Landowners should think twice about a straight cash rent lease
The key to the success is the formula for determining the rent to be paid. For the flexible lease, Paulson established the level with the crop insurance base or the projected price, along with the average price from April through September as reported by USDA. He also used a crop rotation which utilized 55% corn and 45% soybean acres.
Paulson said, “Despite yield levels well below trend in all three regions of Illinois, the flex lease design results in similar or larger payments than the average fixed cash rent reported for each region. This is true for both the base insurance price and the average price received from April through September. In Northern Illinois, where yield losses are expected to be smaller than other regions, the flex payments are considerably higher than the average fixed cash rent. For Central and Southern Illinois, the flex lease rate calculated using the base insurance price is similar to the average fixed cash rent while the flex lease rate based on the average price received is well above the average cash rent level in these regions.”
Trends in land rental rates and agreement types suggest that tenants are taking on more risk exposure. This is a serious concern for all farm operators, but especially for those who are highly leveraged and/or rent a large proportion of their acres. Given market trends toward cash rental arrangements, convincing landlords to use a share or flex lease may be difficult. Price and yield levels since 2008 have resulted in the “typical” 50-50 share lease, and a similar flex lease payment equal to 40% of gross revenue, providing payments to landowners which may exceed average fixed cash rent levels. Moving to a share or flex lease will also shift some risk from the tenant to the landlord. Farm-level yields will vary around these averages considerably, implying that share or flex lease payments for some operations will be well below comparable cash rental rates for the area.