Determining an Equitable
Crop Share Lease
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Should a crop-share arrangement be used?
Advantages
• For operator, lower operating capital
requirements
• Shared management
• Crop sales, input purchases may be timed for
tax purposes
• Risks shared
• Landowner can establish material
participation
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2
Should a crop-share arrangement be used?
Disadvantages
• For landowner, income will be variable
• Increased record-keeping
– Shared expenses
– Government programs
– Crop insurance
• Landowner must make marketing decisions
(unless it is a nonmaterial participation lease)
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3
Should a crop-share arrangement be used?
Notes
• Sharing arrangement may need to change as
prices or technology change
• For landlord, material participation may
reduce Social Security benefits in retirement
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4
Establishing a Crop-Share Arrangement
• Share yield-increasing variable expenses in
the same percentage as the crop
• Adjust arrangement as technology changes
relative costs
• Share total returns in the same proportion as
parties contribute resources
• At the end of the lease, compensate
operators for portion of long-term investments
made that are not fully depreciated
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5
Establishing a Crop-Share Arrangement
• Maintain open and honest communication
– Make sure both parties know and understand their
responsibilities.
– Written leases encourage communication up front
and clarify plans.
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6
Share yield-increasing variable expenses in
the same % as the crop is shared
Encourages optimal input use.
Yield increasing inputs may include:
• Fertilizer
Yield
• Irrigation water
• Herbicides
• Seed
Input
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7
Share yield-increasing variable expenses in
the same % as the crop is shared
• For example, at $0.40/lb for fertilizer, $4 per
additional bushel of corn yield
Fertilizer
(lb/a)v
Yield
(bu)
Income
($/a)
Return
over
fertil.
cost
140
175
700
160
178
180
200
Operator position for income (I) and cost (C)
100% I
100% C
50% I
100% C
50% I
0% C
50% I
50% C
644
644
294
350
322
712
648
648
292
356
324
179
716
644
644
286
358
322
180
720
640
640
280
360
320
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8
Adjust arrangements as technology changes
relative costs
• Yield-increasing inputs shared in the same %
as the crop
• True substitution inputs paid by the party
responsible for them in the original lease
• Both? Address in lease
– Corn seed with bundled traits
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9
Share total returns in the same proportion as
parties contribute inputs
Figure 2. Effects of Land Quality and Farm Costs on Crop-share Rental Arrangements
Operating
cost, $/ac
Yield, bu/ac
60
55
50
45
1/2 Landowner
40
35
1/3 Landowner
1/4 Landowner
COSTS
30
25
20
15
1/2 Operator
2/3 Operator
3/4 Operator
10
5
0
Most productive land
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Land Quality/Value
Least productive land
10
Compensate operators for long-term
investment remaining
• If the operator shares in the cost of an input
that has a useful life beyond the life of the
lease, the lease should stipulate how the
tenant will be compensated for any unused
portion.
–
–
–
–
Lime
Alfalfa seed or establishment costs
Tiling
Underground pipe
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11
Developing an Equitable Crop-Share
Lease Arrangement
Crop Budget Approach
Identify items and values/charges
• Land
–
–
–
–
–
Value
Interest on land
Cash rent
Real estate taxes
Development
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12
Developing an Equitable Crop-Share Lease
Arrangement (continued)
• Crop machinery (and irrigation
equipment, if applicable)
– Depreciation
– Repairs
– Taxes
– Insurance
– Interest
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13
Developing an Equitable Crop-Share Lease
Arrangement (continued)
• Labor
– Value is part of bargaining process
– Caution: avoid forming a partnership
• Management
– One alternative is a percent of the average
capital managed, e.g. 1 to 2.5%
– Professional farm managers may charge 510% of adjusted gross receipts
• Custom rates
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14
Cropland Rent-to-Value Ratios by Region
Figure 3. Cropland Rent-to-Value Ratios by Region, 2001-2010 (Source: USDA NASS Land Values and Cash Rents)
Rent-to-Value, percent
8.0
Northeast (CT, DE, ME, MD, MS, NH,
NJ, NY, PA, RI, VT)
7.0
Lake (MI, MN, WI)
6.0
Corn Belt (IL, IN, IA, MO, OH)
Northern Plains (KS, NE, ND, SD)
5.0
Appalachian (KY, NC, TN, VA, WV)
4.0
Southeast (AL, FL, GA, SC)
3.0
Delta (AR, LA, MS)
2.0
Southern Plains (OK, TX)
1.0
Mountain (MT, ID, WY, NV, UT, CO,
NM, AZ)
0.0
Pacific (WA, OR, CA)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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15
Contributions Approach
• Percentage contribution of each party is
determined (Worksheet 1)
• Parties share other operating expenses
and income (crops, government
payments, other income) in the same
percentage
• Note: use average costs for crop
rotations
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Desired Share Approach
• Parties specify a given percentage
share basis, e.g., 60-40 and adjust
contributions to fit this percentage
• Use Worksheet 1 to discuss alternatives
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17
Put the Agreement in Writing
• Encourages a detailed statement of the
agreement, with better understanding of
expectations by both parties
• Serves as a reminder of agreed upon
terms
• Guide to heirs of either party
• Documentation for tax purposes
• See NCFMEC-02 for a sample form
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18
Lease Publications at AgLease101.org
• Fixed and Flexible Cash Rental Arrangements
For Your Farm (NCFMEC-01)
• Crop Share Rental Arrangements For Your Farm
(NCFMEC-02)
• Pasture Rental Arrangements For Your Farm
(NCFMEC-03)
• Rental Agreements For Farm Buildings and
Livestock Facilities (NCFMEC-04)
• Beef Cow Rental Arrangements For Your Farm
(NCFMEC-06)
AgLease101.org
© North Central Farm Management Extension Committee
19
North Central Farm Management Extension Committee
Providing leadership in the development of high quality research-based extension
programs and publications that anticipate and meet the ever-changing business
management educational needs of agricultural producers of the North Central States. Our
programs and publications capitalize on the expertise of farm management faculty from
throughout the region and country.
AgLease101.org
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AgLease 101 was developed with funding provided by the North Central
Risk Management Education Center.