Farm Service Agency.”
Marketing crops and paying for inputs make crop share leases much less
desirable for farmland owners, Eggers said. Additionally, crop share leases have
additional complications that may present difficulties for out-of-area investors.
“Crop share agreements not only tend to be more complicated but also require
another layer of trust between tenant and landlord,” Jim Stordahl, assistant
extension professor at the University of Minnesota, said in an e-mail interview.
“For example, since the crop is literally shared, the landlord needs to trust that
the tenant did not ‘forget’ to deliver the last load during harvest. This may be
even a greater concern with absentee landlords.”
The level of involvement required with a crop share lease may be a positive or a
negative for an investor, depending on their characteristics and desires. Some
investors may also consider a custom farming lease in which the tenant supplies
all labor, equipment, planting, pest control, harvesting and storage of crops and
the owner pays all other expenses. In these cases the tenant generally receives
a fixed payment per acre or per operation performed from the owner.
“In a 50-50 crop share lease, the owner takes half the risk of price and yield
variation, as well as the risk of rises in input prices such as fertilizer and seed,”
Edwards said. “As a custom farming owner, he/she takes all of these risks.”
The level of involvement with a custom farming lease is higher than the level of
involvement required for a crop share lease.
“Custom farming, or a share lease, requires more involvement in marketing than
a cash lease, which may be rewarding to some owners or frustrating to others,”
Edwards said.
Tax Considerations
Perhaps most importantly for investors considering a crop share lease, assisting
in decision making on a farm may show “material participation” for government
and financial management purposes, according to Colorado State University’s
Cooperative Extension. It is much easier to prove material participation with a
crop share lease than with a cash rent lease.
A cotton bumper crop in 2007 brings big yields to landowners and tenants
Lack of material participation reduces federal farm program subsidies
Material participation was originally placed in tax law to determine whether a farm
owner was liable for self-employment taxes, according to Purdue University’s
Extension. Landlords who make key decisions regarding the farm, such as which
crops to plant or whether to use herbicide, must report income and expenses and
pay self-employment taxes.
Material participation may limit Social Security payments, depending on the age
of the landlord and other income. Lack of material participation may negatively
affect federal farm program payments, which subsidize some of the expenses of
farming. Owners hoping to receive federal farm program payments should speak
to their local Farm Service Agency about how material participation affects their
federal farm program payments.
Material participation is also a consideration for federal estate tax savings
qualification, according to Purdue University's Extension. Special use valuation
allows a reduction of up to $750,000 in land value to be included in the estate of
someone who has passed away. This valuation requires a 10-year period of
material participation by the heirs, according to Purdue University and The Tax
Adviser.
A landowner may maintain eligibility for that valuation with a cash rental to a
family member, who may satisfy both a material participation requirement and an
"at risk" requirement. To be at risk generally requires a crop share lease.
Crop share leases do not require material participation. An investor who chooses
a crop share lease will have to determine whether they are a material participant,
which has different implications for taxation. Investors may want to consult a tax
attorney, their local Farm Service Agency or other professionals in the field
regarding the tax implications of material participation.
If the farmland meets the qualifications for special use valuation, investors may
want to consider whether the deduction makes participating in the farmland
management—and dealing with any self-employment taxes that may come along
with that decision—worthwhile.