Landowners should think twice about a straight cash rent lease

If you are signing farmland rental agreements for 2013, what are the terms?  If you are an operator, are you agreeing to higher cash rent than 2012 because the landowner wants more since prices are going up?  Are you engaging in a flexible lease payment that protects an operator’s financial commitment should 2013 be another dry year?  Are you continuing with the crop share lease that was begun with the prior generation of both the owner and the operator?  Farmland leases vary widely from one part of the Cornbelt to another, but operators still must manage their risk in an agreement that the owner considers a fair lease.  

Illinois, with a high percentage of land owned and operated by different individuals, also has a wide variation in rental agreements because of soil productivity.  University of Illinois economist Nick Paulson says the trend of the past 15 years has been a move away from crop share leases to cash rent leases, in part because of aging landowners who want to avoid all of the bookkeeping chores.  Their simplicity may be attractive, but at high levels that have been recorded in recent years, operators face significant risk of heavy financial obligation without protection against lower yields or prices.  2012 is a good example.  

Paulson compares the straight cash rent agreements to flexible and share rental agreements, and finds the latter not only protect the operator more, but frequently provide more cash to the land owner.  And owners may find that to be a surprise.  Paulson says that has been the case since 2008, including the lower yields of 2012.  

• For the northern third of the state, Paulson calculated rental rates for a 50-50 crop share lease, as well as a flexible lease in which the owner received 40% of actual crop revenues.  He said they resulted in similar payment levels over time, and averaged $318 and $305 per acre, and were larger than the $203 fixed cash rental rate for northern Illinois based on USDA averages.    

• For the central third of Illinois Paulson said the 40% share and flex rate leases averaged $280 and $278 respectively for the past five years, compared to the average of $215 per acre for the cash rent lease reported by USDA. 
  
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• In the southern third of Illinois, the 40% share and flex rent leases were $243 and $241 per acre for the past five years, compared to the $127 average cash rent.    

While the widely variable productivity in farmland returned similar performances for flex and share rent leases compared to straight cash rent leases, Paulson said those five years were times of high and increasing commodity prices.  He questioned if the same could be expected if there was a year of large yield losses, such as in 2012.