Now, more than ever, big swings in crop prices and input costs points toward negotiating some flexibility in cash leases for farmland.
“Volatile” and “uncertain” are two words that might best describe grain prices and input costs for row crop production heading into the 2009 planting season.
With this increased volatility and uncertainty, risk increases for producers and more uncertainty arises about the amount of cash rent to pay.
On the other side of the negotiating table, landowners, seeing higher profitability in recent years for commodity crops, are possibly seeking higher cash rents.
So, just what is that “most equitable” cash rent amount and how can it be maintained from year to year or contract to contract?
One answer is negotiating a flexible cash lease arrangement that varies from year to year based on price, yield and input costs. Price, yield and input cost changes from an agreed upon starting point will trigger changes in the base lease amount.
Historically, flexible cash leases have been based on price or yield or a combination of the two. With the extreme volatility in input costs the past two years, some producers are only willing to negotiate a flexible cash lease if there is some measure of costs built in to the flex lease.
This Flexible Cash Lease Calculator can assist users in developing a flexible cash rent model.
Unlike other flexible cash lease calculators, this tool allows the user to incorporate flexible parameters for input costs as well as for price and yield.
The flexible cash rent approach used in this calculator is to multiply the base rent by: 1. the ratio of the Year End Price to Base Price, 2. the ratio of the Year End Yield to Base Yield and 3. the ratio of the Base Input Costs to Year End Input Costs.
Available on Web site
This Flexible Cash Lease Calculator is available at http://aede.osu.edu/Programs/FarmManagement/Budgets/download.htm
The Microsoft Excel spreadsheet is designed to enable the user to input base and year end prices, yields and costs to formulate a flex rent at the end of the lease year.
There are two tabs for this calculator. Page one contains the Flexible Cash Lease Inputs and page two contains the Flexible Cash Lease Output.
The Flex Cash Lease Calculator offers four methods of calculating a flex lease.
Method I is Flexing for Price Only. This will take your base rent; multiply it by your adjusted price (current price divided by base price). This will equal the rent per acre, which will then be multiplied by acres grown.
That will calculate the adjusted rent for the year. The total rent per acre is the sum of the adjusted rent for the year divided by total acres. This is the suggested rental rate for the year.
Method II is Flexing for Price and Yield. This method will use the same methods as above, but include the adjusted yield which is the current yield divided by current price.
Method III is Flexing for Price and Input Costs. This section will combine Method I with the total input costs calculated on the user input page. This will take the adjusted input costs (current input costs divided by base input costs) and multiply it to the adjusted price from Method I.
Method IV incorporates flexing for Price, Yield and Input costs. This will multiply the adjusted price, adjusted yield and adjusted input cost.
Choosing a method
In all four methods, the Total Rent per Acre line is the suggested flex rent per acre. Choosing which method to decide rental rates from will come from conversation between land owner and tenant.