Flexible Land Rental
The cropland cash rent scene around the county in the past two years can only be described as something similar to the wild west. Two very popular questions have been, “How much can I get?” and “How much can I afford to pay?” Cropland cash rent values have increased along with commodity prices, albeit at a slower rate. The average Fond du Lac County cash rent value is near $100 per acre, but that figure is on the low end of the range for what is being paid on new contracts and only half (or less) of what is being considered for some parcels.
Many producers would probably consider $200 per acre an outlandish amount to pay for land rent, yet it is a similar percentage of total crop revenue than was the case when $50 was paid for the opportunity to market $2.00 per bushel corn. Yes, input costs are higher, but so are corn yields.
Dairy producers find themselves between a rock and a hard place because their income is derived from selling milk, not corn, and the price relationship is not always the same. Nevertheless, cropland cash rent markets are always going to be driven by grain commodity prices.
High cash rent prices are profitable as long as 1) commodity prices remain at historically strong levels, and/or 2) there isn’t some sort of crop yield disaster. What if commodity prices decline between the time a rent agreement is made and the crop is harvested or we go on a run of years where corn sits comfortably at $3.50 to $4.00 per bushel? Are landlords going to be willing to back-off on land rents?
This discussion now brings us to the concept of flexible land rents. Although used extensively by crop producers in our southern neighboring states, they’ve been about as popular in Wisconsin as soy milk on the family’s dinner table. Given the turbulence in today’s commodity markets, perhaps the time has come for more flexible leases (but not soy milk).
A flexible lease is somewhat different than a crop-share lease where either the landlord gets a flat percentage of the crop (regardless of price) or the landlord or tenant evenly split the expenses and the crop. A flexible cropland lease is based on yield, price, or total revenue per acre. Using revenue is probably the fairest approach as both yield and price are taken into account. This is the direction we’ve seen crop insurance headed. Advantages of a flexible cropland lease include:
There are two primary ways to set-up a flexible lease. The first, and probably most common, is to simply use a flat percentage of gross corn revenue. For example purposes, let’s use 18 percent.
Table 1. Cash rent paid at 18 percent of gross revenue for various price-yield levels.
As can be seen from the above analysis, the landlord has the opportunity to receive more than a prevailing market cash rent value in times of exceptional revenue (their incentive for agreeing to such a lease), but also assumes some downside risk if corn yield and/or prices decline. There will need to be an agreement as to how the price will be set. This could be the local price at the time of harvest or an average of prices during the growing season.
Another approach to setting up a flexible lease is to establish a minimum base rent value (lower than the current market rent value) and pay an additional premium when gross revenue reaches a certain “trigger” value. The gross revenue trigger needs to be at least equal to the base rent value plus the cost of production, excluding land rent. An example with several different corn price – yield levels might be as follows:
Notice for Example 1, even though actual gross revenue fell below the base revenue, the minimum rent per acre was still paid out. Remember, these are only examples and there are many ways a flexible lease agreement can be structured.
For more information contact Mike Rankin