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Flexible land rent considerations

Your Farm Business

September 14, 2012
From Tina LeBrun and Wayne Schoper - South Central College , The Journal

The hot question this fall and winter will be what to charge for cash land rent for the cropping year 2013 and beyond.

Back in April, corn and soybean prices were much lower than they are now. Then it quit raining after Memorial Day and commodity prices have risen significantly. The last five months we have seen higher commodity prices with new crop 2012 corn now well over $7 per bushel and beans over $16 for fall delivery. Land rents hit an all-time high for 2012 production with an average around $200-$225 per acre with a lot of reports higher then these two figures.

For cropping year 2013 many land rental agreements have are being negotiated. Landlords have been calling me wondering what might be a fair charge for cash rental rates for 2013 production. We have been saying that a fair cash rental rate might be around $225-240 for 2013 production.

Article Photos

Tine LeBrun and Wayne Schoper

The current drought conditions could easily carry into next year. Crop insurance helps, but it does not replace a good crop for income purposes. We do know that input costs such as fertilizer and seed are on the rise. The fertilizer companies are charging outrageously high prices for phosphate and potash even though there is no problem with world supply. Farm diesel fuel has been rising in price, but corn drying costs are expected to be lower with the drought conditions of the past growing season.

The fact of the matter is most farmers follow a marketing plan that starts selling corn and soybeans on a forward-contract basis. Many bushels were sold for fall delivery starting around $4.75 per bushel for corn and $12 for soybeans. Most producers will be selling a lot of corn with an average price below $6 on corn and $13 on beans. The drought also took out a lot of the potential yields. We were lucky enough to get some timely rains which rescued some fields. Throwing out the high and the low, yields will be coming in at around 125 to 170 bushels per acre for corn and 35-45 for soybeans.

Many landlords are looking for something else, some sort of flexible cash rent lease that allows them to share the risk with their tenant. Here are some examples of what is out there. Please note that in all examples the landlord could also share in some additional expenses and would also share in the risk as commodity prices shift throughout the year.

Flexible rent based on gross revenue

The most common type of flexible lease bases the final cash rent on an estimate of the actual gross revenue from the crop each year. Below are some examples:

1. Base cash rent or 1/4 value of crop whichever is greater. Example: $140 base guaranteed; 150 bushels of corn X Dec. 15th price x ? = $243; 45 bushels of soybeans x Dec 15 price x 1/3 = $237

2. Yearly base rent or 25 percent of gross revenue from farm, including FSA payment; farm yield times average price at local elevator on April 1, July 1, and Nov. 1

3. Yield x price established at local elevator X 25 percent; $195 minimum

4. 25 percent of gross for corn; 30 percent for beans. Gross equals average price the first of every month at local co-op times actual yield

5. Corn yield x price at local elevator x 25 percent

6. The landlord receives 25 percent of the gross revenue in cash

7. Higher of $195 or 30 percent of gross for beans or 25 percent of gross for corn, using county average yield x average of March 15 and October 15 local price

8. Corn = 25 percent of yield x average price for year

Soybeans = 30 percent of yield x average price for year

9. One-fourth of gross income based on Nov. 1 local cash prices. Example = Corn at 160 bu/acre x $6.50 per bu. x 1/4 = $260 cash rent

These are just some ideas that some landlords and tenants have come up with to try and share the risk a little bit. When you run the numbers that we have right now you can see that there is both risk and reward for both parties.



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