Price and yield volatility add risk to fixed-rate farm leases

decrease font size  Resize text   increase font size       Printer-friendly version of this article Printer-friendly version of this article

Over the years, most cropland has been rented on a fixed rate per acre, but recently there has been a lot of volatility in both crop prices and crop yields. University of Missouri Extension agricultural economist Ron Plain says this makes a lot of producers concerned about fixed-rate agreements.

“A lot of landlords are looking to get more money given the higher crop prices, and tenants are uneasy about locking themselves into a high fixed rate because of the yield risk,” Plain said. “So there has been growing interest in a variable rate in which the payment is not a portion of the crop but a cash payment that will vary depending on crop prices and yields.”

According to Plain, a common method is to look at historical averages of price, rent and yield, and use current prices and yields to whether to take the cash rent up or down compared to the historical average.

There are several other variations that can be used to determine a cash rent rate.

“One that varies just for price is where a tenant pays the landlord the value of X bushels of crop,” Plain said. “In the case of beans, for example, say 8 bushels per acre is what the tenant is going to pay. You multiply that times harvest price, and that’s how many dollars per acre the operator pays.”

When a tenant is worried about a drought year, sometimes there is an agreement to pay a percentage of the production times a fixed price per acre, Plain said.

“One of the drawbacks to these flexible arrangements is that until the harvest comes in and you see harvest-time prices, neither the landlord nor the tenant knows what the rent will be for the year,” he said.

Plain says it is good advice to put all rental arrangements and lease agreements in writing. These discussions usually happen once a year and memories can fade over time. A written agreement also will ensure that should something happen to you, your family members will know the terms of the agreement.

According to USDA numbers, pasture and cropland rental rates have been going up quite fast in recent years. Plain cautions producers to remember that nothing can go up forever.

“If you look at how high we’ve pushed some cash rents, there are probably going to be some situations in which these cash rents are going to have to back down a bit,” Plain said. “If it rains more in 2013 and we have a better crop, we are going to see crop prices back down.”


Buyers Guide

Doyle Equipment Manufacturing Co.
Doyle Equipment Manufacturing prides themselves as being “The King of the Rotary’s” with their Direct Drive Rotary Blend Systems. With numerous setup possibilities and sizes, ranging from a  more...
A.J. Sackett Sons & Company
Sackett Blend Towers feature the H.I.M, High Intensity Mixer, the next generation of blending and coating technology which supports Precision Fertilizer Blending®. Its unique design allows  more...
R&R Manufacturing Inc.
The R&R Minuteman Blend System is the original proven performer. Fast, precise blending with a compact foot print. Significantly lower horsepower requirement. Low inload height with large  more...
Junge Control Inc.
Junge Control Inc. creates state-of-the-art product blending and measuring solutions that allow you to totally maximize operating efficiency with amazing accuracy and repeatability, superior  more...
Yargus Manufacturing
The flagship blending system for the Layco product line is the fully automated Layco DW System™. The advanced technology of the Layco DW (Declining Weight) system results in a blending  more...
Yargus Manufacturing
The LAYCOTE™ Automated Coating System provides a new level of coating accuracy for a stand-alone coating system or for coating (impregnating) in an automated blending system. The unique  more...
John Deere
The DN345 Drawn Dry Spreader can carry more than 12 tons of fertilizer and 17.5 tons of lime. Designed to operate at field speeds up to 20 MPH with full loads and the G4 spreader uniformly  more...
Force Unlimited
The Pro-Force is a multi-purpose spreader with a wider apron and steeper sides. Our Pro-Force has the most aggressive 30” spinner on the market, and is capable of spreading higher rates of  more...
BBI Spreaders
MagnaSpread 2 & MagnaSpread 3 — With BBI’s patented multi-bin technology, these spreaders operate multiple hoppers guided by independent, variable-rate technology. These models are built on  more...


Comments (0) Leave a comment 

Name
e-Mail (required)
Location

Comment:

characters left


Vertical Floor Blenders

Waconia floor blenders provide a quality blend fast, year-after-year. Blenders are mounted on (4) load cells that provide accuracy ... Read More

View all Products in this segment

View All Buyers Guides

Feedback Form
Feedback Form