What type of rental relationship is best for you and your farmland?
If you are renting land as a major part of doing business, understanding types of lease agreements can be very important. In some areas, it is not uncommon for producers to be renting up to 75% of their total production acres. Not all rental agreements are the same and many transfer risk from either the landowner or the tenant depending on the type of agreement. Each one carries with it some risk, but also some control of production practices and input management. Below are just a few of the major lease agreements common in farming today.
Fixed Cash Lease
The tenant pays a given amount per acre per year for the use of the farmland and/or structures. The landowner can put some restriction on the farming practices of the tenant but for the most part the tenant has free rein to manage the farm as he or she sees fit. The tenant then receives all the income from the crop but also shoulders the majority of the risk. When commodities are high this agreement can be very profitable, but in lower revenue years it can be what prevents you from having a positive balance sheet.
Flexible Cash Lease
This variation of the fixed cash lease follows the actual yield and the price in which it was sold for. This allows the land owner to share in lower yields and commodity prices but benefits when the price and production exceeds the expectations of the tenant. This lease agreement has generated most popularity in the last few years as farmers are looking at high production cost and lower commodity prices. This allows the landowners some fixed income but yet doesn’t place all the burden on the farmer. This is also a great option for marginal soils when consistent production can be challenging.
Crop Share Lease
In a crop share lease, the owner receives a portion of the negotiated percent of the profit from the crop and/or USDA payments. The landowner usually furnishes the land and buildings as well as any grain set-up but then shares the cost of the other crop inputs. The tenant will then supply the labor and in some cases the equipment as well as the rest of the crop expenses. Many of the crop share leases are a 50/50 or some variation of this can be 60/40, 75/25 etc. This lease type is a solid business agreement in years when margins are narrow or on soils that have some limiting production factors. I like this agreement because it allows both parties to have input into the production system and each shoulders the risk.
It is important that when you are sitting down with the landowner to negotiate rental agreements, make sure to talk through the pros and cons of each lease type. Each agreement should be rooted in the long term goals of each person. Profitability is important for both you and the landowner, and getting that right from the start is a key to a strong long-term relationship. Included is a great link with resources on alternative rental agreements. Check it out here.
Here at Bird Dog, we help growers and landowners come together to start these long term relationships. You have had trouble growing or would like the opportunity to expand your farm, we can help. If you own farmland and need to find the right farmer for you, Bird Dog is here for you. We know growth is not easy but is a necessary part of a healthy business.