LINCOLN, Neb. -- Facing a likely economic windfall in 2007 from rising corn prices, landowners and tenants should rethink their cropland cash lease arrangements to assure both parties benefit from the good times to come while protecting their longer-term relationship, a University of Nebraska-Lincoln agricultural economist said.

An "ethanol gold rush" has driven corn prices beyond $3 per bushel, about double the price at harvest a year ago, said Bruce Johnson. "Many expect these new price levels to hold, at least for the 2007 crop season," he added.

Johnson suggested that economic outlook should be figured into next year's cash leases to be fair to both landowners and tenants. There are cases, he added, in which landowners are taking advantage of the situation by "demanding, and sometimes getting, exorbitant cash rent increases for 2007," and other instances of tenants "quickly trying to lock in last year's cash rents for 2007 with their naive and uninformed landowners.

"Neither extreme is in the best interest of all parties being served," Johnson said. "Given the fact that both tenants and landlords need one another and can benefit from partnering over the long-run, a more rational negotiation of 2007 cropland rental rates is called for."

In many cases, the 2007 rental rate already may have been determined, before the recent market shifts occurred. In those cases, "a particularly noble action would be for the tenant to take the initiative to renegotiate the contract for a higher rental rate," Johnson said. "While that may certainly mean forgoing some of the 2007 earnings for the tenant, it would do wonders to solidify the longer-term tenant-landowner relationship."

Landowners, meantime, should resist the temptation to "extract as much of the short-term economic windfall as possible" with large cash rent increases.

Landowners and tenants looking for an equitable arrangement in 2007 would be wise to estimate the profit increase expected with the higher prices and agree how to split that increased profit, with the landowner's share coming in increased per-acre cash rents. Agreements also should acknowledge that it is the cash-rent tenants bearing virtually all of the risk, and therefore should be receiving the larger portion of the anticipated return.

"Only time will tell whether or not this economic environment is viable long-term. Therefore, it is important for both parties to understand and agree that a negotiated upward adjustment in crop cash leases is for one year only," Johnson said. "Until there is some degree of equilibrium returning to the economy, it should be understood that rents will be appropriately adjusted, either up or down, on a year-by-year basis to the mutual agreement of both parties."

Individual situations differ, but a 15-to-20 percent increase in cash rents in 2007 over 2006 levels might be quite reasonable in corn-producing regions, Johnson said.
The Institute of Agriculture and Natural Resources specialist added that the "added windfall amount" could be due in the second payment of the cash rent, which would help tenants better manage risk. Partners also might want to negotiate a "circuit breaker clause" in the event that prices or even yields fall precariously; that could be especially appropriate with dryland acres where there is added weather risk.

UNL's Department of Agricultural Economics has an online lease calculator available to help tenants and landowners agree on a contract. For more information, see the current issue of Cornhusker Economics.

SOURCE: University of Nebraska news release.