What type of farmland rental agreements are right for you?
Depending on the region of the United States you live, in some types of rental agreements are more common than others. 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 farmers 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 Agreements
The tenant pays a given amount per acre per year for the use of the land 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 Agreements
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 Agreements
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.
Other Lease Agreement Options
These are the three most common lease agreements that many farmland owners and farmers will use. Two less common lease agreements are Fixed Bushel Rent and Multiple Choice Flex Leases. Here is also a link to these lesser know lease agreements along with much more valuable info put out by Michigan State University Extension
It is important that when you are sitting down with the farmer to negotiate rental agreements, make sure to talk through the pros and cons of each lease type. Just remember there are many factors that affect farmland rental agreements, things like supply and demand, and the value of the cash crop being produced. Along with the field shape and size, soil quality and the lands ability to manage air and water are all very important factors. Sit down, talk about each others goals to create a win-win opportunity. Profitability is important for both you and the farmer, and getting that right from the start is a key to a strong long-term relationship.