Flexible Farm Lease Agreements

Advantages To Flexible Leases:

• The actual rent paid adjusts automatically as yields or prices fluctuate.
• Risks are shared between the owner and the tenant, as are profit opportunities.
• Owners are paid in cash—they don’t have to be involved in decisions about crop inputs or grain marketing.

Fluctuating markets and uncertain yields make it difficult to arrive at a fair cash rental rate in advance of each crop year. To address this problem, some owners and tenants use flexible lease agreements in which the rent is not determined until after the crop is harvested. The final rental rate is based on actual prices and/or yields attained each year. A recent survey showed that flexible leases accounted for nearly 12 percent of all cash leases in Iowa.

Option A: Share of Gross Revenue

The most common type of flexible lease calls for the owner to receive cash rent equal to a specified share of the gross revenue of the crop. The value of the crop is determined by multiplying the actual harvested yield by the market price available, usually at harvest time. Under this type of lease both price and yield risks are shared between tenant and owner, in the same proportion as the gross revenue. In this respect, it is similar to a crop share lease.

Option B: Base Rent plus Bonus

Another type of flexible lease formula specifies a base or minimum rent, plus the owner receives a share of the gross revenue in excess of a certain base value.

The base value for gross revenue can be the amount that would be received under typical yield and price conditions corresponding to the base rent. It can also be equal to the tenant’s cost of production per acre, including the base rent. This, in essence, becomes a profit-sharing plan.

Sharing Risk

Owners and tenants should carefully consider the type and degree of risk they want to assume. Taking on risk means greater losses when prices or yields are low, but can result in larger profits in better years. Owners who wish to receive a fixed income from their farm investments may have to accept a lower long-term rent than those who are willing to share risk. Tenants with substantial financial obligations should consider adopting other means of reducing risk, as well, such as purchasing crop revenue insurance. 

Determining Yield

It is important to agree ahead of time on the procedure for determining the factors that will be used to calculate the final rent. These factors should be based on information that is available to both parties. Actual yields can be determined by:

• Weight tickets, if all the crop is sold or put into commercial storage
• Combine yield monitors or weigh wagons
• Storage bin capacity 

When crops stored on the farm are ultimately sold, any variation from the estimated yield can be used to adjust the rent paid for that crop. Estimated yields should be corrected to a standard moisture level, for example, 15 percent moisture for corn.

Determining Price

The price used to calculate the final rent payment should represent the potential income that could be received from selling the crop. This can be the cash price at a local elevator or processor on a specified date, or an average of nearby prices on several dates. Prices on dates near or before the time the final rent is paid should be used even though the crop may actually be sold later. Only if the landowner is providing storage facilities should prices after harvest be used.

Other Issues

Some tenants and landlords may want to avoid the possibility of a very high or very low rent in a given year by setting a maximum and/or minimum rent. This keeps the actual rent paid each year within a desirable range. 

The flexible lease formula to be followed should be tested by using several different price and yield possibilities so as to illustrate the range of potential cash rents. Regardless of what type of agreement is adopted, it should be described in writing (with an example) and made a part of the written lease contract.