Flexible cash farm leases offer advantages

farm landscape

Landowners and farmers have found it increasingly difficult to agree on an equitable cash rent as crop prices and input costs have recently experienced significant volatility.

Cash lease rates aren’t public knowledge and don’t have a public clearinghouse such as a futures exchange so information on rates is often sketchy or unavailable. Cash lease arrangements often create a negotiating environment where there is asymmetric information. Landowner lessors are often negotiating at a disadvantage without recent yield information and knowledge of current farming practices and economics.

Flexible cash leases help solve some of this problem of asymmetric information. A flexible cash lease normally requires more information sharing between the two parties as the calculations necessary in rental rate calculation require sharing of a combination of yield, price and occasionally cost data.

Flexible cash leases do allow flexibility but they may not be suitable for every situation. They do require more communication between landowner and farmer. They also require more management and record keeping. These flex leases typically require a sharing of data from the farming lessor to the landowner leasee. The lease also will contain a formula to calculate the final rental rate to be paid at the end of the lease period.

Since most flex leases require some combination of yield, price and possibly input costs, there needs to be verification mechanisms agreed to and written into the lease. The verification part of a flex lease is often the trickiest part of the whole arrangement.

Market destination

The price component verification can be easily solved by choosing a market destination for price averaging in the flex lease calculation that is accessible to both tenant and landowner although some tenant farmers may prefer to use actual prices received as the price data points to be used in the calculation.

One difficult parameter to verify in most flex lease calculations is the yield component. Weight tickets, yield maps, bin measurements or crop insurance yield submissions are viable options. Costs, if used in a flex lease, require verification but may pose challenges.

A landowner with a good understanding of modern crop production practices and costs may have an advantage with this type of flex lease, as they will be able to use their judgment to determine if costs are being reported properly.

Professional farm management services may be a wise investment for a landowner with little experience with farm leases and more specifically, flexible cash farm leases.

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